How the anthrax scare challenged drug patents.
Before September 11, U.S. policy toward pharmaceutical patents was clear: The interests of the patent holder came first. However, the anthrax scare that surfaced in October has managed to shake that policy to its roots. By the time the shaking was done and the original scare had subsided, Bayer Corporation, the Pittsburgh-based American subsidiary of the German pharmaceutical giant Bayer AG, had managed to hold onto its patent monopoly over the manufacture and sale of the powerful antibiotic ciprofloxacin, now familiar to Americans by its brand name, Cipro.
How that happened provides a lesson in how both public health issues and certain types of intellectual property rights have been affected by the terrorist attacks on the World Trade Center and the Pentagon, as well as by the mail-based anthrax attacks. Perhaps more important, in a world in which threats of bioterror are only likely to increase, the tug of war between Bayer and the government over Cipro hints at how even governments that nominally give patent protection a high priority are likely to compromise their principles in the face of a perceived public health threat—at least when that threat faces their own citizens.
Increasingly over the last two decades, American pharmaceutical policy has favored the interests of the patent holder. The U.S. has labored to discourage foreign governments from breaking pharmaceutical patents and buying unauthorized generics from India or China—two nations widely recognized as the major exporters of unauthorized generic drugs. When necessary, the U.S. has used trade barriers and various other types of political pressure to keep non-compliant governments in line.
"For 20 years, it's been the policy of the U.S. government to tighten the screws on foreign governments over intellectual property rights, particularly with medicine," says James Love, director of the Consumer Project on Technology, a Washington, D.C.-based public interest group critical of the pharmaceutical industry.
This approach is reflected in Article 31 of the World Trade Organization's Trade Related Agreement on Intellectual Property Rights (TRIPS). That agreement requires governments to honor patents. If a government needs or wants to exploit a patented invention, it must ask the patent holder for authorization and offer "reasonable compensation" for the privilege.
Love, whose group promotes global access to "essential" medicines, says the hard-line American policy "started in the Reagan era," when the push toward globalized trade began. To critics like Love this policy seems harsh, but its logic is clear: Without a worldwide framework in which each nation honors and enforces other nations' patent rights, it's possible for nations not bound by patent agreements to flood the world market with cheap generic drugs. Drug companies wouldn't be able to price their products high enough to guarantee a return on their research investment.
Furthermore, the argument goes, if you undermine the patent incentive system, you won't get the new drugs that are needed to address new health crises. "You wouldn't have Cipro if there wasn't a patent," says Mark Grayson, senior director of public affairs for the Pharmaceutical Research and Manufacturers of America (PhRMA), the drug industry's association in Washington. (See "Goddamn the Pusher Man," April 2001.)
Historically, PhRMA's view has been more or less shared by the U.S. government. So in the late 1990s, when Brazil faced a problem in providing government-subsidized access to affordable AIDS drugs and the Brazilian government authorized the domestic production of generic knock-offs of American drugs, U.S. Trade Representative Robert Zoellick announced that "the U.S. won't hesitate in using its total strength and international laws to modify the situation."
Although the U.S. approves of anti-AIDS generic-drug programs in impoverished countries such as Senegal and Uganda, it stops short of approving compulsory licensing or patent-breaking in so-called Middle Income Countries such as Brazil, which have an adequate gross domestic product and industrial base to support the purchasing of brand-name pharmaceuticals. Given this history of strong patent enforcement by the U.S., Bayer may well have been confident about its own patent rights when anthrax panic triggered a run on Cipro. But Bayer's status was in fact anything but secure.
Bayer's drug division could certainly have used the windfall: Market analysts were predicting that it would likely end 2001 in the red. Cipro was already looking like Bayer's lucky charm; the drug generated $1.6 billion in sales last year for the company, out of $10.1 billion in revenue overall. Sales volume in the aftermath of the anthrax panic could only increase.
Patented in the early '80s, Cipro until recently was best known as a treatment for bladder infections and other, more common conditions than anthrax. It's often the antibiotic of choice when infecting organisms are resistant to other kinds of antibiotics. The period of patent protection is 17?20 years, and the drug's U.S. patent is set to expire in 2003. Cipro was the first drug approved by the Food and Drug Administration for treatment of anthrax infections, receiving the FDA's blessing in 2000, even though the drug had not been tested on humans as an anti-anthrax treatment. (Until a few months ago, no one in the U.S. had had anthrax since the 1970s, so there was no existing base of anthrax patients available for testing.)
Cipro's major anthrax tests were conducted over a decade ago by U.S. Army biowarfare researchers—on rhesus monkeys. Still, the FDA (and not, surprisingly, Bayer) pushed for, and rushed through, approval of Cipro as an anthrax treatment, primarily because of fears that Iraq's Saddam Hussein might resort to an anthrax-based terror attack. The broad-spectrum antibiotic did not do better than some other antibiotics when the rhesus monkeys were treated, but it had at least one advantage the others lacked. Ciprofloxacin is not part of the penicillin or tetracycline families of antibiotics, which means that if foreign nations (or, for that matter, the U.S.) managed to develop strains of anthrax that were resistant to penicillin or tetracycline, Cipro would remain an effective therapy.
When the first cases of anthrax infection and exposure were publicized, it was only natural that the FDA and the Atlanta-based Centers for Disease Control started recommending prophylactic treatment with Cipro. Accordingly, everyone who was exposed or at risk—from Tom Brokaw to New York City postal workers—starting taking Cipro. Even those who weren't at risk found ways to get a prescription. In New York City, there was a sudden run on the drug, and some pharmacies were forced to post signs saying they could issue only 10-day supplies of Cipro.
Suddenly the question became, Would there be enough Cipro to go around? In addition, the U.S. and Canadian governments were entering the market as well—as buyers in bulk. The U.S. government alone decided to purchase 100 million or more doses.
The government balked, however, at Cipro's price tag. The standard to-the-government price was $1.83 per pill. (The standard wholesale price to pharmacies is about twice that.) There were strong hints that Department of Health and Human Services Secretary Tommy Thompson would "break" the Bayer patent, perhaps through compulsory licensing, if Bayer would not sell to the government at a lower price.
Thompson also stated, somewhat controversially, that the government lacks current statutory authority to sidestep Bayer's patent. James Love and Ralph Nader promptly co-authored a public letter to Thompson arguing that current law—specifically Title 28, Section 1498, of the United States Code—was more than adequate authority for such a move. That law provides for "reasonable and entire compensation" to the patent holder when the United States "uses" a patented invention without a license. Compensation is, however, the only remedy—the patent holder can't sue to stop the government from using his patent.
PhRMA's Grayson disputes this reading of the law. He calls the statute a provision for "eminent domain" compensation, and says it does not trump the U.S.'s obligation as a WTO/TRIPS signatory to try to work with the patent holder first before even considering breaking the patent.
Complicating matters even more was the question of supply. If the U.S. didn't break its patent, could Bayer's limping pharmaceutical division produce hundreds of millions of Cipro doses on a short timeline? Sen. Charles Schumer (D-N.Y.), a longtime critic of the pharmaceutical industry, didn't think so. On October 16, he issued a press release calling for Thompson's Department of Health and Human Services to go ahead and order up generics. "First, Bayer can only produce so much Cipro," said Schumer. "And we should not put our best response to anthrax in the hands of just one manufacturer. Second, buying Cipro only from Bayer—who charges a lot more than generic manufacturers would—means we spend a lot more and receive a lot less."
In Grayson's view, this was "political grandstanding," an opportunistic use of the anthrax scare to promote Schumer's longstanding efforts to make generic drugs more available. Schumer had introduced a bill to increase access to generic drugs last May, along with Sen. John McCain (R-Ariz.).
Grayson says he is more inclined to forgive Thompson his early "I'm a tough negotiator" rhetoric. Nicolas Barzoukas, a partner in the Houston office of the law firm Howrey, Simon Arnold & White, insists that the beleaguered HHS secretary "was never planning to break the patent." Barzoukas' firm represents Merck & Company, the country's second-largest drug company in terms of sales. He argues that breaking the Bayer patent would have had hugely negative consequences in the long term. "The problem," says Barzoukas, "is that you can do it [break a patent] one time, but that kills the incentive for drug companies down the road." The pharmaceutical companies responsible for innovative new drugs need to have control of their patents in order to make the kind of profits necessary to subsidize new research. "Forty percent to 50 percent of pharmaceutical innovation takes place in the U.S.," says Barzoukas.
What's more, Barzoukas says, if Bayer really is unable to produce enough Cipro, the fix is still to contract with Bayer. The company can meet new demand by licensing the patent to other manufacturers. This is the kind of resolution that allows Bayer to maintain the long-term value of its patent, and set prices for Cipro in private transactions, while still meeting the demands of the government during a public health crisis.
Such considerations did not shake the skepticism of some U.S. officials about Bayer's ability to produce Cipro. This feeling was echoed by at least some Canadian officials. In Canada, the campaign against Bayer's Cipro patent rights took a radical turn when Health Canada, the Canadian public health agency, placed an order for generic supplies of Cipro with another company.
What prompted Canada's response? According to Neil Belmore, a partner in the Toronto law firm Gowling, LaFleur & Henderson, the real issue in Canada was less one of a public-policy change than one of a lower-level Health Canada functionary who jumped the gun in placing an order. Belmore represents Bayer AG's Canadian subsidiary and attended an October negotiating session with officials of Health Canada in the agency's Ottawa offices. In the course of discussions it became clear that the Health Canada official who ordered the generic Cipro had departed from longstanding Canadian practice. Canadian law regarding compulsory licensing requires, among other things, prior approval of the ministry of industry's patent commissioner. No such prior approval had been sought, no official emergency had been declared, and the record of communications between Health Canada and Bayer was sufficiently muddled that the agency quickly backed off its order.
In fact, by the end of the negotiating session, the agency had agreed to publish a joint press release with Bayer, acknowledging the validity of the company's Canadian patent (due to expire in 2004). The press release also reaffirmed that Bayer would be Canada's sole supplier of emergency Cipro and would soon provide 900,000 tablets for that country's emergency stockpile. Why, if the government backed down so fast, had it ordered generic Cipro in the first place? Nobody knows for sure, says Belmore, since no senior official will take responsibility for the decision. "I can only speculate as to what internal pressures there were within the government" that might have led to the order, Belmore says. "It was an extremely fluid situation."
The same week Canada announced its resolution, over in the U.S. Thompson proclaimed a negotiating victory. The U.S. would buy Cipro from Bayer at just under $1 per dose, or close to half of the previous standard-to-the-government price. Bayer presented itself as equally upbeat. "We had a professional and satisfactory meeting today with HHS Secretary Thompson and his staff," said Bayer Corp. president Helge Wehmeier just before Thompson's announcement. "Within 10 minutes we came to a handshake agreement," Wehmeier now says.
"It took some time for contracts to be worked out," he adds. "It took 24 hours, and that may sound like a long time, but as [HHS] smilingly told us, it was the fastest time in living memory that they actually drew up a contract." Bayer Corp. also announced that it was tripling its production of Cipro tablets, and that it would ship 200 million tablets over the next three months, with 100 million of those tablets to be purchased outright by the U.S. government at the new negotiated price, and as many as 300 million total set to be purchased by the government.
Did the same factors underlie the apparent turnabouts in both Canada and the U.S.? Perhaps. Bayer AG's assurances that it could meet increased demand for its anthrax drug surely played a role. "We can fully cover the demand for Cipro tablets as defined by the Canadian and the U.S. governments," said Bayer AG chief executive Manfred Schneider on October 23. Schneider acknowledged that even with the discount, the transaction would be profitable for Bayer, whose per-unit manufacturing cost of Cipro is estimated by the Amsterdam-based Health Action International, a drug-policy watchdog group, to be under 5 cents U.S. (Schneider makes a point of adding that Bayer's drug division will still end the year in the red.)
That the drug division is still limping along in spite of what could have been a much larger Cipro windfall is ironic, since the U.S. and Canadian governmental policy has been to use the patent system to create the very possibility of such a windfall—that is, to make profits that subsidize long-term research and development of new drugs by the pharmaceutical companies. So much for policy, though—when the anthrax panic gripped Washington and Ottawa, the result was that in both countries Bayer had to give up a huge amount of profit. Put bluntly, Bayer was told—directly and indirectly—to cut the government price and get some profit or keep it at its pre?September 11 price and risk losing what are likely to be the two most profitable years of the patent.
Another calming factor: We now know that Cipro isn't the only anthrax remedy out there. Amoxycillin and doxycycline are now known to be equally effective, and some public officials have gone so far as to say that just about every antibiotic currently known will work. But perhaps the primary reason for the governments' sudden turn was the prospect of an important upcoming WTO conference, scheduled for mid-November in Doha, Qatar. On the top of the agenda was the question of abiding by pharmaceutical patents. Western nations planned to argue for upholding their pharmaceutical industries' patents under TRIPS. African nations planned on arguing their right to produce or purchase cheaper generic drugs in response to the AIDS crisis in Africa.
The "Declaration on the TRIPS Agreement and Public Health" that emerged from the Doha meeting had one foot squarely on each side of the dispute. Member nations were reminded that TRIPS permits nations to engage in compulsory licensing of drug patents during public health emergencies. Developing nations were also assured that developed nations would provide them with the technology necessary to take advantage of TRIPS's compulsory-licensing provisions—such as when a developing nation needs to build a pharmaceutical factory to manufacture its own generic AIDS drugs.
In light of the WTO negotiations, the U.S. might want to contract with Bayer, which makes One-A-Day vitamins, for a new product: irony supplements. Why?
Almost every aspect of the anthrax panic in the United States and in Canada was overblown. Despite the sheer viciousness of the anthrax-letter attacks, the actual impact on public health was and is small. In early December, fewer than 20 people have actually contracted the disease, and only a handful have died. By contrast, according to CDC statistics and other sources, there are likely to be 20,000 or more influenza-related fatalities in the U.S. in any given flu season.
One shouldn't diminish the impact of October's anthrax attacks. They were the first bioterror incidents of their kind in the U.S. They were immensely public and yet they remain mysterious. More than anything, those factors explain the speed with which policy makers put compulsory licensing on the table in their negotiations with Bayer. Whether the close-to-home aspect of the anthrax attacks will make the U.S. more sympathetic to the arguments of African nations—who actually do face a large-scale public health crisis—remains to be seen.
Critics of the pharmaceutical industry such as the Consumer Project on Technology's Love and Sen. Schumer argue that drug companies should not be allowed to profit unduly from a public health crisis, if and when one emerges. But PhRMA's Grayson insists that declaring war on drug company profits is not the answer. If a bioterror epidemic does occur—an outbreak of "weaponized" smallpox infections is everyone's worst-case scenario—Grayson says the only way enough smallpox vaccine will be produced is if the government enlists the help of industry. According to Grayson, "They won't be able to make enough vaccine without having a lot of industry support."
Of course, the brand-name drug industry is already showing its support for the government's anti-terrorism efforts. Representatives of pharmaceutical companies have promised to provide doxycyline and amoxycillin, and perhaps other drugs, to the national stockpile free of charge, provided the FDA quickly approves the use of these drugs as anti-anthrax therapies. Industry lobbyists are quick to describe this effort as public-spirited, but it's also good public relations. If the brand-name drug companies build up enough good will in their response to this public health issue, they may be less fearful that their patents will be at stake when the next big disease scare happens.