Copyright 1999 Federal News Service, Inc.
Federal News Service
JULY 1, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
2365 words
HEADLINE: PREPARED TESTIMONY OF
MAURA
KEALEY
DEPUTY DIRECTOR, PUBLIC CITIZEN'S CONGRESS WATCH
BEFORE THE
HOUSE JUDICIARY COMMITTEE
SUBCOMMITTEE ON COURTS AND
INTELLECTUAL PROPERTY
SUBJECT - H.R. 1598
THE "PATENT FAIRNESS ACT OF
1999"
BODY:
Mr. Chairman and Members of the
Subcommittee, thank you for the opportunity to testify this afternoon. I am
Maura Kealey, Deputy Director of Public Citizen's Congress Watch. Public Citizen
is a 150,000-member nonprofit organization that advocates for the rights, health
and safety of American consumers. For more than 25 years Public Citizen's Health
Research Group, under the direction of Sidney M. Wolfe, M.D., has been at the
forefront of the fight to ensure that consumers have access to safe, effective,
and affordable medicines.
Prescription drugs is one of the top challenges
facing consumers in the United States today. Two days ago, President Clinton
announced a serious effort to provide Medicare coverage for outpatient
prescription drugs in order to make medicines affordable for two groups who need
drugs the most, seniors and individuals with disabilities. Ironically, in the
same week this Subcommittee is considering H.R. 1598, the special patent
extension bill that is the subject of this hearing, which goes in
exactly the opposite direction. While the Clinton bill seeks to expand drug
coverage while placing Medicare on a sound financial footing, this bill would
have no benefit for the health of consumers and would increase costs that would
extend beyond Medicare.
If Congress passes H.R. 1598, the message it will
send to the American people is that Congress is in favor of protecting drug
company monopoly pricing practices - not helping seniors and the rest of us
afford the medicines we need.
In judging H.R. 1598, the fundamental question
is this: Does it advance the goal of making prescription drugs more affordable
for and hence more accessible to American consumers?
The answer is a
resounding no. H.R. 1598 attempts to undo a compromise reached in 1984 when all
affected parties were at the table and reached agreement on the Drug Price
Competition and Patent Term Restoration Act of 1984 (Waxman-Hatch Act). Now one
side is attempting to rewrite the rules to their benefit. This is not only
unfair; it would set a bad precedent for the future.
A three-year
patent extension for Claritin would alone cost American
consumers an additional $1.6 billion - $3.2 billion.1 For all seven drugs
affected by the bill, the additional cost to consumers and the U.S. healthcare
system would be between $2.2 billion and $4.5 billion over the three years. For
individual allergy sufferers, this could mean up to hundreds of dollars a year
in additional drug costs.
The billions of dollars that H.R. 1598 would cost
consumers would, of course, translate directly into billions of dollars of
additional revenue to Schering-Plough, Claritin's manufacturer. This is an
unwarranted transfer of income particularly in the case of Claritin, a drug that
has already more than amply repaid its maker. Claritin had worldwide sales of
$2.2 billion in 1998, and accounted for 28 percent of Schering-Plough's total
sales. Public Citizen estimates that between its initial marketing in 1993 and
1998, Claritin earned at least $1.3 billion in profits. Before its patent
expires in 2002, we estimate that it will earn another $2.2 billion.2
Thus
when H.R. 1598 is evaluated on the basis of its economic impact on U.S.
consumers and the U.S. healthcare system, it fails to pass the test of good
public policy. That is perhaps why the bill's proponents attempt to clothe it in
the mantle of defending intellectual property rights or stimulating research and
development into new treatments. Before explaining why we believe those
arguments are without merit, let me quickly sketch how H.R. 1598 would work.
H.R. 1598 would create a special patent extension review
process for seven "pipeline" drugs (so-called because they were in the FDA new
drug review process at the time the Waxman Hatch Act) became law: in addition to
Schering-Plough's Claritin, the main drug affected, Smith- Kline Beecham's
Relafen, Bristol-Myers Squibb Cardiogen-82, Bayer's Nimotop, Hoechst Marion
Roussel's Dermatop, Rhone-Poulenc-Rorer's Penetrex, and Schering-Plough's
Eulexin would be eligible. Manufacturers could petition the Commissioner of
Patent and Trademarks for three additional years of patent protection for these
drugs. The sole basis on which the extension could be challenged would be a
showing that a firm failed to exercise "due diligence" during some part of the
review process; the burden of proof would be on the opponents. FDA would have no
role in the review process. Public interest considerations, such as how higher
prices would affect consumers, would be irrelevant. If a patent expired during
the review process, an automatic extension would be granted, which could be
extended during any period of judicial review.
H.R. 1598's proponents make
three claims for their bill. We believe the Subcommittee should reject all
three, for the reasons explained below.
Claim #1: Claritin was denied the
full patent term restoration to which it should have been entitled under the
1984 Waxman-Hatch Act.
In an attempt to justify this windfall profits
scheme, H.R. 1598's proponents have attempted to rewrite legislative history.
They claim that the two-year patent extension granted to seven
"pipeline" drugs, including Claritin, should be extended because the FDA review
process for these drugs took much longer than average. Proponents claim that in
order to "remedy" an "unintended consequence," Claritin should be made eligible
for an additional three years of patent protection.
This "fairness" claim
rests on a clever attempt to confuse two unrelated parts of the Act:1. The
five.year patent term restoration process. Congress made this provision of the
Waxman-Hatch Act prospective only. It deliberately chose to exclude the pipeline
drugs from this section because patent term restoration was intended as an
incentive to stimulate new research and development. Since the research and
development phase for the pipeline drugs had already occurred, they were not
meant to be covered.
2. Special protections for pipeline drugs. This does
not mean that Congress ignored the competitive situation of the pipeline drugs.
Other sections of the Act provided them two types of protection: (a) two years
of patent extension, and (b) a variety of special non- patent
exclusivity provisions, which prevented or delayed generic competition.
Schering- Plough got its two years for Claritin. (In addition, it later received
another 22 months extension due to the General Agreement on Tariffs and Trade
(GATT)).
It is wishful thinking on Schering-Plough's part to read into the
Waxman-Hatch Act any intent to provide pipeline drugs with more protection that
the Act gave them. If Congress had wanted to make the length of the FDA review
and approval process a factor for pipeline drug patent
extension terms, it could have - and would have - done so. Claim #2:
H.R. 1598 is somehow a necessary incentive for companies to continue to do
research and development to find new treatments.
Brand-name
pharmaceutical companies frequently play what has been called the "R&D scare
card" - that is, raising the threat that they will not be able or motivated to
invest in new research and development unless they get their way on whatever
legislation Congress is considering. Although this argument can be a successful
scare tactic, playing on the fears that a vitally needed treatment for a disease
won't be discovered, its premise is false.
There are two reasons why it is
false. The first is that brand-name companies rely on R&D to make money: it
is the source of new patents, new products, and future profits. Over the 15
years since the Waxman- Hatch Act passed, according to the Pharmaceutical
Research and Manufacturers of America (PhRMA), brand-name company R&D has
increased from $3.4 billion in 1985 to $17.2 billion in 1998. In the five years
after Congress imposed price restraints on Medicaid drag prices in 1990, which
also had been opposed by the brand-name industry on the grounds that they would
have a chilling effect on research and development, R&D expenditures almost
doubled, going from $6.8 billion to $11.9 billion. These firms are not going to
commit business suicide by curtailing R&D.
Secondly: The brand-name
industry's profit margins are more than sufficient to increase R&D.
According to Fortune Magazine, in 1998 the pharmaceutical industry was the most
profitable in the U.S. based on rate of return on sales, assets, and equity? Its
profit margin of 28.7 percent is nearly three times higher than the profit
margin of other manufacturers of branded consumer goods.4 This industry does not
operate on such razor-thin margins that some equitable price relief for
consumers will drive brand-name pharmaceutical companies to cut research and
development.The record shows that for Schering-Plough, as well as other leading
brand-name pharmaceutical companies, profits are a much higher priority than
R&D. In 1998, ScheringPlough allocated almost 22 percent of its net sales to
profit (net income) and just 12.5 percent to research and development. None of
the top ten U.S. pharmaceutical companies ranked by sales in 1998 spent more on
R&D than they generated in profits (net income). The median for the ratio of
net income to R&D for the top ten was 1.5.
Leading Pharmaceutical
Companies Place Profits above R&D
Net income as a R&D as
a percent Ratio of net Company percent of sales of sales income to R&D
Bristol-Myers Squibb 17.2% 8.5% 2.0 Abbott 18.7% 9.8% 1.9 Merck 19.5% 10.6%
1.8 Schering-Plough 21.7% 12.5% 1.7 Am. Home Products 18.4% 12.2% 1.5 Pfizer
26.4% 18.0% 1.5 Warner-Lambert 12.3% 8.6% 1.4 Johnson & Johnson 13.0% 10.3%
1.3 Amgen 31.8% 24.4% 1.3 Eli Lilly 22.7% 18.8% 1.2
Fortune Magazine's top
ten pharmaceutical companies ranked by sales, in this chart in declining order
by ratio of net income to R&D. Company figures from 1998 annual reports.)
These numbers show three things: (1) the enormous profitability of brand-name
pharmaceutical companies; (2) that they all earn enough to allocate more money
to research and development than they now do and still maintain enormous
profits; and (3) that without exception, the top ten place a higher priority on
profits than R&D. The R&D scare argument is particularly laughable as a
justification for a three-year patent extension for Claritin,
in view of Schering-Plough's enormous profits and the imbalance between profits
(net income) and research and development expenditures. Claim #3: H.R. 1598
merely sets up a "fair and open" review process to resolve disputes about these
patent term extensions objectively instead of through "stealth" riders
The
first thing that's wrong with this argument is that Schering- Plough, the
company whose aggressive lobbying is driving H.R. 1598, tried for three years to
get a patent extension for Claritin with just those stealth
tactics. It is only because they were unable to put their special interest
provision as a last minute rider onto various appropriations and other bills,
due to alert legislators and attention from the media, that a legislative
strategy is underway this year. But if it succeeds, the consequences for
consumers will be no different.
Next, H.R. 1598's review process is neither
fair nor open. The bill gives the drug company asking for the patent
extension the winning hand before the cards are dealt by, as noted
above, placing the burden of proof upon the opponents and constructing the
review criteria so that a favorable outcome for the petitioner is all but
inevitable.
Some of H.R. 1598's proponents have sought to find a way to
profit from adversity. In responding to widespread criticism of their stacked
deck process, they attempt to re-focus the entire debate on this question, as if
getting the process right could "fix" the problems with the bill. Should the
Court of Claims hear the case rather than the Commissioner of Patents and
Trademarks? Should the review criteria be changed?
But to enter into that
discussion' is to have taken the bait - that is, to have accepted proponents'
claim that there is any legitimate reason for Congress to establish any review
process - no matter how structured or where located - that could result in
three-year monopoly patent extensions for drugs already on the
market, one of which is enormously profitable. Since H.R. 1598's proponents have
utterly failed to meet the threshold burden of showing that some past wrong was
done them that should be righted, their attempt to cloak this special interest
bill in the sacred mantle of defending intellectual property rights should be
rejected as the sophistry it is.
In conclusion, I want to come back to the
contrasting stories with which I began - the President's proposal two days ago
finally to provide a Medicare prescription drag benefit to help seniors and
persons with disabilities afford the medicines they need. The bill that is the
subject of today's hearing goes in exactly the opposite direction by making
medicines less, rather than more, affordable.
That is the context in which
we hope this Subcommittee will evaluate H.R. 1598. We are certainly not opposed
to either pharmaceutical patents or intellectual property rights. But drug
patent protection should not, to paraphrase former Senator Pryor, be viewed as a
God- given right, but instead as something government creates to fulfill a
public purpose.
An examination by this Subcommittee of how the U.S. drug
patent monopoly price system is actually working - and whether it is truly
promoting the public good as it should would be welcome. But in the meantime, we
would urge you to reject H.R. 1598. The public interest demands that medicines
be made more affordable for American consumers - not less.
FOOTNTOES:
1.
Public Citizen fact sheet, "Stop Claritin's Billion Dollar Patent
Extension Grab," May 24, 1999, p. 3.
2. Public Citizen fact sheet,
"Claritin Patent Extension Bill: Don't Be Fooled by the R&D
Scare Card," June 21, 1999.
3. "Drug Dependency: U.S. Has Developed an
Expensive Habit," Wall Street Journal (Nov. 16, 1998). 4. Houlihan Lokey Howard
& Zukin, Expert Analysis of Profitability (Feb. 1998).
END
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