Claritin Patent Extension Bill: R&D Scare Card

Claritin Patent Extension Bill:
Don't Be Fooled by the
"R&D Scare Card"

Click here for a complete text of the bill,
list of co-sponsors, and current status.

Proponents of H.R. 1598/S. 1172, which creates a "slam dunk" patent extension process for Claritin and six other drugs that could cost consumers between $1.6 billion and $3.2 billion over three years, seek to justify this special interest legislation with two main arguments: (1) defense of "patent integrity," and (2) the "R&D Scare Card:" without enormous drug company profits, the research and development investment necessary to find and develop new medicines will stop.

R&D Scare Card: The brand name pharmaceutical industry plays the R&D scare card every time Congress considers legislation to mitigate the consequences of the U.S.'s extraordinarily high prescription drug prices. Here it is used as an affirmative argument for granting Claritin a third patent extension.⁽¹⁾ Representative Ed Bryant introduced the R&D argument in his April 28, 1999, floor statement on H.R. 1598: "Drug research is...expensive...It costs more than $500 million to develop and discover one new medicine...That explains our legislation and the necessity for patent integrity." This argument is particularly absurd with respect to best-selling Claritin, which has repaid its makers' R&D costs many times over. The case of Claritin also disproves the erroneous implication that the enormous profits earned by drug companies go in large part to R&D.

Schering-Plough's expenditures on R&D are low and its profits are high: The attached pie chart shows data from Schering-Plough's Annual Report on how Schering-Plough's 1998 net sales were allocated. Despite the rhetoric about the importance of research and development, it reveals that, even with a profit rate of almost 22 percent, Schering-Plough allocated a scant 12.5 percent of sales to R&D.⁽²⁾ (see attached pie chart).

Schering-Plough does not need three additional years of patent protection to reap ample rewards for developing Claritin: Brand name drug companies do not reveal how much they spend on bringing a new drug to market. But even at the Pharmaceutical Research and Manufacturing Association's (PhRMA) inflated figure of an average of $500 million per drug that makes it to market,⁽³⁾ the investment in Claritin has been repaid many times over.

Since Schering-Plough does not report what proportion of its net income derives from Claritin, Public Citizen has constructed an estimate using the rough assumption of a 1:1 relationship between Claritin's shares of Schering-Plough's net sales and net income.⁽⁴⁾ On that basis, Claritin has earned $1.3 billion in its first five years on the market.

Prospects for future earnings are also bright. For the next three years, 1999 - 2001, Claritin's sales are projected to total nearly $10 billion.⁽⁵⁾ At Schering-Plough's current 21.7 percent profit rate,⁴ Claritin could earn another $2.2 billion before its first patent expires in 2002.⁵ The drug will have earned $3.5 billion in its first eight years on the market, seven times more than PhRMA's inflated cost of bringing a drug to market.

Nor will these profits cease in 2002. To the contrary: analysts expect Claritin to remain a blockbuster drug for Schering-Plough for many years, due to expanded sales from new formulations (Claritin-D 24 Hour, Claritin Syrup, and Claritin RediTabs have been introduced over the last few years) and a 1997 licensing agreement with Sepracor, which holds the patent for the active metabolite of Claritin, giving Schering-Plough patent life for some products extending as far as 2014.⁵ Among the MedAdNews editors' explanations for "What makes Claritin special:" "long life ahead before patent expires" and "many years of growth ahead."⁵

Claritin's success is based on aggressive marketing: In saluting Claritin as its 1998 brand of the year, MedAdNews' editors particularly noted the "aggressive promotional effort by marketer to establish brand identity."⁵ Claritin is indeed a story of aggressive marketing. Between January and June, 1998, it led all other drugs in direct-to-consumer (DTC) ads. During that period, Schering-Plough spent $66.7 million on DTC ads for Claritin, an increase of 91 percent over the first half of 1997.⁽⁶⁾ The company also increased its sales force, which markets to physicians, hospital formulary committees, and HMOs.⁽⁷⁾ And recently Claritin's promoters have borrowed an idea from the tobacco industry - placing young people in blue T-shirts on downtown street corners to hand-out "$5 off" promotional coupons (with the necessary "ask your doctor" tagline, since Claritin is available by prescription only).

Conclusion: H.R. 1598/S. 1172 is not about patent integrity or drug research and development. Above all, this bill would reward Schering-Plough's aggressive Congressional lobbying campaign with additional billions in profits which, if the company's past priorities are a guide, would go in large part to fuel aggressive marketing campaigns like that waged for Claritin, arguably the most aggressive in U.S. pharmaceutical history. That may be a legitimate reason for Schering-Plough stockholders to support the bill - but not for Congress to pass it.

Attachment: Public Citizen's May 24, 1999, fact sheet, "Stop Claritin's Billion Dollar Patent Extension Grab," which rebuts the patent integrity argument made for H.R. 1598. It explains how H.R. 1598 would subvert rather than defend the integrity of the drug patent system while costing consumers billions of dollars.

Rev. July 30, 1999
For more information: Maura Kealey 454-5116

1. Claritin received a two-year extension under the terms of the Waxman-Hatch Act, and 22 more months from the Uruguay Rounds Agreement Act (URAA) of 1994, the U.S. enabling legislation for the General Agreement on Trade and Tariffs (GATT). (On average, the URAA extended pharmaceutical patents by 14 months.)

2. Schering-Plough 1998 Annual Report, p. 33. Explanation for "cost of sales" category comes from 6-10-99 telephone interview with Schering-Plough; no further breakdown was available for "selling, general and administrative" or "research and development" categories.

3. The $500 million figure has a "failure rate" built in; i.e., it includes expenditures on R&D for drugs that are never marketed. It dates back to a paper published in 1991 by four economists with well-known ties to the drug industry which used data from an unaudited and confidential industry questionnaire. It has been used in connection with H.R. 1598/S. 1172 not only by Representative Bryant in his floor statement introducing the bill but also by Gerald Mossinghoff, former executive director of PhRMA, at a June 10, 1999 forum organized to promote H.R. 1598. For a critique of the studies underlying this number, see James Love, "Call for More Reliable Costs on Clinical Trials," Marketletter, January 13, 1997, pp. 24-25. Love's analysis of orphan drug tax credit reports and NIH clinical trial costs suggests that the PhRMA number is at least three times too high for the cost of clinical trials, said to be one of the most expensive components of new drug development.

4. Claritin worldwide sales reported by Schering-Plough (6-17-99 telephone interview); corporate worldwide net sales and net income from 1998 Annual Report, p. 36 ($ in millions).

Year

Claritin Sales

Total S-P Sales

Claritin Sales as % of Total S-P Sales

S-P Net Income

Estimated Claritin Net Income

1993
N.A.

$4,229

0*

$ 731

0*

1994
N.A.

4,537

7.7%*

922

$ 71

1995
$ 789

5,104

15.5%

887

138

1996
1,150

5,656

20.3%

1,213

246

1997
1,726

6,778

25.3%

1,444

365

1998
2,263

8,077

28.0%

1,756

492

Estimated Claritin Net Income, 1994 - 1998: $1,312

*Sales data for Claritin for 1993, the year the drug was launched, and 1994 were not available. We estimate Claritin's share of net sales as 0 for 1993 and 7.7% for 1994 (the midpoint between 1993 [0] and 1995 [15.5]). This is undoubtedly a conservative assumption, since Claritin had some sales in 1993.

5. MedAdNews, May 1998, pp. 14-15.

6. Scrip, December 2, 1998, for dollar figure; MedAdNews, October 1998, p. 10, for percentage increase.

7. Schering-Plough 1997 Annual Report, p. 9.

Year	Claritin Sales	Total S-P Sales	Claritin Sales as % of Total S-P Sales	S-P Net Income	Estimated Claritin Net Income
1993	N.A.	$4,229	0*	$ 731	0*
1994	N.A.	4,537	7.7%*	922	$ 71
1995	$ 789	5,104	15.5%	887	138
1996	1,150	5,656	20.3%	1,213	246
1997	1,726	6,778	25.3%	1,444	365
1998	2,263	8,077	28.0%	1,756	492