The Front

GATT Rx: Profit Overdose

NAME-BRAND PHARMACEUTICAL COMPANIES thought they hit a home run with patent changes Congress passed along with the new General Agreement on Trade and Tariffs (GATT). In fact, they hit two.

 A Food and Drug Administration (FDA) ruling made May 25, 1995, puts into effect a controversial interpretation of the GATT-related patent law change that will add $6 billion to the pharmaceutical bills of U.S. consumers, a recent University of Minnesota study says. This change would add an enormous cost to the international trade agreement that multinational corporations and President Bill Clinton touted as a boon to consumers.

 U.S. patent holders now enjoy exclusive marketing rights for a period of 17 years from the time a patent is issued. To bring U.S. law in compliance with the GATT, Congress changed the duration of U.S. patents, and the way patent life is calculated, as part of the legislative package approving the world trade agreement. Under the new patent law that takes effect on June 8, 1995, market exclusivity will be awarded for 20 years from the time a patent application is filed.

The $6 billion controversy stems from what happens to patents that have been granted but have not expired by June 8, 1995. Under a Patent and Trademark Office proposal, patents in effect on or prior to June 8 would get the longer of either 20 years from filing or 17 years from patent grant. The proposed policy would ensure that transitional patents get the maximum monopoly marketing period afforded by either the new or old patent system. In the case of the pharmaceutical industry, this policy would result in the unforeseen transfer of billions of dollars from the pockets of consumers and generic drug companies to producers of name-brand drugs.

 In reluctantly accepting the Trademark Office's proposal, the FDA - which instructs generic drug makers when drug patents expire and when they can begin marketing generic versions of the drug - sold short consumers and the many generic companies that have been preparing to market generic versions of name-brand drugs with soon-to-expire patents.

 The generic drug industry argues that it was not Congress' intent to eliminate pharmaceutical competition during the transitional patent period. The GATT implementing legislation says that generic producers that have made a "substantial investment" preparing a generic to compete with a name-brand drug can go ahead and market that product during the transitional phase provided that the patent-holder receives "equitable remuneration."

The generic industry takes some solace in this provision but it poses two significant problems. First, Congress did not define the key terms "substantial investment" and "equitable remuneration." As a result, these determinations are likely to be interpreted by the courts. A greater problem is that Congress did not tell the FDA how to resolve apparently conflicting mandates. The 1984 Waxman-Hatch Drug Price Competition Act directs the agency to move generics on the market as soon as possible. But in applying the extended patents to drugs in the transitional period, the FDA will postpone approval of generics that have been cleared for imminent marketing based on the old patent system.

 "Our position is that the FDA has the discretion of sticking with the original [patent-expiration] dates because Waxman-Hatch is clear on that and GATT is not," says Robert Milanese, president of the Garden City, New York-based National Association of Pharmaceutical Manufacturers, which represents the generic drug industry. The GATT law "was meant to allow marketing provided that the company that is trying to get on the market can show substantial investment and that they pay a royalty."

Milanese says Congress, the FDA and the generic industry were slow to realize the implications of the GATT-related patent change for generics. "It was only after Bristol- Myer [Squibb] and Glaxo and a few others started crowing about the fact that, ŠWow, not only have we gotten 20 years, we're getting all this other stuff' that everybody said, ŠWhoa, what happens to us?'"

 Glaxo and Bristol-Myers Squibb have led the charge for hard-line enforcement of GATT-extended patent terms. Bristol-Myers' hypertension drug Capoten will be the first important drug affected. According to the FDA "Orange Book," which lists drug patent expiration dates, its patent expires on August 8, 1995. Under the GATT change, this market protection would be extended to February 1996. Milanese says five generic companies have made substantial preparations to market captopril, the generic version of this drug, in August. Bristol-Myers has about $102 million dollars at stake with Capoten, according to the study by the University of Minnesota's Pharmaceutical Research in Management and Economics (PRIME) Institute. For its part, Glaxo stands to make more than $1 billion of extra revenue from its ulcer drug Zantac if its expiring patent is extended, the PRIME study says.

 Glaxo spokesperson Nancy Pekarek says she could not confirm how much extra revenue the company would take in if Zantac's patent is extended, but she acknowledges that extending its expiration date from December 1995 until July 1997 would be a "considerable" extension. Pekarek says that this aspect of GATT comes as a welcome though unforeseen windfall. "We had supported GATT basically for the 20-year extension but did not realize at the time that GATT was passed that it applied to existing patents," she says. "GATT was signed December 8, I believe, and maybe two weeks after that we realized it. It's not something we had lobbied for."

 Though Glaxo says GATT's booster for existing patents was unforeseen, it made it clear that it would fight to preserve its interpretation of the law. The Washington, D.C.- based law firm Arnold & Porter filed a complaint with the FDA on Glaxo's behalf on March 7, 1995. The complaint, supported by letters from Bristol-Myers, sternly warns that the "FDA may not lawfully ignore such revised expiration dates and instead rely on the expiration dates dictated by prior law" when approving generic drug applications. Otherwise, the petition says, "Glaxo may find that it must seek judicial review of FDA's position." The petition also says the FDA should not collect data on whether a generic firm has made the "substantial investment" described in the GATT implementing legislation. Arnold & Porter's lawyers argue that FDA "has no ability to judge the validity of claims of substantial investment" and need only evaluate generic drug applications on the basis of whether or not the extended trademark patent is still in force.

 Not all multinational drug corporations support the Glaxo and Bristol-Myers line. Ciba-Geigy Corporation produces both name- brand drugs - including four that would benefit from the patent extension - and generics. Apparently, Ciba-Geigy, which did not respond to requests for comment, has more to gain from speedier generic sales than from patent extensions. "Ciba owns one of the companies that we're in [patent-infringement] litigation over on a generic" version of Zantac, Glaxo's Pekarek says, referring to Ciba subsidiary Geneva Pharmaceutical Inc. "If they would've prevailed in the litigation they would've been able to market [a generic version of Zantac] in December of this year. Whereas, even if litigation were to be finished this year, in our view they still couldn't market until July of 1997 unless someone says the GATT extensions are not to be honored," Pekarek says.

 A spokesperson for the Pharmaceutical Research and Manufacturers of America (PhRMA), which represents name-brand drug companies, some of which also sell generics, says the trade group is not taking a position on how the FDA should apply the GATT-related patent law to generic drugs because the issue will benefit some PhRMA members and hurt others. "When that happens, we stay out of it," he says.

 The PRIME study, "Economic Impact of GATT Patent Extension on Currently Marketed Drugs," illustrates the stakes in the patent term dispute. The study analyzed most FDA-approved drugs (the main exception are antibiotics), identifying 109 drugs whose patent holders would benefit from the patent extension. The average patent- extension gain for these products is 12 additional months of monopoly pricing. An increase in the prices of antibiotic drugs, which are to be the subject of a subsequent study, would add to the overall cost to consumers. The study was funded by the National Association of Pharmaceutical Manufacturers and the National Pharmaceutical Alliance, which mainly represent generic drug producers.

 The introduction of generic drugs following patent expiration brings enormous cost savings to consumers. On average, one year after generic entry, a generic alternative costs 55 percent of what the original drug cost when its patent ran out. After two years, the average generic costs just 39 percent of the patent-protected price, according to the study.

 Although the $6 billion in additional profits that pharmaceutical companies may receive from the GATT extension is derived from 109 different drugs, just 10 drugs account for two-thirds of these added profits. Similarly, although 34 drug companies and subsidiaries would benefit, just three companies would pocket half of the $6 billion windfall. The lucky companies are Merck , Glaxo and Bristol-Myers Squibb.

Unlike the other big three, Merck has not urged the FDA to postpone the entry of new generic drugs until the extended patent terms expire. Like Ciba-Geigy, Merck has made a hefty investment in generic versions of drugs with patents that will soon expire unless they receive the windfall extension. Dupont Merck Pharmaceutical Co. and Mylan Pharmaceuticals Inc. filed suit against Bristol-Myers in the U.S. District Court in Delaware on May 10, 1995, seeking a court order allowing them to proceed with their plans to market captopril, a generic version of Bristol-Myers Capoten.

 Because the patent law change for Capoten and 108 other drugs would transfer enormous costs to government health programs, drug consumers will essentially pay twice: once at the pharmacy and again as taxpayers. "Based on current expenditure patterns of Medicaid, Medicare, and other government programs such as the Veterans Administration and the Department of Defense, this extension of existing patents will cost federal and state governments more than $1.25 billion over the next two decades," the report says.

 Six senators, four of whom voted for GATT and the patent change, wrote a letter to FDA Commissioner David Kessler on March 27, urging him to oppose the giveaway. "In no way did Congress intend GATT to serve as an obstacle to the workings of the free market nor as an inducement to particular industries to seek shelter behind regulatory barriers," the letter says. "The health of American consumers, particularly older Americans, often depends upon their access to high quality and more affordable generic drugs. Rather than impede the drug approval process, the FDA should continue to recognize pre-GATT patent expirations and allow the marketing of generics for which substantial preparation has been made."

 Ciba-Geigy and the generic National Association of Pharmaceutical Manufacturers advocate a legislative solution to the problem through an amendment to the 1984 Drug Price Competition Act. Such an amendment could require new generic drug applicants to certify to the FDA that they have made a substantial investment in product development prior to June 8, 1995 and that they have notified the patent holder of the filing. Then it would be up to the patent holder, the generic company and, if necessary, the courts to solve the issue of "equitable remuneration." Such legislation would have to be passed over the strenuous objections of such companies as Glaxo and Bristol-Myers.

 The FDA ruling acknowledged that its interpretation may not reflect Congress' intent, leaving the door open to a legislative fix. Senator David Pryor, D-Arkansas, who had spearheaded the March letter to Kessler, responded to the FDA decision by pledging to introduce a bill to reduce the terms of drugs now under patent or in the application pipeline.

 - Andrew Wheat


Patently Obscene: Drugs That Would Most Benefit from a Patent Extension

Generic name Trade name Producer Months extended Usage Savings ($1996)
ranitidine Zantac Glaxo 19.7 ulcers $1,046,930,747
omeprazole Prilosec Merck 16.9 ulcers 586,890,482
lovastatin Mevacor Merck 19.4 cholesterol 448,172,731
loratadine Claritin Schering-Plough 22.5 antihistamine 436,099,410
fluconazole Diflucan Pfizer 20.6 anti-viral 410,485,737
paroxtetine Paxil SK Beecham 20.9 anitdepressant 390,689,487
pravastatin Prevachol Bristol-Myers Squibb 21.4 clogged arteries 272,531,323
famotidine Pepcid Merck 16.5 ulcers 183,222,361
buspirone Buspar Bristol-Myers Squibb 16.4 anxiety, stress 141,602,241
ketorolac Toradol Roche-Syntex 13.9 pain killer 125,084,993

Source: PRIME Institute, University of Minnesota


Big Oil Bilks Taxpayers

WE HAVE MET THE ENEMY and it is government agencies and the industries they regulate. This corruption of an old Pogo cartoon is a reasonable summary of an April 1995 report from the Project on Government Oversight (POGO).

 Seven of the largest U.S. oil companies are cheating the federal government out of $1.5 billion for oil extracted from federal lands in California, according to a report from the Washington, D.C.-based Project on Government Oversight (POGO). The government has done little to recover the money, the report says.

 Because they control the whole production process - extracting, transporting and refining oil - these seven so-called "integrated" companies are free to set whatever artificial crude price benefits them. According to the report, Texaco, Shell, Mobil, ARCO, Chevron, Exxon and Unocal deprived taxpayers and oil independents of revenue by depressing the "well-head" or production-site price below market value. These alleged pricing practices hurt others because the oil revenues of independent oil producers, the state of California and the federal government are all based on the well-head price of crude.

The report, "Department of Interior Looks the Other Way: the Government's Slick Deal for the Oil Industry," says all of these companies except Exxon are fully integrated in California. Although Exxon extracts California crude and refines it in its own facilities, it is not fully integrated because it does not have a proprietary pipeline in that state, POGO says.

 The California case is unusual. Although the state is the nation's fifth largest oil producer and has the largest U.S. market for transportation fuel, only one of the seven major oil pipelines crossing federal lands in California is a common carrier. Most oil pumped by independent producers must flow through proprietary pipelines of the integrated companies or be moved by truck, which is much more expensive.

Refineries owned by the integrated companies require more crude than the owners produce directly. To meet this demand, the integrated companies stipulate that independents using their pipelines must sell all crude passing through proprietary pipelines to the pipeline's owner, the report says. The revenue of independent producers depends on crude prices "set" by the integrated producers, which produce more than 80 percent of California crude. Independent refiners, on the other hand, typically purchase transported crude from integrated suppliers at prices that are substantially above the Big Seven well- head price, on which government royalties are based.

 A 1988 General Accounting Office report found well-head prices for California crude were 13 percent lower than prices for a similar grade of West Texas crude between 1980 and 1986. A 1994 Department of Energy report concluded that the California crude market "could amply support an increase in crude oil prices of $1.50 to $2.00 per barrel without necessarily causing an increase in consumer prices."

The depressed well-head price of California crude has not helped consumers; the price of the fuel coming from the refineries of these integrated companies is comparable to average prices around the country. The integrated companies "push their profits downstream to the refinery end," the report alleges.

The practices of these integrated companies are common knowledge within the appropriate federal agencies, explains the POGO report, citing documents from the Commerce and Interior departments. Oil royalties "may have been underpaid by as much as $29.5 million from 1990 through 1993," according to a draft Department of Interior (DOI) Inspector General report cited in the study.

 "These oil companies have already settled for over $350 million with the State of California for royalties owed to the State for the same reasons money is owed to the Federal Treasury," the POGO report says. "However, all the evidence used by the State to retrieve this money has been sealed by the courts at the request of the oil companies who feared Špotentially prejudicial pretrial publicity.'"

 Several oil companies asked about the report by Multinational Monitor referred to it as if it were a work of fiction. "We have paid all royalties owed," says a spokesperson at Mobil headquarters in Fairfax, Virginia. "We weren't aware of what they were referring to." "This story has been overplayed. We don't know when or why our name has been connected with it," says Albert Greenstein, a spokesperson in ARCO's Los Angeles headquarters. "It's not in our interest to keep prices artificially low."

"This is a moot issue for us," says a spokesperson in Chevron's San Francisco headquarters. "All but one of our pipelines in California are common carriers" and the other doesn't cross federal lands, she says.

Danielle Brian, author of the POGO report, says Chevron was operating its pipeline as a common carrier until three years ago, when it moved the pipeline off public federal lands to circumvent the common carrier requirement.

In June 1994, the House of Representatives directed the DOI to come up with a plan to recover "royalties and interest from supposed undervaluation" when submitting its fiscal 1996 budget request in April 1995. The POGO report says the DOI is still preparing plans for a limited audit of just two integrated companies.

 POGO recommends that the DOI enforce Mineral Leasing Act provisions that require pipelines crossing federal lands to be operated as common carriers. The group is also calling for the oil royalty regulations to be amended to allow the DOI to cross-check and challenge suspiciously low crude oil prices submitted by companies operating on federal lands.

But the watchdog group noted that these changes will not alter the status quo until the DOI reverses "its mind-set from trying to find reasons not to collect money from the big oil companies, to trying, instead, to figure out how to retrieve this windfall for the American people."

The DOI has not issued a formal response to the report yet. "Some things are inaccurate [in the POGO report] and they come to some wrong conclusions," says Lyn Herdt, a spokesperson in the DOI's Minerals Management Service (MMS). Herdt confirmed that a task force with representatives of the departments of Energy, Justice Commerce and Interior have requested information from two of the oil companies for an audit. The next day, however, another MMS spokesperson said only Texaco has been selected for an audit. Texaco is cooperating with the MMS audit and the agency will determine how to proceed on the basis of that study, the second spokesperson said.

 - Andrew Wheat