An Uneven Debate on "Takings" in Pharmaceutical Patent Law

    By Kevin E. Noonan --

Our opinions are always (perhaps inevitably) informed by our experience.  And when our experience is limited, particularly when those limitations are coupled with passion, those limitations equally inform our opinions.

These realities come to mind when reviewing a letter from two medical students in the journal Science in response to an article by Sherry Knowles regarding patent law and the pharmaceutical industry.  In a "Policy Forum" article in Science entitled "Fixing the Legal Framework for Pharmaceutical Research," Ms. Knowles (at right) discussed two aspects of such "takings" regarding branded drugs as a consequence of changes in patent law (see "'Takings' by Congress and the Courts").  Ms. Knowles, who until recently was Chief Patent Counsel at GlaxoSmithKline, set out legal arguments why changes in patent law occasioned by several Supreme Court and Federal Circuit cases (including KSR International Co. v. Teleflex, Inc., In re Bilksi, and Ariad Pharmaceuticals, Inc. v. Eli Lilly and Co.), as well as the (perhaps unforeseen and unintended) effects of the Hatch-Waxman generic drug regime could constitute a "taking" of property that could raise constitutional liability under the Takings Clause of the Fifth Amendment to the U.S. Constitution.  Specifically, Ms. Knowles questioned the legal effects and consequences of such government action regarding the investment drug companies:

An issued patent is property just like a piece of land or a house (citing Consolidated Fruit-Jar Co. v. Wright, 84 U.S. 92, 96 (1872) and Patlex Corp. v. Mossinghoff, 758 F.2d 594, 599 (Fed. Cir. 1985)).  When a federal judicial decision dramatically changes the law, such that a valid patent becomes invalid, has the federal government taken private property in violation of the federal Constitution?  Application of the Fifth Amendment is not clearly limited to legislative and executive action; nothing in its text bars extension of the takings clause to judicial action.

Her prescription to "justly compensate" private companies for the takings effects of judicial decisions and the Hatch-Waxman Act was to increase the term of data exclusivity under Hatch-Waxman from 5 to 14 years, and to give appellate courts discretion to have a decision have prospective effect only, should it overrule prior interpretation of patent law.  She professed the belief that these changes would "substantially increase the number of drugs in the R&D pipeline, which would greatly benefit patients and ultimately benefit generic drug companies."

Two medical students, Laura M. Musselwhite and Jane Andrews take issue with these arguments.  (It should be noted that while Ms. Knowles' article was directed towards the beneficial effects of the changes she proposed, it was basically a legal argument, and there is no evidence that either medical student has any legal experience.)  In a June 11th letter to Science entitled "Protect Pharmaceutical Innovation" (access requires an AAAS subscription), the students argue that the changes Ms. Knowles proposes "would likely narrow the drug development pipeline and certainly increase drug prices."  Their argument is based on a 2001 Public Citizen report that the cost of new drug development is not $1.2 billion (in 2008) but about one seventh of that figure.  Without questioning the validity of the Public Citizen analysis, it is almost ten years out of date and contrary to every other estimate of drug development costs, across the political spectrum public and private.  They also cite a Kaiser Family Foundation study that pharmaceutical companies have "garnered three times the profits of the average Fortune 500 company," one of those statistical arguments that are of little value without context:  without knowing the range of profitability, it is hard to know whether that difference is significant.  They also repeat the naïve statement that "governments and non-profits already fund the majority of health R&D that generates [drug discovery]."  Governments and non-profits support basic research (as they should); drug discovery is overwhelmingly done by pharmaceutical and biotech companies, and these efforts depend on investment orders of magnitude greater than the monies spent by governments.  (It is perhaps not surprising that students who have spent their lives in academia would think that every innovation begins there.)

They also cite the benefits of generic drugs facilitated by the Hatch-Waxman regime since 1984, correctly citing statistics showing the percentage of prescribed drugs that are generic and the reduced prices charged for them.  However, their statement that "Hatch-Waxman has been preserving the precarious balance between public welfare and industry incentive for drug innovation by providing affordable medicine" is a sentiment (or maybe a belief) unsupported by evidence cited or otherwise (perhaps they thought it was self-evident).

They end their letter by calling for a Congressional ban on reverse payments (which they call "unethical"), which they say would "deincentivize compensatory agreements" and "refocus brand name companies on constructing novel therapies that may address presently unmet medical needs."  Lofty sentiments untethered to reality:  first, because several appellate courts have determined that reverse payment agreements can be procompetitive and permit generic drugs to enter the marketplace faster than they would otherwise (see "Reverse Payments in Generic Drug Settlements" -- Part I, Part II, Part III, and Part IV).  Second, the existence of reverse payment agreements is irrelevant to development of new drugs except in ways exactly opposite to the students' argument:  reverse payments permit pharmaceutical companies to obtain additional revenues to pay for drug development

In her response (also published in the June 11th issue of Science), Ms. Knowles, now a private consultant, cites several studies contradicting the assertions in the medical students' letter.  These include a National Academies study that recommends an increase in the exclusivity period (from 5 years to 12-14 years) under the Hatch-Waxman Act, based on more recent assessments of "the complexity and length of drug development today" and a Congressional Budget Office study showing that the number of new molecular entities by innovator drug companies "spiked in the mid- to late 1990's and have been decreasing since 2000."She points out that the Public Citizen study was not peer-reviewed and would predict outcomes not reported in any study of the pharmaceutical industry, and notes analytical deficiencies in the Kaiser Family Foundation study.  She also cites economic statistics that contradict the Kaiser study, including that "the share prices of many of the largest global pharmaceutical companies have declined dramatically" since 2000, some by as much as 60%, and attributes much of this decline to the effects of generic competition on investment in new drugs.  She rebuts the argument that governments and non-profits fund "the majority of research" on drug development with another CBO study.  Finally, with regard to reverse payment agreements, she cites the facts:  that since 2004 every settlement agreement must be filed with the Federal Trade Commission, and that of the 152 settlements only a "very small number" of these have been challenged by the FTC (and that the government has lost more of these challenges than it has won).

It is understandable why these students have the beliefs they profess in their letter:  Ms. Andrews is a member of the 2009-2010 Coordinating Committee of Universities United for Essential Medicines, has an undergraduate degree in political science, and received a Fulbright grant for research in Tanzania on barriers to rural antiretroviral access.  Ms. Musselwhite, another UUEM member, has similar views as espoused in the Winston-Salem Journal as a Guest Columnist:

Earlier this year, as a medical student at Duke University, I saw a patient with Crohn's disease, an inflammatory intestinal disease associated with substantial disability and mortality that affects more than 500,000 individuals nationwide.  This patient required hospitalization for a flare that she attributed to not being able to afford the month's Humira, a biologic medicine used to treat severe, active Crohn's disease.

The drug is priced by Abbott Laboratories at a staggering $22,000 a year.  This patient would clearly have benefited from the availability of an affordable, generic version.

This is their experience, seeing firsthand the consequences of the dysfunctional U.S. medical system that lets private insurance companies rather than doctors determine who gets care and how much they can afford.  This experience is not the same as understanding how such medicines actually get developed, the subject of Ms. Knowles' piece.  It is unfortunate that the politics of medical care provides an incentive for individuals providing care to oppose individuals providing the new drugs that improve our ability to treat and cure patients (which should be the goal for all of us).  But acting on the incentive to demonize biotech and pharmaceutical companies is self-defeating.  Generic drug companies, for all their benefits, do not invest the time and resources to produce any new drugs; without innovator biotechnology and pharmaceutical companies, generic drug makers would have nothing to copy or sell.  It would be well for the medical students and others on their side of the debate to consider where novel therapies will come from without companies with experience in obtaining (and financing) regulatory approval of such drugs, protecting them with patents, and having the business resources to bring such drugs to market.  It is certainly the case that these companies are for-profit (it's capitalism, after all), but the costs of R&D and regulatory approval, as well as scale-up, production, and distribution are realities that cannot be ignored.  That is where experience, specific experience with drug development, is invaluable.  Frankly, it is precisely this experience that the medical students lack.

Comments

[EG]

Kevin,

Nice report. Once more, "amateurs" (aka two medical students) opining out of sheer ignorance, and without bothering to get an appropriate factual basis for drug development costs. What I continue to find scary is that uninformed and ill-informed opinions like these are too often accepted by the general public without critical analysis. Also, if you challenge such opinions for their ignorance (and inaccuracy) you run the risk of being labeled an elitist, against free speech, etc.

[Gary Johnston]

Interesting stuff. Sherry is smart, but she's about as much out of her element in arguing that these decisions constitute a takings as the medical students. If KSR and Bilski are takings, then what is the Sonny Bono Copyright Term Extension Act? Give the students a break. I don't have a problem with their article. I disagree with their position on "pay for delay" but it's not like they are all alone on that issue. Maybe you just feel that doctors should stay out of public policy debate. Pretty arrogant view. Remember, most molecular biology/cell biology/biochemistry graduate students are just failed medical school applicants...

[Dan Feigelson]

At least they're still idealistic while they're young. I only hope that if (God help us), because of efforts like theirs, the time ever comes when the new drug business becomes sufficiently unprofitable that new drugs aren't being developed, and their patients start to die from infections from bacteria that are resistant to all the antibiotics known at that time, they'll fess up to being part of the problem, and work to get the drug development business back on track. But it would be a shame for such a catastrophe to have to take place before sanity is restored.

[Eric Butter]

Calling this an "uneven" debate betrays the sorry lack of scientific rigor on BOTH sides of the aisle. A quick example: any chance you could source your comments like the "Her prescription ..." (par. 4) with a study not led by Grabowski, Dimasi, or Vernon (regularly funded by private money form pharma/biotech)? We can argue all day about the validity of studies by Kaiser and Public Citizen, but at least they do not have the major conflicts of interest of Knowles' sources. The oversight (or lack thereof) in magazines and journals is not the only measure of a study's validity or scientific weight.

Another example: IF pharma is truly maximizing *innovation, why is generic competition after years of patent protection causing their stocks to drop? Why beg (or pay Congress?) for even more protection and "incentives," when the current incentives are not yielding results? More reasonable to me is that the drop in consumer confidence is tied to pharma's continuing and escalating history of scandals (recent Pfizer fiasco being a perfect example) and their failure to develop many great new blockbusters. Pharma and biotech now spends half as much on R&D as they do on marketing (Gagnon and Lexchin, PLoS Med, 2008) -- this trend is totally unacceptable of true "innovators."

A couple other quick tidbits: Knowles' quote from the National Academies article is an utter mischaracerization.

What Knowles wrote:
"On the contrary, a National Academies study recommends extending the data exclusivity period to 12 to 14 years to avoid competitive disadvantage in the United States “given the complexity and length of drug development today” [p. 190 in (1); (2)]."

Quote from NAS on p. 190:
"In the near term, the United States should adopt the European period of 10-11 years. However, research should be undertaken to determine whether this period is adequate, given the complexity and length of drug development today."

The second citation on this last quote (2) is “The Patient Protection and Affordable Health Care Act of 2010, signed by President Obama on 21 March 2010, provides 12 years of data protection for follow-on biologics.” This is an irresponsible mis-characterization of the National Academies study -- what is this doing here, and why did Science editors allow it?

Furthermore, it is very convenient to leave out that the same CBO study Knowles cites also acknowledges too little pharma investment in R&D, urges the U.S. to expand prescription drug coverage and medicaid rebates, and suggest that drug companies need to pay larger rebates for Medicare Part D (one of the main factors in America's rising healthcare costs). Not quite so clean a picture anymore, right?

P.S., Pay-for-delay is a totally legitimate problem: compensatory agreements from brand-name to generic companies prohibit generic entry for nearly 17 months longer than agreements without payments; most of these agreements are still in effect, protecting at least $20 billion in brand-name drug sales from generic competition, and costing American consumers an estimated $35 billion over the next 10 years (January 2010 FTC report: "Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions").

[max hensley]

This is one of the more informed debates I've seen on this subject. Congratulations to the participants.

The problem, fundamentally, is that politics is the tail wagging the 500 pound health care economy dog. Opinions are essentially belief-based, just as with religion. Facts exist only to serve the cause, as we've seen in this little debate.

Health care, and pharmaceuticals in particular, are now part of a government-private hybrid command economy piloted by large politically-active institutions, festooned with distortions and inanities. There's more equity and common sense around a dry season Serengeti watering hole.

Don't believe me? I just picked up a relative's prescription for doxycycline, a generic drug. The pharmacy presented the goods - and a $310 bill. But wait, there's more. Free samples given out at the doctor's office come with a rebate card that reduces the cost to $25 maximum. It's as if the plumber wants $1000 for the service call, but if you harness up your PhD in Discountology, it's $50.

We have an insane health care edifice, soon to be much worse. Exclusivity periods are merely the June Bug on the door screen.

[Kevin E. Noonan]

Dear Gary:

I would be more sympathetic to the students' position if there was evidence that they brought equal passion to battling insurance companies. I don't think the Sonny Bono case apposite, since that was giving more term to copyright holders, not less. Sherry may be right or wrong on her takings argument, and I don't think doctors should stay out of public policy debates. I do think most doctors don't take the time to acknowledge that there are legal issues they may not fully understand, and use their positions as proxy for actual knowledge about these issues. I refrained from characterizing that position as arrogant, but that's exactly what it is.

Thanks for the comment.

[Kevin E. Noonan]

Dear Eric:

Don't think that political persuasion can't imbue just as much bias as you attribute to Professor Grabowsky et al. The issue of peer review isn't whether journals are proper gate-keepers; it's whether an academic is willing to risk the harm to his reputation by espousing views and conclusions inconsistent with the data.

We can disagree with how pharma spends its money, but there is not much of an alternative for new drugs, and insofar as biotech is to pharma as Microsoft/Apple etc. were to Xerox/IBM etc., that cycle will turn.

As for reverse payments, now you are selectively citing the data. Most appellate courts have found that these agreements are pro-competitive (or at least not anti-competitive).

Thanks for the comment.

[Kevin E. Noonan]

Dear Max:

Colorful and succinct.

Thanks for the comment.

[6]

We're going to throw your old gaurd system out when you guys leave, or are tossed out. Bet on it. Your protectionist nonsense regarding pay for delay may have fooled one court, but it won't fool people forever.

[Kevin E. Noonan]

Dear 6:

I'm not worried. Anyway, there is more than one court that has found reverse payments to be legal and not anti-competitive; in fact, most courts have done so. The FTC presumes these agreements to be anti-competitive because they presume the patents are or will be found invalid (something you probably agree with). At least they have the excuse that they know little about patent law.

So don't presume fools or foolishness.

Thanks for the comment.

[David Boundy]

What would Ms. Musselwhite's sentiments be if Humera were not available to treat Crohn's disease at any price? What would be the next-best option for all Crohn's patients?

[Gary Johnston]

Kevin:

The Sonny Bono Act reference was an attempt at humor (e.g., if KSR is a "taking," then is the Sonny Bono Act a "giving?"). But my point remains: people are on shaky ground when they attempt to apply the takings doctrine to intellectual property rights.

[m]

Kevin, I enjoyed your article and thoughts. The frustrations of an ill functioning healthcare system make it easy to misplace blame and anger. Everyone can agree on what the results of healthcare should be, but the discussion around the means for acheiving those results is almost always driven by emotion and that person's sense of "fairness" that they would like to impose.

Although I somewhat disagree with the "takings" position supported by Ms. Knowles, these are precisely the types of arguments (supported by facts) that help move the debate forward. So hopefully if the Medical Students (or other defendants)respond to the Knowles response, they have to acknowledge sources like the Public Citizen Report should not be cited and it stops being repeatedly cited by others.

However, I still come back to Kevin's initial comment on the background of the students. My own experience has been that I have almost never been convinced to change my position in these sorts of debates until I've had those life experiences myself. But I would still hold out some hope if the debate is more driven by facts, as even I changed my views on many issues after watching Milton Friedman's "Free to Choose" series a couple years ago which were rigorously supported by facts and logic! (ideachannel.tv)

[Kevin E. Noonan]

Dear Gary:

I agree that apply takings law as Sherry has tried to do is an extension of the concept, and one that has it's limitations. Now that I "get it," the Sonny Bono reference was funny.

Thanks for the comments.

[Skeptical]

Dr. Noonan,

Your subtlety is amusing:

"At least they have the excuse that they know little about patent law.

So don't presume fools or foolishness."

Are you purposely presuming knowledge (at least a little) on the part of the poster, and implying that to disagree renders the poster himself a fool?

[Courtenay Brinckerhoff (Twitter @PharmaPatents)]

David Boundy: EXACTLY. I'd like to say the same thing to the plaintiffs in the BRAC1 case.

And, has everyone who thinks that "the government" should be developing new drug therapies forgotten that government funding = taxes?

[Gena777]

The high cost of medical treatment is one reason why I've been heartened by recent developments such as patent pools and compulsory licensing for pharmaceuticals treating certain diseases that are a threat to the public health. The truth is that investment won't happen unless investors stand to make a profit.
Another possibility could be a multi-tiered patent system that gives different degrees of rights to different types of patents. Such a system could, for instance, grant longer patent terms to certain pharma products. Perhaps this would incentivize them to agree to lower their prices.
Ultimately, the answer may be flexibility. I think that we need to be both pragmatic and open-minded, and start considering new approaches. Because the traditional patent law structure is no longer meeting our contemporary needs. Unfortunately, I'm not sure Congress is capable of enacting meaningful patent reform, so we may have to rely on Kappos and the USPTO.
http://www.washingtontimes.com/news/2010/may/25/patent-reform-misses-the-mark/