FDA Attempts to Shame Pharmacuetical and Biotechnology Companies

The U.S. Federal Drug Administration (FDA) recently decided to try to “shame” some pharmaceutical and biotechnology companies for failing to provide samples to companies who wish to produce generic versions of their pharmaceuticals.  The FDA states:

In passing the 1984 Hatch-Waxman Amendments to the Federal Food, Drug & Cosmetic Act, Congress created a system that balances encouraging and rewarding medical innovation with facilitating robust and timely market competition. One of the primary ways that FDA facilitates a competitive marketplace is through the efficient approval of generic drugs, which are often lower-cost than brand drugs.

Unfortunately, the process established by Congress may not always function as intended. At times, certain “gaming” tactics have been used to delay generic competition. One example of such gaming is when potential generic applicants are prevented from obtaining samples of certain brand products necessary to support approval of a generic drug. The inability of generic companies to purchase the samples they need slows down, or entirely impedes, the generic drug development process – leading to delays in bringing affordable generic alternatives to patients in need.

As described in further detail below, these kinds of problems with generic access to necessary samples may occur when brand products are subject to limited distribution – whether the company has voluntarily adopted limitations on distribution, or the limitations have been imposed in connection with a Risk Evaluation and Mitigation Strategy (or REMS), a program that FDA implements for certain drugs to help ensure that their benefits outweigh their risks. In some cases, brand drug sponsors may use these limited distribution arrangements, whether or not they are REMS-related, as a basis for blocking potential generic applicants from accessing the samples they need.

As part of the FDA’s Drug Competition Action Plan (DCAP), FDA is committed – among other things – to addressing and improving transparency about this and other gaming tactics that delay the generic competition Congress intended.

There are around 50 drugs listed, including about 40 different pharmaceutical and biotechnology companies.  Do you think this tactic will work?  Interestingly, a New York Times article describes Celgene’s response, here. 

Farewell Sandwich

In the midst of discussions about the future of IP tax and incentives in the UK comes the news that Pfizer is closing its UK R&D facility at Sandwich in Kent, after about 50 years of R&D at the site. The pharma group will no longer have any UK R&D operations.

It's part of a restructuring that will move more of Pfizer's R&D to the US, and reduce the amount of R&D that the group does, moving away from 'high-risk R&D' and eliminating altogether a number of areas of R&D. That said, a move to the US does suggest that they aren't being enticed by tax incentives, as the US incentives for R&D are not the most attractive. The project seems to reflect its description as a cost-control exercise overall, unsurprising given the group's cuts in sales forecasts, reflecting issues such as Lipitor coming out of patent protection in November.

Branded Generics; did The Economist Get It Right?

Once again the quality press seems uncertain about intellectual property, and in particular the role of trade marks in the drug business. This time it is The Economist. In an article from its August 8 issue, entitled “Friends for Life: Big Drugs Firms Embrace Generics”, the magazine described the intertwining of Big Pharma with generic manufacturers as the impending expiry of blockbuster-protected patents and apparently thin patent pipeline for drugs are forcing both sides to rethink the nature of their relationship/interrelationship.

What caught my attention was the discussion in the article about the issue of “branded” versions of drug products that are being sold by Big Pharma after patent protection has expired. So is this a good or bad thing? It is a difficult to fathom from the article. Let’s consider how the issue is treated. First, the article observes as follows: In order to combat the expected decline in revenues, Big Pharma is “peddling “branded” (but not patented) versions of their original drugs for higher prices than unbranded equivalents. Illogical though it may seem, such is the power of brand loyalty and inertia among doctors and patients ….”

Here we find Big Pharma as “peddlers” of generic brands, and both doctors and patients as acting in an “illogical” manner. Nothing is seemingly new about the negative tone given to the role of trade marks. From the debates in Parliament 150 years ago at the dawn of the first English trade mark law, through the skepticism towards trade marks expressed by the US Justice Department and others prior to the enactment of the Lanham Act in the 1940s, and up to Naomi Klein's polemic No Logo here, there has been a view that trade marks have the power to compel people to buy at a premium what they rationally would not purchase, i.e. a branded product.

But the article then seems to change direction. Moving on, it later observes that “[t]he real action now is in branded generics, which command a premium in many emerging markets due in part to the fear that unknown products might be fake or of dubious quality.” Note that here trade marks serve a potentially useful purpose for “emerging markets” (not the developed world, who presumably know better) in assuring that the drug products are genuine. I must confess that I don’t quite understand the point here. If I want to sell a counterfeit drug product, it seems to me that I will simply imitate the proprietary brand. As a policy matter, if I want to prevent the counterfeiting of drugs, it seems that the better way is to ban the use of the mark after the expiry of the patent protection period. In this way, the counterfeiter cannot exploit the name recognition and goodwill developed in connection with the drug during its proprietary period.

But all is not lost for Big Pharma, even in developed countries. The article concludes by referring to Charles-Andre Brouwers of the Boston Consulting Group, who notes as follows: “[B]rand loyalty laziness--or laziness--is something drug marketers can tap to keep a premium in their prices." As he puts it: ‘The secret about this industry is that patients taking a red pill don’t really like switching to a blue pill’. “While consumers are no longer “illogical”, they are “lazy”, and this consumer slothfulness can be exploited to the commercial advantage of Big Pharma.

Not too much doubt here: except for developing countries (even the basis for the argument is questionable), branded generics [read: trade marks] are cast in a negative light. However, before we condemn “branded” generics” to the Dark Side, we might consider the following observation by Nassim Nicholas Taleb in his irreverent best-seller, Fooled by Randomness here (fooled you if you were expecting The Black Swan).

In discussing what he calls “the path dependence of beliefs”, and what economists call, in a somewhat different context, the "endowment effect”, Taleb observes “[t]hat there are reasons to believe, for evolutionary purposes, we may be programmed to build a loyalty to ideas in which we have invested time…. Researchers found that purely rational behavior on the part of humans can come from a defect in the amygdale that blocks the emotions of attachment, meaning the subject is, literally, a psychopath.”

If these observations can be applied to trade marks, perhaps “branded” generics are an expression of evolutionary make-up. Instead of being "illogical", a sign of "laziness", or worse, the relationship of doctors and consumers to branded generics reaches deep into our human psyche. At the least, it suggests that the issue of trademarks in connection with branded generics is far more textured than the article suggests. In truth, when one thinks about trade marks, that is not such a surprising, or radical conclusion--is it?

Two Final Thoughts on Big Pharma Acquisitions

A coda in two parts to my recent postings on the mega-transactions by Pfizer, Merck and Roche of Wyeth, Schering-Plough, and Genentech, respectively.

Coda No. 1

I had surmised that one of the possible outcomes of the current spending spree by Big Pharma would be that promising small companies in the pharma area, and in particular, biotech companies, would be gobbled up principally for their promising technology. However, if the observations by Ben Levinsohn are correct ("Biotech Bonanza", Business Week, Feb. 16th), I may have to modify by predictions.

According to Levinsohn, writing in the "Money Report" section, the driving dynamic of Big Pharma is that it needs quickly to replace (read cash) to make up for the fact that many blockbuster drugs will be coming off patent in the next several years. If so, and relying on the views of an industry analyst (Leerink Swann), what Big Pharma needs is "manufacturing knowhow of big biotechs to bring new biopharmaceuticals to market." If that be correct, then the biotech companies most likely to be in play are those with manufacturing capabilities and not merely promising technology. Stated otherwise, small biotech companies without a manufacturing capability will be less likely to be acquired than their larger and more integrated corporate brethren.

I think I need some help here. A mantra being expressed a lot these days is that it is a buyer's markets for those flush with cash seeking to buy promising technology on the cheap.Perhaps this is only true for pharmaceutical products that are not biotech per se, where "cash is king" still enables nimble, dynamic small companies to attract a willing purchaser for its technology. If Swann is correct, however, that mantra is less appropriate for biotech products, where the desire by Big Pharma for quick revenues means that manufacturing prowess may be no less important than promising biotech technology.

Biotech: it may be about manufacture after all

So what happens to the smaller biotech companies, especially if they need to obtain additional financing during the coming years? Does this mean that there will be less aggregate development for biotech because of this concern for shorter term revenues? If not, exactly what is the mechanism for ensuring that technological developments remain apace in the biotech area? I would be delighted for some insight here.


Coda No. 2

Perhaps I got a bit carried away when I assumed that Big Pharma was funding these acquisitions by their cash reserves. It seems that all of these purchasers-Wyeth, Merck, and Roche--are in fact reaching out to the bond market as well to borrow money from the public to fund at least apart of the acquisitions.

As reported by Bloomberg.com on March 17th ("Pfizer May Get Lower Rates Than Roche in Planned Bond Offering", by John Detrixhe and Gabriella Coppola), drug makers have already offered $27 billion dollars in bonds in 2009, as compared to $13 billion dollars in all of 2008. While these may not be bind-boggling sums in an era of AIG excess, they still point to a willingness by the public to buy the debt of Big Pharma to fund these purchases and the willingness of the public to invest in this corporate paper.

Maybe I should have bought those big pharma bonds all along

I need some help here as well. Given the sums being borrowed by corporate Big Pharma for the acquisitions via bond offerings, I would like to understand better how Big Pharma is funding its R&D efforts to replace its product lines. Is it being funded internally by company cash, by bank loans (that hardly seems likely in today's lending/borrowing climate), or otherwise? And whatever the answer to this question, is this funding adequate to support the kind of R&D that will be needed to replenish the drug pipeline? In the flurry of the business press to cover these mega-acquisitions, the issue of product R&D has been largely ignored of late. I, for one, would be grateful if it would return to center stage.