How the Kirtsaeng Decision Could Ruin the U.S. Branded Drug Industry

By Kevin E. Noonan --

The Constitution gives Congress the power to grant copyright and patent protection in the same part of Article I, specifically in Section 8, Clause 8:

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

This coincidence of these Powers has raised questions of whether development of the law in one area can affect the law in the other, for example, with regard to concepts such as exhaustion and extraterritoriality (see "Microsoft Corp. v. AT&T Corp. (2007)").  Both of these issues arose in the copyright case of Kirtsaeng v John Wiley & Sons case decided by the Supreme Court last term; while the immediate effect of this decision on patent law was unclear, recent developments may make the case very relevant and very dangerous for continued pharmaceutical innovation.

Briefly, the case involved a copyright infringement action brought by Wiley against a Thailand national, Supap Kirtsaeng, who was studying in the U.S. and arranged to have copies of textbooks sold in Thailand sent to him by his relatives for resale in the U.S.  Because Wiley (like many U.S. publishers) sells the same textbook at a much lower price in countries like Thailand than they cost in the U.S., Mr. Kirtsaeng was able to sell the books sent to him from abroad on eBay, ultimately making $1.2 million in revenues (there was a dispute, not relevant to the Court's decision, about the amount of this total that was profit, but presumably it was worth Mr. Kirtsaeng's while to continue his business while studying in the U.S.).  Although Wiley prevailed in the district court and before the Second Circuit, the Supreme Court reversed, on the grounds that the "first sale doctrine" permitted resale of legally obtained copyrighted works without obtaining the copyright owner's permission, and that U.S. copyright law, and the notice on the textbooks purchased in Thailand that they were only authorized for sale outside the U.S., did not mandate a different outcome or trump the first sale doctrine.  As a result, Wiley increased the cost of its textbooks sold abroad.

This case has clear implications for branded drugs, which are often sold ex-U.S. for less than the same drugs costs at home; at least some of these cost differences are the result of foreign governments regulating the cost of branded drugs.  This is not a phenomenon limited to developing or Third World countries:  European countries having a nationalized health care system (i.e., all of them) also have varying levels of cost controls for branded drugs, along with regimes for generic versions of these drugs after expiration of some term of exclusivity for the branded versions.  And many countries such as Brazil, China, India, Russia, and Thailand have relied upon international treaty provisions (such as the Doha Declaration under the auspices of the World Trade Organization) to provide government-subsidized generic versions of branded drugs at prices much lower than the prevailing price in Western countries.  These differences in costs have not affected U.S. prices because, unlike textbooks, branded drugs cannot be reimported into the U.S. under FDA regulations and U.S. law.

That may be changing, however, in view of a N.Y. Times report yesterday on bipartisan efforts to reduce drug prices by permitting reimportation.  The Times reports, in an article by Elisabeth Rosenthal, that Senator Amy Klobuchar (D-MN) is planning to revive a prior bill that would permit reimportation from Canada, a country whose national health service regulates the price of branded and generic drugs.  She is supported in these efforts by Senator John McCain (R-AZ) and undoubtedly other Senators will join in the effort.  The impetus for action now, according to Ms. Rosenthal, is not that branded drug prices are high (although there is certainly concern about the price of some drugs, particularly biologic drugs directed towards intractable diseases like cancer); rather, it is the rising price of generic drugs that has raised concerns.  Last Thursday, a Senate panel of the Senate Subcommittee on Primary Health and Aging, chaired by Sen. Bernie Sanders (I-VT) investigated the issue, hearing from Professor Stephen Schondelmeyer, University of Minnesota; Dr. Aaron Kesselheim of the Harvard Medical School; and Mr. Rob Frankil, who testified on behalf of the National Community Pharmacists Association who had requested Congressional action.  (Three generic drug company executives declined the panel's invitation to testify, according to the Times report.)  The testimony included reports of generic drug costs increasing by ~8,000 percent (i.e., 80-fold, for doxyxycline) and over 300 percent for ten other generic drugs.  These increases are recent (over the past few months), and the causes attributed to the increases range from shortages in active pharmaceutical ingredient supplies, manufacturing problems, and consolidation of drug companies by mergers and acquisitions.  As can be expected, the Senate panel heard calls for greater government regulation and application of drug rebate requirements to Medicare and Medicaid to apply to generic drugs, just as they now apply to branded drugs.

More troubling long-term is the solution proposed by Senator Klobuchar, allowing importation from Canada; Maine is already permitting its residents to purchase some drugs from Canada, Great Britain, Australia, and New Zealand in contravention of U.S. law.  The crisis in the cost of generic drugs has made this solution particularly attractive, because paradoxically the cost of a generic version of a drug in the U.S. can be higher than the cost of the branded drug in Canada.  The Times article illustrates this situation for digoxin, where a 90-day supply of the generic drug costs $187 in New York while the same amount of the branded version, sold as Lanoxin, costs $24.30 in Canada.  The comparisons are similar for an inflammatory bowel disease drug ($1,625 for the generic in the U.S., $155.70 for the branded version in Canada) and the cholesterol drug Pravachol ($230 U.S. generic/$31.50 branded Canadian).  With these differential costs plans permitting branded drug reimportation begin to have political force, as does the aging of the population where more people will be covered by Medicare and costs to the government will rise accordingly.

If successful, these efforts will create a situation akin to the consequences of the Kirtsaeng case in the copyright arena.  Here, however, innovator drug companies will not have the option, exercised by Wiley, of increasing prices abroad to make reimportation less economically attractive.  The prevalence of ANDA litigation in the U.S. over the past thirty years is one indication of the importance of exclusivity, and the attendant profits that result from exclusivity, to pharmaceutical innovation.  Should those profits decrease significantly, the return on investment for innovator drugs will fall, and the calculus of investment that supports new drug development will be affected unpredictably (but not positively; the unpredictability resides in how much the ROI will change and how that will affect investment decisions).  A common criticism aimed at branded drugmakers is the frequency with which they develop "me too" and next generation versions of already marketed drugs rather than create innovative new treatments and therapies.  The same uncertainties in drug development that make such behavior sound economically also impact the decision to develop new drugs, and policies that reduce ROI for such new drugs (which bear the greatest economic risk) are unlikely to promote innovation.

It is ironic that the U.S. Supreme Court has based many of its recent decisions limiting patent eligibility on a purported concern that patents can inhibit innovation.  They do not, of course, but policies that make it economically unsound to invest in drug development may certainly do so.  Such policies are likely to be just as welcome by the general public as such Supreme Court decisions, and just as likely to have exactly the opposite effect (here, on affordable drugs) than their supporters envision.

For additional information on this and other related topics, please see:

• "Ironically, It Seems Big Pharma Is Preferred by Venezuelan People," July 20, 2009
• "Will GSK Break the Doha Impasse in the Global Drug Pricing Crisis?" February 19, 2009
• "Neocolonialism in the Current Global Drug Pricing Regime?" August 19, 2007
• "More on the Global Drug Patenting Crisis," August 14, 2007
• "The Effect of Foreign Generics on the U.S. Drug Supply - Part III," July 17, 2007
• "Brasil Prevails in Dispute with Abbott over AIDS Drug Pricing," July 9, 2007
• "The Effect of Foreign Generics on the U.S. Drug Supply - Part II," June 20, 2007
• "The Effect of Foreign Generics on the U.S. Drug Supply - Part I," June 19, 2007
• "Africa (Still) Depending on the Kindness of Strangers in Anti-AIDS Drug Pricing," May 29, 2007
• "The Law of Unintended Consequences Arises in Applying TRIPS to Patented Drug Protection in Developing Countries," May 1, 2007

Comments

[EG]

Hey Kevin,

Very interesting and thought provoking article. As I've repeatedly said before, those that expect, including legislators, that there is a "free lunch" for drug development are badly mistaken. The R&D won't be spent for drug development if the ROI isn't there.

[Skeptical]

I would simply note a different angle: STOP using the american public to subsidize foreign sales.

Yes, this set of circumstances that you describe may lead to the outcome of those branded drug manufacturers simply not offering their product in nations for whose policies artificially prevent a decent profit IN THOSE REGIONS.

I do not take comfort in those who may have to suffer for their government policy. AT THE SAME TIME, living here in the States, and having for some time now been forced to augment the profits for these international (read that as Big Corp) drug companies, I welcome the ability to reimport based on a legitimate application of exhaustion doctrine. I do not feel bad at all that this extinguishes a certain business model that unfairly raises my prices here in order to recoup the artificially low prices elsewhere.

[GrzeszDeL]

"a 90-day supply of the generic drug costs $187 in New York while the same amount of the branded version, sold as Lanoxin, costs $24,30 in Canada."

Is this meant to be the other way round? In the other two examples, the Canadian price was the cheaper of the two.

[The Big Lebowski]

GrzeszDeL, last time I checked 187 > 24.3. But I'm getting old, maybe things have changed recently.

[Derek Freyberg]

Even if you do not have re-importation, the price differential for some drugs is such that "pharmaceutical tourism" makes sense. As an example, for SOVALDI it would be cheaper to take a 12-week vacation in a low-drug-cost country and get the drug there than to pay US list price of $84,000 for a treatment cycle.

[Skeptical]

GrseszDel,

No, that is not supposed to be the other way around, and is a perfect example of what I call in my post "profit augmentation for other nations."

That business model has been sheltered for far too long.

[Matt]

I believe the Canadian Government negotiates price and quantity based on expected need. A few years ago there was talk of an export ban in Canada due to shortages caused by the importation of drugs into the US. I am not sure such a ban was put in place. If not, would Canada revisit an export ban,if the US lift its ban?

[Kevin E. Noonan]

Sorry, everyone, the Canadian price of branded digoxin should be $24.30 not $24,40 (commas are awfully small and look like periods in these fonts).

Thanks for the comments

[Simon Elliott]

A lot of the criticism of "me-too" drugs strikes me as ignorance about how drugs and formulations work.

Drugs with the same primary target usually have differences in their binding affinities to subtypes of the target, secondary effects, pharmacokinetics, etc. Even getting the same drug in greater purity, or a different formulation is technically demanding and can be a significant advantage.

e.g. Relenza was the first neuraminidase inhibitor for treating influenza, but could not be administered orally, and lost market share to Tamiflu, which was orally active. GSK developed inhalational powder forms of Relenza, and also showed that it could treat forms of influenza that were resistant to Tamiflu. Are these all just "me too" developments?

[Nelson]

Thank you for the thoughtful and informative post. The problem of course with getting people to understand why it is not a good idea to reduce ROI on drugs is that it takes some imagination to consider long-term effects. It's too bad there aren't well-known examples of drugs that were at one time not pursued or developed due to an investment decision but that later were pursued and ended up being very useful. For awhile some years ago there were a few articles about how the incentives to develop new antibiotics had decreased and so there were fewer in the pipeline, but that seems to have been forgotten even with the increase in MRSA problems. It would be great if some pharma executives would talk to Congress about lines of research or development that are next on the chopping block; maybe some members would find that compelling, if only perhaps because somebody in their family is unfortunately afflicted.

[Jacob S. Sherkow]

For more on this topic--exhaustion of patented goods abroad--see Prof. Sarah Rajec's (William & Mary) informative paper on this topic, here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2428383.