Counterpoint: Generics And The Pharmaceutical Industry

Counterpoint: Generics and the Pharmaceutical Industry I will be presenting the viewpoint of the pharmaceutical industry on generics, patents, and the developing world. In this very brief presentation, I hope to dispel a few misconceptions on the industry as well as the impact of generic drugs in providing future care for the world’s most crucial health problems. I will also provide a few possible solutions on how to resolve these issues that serve to benefit everyone. To start, I will speak a little on the pharmaceutical industry as a corporation and its image with the public. The corporation is an easy target. It’s hard to empathize with a faceless entity, considered an individual mainly for tax purposes. And, it is even easier to despise and even hate an entity that is supposedly making millions in profit on the suffering of others. Not surprisingly, this is the fate of a biotech corporation. In the attempt to demonize the pharmaceutical industry, it is easy to overlook many of the positives that industry brings to everyday Americans. As of the latest Bureau of Labor Statistics report, the pharmaceutical industry is one of the fastest growing manufacturing sectors in the United States, in terms of hiring Americans.1 And, these statistics just consider the manufacturing stage of the product, not the research and development. Taking into account the massive R&D output, the suppliers, and tangential suppliers, this makes the pharmaceutical industry one of the largest American-based, American corporate employers.2 Furthermore, the pharmaceutical industry also is known for supporting the arts and sciences by offering scholarships, mentorships, and sponsorships to benefit students everywhere.3 Yet, people remain fixated on the belief that South African children are dying solely because of corporate greed by the pharmaceutical industry and that the best way to fix the system and perhaps, punish this, is by promoting generic drugs at the expense of the pharmaceutical industry’s patents. South African children are dying from disease, not to mention poverty, war, malnutrition, government corruption, inefficiency, and a host of other problems. And, this is not only a tragedy, it is a blatant injustice. But, increasing generic drug availability at the expense of patents, which seems all the more popular these days, is not the best answer. Nor does it resolve the problems plaguing lesser developed countries either. The literature for and against patent protection of biotechnology is very comprehensive. There is, undoubtedly, strong emotions regarding the plight of the South African victims from both sides of the table. And, it is clear that no one- absolutely no one- even the “evil” pharmaceutical industry wants people to die. Also, no one wants to rob the other of his or her fundamental rights either- a là Robin Hood’s popular but morally questionable “steal from the rich and give to the poor,” either. So, I am going to forgo the emotional blackmail and focus on the practical: what is 1

“Pharmaceutical and Medicine Manufacturing,” Bureau of Labor Statistics 18 December 2007, accessed 30 April 2009; available from http://www.bls.gov/oco/cg/cgs009.htm. 2 Lawton R. Burns, “The Biopharmaceutical Sector’s Impact on the U.S. Economy: Analysis at the National, State, and Local Levels,” Archstone Consulting March 2009, accessed 29 April 2009; available from http://www.archstoneconsulting.com/biopharmapdf/report.pdf 3 Some examples can be found at: http://www.tylenol.com/page.jhtml?id=tylenol/news/subptyschol.inc; http://www.uncf.org/portal/Default.aspx?tabid=93; http://www.epilepsy-scholarship.com/

the best way to help the victims in the most effective, efficient, and fair means possible. Because of this, I will try to refocus the debate on less charged grounds, namely, economics. The first place to tackle this enormous issue is in the appeal of generic drugs. Easy enough: the answer is its price. Generic drugs are the chemical equivalent of their branded counterparts and cost a fraction of the price. Why? Generic drug companies don’t have much overhead cost. They merely piggy back off of the efforts of others. Generic drug companies don’t: 1) Have to spend millions on research and development, including dead end experiments that yield no product 2) Have to run clinical trials on drug efficacy and safety 3) Have to compete to recruit the brightest minds to their labs (and pay enticing enough salaries) 4) Have to raise awareness of the drug to the medical community and persuade them to take a chance on this new product 5) Have to worry about recuperating such heavy costs This provides generic drugs the ability to slash prices drastically and still remain fiscally solvent. For a moment, consider this scenario from the vantage of a biotech corporation. Having spent years of hard-won research, been rejected by the FDA scores of times, burned through millions of dollars in labor, infrastructure, and equipment, and on the verge of becoming called upon to provide a return on loans made4--- you have a new drug. You are successful in gaining a patent for 20 years. In those 20 years, you have to make up for the ridiculously large expenditures you incurred and be able to have sufficient profit to seed your next experiments. Economically, there are two ways to raise the money. One, you sell large quantities over a large period of time for low prices. Two, you sell at high prices for smaller quantities for a short period of time. This is where generic drugs come into play. The biotech corporation has a very limited patent shelf life. Yet, it knows that as soon as its patent expires, the market for its product plummets due the availability of cheap generics. Consumers are not stupid and are not going to pay for a pretty brand name when an identical cheaper alternative exists. The biotech corporation cannot afford to compete with generic drug companies since it has to consider its heavy cost burdens. So, while you, as the biotech corporation, would love to sell your product for pennies on the dollar, you can’t and make ends meet. The other alternative is to sell at a high price during a short time frame. To help spur sales, the company has to engage in some irritating habits such as marketing directly to consumers. They can’t afford not to do so. In the scenario in which patents are reduced, the biotech corporations now have less time than ever to recover their expenses. From here, there are two possible scenarios. The corporation can raise the prices even more to make up for its even more limited time or it can stop innovating. If the price the corporation estimates it needs to sell its produce by is ridiculously high that not even the most desperate would be willing to purchase the product, it may not be worth it to bother spending the money and effort. Without the initial sweat of the brow, there would be no generics and society at large would be worse off. 4

Joseph DiMasi, Ronald Hansen, and Henry Grabowski, “Accessing Claims About the Cost of New Drug Development,” Tufts Center for the Study of Drug Development, 1 November 2004, 220.

So, what does this have to do with the developing world and orphan diseases? Orphan diseases are an example of what happens when the biotech corporation cannot afford to feasibly do the necessary research for a particular illness. Yet, rather than foisting generics on the corporation prematurely when it does complete such research, a better means would be to work with the corporation. Instead of fighting and demonizing the biotech corporation, why not seek mutually beneficial arrangements? And, we have started such essential partnerships through public-private sector alliances where governments offer financial assistance and tax relief5 for corporations dedicated to finding cures to lethal diseases and selling them at tiered prices. In tiered pricing, the biotech corporation takes a page out of the airline industry’s playbook in that it sells its products at higher prices in wealthier nations and at lower prices in poorer countries. The industry would sell based on ability to pay. This is what Roche is currently doing in Africa for influenza and to great success!6 The opposing side claims that there lacks transparency in tiered pricing, yet he is able to claim, with great confidence and precision the exact prices of Roche’s drugs in different places. In spite of claims that tiered pricing has not worked, the opposition disregards the fact that many Africans have benefitted from such a price structure. It is not tiered pricing itself that the opposition seems to have issues with, but the apparent inequity from tiered pricing. Yet, this makes very little sense. Tiered pricing is supposed to be inequitable in pure numerical terms to ensure equity through dispensing the drugs. No matter how many “work hours” it takes to purchase a certain drug, whether patented or generic, there will always be people who simply cannot afford it. This is a socioeconomic problem and not one because of the pharmaceutical industry itself. As the opposition rightfully notes, yes, even generics can be very expensive. However, I have yet to hear about tiered priced generics. There have been cases where tiered patented drugs actually prove to be cheaper than their generic drugs!7 Another possible solution is the virtual pharmaceutical company (VPC), which sidesteps some of the financial problems by having participating corporations specialize in specific areas of the research and development process instead of fragmented, overlapping research from individual companies.8 The VPC, therefore, can access a wide range of expert technical resources to meet specific needs. The VPC itself is highly flexible and responsive to changes since it does not depend have to tie itself to failing research in the desire to force a sellable product out of it to ensure that the company can recuperate costs.9 Funding the VPC tends to come from private 5

In the original draft, I provided a financial statement and income tax analysis of the pharmaceutical industry, but I think you might find this a bit dry. However, if you want to get some sense of the pharmaceutical industry’s tax expenses, I recommend reading the firm’s annual financial statement particularly its footnotes and compare it to its balance sheet. 6 Bob Roehr, “Roche’s tiered pricing enables poorer countries to stockpile drugs,” British Medical Journal 333.7558 (2006) 63. 7 DiMasi, supra n4 at 221. 8

Stamatios Tsakopoulous, Albert Bokma, and Simon Kerridge,“Supplypoint: Towards a Framework for Virtual Enterprises in Contracting,” in Business and Work in the Information Society: New Technologies and Applications, eds. Jean-Yves Roger, Brian Stanford-Smith, Paul T. Kidd (Lansdale, PA: IOS Press, 1999) 228 . 9 Bill Love, “Virtual Pharmaceutical R&D: A Strategy for the Millennium?” Pharmaceutical Science & Technology Today 1.3 (1998) 89.

foundations such as the Rockefeller Foundation, which also direct the course of the research. Some current, ongoing VPC projects include researching vaccines for AIDs and tuberculosis.10 In the AIDs example, the VPC, called “The International AIDS Vaccine Initiative” (IAVI) contains some of the most prominent philanthropic donors in the world such as Rockefeller Foundation and the Bill and Melinda Gates Foundation.11 The private sector, pharmaceutical industries, that take part in this include Wyeth, AlphaVax, and Chiron, which is an amalgamation of small and large biotech firms.12 However, it is clearly stated that the “Patents go to private partners; IAVI stipulates prices and use of technologies.”13 The reason for this is simple: VPCs understand that patents are an important incentive to ensure that biotech firms gain ownership of their own products. The main benefit of the VPC is that some of the financial burdens on the pharmaceutical companies disappear, allowing the companies to take on orphan diseases. Not surprisingly, the VPC is beneficial for the biotech firms, both large and small. Smaller biotech firms have the opportunity to partner with larger firms as well receive the venture capital to begin their research. Large biotech firms receive excellent public relations at a minimal cost in both research and marketing. Many of the companies involved keep their patents on the processes and their contributions to the cure, but the cure itself would be available at a very reasonable price.14 Everyone wins in this scenario. The public has a cure at a low cost. The companies are able to perform the research they’ve always wanted to do, but couldn’t because of the financial constraints. The philanthropic foundations achieve their goals for helping the public. And, all of it was done while maintaining intellectual property integrity, an important aspect for spurring innovation and giving individuals a tangible hold on the fruits of their labor. This is a value so important that the Framers of the U.S. Constitution enshrined it within the very first Article of this great document. The opposition wants to coerce biotech firms to do the bidding of governments through compulsory licenses. Yet, the opposition fails to explain why any rational, intelligent individual or firm would be willing to subject their hard-earned labor to the “greater good.” Perhaps, it is altruism or even the feeling of doing “good” in the world. But, let’s be honest. That is hopelessly idealistic. While it would be nice if people wanted to work for free or give up their research in the name of open access, there is no tangible incentive to do so. There is always the possibility that the biotech firms will refuse to innovate or better yet, avoid bringing their drugs into countries where such draconian laws exist. The opposition acknowledges this yet still believes that this is a policy worth mentioning. Just as confusing is the love-hate relationship the opposition seems to have with voluntary licensing. The opposition advocates voluntary licensing yet goes on to denounce it as depending too much on the goodwill of the patent holder. This seems to suggest that voluntary licensing doesn’t work well. While perfectly understandable at this point, it becomes somewhat confusing when the opposition then goes on to claim that there 10

Volker Lehmann, “New Models for public-private partnerships in drug development,” Biotechnology and Development Monitor 46 (2001)7. 11 “IAVI’s Public Private Partnership Model,” IAVI, accessed 29 April 2009; available from http://www.iavi.org/viewpage.cfm?aid=37 12 Volker, supra n5 at 7. 13 Id. 14 Id. at 8.

is an essential need for voluntary licensing for the sake of gaining revenue streams. Although the opposition is correct to point out that the choice of voluntary licensing is within the power of the patent holder, I see no problem with this. It is, after all, the patent holder’s right to determine how his or her property is used. And, being rational individuals, patent holders are not going to forgo potential revenue merely for the sake of “being evil” or other dastardly reason. In fact, many do go on to voluntarily license their drugs sensing that it is not viable to keep such prices so high. The opposition would have us believe that these biotech firms are irrational and selfish, but ultimately they are fiscally savvy and yes, they are made up of humans who do have empathy for the plight of others. This point alone goes to show how ingrained the image of an evil corporation that I mentioned earlier continues to exist. The overall conclusion is this: generics seem like a good idea, but they are not the full solution to the current health crisis. Over-demonization of the pharmaceutical industry, while morally satisfying in a sense, does not accomplish much compared to working with it to find sensible solutions that benefit all. With the right partnerships, it is possible to ensure that the tragic nature of our global health can be resolved without sacrificing our values.

Bibliography Burns Lawton R.“The Biopharmaceutical Sector’s Impact on the U.S. Economy: Analysis at the National, State, and Local Levels.” Archstone Consulting March 2009. Accessed 29 April 2009. Available from http://www.archstoneconsulting.com/biopharmapdf/report.pdf DiMasi, Joseph, Ronald Hansen, and Henry Grabowski. “Accessing Claims About the Cost of New Drug Development.” Tufts Center for the Study of Drug Development, 1 November 2004.

“IAVI’s Public Private Partnership Model,” IAVI. Accessed 29 April 2009. Available from http://www.iavi.org/viewpage.cfm?aid=37 Lehmann, Volker.“New Models for public-private partnerships in drug development,” Biotechnology and Development Monitor 46 (2001). Love, Bill. “Virtual Pharmaceutical R&D: A Strategy for the Millennium?” Pharmaceutical Science & Technology Today 1.3 (1998). “Pharmaceutical and Medicine Manufacturing.” Bureau of Labor Statistics 18 December 2007. Accessed 3 May 2009. Available from http://www.bls.gov/oco/cg/cgs009.htm. Roehr, Bob. “Roche’s tiered pricing enables poorer countries to stockpile drugs.” British Medical Journal 333.7558 (2006). Tsakopoulous, Stamatios, Albert Bokma, and Simon Kerridge. “Supplypoint: Towards a Framework for Virtual Enterprises in Contracting,” in Business and Work in the Information Society: New Technologies and Applications, eds. Jean-Yves Roger, Brian Stanford-Smith, Paul T. Kidd (Lansdale, PA: IOS Press, 1999).