From the Editors - End of Drug Monopolies & Mega-profits?
Recent rulings in India may make it harder for big pharmaceutical
companies to maintain their monopolies and very high prices, especially in the
To patent an invention you have to convince the patent office that it
is both novel and useful and that it is not obvious. If you succeed, you will
be given exclusive rights for a limited period, normally twenty years. During
that time, no one can copy it without your permission, and this allows you to
exploit your invention without having to keep it secret. In return for this
protection, you have to make public a full description of your invention and
how it is used. After the patent expires, it is freely available to anyone.
It’s not really as simple as that, of course;
difficulties arise at every stage. Is a particular invention really new, not
just a tweaking of something that’s already known? Is it even an invention at
all, or is it a discovery? If it is the latter, it cannot be patented, however
novel it may be. Whether scientists invent genes or merely discover them is
currently before the US Supreme Court. Does the patent application make a claim
that is broader than is warranted by the actual invention? And so on. And after
a patent has been awarded, the question of whether some later product infringes
it may be very difficult to decide. The recent dispute between Samsung and
Apple about mobile phones and tablets lasted over two years.
The time limit on a patent is a particular issue in the pharmaceutical
industry. Once a drug has been developed and brought to market, the cost of
actually producing it is typically very low. The high prices to the consumer
are meant to reflect the cost of development, which was incurred long ago. They
also reflect the cost of marketing and the companies’ profit margins, both of
which are considerably higher than in most other industries, though the
companies don’t usually mention that when they are trying to justify the prices
they charge. As long as a successful drug can be kept in production and sold at
the original price, it can make huge profits for the company. Once the patent
runs out, however, other companies can produce their own versions of the drug
and the price will fall sharply.
You can see how important this is from the financial
section of your newspaper, which will often tell you when the patent on some
“blockbuster” drug is to expire, with the very large loss in profits that will
imply for the manufacturer. A pharmaceutical company has a very great incentive
to engage in evergreening, i.e. devising ways of extending its monopoly
as far as it can.
A common form of evergreening that can be very
difficult to counter is to make a number of modifications to a drug and obtain
patents on the new version. The drug will then be protected until these new
patents expire, which can be many years after the original ones.
The large pharmaceutical companies and their
supporters deny there is a problem. If a company has developed and patented an
improved version of the drug, they argue, that doesn’t prevent anyone else from
producing and selling the original one. Consumers will decide whether they want
to pay extra to have the most up to date formulation.
In theory, that might be true; in practice, things
are far more complicated. There are often many patents involved, both on the
original drug and on the new one. The generic manufacturer must be able to show
its drug relies only on what was in the original patent and does not infringe
any of the new ones.
The difficulties that can surround the patenting
process mean that the company that holds the patents is very likely to find
some grounds that allow it to mount a plausible challenge; indeed some of the
new patents may have been filed specifically with that in mind. The litigation
may be very long and correspondingly expensive, and the company defending its
patents will have very deep pockets. What is more, it stands to gain even if it
loses its case. For as soon as it files its suit it can get an injunction
preventing the generic competitor from selling its product. The injunction will
of course be lifted if it loses, but the monopoly will have been maintained for
an extra year or more. A blockbuster drug can have sales of several billion
dollars a year (for example, sales of Vioxx - a drug eventually withdrawn
because of serious side effects - were $2.5 billion in 2003, see Vioxx, A Mercky Story, SiS 43). By the time it is close to running out a
very large fraction of that is profit, which gives a company a very large
incentive to take the generic manufacturer to court, even if it is not at all
confident of winning.
In 2002 the US Federal Trade Commission found that
about three quarters of new drug applications by generic manufacturers were
being challenged. It recommended that no more than one 30-month stay per
generic product should be permitted, but even this can be worth a huge amount
of money. What is more, as part of the deal to get the change approved, the
government agreed to provide a large subsidy for drugs for the over-65s, and
also to prevent the Federal Medicare Agency from using its influence to
negotiate prices on a national basis with the companies . What the companies
lost in accepting a limitation on evergreening, they got back from the public
in other ways.
Patent laws vary from country to country and they
change in time, usually in response to intense lobbying from corporations that
are trying to advance their own interests. For example, it is not so long ago
that many countries did not permit the patenting of molecules. When aspirin was
first synthesised, it was patentable in the US but not in Germany or the UK.
The only protection Bayer could have in Europe was for the process they had
developed to make it, not the product itself. Today, aspirin would have been
patentable almost everywhere in the world, certainly in any country that is a
member of the WTO, and the argument has moved on to genes. This is obviously in
the interests of the big pharmaceutical companies; whether it is in the
interests of society as a whole, or even the small and medium size companies,
is another matter.
Pay to Delay
On 19 April, the UK Office of Fair Trading (OFT) issued a Statement of
Objections alleging that over the years 2001-2004 four pharmaceutical companies
acted to delay competition in the UK supply of paroxetine, a widely prescribed
According to the OFT, three generic manufacturers,
Alpharma, Generics UK and Norton Healthcare were each attempting to supply a
generic product to compete with GlaxoSmithKline’s Seroxat. GSK challenged all
of them, arguing that their products would infringe GSK’s patents. Rather than
fighting the issues out in the courts, each of the generic manufacturers
concluded one or more agreements with GSK. The OFT’s “provisional view” is that
these included substantial payments from GSK to the generic companies in return
for their commitment to delay the introduction of their own versions of
This would compensate the generic manufacturers for
their loss of profit while they held back from producing their drugs, while
allowing GSK to maintain its high profit margin on a blockbuster drug. It would
be a win-win situation, more precisely win-win-lose, with both GSK and the
generic companies profiting at the expense of the consumer, in this case
chiefly the National Health Service.
The US Federal Trade Commission estimates that this
practice, known as “pay to delay” costs American taxpayers $3.5 bn each year.
GSK’s initial response is that they acted within the
law and that the arrangements “actually resulted in generic versions of
paroxetine entering the market before GSK's patents had expired.” They argue
that there has already been an investigation by the European Commission, and
that it decided in 2012 to take no action. A spokesperson for the European
competition commissioner said however that their investigation was not focused
on the matters being pursued by the OFT.
The four firms will be asked to make formal
responses to the OFT before it decides whether UK competition law was
violated. If it does prove its case, GSK could be liable for a fine of up to
30% of its UK turnover for 2001-04; the average over that period was £1.4 bn
Developments in India
Recent decisions in India suggest that at least in some important parts
of the world, there are winds of change.
In 2006 the Indian Patent Office refused
GlaxoSmithKline a patent for its anti-cancer drug, Glivec. It held that Glivec
was not a new product but merely an “incremental innovation” under Section 3(d)
of the Indian Patents Act (see Box). GSK appealed and on 1 April this year, the
Supreme Court upheld the decision of the Patent Office. It used the same basic
principle that applies in other countries; where it differs from courts in
Europe and the US was in its opinion of how new something has to be to warrant
Section 3(d) of the Indian Patents Act, 2005
“The following are not inventions within the
meaning of this Act:
“The mere discovery of a new form of a known
substance which does not result in the enhancement of the known efficacy of
that substance or the mere discovery of any new property or new use for a known
substance or of the mere use of a known process, machine or apparatus unless
such known process results in a new product or employs at least one new
reactant. Explanation—For the purposes of this clause, salts, esters,
ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of
isomers, complexes, combinations and other derivatives of known substance shall
be considered to be same substance, unless they differ significantly in properties
with regard to efficacy.”
This might seem a statement of the obvious. The
mere fact that it has been controversial and that some have even suggested it
may be contrary to the rules of the WTO indicates the scope that exists for
skilful lawyers to turn the law to their advantage.
In March 2012, India granted a compulsory licence to a local company,
Natco Pharma, to produce Bayer’s cancer drug Nexavar. Bayer appealed but their
petition was rejected by the Intellectual Property Appellate Board in Chennai.
In this matter too, the law in India is in line with the rest of the world:
compulsory licensing has been permitted by the WTO under the Trade-Related
Aspects of Intellectual Property Rights (TRIPS) agreement since it first took
effect in 1995. Again the principle is clear; the issue is what counts as
India is obviously determined to obtain the
pharmaceuticals it needs at prices it can afford, which means well below what
the multinationals are charging in the north. It is in a strong negotiating
position because the Indian market, including exports, is currently estimated
to be around $30 billion and growing rapidly. The major companies can hardly
turn their backs on it, and even if they did, the recent decisions have shown
that India can get the drugs it needs from local generic manufacturers while
still complying with the rules of the WTO.
Many people in the developed countries take it for
granted that as other countries become more prosperous they will inevitably
adopt the North’s economic and political systems. We have, so we are told,
reached what Francis Fukuyama described as the end of history. Where
differences and anomalies remain we have only to wait; sooner or later they
will be resolved in our direction.
We would be better advised to consider the
possibility that as third world countries become more prosperous and more
powerful, they will develop ways of doing things that reflect their own
histories and current situations and that in the end the northern countries
will adopt many of them. That may be because the new rules are seen to be
better, but it might also be simply because international agreements tend to
conform to the practices of the most powerful nations and the world’s economic
centre of gravity is shifting.
The future of pharmaceuticals
A few years ago I attended a small seminar in London on the provision
of drugs for diseases such as Leishmaniasis
and sleeping sickness that are endemic in some third world countries but rare
in the wealthy north.
At present, the standard model for research and
development in pharmaceuticals is that a company invests a large amount of
money up front, expecting to recoup its investment by charging very high prices
for the drugs if and when they reach the market.
This works, up to a point, in rich countries. It can even work on a
global basis, if, for example, differential pricing allows most of the initial
investment to be covered by sales in the rich countries, with people in the
third world paying something much closer to the cost of production alone. It
fails for diseases that are almost completely confined to developing countries.
The companies can be generous about donating existing drugs to these countries,
but also needed are resources for finding new ones.
Everyone at the meeting, and this included some who
worked for major pharmaceutical companies, agreed there was a problem. We
didn’t make any progress towards a solution, but no one doubted that the
business model for pharmaceuticals is unsuited to the needs of the third world.
As I walked home from the meeting, I found myself
wondering whether the current business model for pharmaceuticals is appropriate
for the north, either. Do drugs really have to be as expensive as they are? Do
pharmaceutical companies have to make such large profits and do their marketing
budgets have to be so large? Does the system provide incentives for the
industry to produce the drugs we most need or is too much research being
devoted to the development of “me-too” drugs and to evergreening? Would unethical
behaviour in pharmaceutical companies that we have reported on in previous
issues of SiS be so common if there were not the same massive pressure to seek
potential blockbusters and maintain them at all costs?
Fully referenced versions of all the
articles including this editorial are available on ISIS members website: http://www.i-sis.org.uk/sismembers.php