Egov.ufsc.br

STRETCHING THE LIMITS OF
INTELLECTUAL PROPERTY RIGHTS:
HAS THE PHARMACEUTICAL
INDUSTRY GONE TOO FAR?
LARA J. GLASGOW*
INTRODUCTION
It is well established that there is a tension between intellectual property (“IP”) and antitrust law.1 Perhaps nowhere is this tension moreobvious than in the pharmaceutical industry, where intellectual propertyrights are pushed to their limits in an attempt to maximize profits on popularbrand name drugs. Of particular interest right now are concerns, voiced bythe Federal Trade Commission (“FTC”), Congress, and the public, that largedrug companies are abusing the formidable monopoly power afforded bytheir drug patents at the expense of consumer public welfare andcompetition.
This article examines what role antitrust law ought to play in assessing and enforcing potentially undesirable behavior by drug companies.
Specifically, this article will examine the several ways by whichpharmaceutical companies attempt to lengthen the patent life of their brandname drugs which include: (1) using legislative provisions and loopholes toapply for a patent extension; (2) suing generic manufacturers for patentinfringement; (3) merging with direct competitors as patent rights expire in B.A., New College of Florida (1998); J.D. Boalt Hall (2001). Ms. Glasgow is anassociate with Cravath, Swaine & Moore Worldwide Plaza 825 Eight Ave. New York,NY 10019. The author would like to thank Professor Mark Lemley for his thoughtfulinput and David Corey for his loving support. The views and opinions in this article aresolely those of the author and do not necessarily reflect those of Cravath, Swaine &Moore.
See Robert Merges et al. , Intellectual Property in the New Technological Age 1037-41(Aspen Law & Business 1997); See also Mark Lemley, Intellectual Property andAntitrust Law 1-21 (in press).
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an effort to continue the monopoly; (4) recombining drugs in slightlydifferent ways to secure new patents and layering several patents on differentaspects of the drug to secure perennial monopoly rights; and (5) usingadvertising and brand name development to increase the barrier to entry forgeneric drug manufacturers.
An evaluation of the various practices employed by the large companies specializing in brand name drugs indicates that intellectualproperty protection is not being used to promote an incentive to create andinnovate. Rather, intellectual property rights are being used to gain andmaintain an exclusive market share for the most profitable, not necessarilythe most beneficial, drugs. Antitrust law, in addition to avenues such aslegislative reform, should properly step in to curtail those abuses ofintellectual property rights that have clearly moved beyond their properscope.
THE THEORETICAL BASES OF INTELLECTUAL PROPERTY AND
ANTITRUST LAW
A.
Intellectual Property Law
Several theories have been offered to validate the notion of giving individuals exclusive rights in their own ideas. Though some theorists haverooted their philosophies in natural rights or in personhood, the primary basisfor intellectual property protection in the United States is the utilitarian oreconomic incentive framework.2 This philosophy is supported by the UnitedStates Constitution, in which it expressly provides the grant of power in thepatent and copyright clause in order "to Promote the Progress of Science and[the] Useful Arts."3 It is additionally cited as the main reason behindintellectual property law in judicial decisions: The economic philosophy behind the clause empowering Congress to grant patents and copyrights is the conviction that the best way to advancepublic welfare through the talents of authors and inventors in the ‘Scienceand useful Arts.’ Sacrificial days devoted to such creative activities deservesrewards commensurate with the services rendered.42 See Lemley, supra n. 1, at 2.
Mazer v. Stein, 347 U.S. 201, 219, 100 U.S.P.Q. 325, 333 (1954).
Stretching the Limits of IP Rights The economic incentive framework recognizes the financial investment required for invention and creation. Substantial resources mustoften be expended for research, development and marketing purposes.
Absent any intellectual property protection, a person's ideas could be easilycopied and distributed by competitors at a much lower cost, eliminating theability for the original inventor to recoup the investment costs and make aprofit. Since the potential outcome of this situation is likely thediscouragement of original inventors to exert the mental and financial capitalnecessary to develop their ideas for public distribution, Congress hasinstituted an intricate body of laws providing control, sometimes exclusively,over the use and distribution of their ideas.
B.
Antitrust Law
The antitrust laws seek to control the exercise of private economic power by preventing behavior that threatens competition. The laws prevent awide array of anticompetitive conduct including the development ofmonopolies, establishment of cartels, and the implementation of pricediscrimination schemes.
The fundamental assumption underlying antitrust law is that competition is a desirable goal because it promotes economic efficiency andconsumer welfare, though this philosophical foundation of antitrust law issomewhat difficult to pin down. Judge Robert Bork, for instance, concludedthat the legislative record of the Sherman Antitrust Act5 suggests thatantitrust law "displays the clear and exclusive policy intention of promotingconsumer welfare."6 Other scholars, however, have disputed this theory infavor of other policy goals. These include preserving opportunities forsmaller firms and individuals to compete,7 preventing unfair redistributionsof wealth from consumers to producers,8 and shifting wealth from largemanufacturers to small merchants and farmers.95 15 U.S.C. §§ 1, 2 (1994 & Supp. IV 1998).
See Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself 61 (Basic Books,Inc. 1978).
See Eleonor M. Fox, The Modernization of Antitrust: A New Equilibrium, 66 Cornell L.
Rev. 1140, 1142-43 (1981).
See Robert H. Lande, Wealth Transfers as the Original and Primary Concern ofAntitrust: The Efficiency Interpretation Challenged, 34 Hastings L.J. 65, 114 (1982).
See Thomas J. DiLorenzo, The Origins of Antitrust: An Interest Group Perspective, 5Intl. Rev. L. & Econ. 73, 75-76 (1985).
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Despite the debate in the literature, it appears that the economic efficiency/consumer welfare framework has attracted the most support fromjudicial decisions. In Brown Shoe Co. v. United States,10 for instance, ChiefJustice Earl Warren observed, "taken as a whole, the legislative history [ofthe antitrust provision at issue] illuminates congressional concern with theprotection of competition, not competitors."11 Legislative debates "suggestthat Congress designed the Sherman [Antitrust] Act as a ‘consumer welfareprescription.’"12 C.
The Interaction Between Intellectual Property and
Antitrust Law
A tension between intellectual property and antitrust law arises out of seemingly contradictory theoretical foundations. On one hand, antitrustlaw seeks to promote competition by ensuring that no single company orindividual secures exclusive market power for a particular good or product.13On the other hand, intellectual property law seeks to promote innovation andcreation by providing what the antitrust laws specifically prohibit, namely, alawful monopoly over a particular good.14 Indeed, in many cases theintellectual property laws translate to a situation where fewer people buy aparticular good than if it were sold competitively, and these people each paymore for the good.
Because intellectual property rights result in actual costs to the consuming public, they can only be justified as valid incentives to create andinnovate only to the extent they actually encourage enough creation andinnovation of new works to offset these costs.15 In fact, intellectual propertyrights are limited in their breadth and duration in order to balance the costdirected to the consuming public with the benefit of encouraging theproduction of creative new works.16 Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979) (citing Robert H. Bork, supra n. 6, at66).
See Bork, supra n. 6, at 51.
See Loctite Corp. v. Ultraseal Ltd. , 781 F.2d 861, 886-87, 228 U.S.P.Q. 90, 100-01 (Fed.
Cir. 1985) (The purpose of the patent system is to “encourage innovation and its fruits”;the purpose of the antitrust laws is “to promote competition”).
See Lemley, supra n. 1, at 12.
Stretching the Limits of IP Rights It is when intellectual property rights are utilized beyond their rightful scope that intellectual property law is no longer in balance withantitrust law, but rather in direct conflict. In situations where intellectualproperty rights are used to obtain unwarranted market power, or to interferewith competition beyond what is enabled by the law, antitrust law must stepin to curtail the potential excessive cost to the consuming public. Thus, it isnot the legitimate exercise of one's particular lawful intellectual propertyright that provides problems for antitrust; it is the illegal abuse of that right.
It is this issue that is the focus of the present article.
THE PHARMACEUTICAL INDUSTRY
The American pharmaceutical industry is massive. Drug expenditures account for 8% of all health care spending and will soonsurpass spending for physicians' services and hospitalization costs.17 In 1997,the dollar sales of prescription drugs in the United States amounted to $71.8billion.18 Of this amount, about 90% come from the sales of brand nameprescription drugs.19 The profit power of brand name prescription drugs relies heavily on a drug company's patent rights. With a valid patent and regulatory approvalby the Food and Drug Administration (“FDA”), a drug company canlawfully exercise its monopoly rights and reign as the sole producer of aparticular drug until the patent expires and generic manufacturers enter themarket. Securing a patent for a brand name prescription drug carries with itenormous costs. For instance, it is estimated that the cost of bringing asingle brand name prescription drug to market is somewhere between $250-500 million.20 This figure includes the costs of research and development ofthe drug, extensive testing for FDA approval and production of the drug.21 See Marcia Angell, The Pharmaceutical Industry: To Whom Is It Accountable?, 342 NewEng. J. Med. 1902 (2000).
See Robert Levy, The Pharmaceutical Industry: A Discussion of Competitive andAntitrust Issues in an Environment of Change, Bureau of Economics Staff Report, Fed.
Trade Commn. (Mar. 1999).
See The Gale Group, Intellectual Property Rules: A Delicate Balancing Act for DrugDevelopment, 23 Chain Drug Rev. RX13 (2001).
See Levy, supra n. 18, at 7. See also Stephen S. Hall, Prescription for Profit, N.Y.
Times Mag. 42 (Mar. 11, 2001).
While drug companies have to first jump through the PTO hoops to secure a patent onthe drug, it must also prove to the FDA that it is safe and effective by documentingexpensive and lengthy trials that the pill will not have harmful side effects and will do IDEA — The Journal of Law and Technology
Because the FDA approval process generally occurs once the drug has beenapproved for a patent, the drug's time in waiting at the FDA severely cutsdown on the effective patent life, the term used to describe how long apatented drug has left on its patent once it enters the market. The averagelength of time it takes to secure marketing approval from the FDA for a newbrand name drug is nine years.22 The financial blow incurred by a manufacturer of an original brand name drug when its patent expires, and generics enter the market, issubstantial. Generic drugs, those drugs that are chemical equivalents of anoriginal drug and capable of receiving FDA approval without having toinvest in the initial research and development, account for $5 billion of alldrug sales.23 While this is currently not a substantial share of the overall drugmarket, it is rising annually, with one estimate speculating that the marketpotential for generic drugs may eventually reach 75% of all drug sales.24 Toillustrate the financial impact of the loss of a patent on a profitable drug,consider the case of Claritin, an allergy drug that costs $85 a month toconsumers and has annual sales of $2 billion.25 When Claritin's patentexpires, and a competing generic enters the market, "the cost of genericClaritin will drop to 80 percent of current prices. When everyone else jumpsin six months later, the price will fall off a cliff . . . the price will drop to $10[per month] very quickly."26 The incentive to extend the patent life of brand name drugs is overwhelming. In a desperate effort to maximize the length of time theirpotential brand name patented drugs can maintain market exclusivity,pharmaceutical companies have employed several clever strategies. Whilesome of this conduct, discussed infra, has been investigated by the FTC forpossible antitrust violations, many of these strategies have been leftunscrutinized by the federal government. The following sections closelyexamine these strategies and the likely impact on competition andconsumers. The strategies are divided into five categories, although many of what it is manufactured to do. See Hall, supra n. 21, for a detailed explanation of theFDA approval process.
See Levy, supra n. 18, at 8.
See Heidi Grygiel, Now They GATT Worry: The Impact of the GATT on the AmericanGeneric Pharmaceutical Industry, 6 U. Balt. Intell. Prop. L.J. 47, 47 (1997). This figureis likely low given the date of the article.
See Jane Everhart, Panelists Detail Barriers to Wider Use of Generics, 216 Am. Druggist16 (May 1, 1999).
See Hall, supra n. 20, at 40.
Stretching the Limits of IP Rights the strategies overlap: (1) Attempts to extend patents through legislativeloopholes and lobbying; (2) Initiating patent infringement litigation; (3)Merging with direct competitors as patent rights expire to maintain marketshare; (4) Layering of patents and combining drugs for new patents; and (5)Using brand name development and advertising to increase barriers to entryfor generic manufacturers. Section VIII follows with an analysis regardingwhether the behavior of the pharmaceutical industry favors continuedprotection of intellectual property rights or whether its behavior favors astricter antitrust policy that closely curtails potential and actual abuses ofintellectual property rights.
ATTEMPTS TO EXTEND PATENTS THROUGH LEGISLATIVE
LOOPHOLES AND LOBBYING
Methods employed by the pharmaceutical industry to extend the patent life of their most profitable drugs through legislative means areperhaps one of its most utilized and underscrutinized strategies. Through aseries of legislative amendments and acts passed by Congress to encouragecompetition in the pharmaceutical industry, and to level the playing field forgeneric manufacturers, the major drug companies have found statutoryloopholes that enable them to extend their patent rights by several months, oreven years. By some estimates, these legislative statutes have increased theaverage patent life of many new drugs by at least 50% over the course of thelast two decades.27 The most used vehicle for patent extension is the Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Act.28 The law was designed to reward innovation at majorpharmaceutical companies and protect intellectual property while at the sametime lowering costs by making it easier for generic drug manufacturers toreach the American marketplace.29 As part of the Hatch-Waxman Act, newdrugs being developed after the law was enacted in 1984 could receiveautomatic patent extensions of up to five years.30 The more than 100 drugsalready in development when the law was passed were given an extension oftwo years.31 Also as part of the Hatch-Waxman Act, the first generic27 See The Gale Group, supra n. 19, at RX13.
See Hall, supra n. 20, at 58-59.
See 35 U.S.C. § 156(d)(5)(E)(i) (1994).
See Hall, supra n. 20, at 59.
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manufacturer to receive FDA approval via an Abbreviated New DrugApplication (ANDA) for a generic version of a competing brand name drugis entitled to 180 days of exclusivity as the only generic on the market oncethe original patent holder's patent expires.32 The Hatch-Waxman Act is unfortunately littered with loopholes, most of which center on the provisional use of the words coming "off-patent."33 While originally meant to simply designate the time a drug patent'sexpires, it has been interpreted and used by drug companies to devise waysin which they can avoid the technicality of coming "off-patent," and thusindefinitely prevent the introduction of generics on the market.
One of the ways that drug companies can avoid coming "off-patent" includes applying for a series of patents over a period of time that coverdifferent aspects of a drug so that new patents become active as old patentsexpire. For instance, Augmentin, a powerful and expensive antibioticproduced by SmithKline, was initially expected to come off-patent in 2002 atwhich time the patent for the original compound amoxycillin was to expire.34However, by securing patents covering other properties of the drugAugmentin will now remain covered until 2017, fully 15 years more thanexpected.35 This new patent was not granted for innovative research on anew drug, but for work conducted in the early 1970's.36 Similarly, the makersof the popular anti-anxiety drug BuSpar, whose main patent was set to expirein November of 2000,37 triumphantly announced that it had secured a newpatent covering the absorption of BuSpar just one day before a genericcompetitor was set to begin distribution of its pill that would have givenconsumers a 25% discount.38 Yet another way the Hatch-Waxman Act has been exploited to extend patent rights is through patent litigation. When generics create a copyof a patented drug, the generic manufacturer files with the FDA an ANDA, See U.S. Pat. No. 4,529,720 (issued July 16, 1985).
See David Pilling & Richard Wolffe, Drug Abuses: As Pharmaceutical Companies Go toExtraordinary Lengths to Expiring Patents, Regulators are Starting to Pay CloseAttention, Financial Times (London) (Apr. 20, 2000).
See Robert Langreth & Victoria Murphy, Perennial Patents, Forbes 52 (Apr. 2, 2001).
See id. In the case of BuSpar, the new patent covers a metabolite produced when BuSparis broken down in the liver. Its manufacturer, Bristol-Myers, claims that generics can'tproduce equivalents without infringing because any generic would violate the new patentwhen the drug is digested.
Stretching the Limits of IP Rights which formally seeks the FDA's approval to sell a generic version of a brandname drug once it expires (and once the first generic gets its 180 days ofexclusivity).39 The Hatch-Waxman Act requires that the genericmanufacturer notify the original brand name manufacturer of its plans todistribute a generic.40 Like clockwork, original brand manufacturers, aware that their drug cannot come "off-patent" when there is ongoing patent litigation, have filedsuit against generic manufacturers claiming patent infringement on one ormore "layers" of patents subsequently filed on various, and ofteninsignificant, elements of the drug. While some of these suits are no doubtmeritorious, initiating litigation has the additional benefit of prolonging thelength of time the original brand name drugs can exclusively occupy themarket, and therefore maximize the original manufacturer’s profit.41 To date,there are ongoing patent infringement suits between the original brand namemanufacturers and generic competitors for the following drugs: Claritin,42BuSpar,43 Cardizem,44 and Prozac.45 In addition to the many patent extension benefits afforded by the Hatch-Waxman Act, drug companies have also turned to other less dramaticforms of legislative assistance: the Uruguay Round Agreement Act(“URAA”)46 and extensions for pediatric testing.47 In 1994, the federal government signed the URAA, which implemented the trade agreements reached during the latest negotiating ofGeneral Agreement of Tariffs and Trade (GATT).48 The URAA amended See Gygiel, supra n. 23, at 51.
See Hall, supra n. 20, at 59.
See Langreth, supra n. 38, at 52.
See Umi Company, Up Against the Law: Hoechst Faces Antitrust Suits, 33 Med. Mktg.
& Media 22 (Oct. 1, 1998).
See Information Access Company, Barr Says Generic Prozac Could Launch by August2001, 22 Drug Store News 14 (Aug. 28, 2000).
See 21 U.S.C. § 355a(a)(2)(A)(ii) (1994).
See Arti K. Rai, The Information Revolution Reaches Pharmaceuticals: BalancingInnovation Incentives, Cost and Access in the Post-Genomics Era, 2001 U. Ill. L. Rev.
173, 182 & n. 31 (2001). In 1994, Congress passed the Uruguay Round Agreements Act(URAA) which amended U.S. patent law to prescribe a twenty-year term that begins torun at the time of patent application.
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two sections of the patent code. In order to harmonize the United Statespatent term with other GATT nations, URAA amended the patent codeproviding that patents issuing after 1995 receive patent terms of 20 yearsfrom the date of application filing.49 In addition, the URAA provided a termof longer than seventeen years from the date of grant or twenty years fromthe date of filing for patents in force in 1995 or patent applications filed priorto this date.50 The transition provisions in effect lengthened protection forany drug patent that received FDA approval in three years or less, becausethe URAA extended patents of drugs without giving any additionalprotections for generic drug makers. For instance, Glaxo's ulcer medication,Zantac, gained nineteen months of protection.51 The drug Claritin receivedan extra twenty-two months of exclusivity.52 Once again, these extensionswere not for any additional innovation or creation, but rather were the resultof simple legislative maneuvering.
Any drug company that conducts pediatric testing for its patented drugs receives an additional six months of patent exclusivity.53 While sixmonths might seem negligible when discussing patent terms of seventeen ortwenty years, these extensions nevertheless amount to significant additionalprofits. For an estimated $3 million pediatric trial, Claritin was able toextend its patent life by six months which translated into earnings of close to$1 billion.54 The legal and political maneuvering by brand name drug companies to extend their patent life on profitable drugs is staggering in its costs toconsumers and competition. For example, the extensions secured on Claritinby utilizing loopholes in the Hatch-Waxman Act, the URAA, and pediatrictrials amounted to an extra four and a half years or $13 billion in revenuesfor its manufacturer, Schering-Plough.55 The cost to consumers andinsurance companies is also staggering, when one considers the potentialsavings had generic competitors been able to slash the price of genericClaritin to $10 per a one-month supply.
See Grygiel, supra n. 23, at 54.
See Hall, supra n. 20, at 59.
See id. This estimate excludes additional extensions due to ongoing litigation or layeringof new patents.
Stretching the Limits of IP Rights Eager for more legislative assistance in maintaining its market power over Claritin, Schering-Plough has mounted a tireless and expensivelobbying effort to pass favorable language that would enable Claritin tocontinue its dominance in the market.56 So far, efforts by Congress to placediscretion in the hands of the FDA to determine whether patent extensionsshould be granted have failed, despite a $20 million lobbying effort bySchering-Plough.57 The proposed legislation is perceived by many as nothingmore than an attempt to unfairly extend the monopoly power of Schering-Plough and has even been mockingly referred to as the "Claritin MonopolyRelief Act."58 So far, the FTC has not pursued any action against pharmaceutical companies stemming exclusively from their attempts to take advantage ofloopholes in legislative provisions or by lobbying for favorable language thatwould extend their patent term. This is despite the fact that these legislativemeasures have provided the drug companies with billions of dollars inrevenues at the expense of consumers who could be purchasing lessexpensive generics. The unwillingness on behalf of the FTC to investigatethis type of conduct likely reflects an institutional policy of not investigatingbehavior that has been officially sanctioned through legislative provisions.
Indeed, any action by the FTC is likely precluded by the Noerr-Penningtondoctrine.59 While the FTC may be more willing to scrutinize transactions thatindirectly arise from legislative loopholes or lobbying efforts, e.g., litigationsettlements incorporating anticompetitive clauses, it might prefer to defer toCongress on potentially faulty legislative provisions that are better mitigatedthrough legislative reform.
Indeed, legislative reform is already underway to close the loopholes that have enabled drug companies to employ so many questionable practicesand consequently maintain their patent monopolies. Ironically, the biggestsupporters of legislative amendment to the Hatch-Waxman Act are theauthors themselves, who appear both frustrated and surprised that theirprocompetitive legislation has been used for motives that are in directopposition to the policies underlying the Act. Congressman Henry Waxmanhas stated, "The Hatch-Waxman Act has been turned on its head. We were See Hall, supra n. 20, at 59. See also Michael F. Conlan, Claritin Patent ShowdownPostponed Until 2000, 143 Drug Topics 29 (Dec. 6, 1999).
See Hall, supra n. 20, at 59.
The Noerr-Pennington doctrine was first established in Eastern R. R. Pres. Conf. v.
Noerr Motor Freight, Inc., 365 U.S. 127 (1961), and embellished in United MineWorkers of Am. v. Pennington, 381 U.S. 657 (1965).
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trying to encourage more generics and through different businessarrangements, the reverse has happened."60 He has also stated that while thebill sought to create greater competition between generic and brand namedrugs, it “has been used to delay competition, rather than foster it."61 Co-author Senator Orrin Hatch has echoed Waxman's sentiments indicating thathe would be willing to reopen the Act if generic and brand name drugmanufacturers could agree to develop a "balanced bill," which he says coulddeal with the "unintended consequences" of the Act.62 Alfred Engelberg, aprincipal advocate of the original legislation who has since altered hisposition in light of problematic loopholes that call for the legislature torevisit the Act, declared that the 180-day exclusivity provision is “being usedby both sides and produce[s] no public benefit that would not otherwiseoccur."63 A new bill has additionally been proposed by Senators John McCain and Charles Schumer that would ease the entry of generic drugs into themarketplace.64 Specifically, the bill would ban brand name companies fromfiling frivolous patents, such as those that include non-therapeutic drugclaims.65 The bill would also discourage paid arrangements between brandname and generic drug companies that delay a generic drug's market entry.66 INITIATING PATENT INFRINGEMENT LITIGATION
Another strategy zealously employed by brand name drug companies is to initiate patent infringement litigation against generic competitors.
While there is the possibility that infringement suits are undertaken in pursuit David A. Balto, Pharmaceutical Patent Settlements: The Antitrust Risks, 55 Food &Drug L.J. 321 & n. 1 (2000) (citing Sheryl Stolberg & Jeff Gerth, Keeping Down theCompetition: How Companies Stall Generics and Keep Themselves Healthy, N.Y. TimesA-1 (July 23, 2000)).
American Health Line, Rx Drugs II: FTC Probes Brand Name-Generic Drug Deals, 6Am. Health Line 4 (Oct. 12, 2000).
American Health Line, Drug Patents: Hatch to Revisit Generic Drug Issue, 6 Am. HealthLine 9 (Mar. 8, 2001).
See Information Access Company, Another Look at the Waxman-Hatch Act Urged, 21Chain Drug Rev. RX21 (July 19, 1999).
See The Gale Group, Senators McCain and Schumer Introduce New Generic LegislationBill to Help Level Playing Field for Generic Drugs, 22 Drug Store News 16 (Oct. 16,2000).
Stretching the Limits of IP Rights of legitimate ends such as resolving genuine intellectual property disputes, itmay well be the case that the brand name manufacturers are using theinfringement suits to pursue illegitimate ends by keeping generics out of themarket.
The goal of keeping generics out of the market through patent litigation may be accomplished in two ways. The first has already beendiscussed and relies on the Hatch-Waxman provision that disallows a genericmanufacturer from entering the market while there is ongoing litigation inorder to settle intellectual property disputes. As a result, the brand namemanufacturer can then extend its patent for thirty months or until thelitigation is ended.67 The second way that drug companies may extend their market power for profitable brand name drugs is by using negotiation settlements duringpatent infringement litigation as a pretext for creating agreements that payoff generic manufacturers to delay or refrain from putting a competing drugon the market.
These agreements not to compete, in contrast to the efforts by drug companies to exploit legislative loopholes, are increasingly under attack bythe FTC as violations of antitrust law. The following discussion represents asampling of the cases currently pending or recently resolved regardinganticompetition clauses.
A.
FTC v. Schering-Plough Corporation, Upsher-Smith
Laboratories, and American Home Products Corporation
In a complaint issued March 30, 2001, the FTC alleges that brand name manufacturer Schering-Plough conspired with two genericmanufacturers to keep a generic version of a Schering high blood pressuredrug off the market, costing consumers an estimated $100 million.68 Thedrug at issue is protected under a patent that does not expire until 2006.69The generic manufacturer, Upsher-Smith, sought FDA approval tomanufacture and distribute a generic version.70 Under authority of the Hatch-Waxman Act, a generic firm may bring a product to market before a patentexpires if it can prove that the patent is invalid or the generic does not See discussion of the Hatch-Waxman Act, supra, for a more lengthy discussion.
See In re Schering-Plough Corp., 2001 FTC LEXIS 39 at *1 (Mar. 30, 2001).
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infringe the patent.71 The patent at issue concerned an extended-releaseformulation of the drug rather than the active ingredient, which Upsher-Smith felt it could more easily challenge.72 When Schering-Plough suedUpsher-Smith for patent infringement, the two companies settled in 1997with Upsher agreeing not to sell any generic version of Schering's drug untilSeptember 2001, and Schering-Plough agreeing to license five drugs fromSchering for $60 million.73 When a similar patent infringement suit was filedagainst generic manufacturer American Home Products, the two partiessettled their suit with American Home Products agreeing not to market anygeneric version of Schering-Plough's drug until January 2004 with Scheringagreeing to license two of American Home Products’ drugs for $15 million.74 B.
FTC v. Hoechst Marion Roussel, Inc., Carderm Capital
L.P., and Andrx Corporation
This complaint, filed in March of 2000 and now scheduled for an administrative trial, alleged that Hoeschst and Andrx entered into anagreement in which Andrx was paid millions of dollars to delay bringing tomarket a competitive alternative to Cardizem, a hypertension and anginadrug.75 Andrx was the first to file its generic version for FDA approval, butwas sued by Hoechst for patent infringement.76 Because the Hatch-Waxmanprovides for 180 days of exclusivity to the first generic market entrant, theeffect of the lawsuit was to prevent Andrx, as well as other genericcompetitors, from seeking FDA approval. According to the FTC, Andrxagreed to neither market its product when it received FDA approval, give upor relinquish its 180-day exclusivity period, nor market a non-infringinggeneric version of Cardizem.77 See 21 U.S.C. § 355(c)(3)(C)(i) (1994).
See In re Schering-Plough Corp., 2001 FTC LEXIS 39 at *7.
See In re Hoechst Marion Roussel, Inc., 2000 FTC LEXIS 142 at **10-11 (Mar. 16,2000).
See Federal Trade Commission, FTC Antitrust Actions in Pharmaceutical Services andProducts <http://www.ftc.gov/bc/rxupdate.htm> (accessed Sept. 8, 2001).
Stretching the Limits of IP Rights C.
Abbott Laboratories and Geneva Pharmaceuticals
In this action, which was settled without any terms disclosed, the complaint alleged that Abbott paid Geneva $4.5 million per month to delaybringing to market a generic alternative to Abbot's brand-name hypertensionand prostate drug, Hytrin.78 Hytrin provided Abbott with sales of $542million in 1998.79 Geneva, a generic drug manufacturer, sought and receivedFDA approval to market a generic version of Hytrin.80 After Genevareceived approval, it entered into an agreement with Abbott in which Genevawould refrain from bringing a generic version of Hytrin to market during theongoing patent litigation in exchange for a $4.5 million monthly payment.81This agreed amount exceeded the amount Abbott estimated that Genevawould have received had it actually marketed the drug.82 In addition, Genevaalso agreed not to waive its right to the 180-day exclusivity period under theHatch-Waxman Act.83 These three cases represent a recent willingness on the part of the FTC to act when pharmaceutical companies are making efforts to extend thelife of their market exclusivity for profitable brand name drugs. This is incontrast to situations in which drug companies are seeking extension reliefthough legislative provisions, lobbying, or private lawsuits despite the factthat both types of conduct carry with it anticompetitive effects that harmconsumers.
Agreements not to compete, secured by drug companies in the course of patent litigation, are particularly problematic for a host of antitrustreasons. First, such agreements prevent not only the generic manufacturers,as a party to the agreement, from entering the market, but also non-partymanufacturers. This is because the generic party agrees to retain, but notexercise its 180-day exclusivity because, pursuant to the Hatch-Waxman Act,no generic parties are permitted to gain FDA approval during ongoing patentlitigation.84 Antitrust law might have been viewed as a source of potentialrecourse had there been some ability for other market entrants to provideameliorative effects even in the presence of this agreement. However, the78 See In re Abbott Labs., 2000 FTC LEXIS 15 at **10-11 (Mar. 16, 2000).
See Balto, supra n. 60, at 333.
See In re Abbott Labs. at **10-11.
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inability of a manufacturer to penetrate the drug market during the 180-dayexclusivity period, as authorized by Congress, has a tendency to triggerantitrust concerns.
Secondly, another major reason antitrust law is being enforced so vigorously against these agreements not to compete is because the genericdrugs at issue in the lawsuits are not only unable to enter the market, butpotentially noninfringing drugs are prevented as well.85 On its face, thisappears to be an abuse of a company's patent right, and is not likely to betolerated by the government when investigating these types of transactions.
Third, the nature of the large monetary payments to the generic drug manufacturer do not fit the pattern of a normal patent infringement suit.
Typically, the flow of money during a settlement is from the allegedinfringer to the claimant. In these cases, it is the alleged infringer, infringingthe brand name manufacturer that is benefiting. The abnormal flow ofmoney in these cases raises red flags for the FTC and gives powerfulevidence of intent.86 MERGERS AND ACQUISITIONS
Mergers and acquisitions of assets are a cornerstone of the American economy. In 1998, the total value of acquired assets in deals announced was$1.73 trillion dollars.87 Today's mergers are largely strategic affairs in whichcompanies may use them to gain a competitive advantage or to respond to aneconomic force.88 This can entail acquiring market share, expanding productlines, combining research and development capabilities, or achieving greaterefficiency.89 The number of mergers and acquisitions in the pharmaceutical industry has also dramatically increased whereby the number of transactionsincreased by almost fifty percent from 1996 to 1997.90 While mergers are notnormally a significant antitrust concern since no one drug companycomprises more than five percent of the entire market, there are many See id. at 334 for a more detailed discussion of the antitrust implications of patent disputesettlements in the pharmaceutical industry.
See David A. Balto & James F. Mongoven, Antitrust Enforcement in PharmaceuticalIndustry Mergers, 54 Food & Drug L.J. 255, 255 (1999).
Stretching the Limits of IP Rights situations in which direct or potentially direct competitors of specifictherapeutic compounds are coming together to raise some antitrust anxiety.91 Of particular concern are the underlying reasons behind the current rash of mergers and acquisitions. The industry faces a record number ofpatent expirations in the next five years representing several billion dollars insales for the original drug manufacturers.92 For instance, the seven drugs thatare at issue in Schering-Plough's push for legislation that would extend theirpatent terms represent $11 billion in sales for the original manufacturers.93Because of the financial blow that original manufacturers suffer when otherbrand name competitors enter the market, there is an incentive to looktowards mergers and acquisitions of direct competitors as a way to maintainthe market power over a particular drug or class of drugs.94 As is the case with agreements not to compete that stem from patent litigation, the FTC has devoted some attention to scrutinizing the terms ofpharmaceutical mergers as they affect intellectual property rights. In makingits orders, the FTC has issued several declarations that require mergingcompanies to divest or abandon intellectual property rights in order for amerger to pass antitrust specifications. The following is a summary ofseveral mergers and acquisitions that have taken place in recent years thatinvolve the negotiation of important patent rights between the mergingparties. This summary reveals that the FTC is particularly concerned withthe anticompetitive effects that may occur with a merger betweenmanufacturers of directly competing goods and its potential harm toinnovation.
A.
Roche Holding Ltd./Corange Ltd. Merger
In 1998, the FTC charged that Roche Holding's proposed $11 billion acquisition of Corange Limited would harm U.S. markets for cardiacthrombolytic agents and drug abuse testing reagents (“DAT”), which areused to treat heart attack victims and to test urine samples for the presence of91 See Information Access Company, Rx Makers Would Gain $11 Billion from Extensions,143 Drug Topics 8 (Aug. 16, 1999).
While the financial blow that occurs when a generic enters the market is significant, thereal problem occurs when there is a competing name brand product for a particulardisease or illness. Even when generics are in the marketplace, there are a number ofconsumers that still opt for the brand name drugs. Mergers eliminate the competition byanother brand name drug.
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illegal substances, respectively.95 Should the merger have occurred, therewould no longer be a competitive market for thrombolytic agents and only aminimally competitive market for DATs.96 The FTC argued that, ifconsummated, the acquisition would eliminate actual competition betweenthe two parties in the markets for the research, development, manufacture,and sale of thrombolytic agents and encourage collusion in the DATmarket.97 Roche was forced to divest or license all of the assets relating tothe two parties' cardiac thrombolytic agents business to a buyer approved bythe FTC, as well as its assets to its DAT products.98 Roche was also requiredto grant to the divestee of the DAT assets an exclusive, world-wide royalty-free license for DAT reagents.99 B.
American Home Products/Solvay Merger
In 1997, the FTC filed suit alleging that the acquisition of Solvay's animal health business by American Home Products would harm competitionin the U.S. market for three animal vaccines: canine lyme vaccines, caninecorona virus vaccines, and feline leukemia vaccines.100 The two combinedcompanies accounted for virtually all of the market for these vaccines.101Entry into each vaccine market was difficult and time consuming because ofthe required expenditure of financial and research resources over a period ofmany years with no assurance that a profitable commercial product wouldresult.102 There existed great concern that the acquisition would result in fewto no competitors in the relevant markets.103 The FTC required AmericanHome Products to divest the three Solvay vaccine assets to Schering-Ploughno later than ten days after the date on which the order became final.104American Home Products additionally had to assist Schering-Plough in See In re Roche Holding Ltd., 1998 FTC LEXIS 60 at ** 1-3 (May 22, 1998).
100 See In re American Home Prods. Corp., 1997 FTC LEXIS 119, **4-6 (May 16, 1997).
Stretching the Limits of IP Rights obtaining the necessary United States Department of Agriculture (“USDA”)certifications.105 C.
Hoechst AG and Rhone-Poulenc S.A.
The FTC charged that Hoechst's acquisition of Rhone-Poulenc would harm competition in the market for direct thrombin inhibitors.106Hoechst’s direct thrombin inhibitor, Refludan, obtained FDA approval fortreatment of the blood clotting disease heparin-induced thrombocytopenia.107Rhone-Poulenc, though not a direct competitor at the time of merger, was inthe final stages of developing its own version of a direct thrombin inhibitor,Revasc.108 The two companies were the closest competitors in the market fordistributing drugs to treat blood clotting diseases.109 By merging, the FTCalleged, all direct competition would be eliminated and incentives toinnovate new blood clotting drugs would be diminished.110 The FTC orderedthat Hoechst transfer all of Rhone-Poulenc's rights for Revasc to a third partyand to enter into a short term service agreement with the third party in orderto ensure the continued performance of development work on the drug.111 D.
Zeneca Group PLC and Astra AB
Zeneca's proposed acquisition of Astra raised antitrust concerns for the FTC.112 At issue was the development of new long-acting localanesthetics. Zeneca had entered into an agreement related to thedevelopment of new long acting local anesthetics with Chirosience GroupPLC to market and assist in the development of this type of anesthetic.113Astra is only one of two companies that is already approved to manufactureand sell the anesthetic.114 Concerned that the merger would result in an105 See id. at **20-21.
106 See In re Hoechst AG, 2000 FTC LEXIS 3 at *8 (Jan 18, 2000).
112 See In re Zeneca Group PLC, 1999 FTC LEXIS 115 at **5-6 (Jun. 7, 1999).
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elimination of a significant source of new competition, the FTC's consentorder required Zeneca to transfer and surrender all of its rights and assetsrelating to levobupivacaine to Chirosience since Zeneca had agreed to co-develop the product with Chirosience prior to the acquisition of Astra.115 E.
Glaxo and Wellcome
When Glaxo attempted to merge with Burroughs-Wellcome in 1995, the FTC alleged competitive harm to innovative markets where the mergingparties were the two companies furthest along in the development of an oraltherapeutic to treat migraine attacks.116 The FTC alleged that the acquisitionwould reduce the number of research and development tracks for thesemigraine remedies and increase Glaxo's unilateral ability to reduce researchand development of these orally-administered drugs.117 The FTC requiredGlaxo to divest Wellcome's assets related to its therapeutic indication for thetreatment of migraine, i.e. the “311C90” assets.118 The assets also includedpatents, trade secrets, and inventory needed to complete all trials and studiesto obtain FDA approval.119 F.
The Upjohn Co. and Pharmacia Aktiebolag
When Upjohn sought to acquire Pharmacia Aktiebolag, the FTC alleged that the acquisition would harm competition in the market fortopoisomerase I inhibitors, drugs used with surgery to treat colorectalcancer.120 There were no drugs currently able to treat the disease, but thedrugs being developed independently by the two merging companies werethe closest to getting to market.121 The FTC argued that a merger would harmresearch and development efforts. In addition, the FTC alleged that the fewother companies completing research in this area were too small and too faroff from product development to constrain the merged firm from terminating 116 See In re Glaxo PLC, 1995 FTC LEXIS 166 at *3 (Jun. 14, 1995).
120 See In re The Upjohn Co., 1996 FTC LEXIS 17 at **4-5 (Feb. 8, 1996).
Stretching the Limits of IP Rights development of the drug or from raising prices.122 This case was resolvedwith divestiture of Pharmacia's assets in topoisomerase I inhibitors to theIDEC Pharmaceuticals Company.123 As is clear from these summaries, the FTC is extremely weary of pharmaceutical mergers that may compromise an important drug by limitingthe competition for research and development, innovation, or sale of the drugin the marketplace. The FTC is additionally quite concerned when the patentrights of one of the merging parties is near expiration and the other mergingparty has received, or is in the process of obtaining, a patent on a new, yetsimilar drug. This is consistent with the theoretical foundations of bothintellectual property law and antitrust law. While the legal system allows forthe grant of a “limited” monopoly when a company has fulfilled thenecessary requirements to secure a patent, it steps in when the company goesbeyond the patent right to maintain market exclusivity to the detriment ofconsumers. In the case of pharmaceutical mergers and acquisitions, therelevant market is generally limited to the exact therapeutic compound.124This is logical given the inability of most drugs to be substituted. Becausethe defined market is generally quite narrow, the antitrust concern foranticompetitive conduct is greater. Due to several factors, including theinherent high costs of entry into the research, development, or distribution ofa drug, there are typically very few parties competing within a market for aparticular brand name drug.125 It is true that merger enforcement by the FTCsometimes results in the divestiture of legally acquired intellectual propertyrights, which seems counter to our intellectual property system. Yet whenthese few parties threaten to merge together and potentially lessen theincentives for competition, antitrust law must step in to ensure that theconsolidation of intellectual property rights does not interfere with the publicbenefits that justify intellectual property rights in the first place.
123 See Balto and Mongoven, supra n. 89, at 269.
124 See e.g., In re Hoechst AG, 2000 FTC LEXIS 3 at *8; In re Zeneca Group PLC, 1999 FTC LEXIS 115 at **4-5; In re Roche Holding Ltd., 1998 FTC LEXIS 60 at **3-4; In reAmerican Home Prods. Corp., 1997 FTC LEXIS 119 at **4-5; In re The Upjohn Co.,1996 FTC LEXIS 17 at **2-3; In re Glaxo PLC, 1995 FTC LEXIS 166 at *2.
125 Generics are competing, but generally after the research and development has occurred for a particular drug; generic companies devote relatively few resources to developingdrugs that don't have brand name drug counterparts already in the marketplace.
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LAYERING OF PATENTS AND COMBINING DRUGS FOR NEW
PATENTS
Another effective and relatively unscrutinized strategy employed by brand name drug companies is the layering of patents and combining ofdrugs leading to the grant of new patents. By securing patents on differentaspects of the same drug, the manufacturers can ensure that the drug will notgo “off-patent” for purposes of the Hatch-Waxman Act.126 Brand namepharmaceutical companies now patent the process of manufacturing the rawmaterial, the medical indications to which the drug can be applied, theformulation of the medicine, and the metabolites resulting from theenzymatic degradation of the parent drug by the body.127 These patents areapplied for over a staggered period of time so that there is a new patent beingissued as an old one nears expiration, a practice known as “layering.”128 Thissets the original drug manufacturer in a position to initiate patent litigationshould a generic drug manufacturer attempt to apply for marketing approvalfrom the FDA.129 Drug companies can additionally use the grant of new patents on what are essentially old drugs as a marketing tool to disguise the likelymotivation behind the new patent. Consider the example of Prozac, the"medication whose name has become almost shorthand for antidepressant."130The FDA recently approved a new once-a-week version of the drug after EliLilly & Company, the drug's manufacturer, submitted data from clinicaltrials indicating that the new version demonstrated comparable efficacy forpeople who had been taking the old version of the drug, in addition to similarside effect profiles.131 While it is true that the new version of Prozac hassome beneficial qualities over the old version, namely convenience for theconsumer, some experts have voiced their opinion concerning Eli Lilly's truemotivation. Dr. Richard A. Friedman, Director of the Psychopharmacology 126 See Hall, supra n. 20, at 59.
129 In the case of Claritin, when Geneva Pharmaceuticals filed its Abbreviated New Drug Application (ANDA), Schering-Plough sued claiming infringement of two Claritinpatents. Since the initial lawsuit, Schering-Plough has filed suit against seven other drugmanufacturers – Zenith Goldline, Teva Pharmaceuticals, Mylan, Andrx, Impax,American Home Products, and Apotex-Novex – when they have gone to the FDAseeking approval for generic versions of Claritin. See id. 130 John O'Neil, Cut Back on Prozac With New Prozac, N.Y. Times, at F6 (Mar. 6, 2001).
Stretching the Limits of IP Rights Clinic at Cornell Medical Center, said the force behind Prozac Weekly'sdevelopment "had less to do with treatment than with patent rights."132 EliLilly's exclusive right to the chemical compound synonymous with Prozac,fluoxetine, expires in August of 2001 and the company has been searchingfor variations that would extend some degree of patent protection.133Obtaining a new patent on Prozac Weekly, in conjunction with a newmarketing effort directed toward once-a-week ingestion, virtually guaranteesthat Eli Lilly can look forward to many more years of market dominance inthe fluoxetine sector.134 This practice of getting new patents on additional aspects of old drugs has been echoed by the manufacturers of Augmentin and BuSpar.135Pfizer, for instance, “bought a new lease on life with an additional patent forits popular Neurontin epilepsy drug, whose basic use patent expired in2000.”136 Like Augmentin and BuSpar, the new patent provides minimalimpact with respect to the drug's therapeutic indication or mechanism ofaction. In essence, the patent covers a new formulation of the drug thatprevents enzymatic degradation; a key fact which generic companies hopethey can prove was already known.137 While the generic makers will betaking up the battle in court, the ensuing litigation is expected to cause delayin the expiration of Pfizer’s patent for at least a year. It is estimated that thisdelay will result in $1.5 billion in sales to Pfizer this year alone.138 While generic manufacturers may eventually secure marketing rights on brand name drugs whose protection is extended by new patent rights, thisresult is not without significant costs to both generic manufacturers andconsumers. Bristol-Myers had secured a new patent that was closely relatedto its original patent on the anti-cancer drug Taxol months before its originalexclusivity period expired in 1997.139 The new patents covered how Taxol 134 While there would be a generic version, it does not present the same level of competition against brand name drug Prozac that had significant brand recognition and a largeadvertising budget.
135 See section on Hatch-Waxman Act, supra pt. III, for discussion of the patent layering of 136 Langreth & Murphy, supra n. 37, at 52.
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was administered.140 Generic manufacturer Ivax eventually convinced a courtto grant market approval on its version of the drug three years after Bristol-Myers obtained its new patent.141 This delay in market entry for Ivax andother generics resulted in an additional $1 billion of Taxol revenue forBristol-Myers.142 As a consequence, this $1 billion windfall translates intomillions of lost dollars to consumers whose alternatives were either to payfor the brand name version of the drug, or forego treatment altogether.
Another method employed by pharmaceutical companies to extend patent rights is to obtain new patents on the individual isomers of racemicdrugs.143 Most drug molecules exist in two mirror-image forms, only one ofwhich is active.144 New chromatographic separation techniques have beendeveloped by drug companies to isolate and discard the non-activecomponent, enabling companies to manufacture essentially the same drugwith greater potency and/or fewer side-effects.145 By obtaining a new patenton a "new molecule" that is a slight variation of the original, and launchingan extensive marketing campaign, has enabled drug companies to achieve thebenefit of two patent lives with minimal further investment in research anddevelopment. This strategy has generated a large number of single-isomerversions of medicines that might have otherwise been subject to genericcompetition, including Prozac, Losec, and Claritin.146 Another ingenious method employed by drug companies with expiring patents is to negotiate complicated business deals that allow for thecombination of two companies' drugs whereby the combination product issubsequently amenable to patent protection. Recently, the drug powerhousesof Merck and Schering-Plough negotiated a deal “for the marketing of twonew drug combinations, one to lower serum lipid levels and the other torelieve allergies.”147 “Each combination product will pair one company'sblockbuster [sic] drug, whose patent as a single product will soon expire,”with another drug, owned by a different company, that supplements thepharmaceutical action of the first drug.148 As a consequence, “[t]he140 See id. 143 See Pilling & Wolffe, supra n. 35, at 20.
Stretching the Limits of IP Rights combination drugs will have new patents, and their profits will be shared byboth companies.”149 While no doubt generating millions of dollars in revenuefor the companies, the medical benefits of the recombinations are specious.150 While this conduct has obvious anticompetitive effects, notably the elimination of generic entrants from the market for up to two patent terms,the FTC has nevertheless declined any form of action regarding combinationdrug product strategies. Recently, the FTC appeared to clear single isomersof any anticompetitive suspicions when it closed a review of Eli Lilly'sexclusive license to market its new version of Prozac.151 There may be two explanations for the FTC and other government agencies' hesitancy towards any action pertaining to the issuance of newpatents on minor variations of old drugs. Yet neither explanation is veryconvincing when the ideological foundations of either intellectual property orantitrust law are considered. One explanation may be that there are arguablebenefits to some of the new patents. While perhaps not an overwhelmingendorsement for single-isomer drugs, experts agree that the new versions dooften eliminate or mitigate side effects that were present in the old drug.152These benefits may provide enough justification for antitrust law to defer tothe policy of granting monopoly rights to innovators of desirable products.
Yet, it is questionable whether these therapeutic benefits, achieved bygranting brand name companies a new monopoly on slight variations of theirold drugs, justify the extraordinary costs to consumers. Furthermore, it isequally questionable whether newly granted patents on expired drug productsactually translates into increased investment by drug companies in researchand development of riskier, but perhaps more innovative drugs.
A second explanation for why the government has seemingly been unwilling to investigate the potentially anticompetitive effects of grantingnew patents on popular brand name drugs may be that distinguishingbetween new patents that are actually beneficial and those that seek to extenda patent monopoly is too difficult. This too, however, seems suspect. Withthe aid of scientific experts examining the relative medical benefits of "new"drugs, it seems that the FTC or other governmental agencies will be able toconduct evidentiary investigations to accurately determine whether acompany is using the patent law legitimately, or as a means to secure astream of profits at the expense of consumers.
151 See Pilling & Wolffe, supra n. 35, at 20.
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USING ADVERTISING AND BRAND DEVELOPMENT TO INCREASE
BARRIERS TO ENTRY FOR GENERIC MANUFACTURERS
One strategy that has been completely ignored by the federal government as a potential antitrust concern is the increasing reliance by drugcompanies on marketing and brand name development to sustain theirmarket power after the expiration of their patent rights. The potential effectof creating a recognizable trademark or spending hundreds of millions ofdollars on advertising for a popular drug is that consumers will be less likelyto switch to generics once they enter the market. This makes it moreexpensive for generics to enter the market and may in fact discourage themfrom entering the market at all.
Direct-to-consumer marketing is a relatively new concept in the pharmaceutical industry that surged with the success of the pioneeringadvertising campaign of Claritin.153 In 1997, the FDA relaxed its rulesgoverning television advertising.154 Instead of having to run the tedious fineprint required in magazine ads, television commercials were able to satisfyFDA regulations by providing a toll-free number, mentioning a fine printmagazine advertisement, or instructing viewers to "ask your doctor" for moreinformation.155 Claritin decided to capitalize on these new flexible rules andlaunched a $322 million advertising campaign in 1998.156 It was immediatelycopied with great success for other high-profile drugs such as Viagra andPrilosec. "The campaign was a landmark. The Claritin campaign . . . wasvery influential. Claritin was clearly the most visible, the most expensiveand skillfully executed, and the bottom-line results were immediatelyapparent."157 It is estimated that drug companies spent an estimated $2.5 billion dollars on consumer advertising last year.158 And these ads may have broughtin as much as $5 to $6 returns for each dollar spent. The antitrust concernfor pharmaceutical industry's increased expenditure of funds to create aprotectable and strong brand for their popular drugs may be found in thecomplicated interplay between the theories of trademark, patent, and antitrust 153 See Hall, supra n. 20, at 45.
157 Id. (quoting Seven D. Findlay, National Institute for Health Care Management Stretching the Limits of IP Rights laws. As already discussed, patent laws seek to reward inventors forinnovation and provide economic incentives to create beneficial products forthe public good. The guiding principle of trademark law is to protectconsumers so that they may control their purchasing choices by meeting theexpectations created by associating a trademark with a particular product.
Antitrust laws seek to encourage competition by prohibiting unlawfulmonopolies.
The potential for concern might be best illustrated by example.
Consider the case of Claritin, which first gained patent approval in August of1981 for the chemical compound.159 The patent application stated that thecompound and claimed chemical analogs were "useful as antihistamines withlittle or no sedative effects."160 However, when Claritin underwent theextensive testing necessary to gain FDA approval, it was shown that the drugwas only slightly more effective than placebo sugar pills.161 Thus, while thedrug Claritin was approved by the FDA and found to meet the statutoryrequirements necessary for the grant of a patent, it appears that it is onlymildly effective in accomplishing what its patent purports to do.162 Perhaps because Claritin was so minimally effective or innovative, the manufacturers mounted an expensive ad campaign in an effort to increaseconsumer demand for the product, and create a brand name association thatwould establish Claritin as the dominant market holder for nonsedatingantihistamines. Critics have described this as an embarrassing paradox of themarketing and brand name development of drugs; marketing may be mostindispensable in categories where new drugs may actually be less innovative,yet the millions spent on marketing puts them in the greatest demand byconsumers.163 "Marketing is meant to sell drugs, and the less important thedrug, the more marketing it takes to sell it. Important new drugs do not needmuch promotion. Me-too drugs do."164 Thus, manufacturers of drugs like Claritin are able to take advantage of patent rights despite their relative in ability to meaningfully add to thebody of drugs currently in existence. As a result, drug manufacturers expendmillions of dollars in advertising and brand name development to ensure that 161 See id. at 43. Patients taking Claritin demonstrated a 43% improvement in symptoms, while patients taking placebo sugar pills reported a 37 - 47% improvement. Id. IDEA — The Journal of Law and Technology
their drugs are perceived by the public to be the dominant, and perhaps best,drug on the market. Though drug companies do not readily disclosemarketing figures, the amount spent on marketing is estimated to be muchlarger than that afforded to research and development efforts.165 The result isa powerful stranglehold on the market for a drug that makes it difficult, if notimpossible, for consumers to reap the benefits of generic entrants. Inessence, the financial rewards of developing a blockbuster drug, andexploiting its monopoly potential through every means of intellectualproperty protection available, far outweighs the costs associated with theresearch and development of drugs that may or may not result in a profitabledrug.
The federal government has expended minimal effort investigating the potentially deleterious effects of marketing and brand name developmenton competition within the pharmaceutical industry. Surprisingly, only onemedia report even broaches the subject by calling upon policymakers toexamine “whether direct to consumer advertising of prescription drugs hasincreased the demand for ‘unnecessary medicine,’ and conveys the‘appropriate information’ for consumers.”166 It may be the case that antitrust law has no role to play in monitoring the advertising and brand name development of popular, but only minimallyinnovative drugs. Indeed, it may be difficult to formulate a way in which thefederal antitrust laws could effectively establish a weaker form of IP when adrug is only mildly beneficial as opposed to strong IP protection for drugsthat are legitimately innovative. Instead, it appears that the legislature is themost appropriate vehicle by which to pursue any type of reform. Statutoryenactments that police the advertising practices of drug companies wouldserve to level the playing field for generic competitors.
THE PHARMACEUTICAL INDUSTRY: IS THE PROPER BALANCE
BEING STRUCK BETWEEN INTELLECTUAL PROPERTY AND
ANTITRUST LAW?
Intellectual property and antitrust laws must strike a delicate balance in order to satisfy the competing goals of creating economic incentives toinnovate and create (intellectual property), while concomitantly preserving 165 See Angell, supra n. 17. Pfizer and Pharmmacia & Upjohn spent 39.2 % of its revenues on marketing and administration in 1999. Id. 166 April Fulton, Rx Drug Costs: BCBS Study Chides Drug Ads, Patent Laws, American Health Line, Politics & Policy (Sept. 26, 2000).
Stretching the Limits of IP Rights and encouraging competition (antitrust). An examination of the profit-maximizing practices employed by the pharmaceutical industry brings intoquestion whether this balance has tipped unfavorably toward consumers.
This section attempts to explain why the theoretical foundations justifyingintellectual property rights are not being met by the conduct of thepharmaceutical industry, and why stronger antitrust enforcement policiesmust be implemented in order to restore the balance between these two areasof the law.
One of the primary justifications advanced by intellectual property law proponents for asset protection is the incentive such protection providesinventors to invest in risky or otherwise costly endeavors necessary to createinnovative works that may contribute to the public good. An examination ofthe findings presented in this article, however, suggests that this justificationis not being met when dealing with the pharmaceutical industry.
The risk inherent in bringing brand name drugs to market cannot be used to validate the strong intellectual property protection that has beendescribed in the present article. “The top 10 drug companies are reported tospend on average about 20 percent of their revenues on research anddevelopment.”167 These companies have “so many drugs in the pipeline atany given time that they can count on being able to bring a certain number ofdrugs to market regularly.”168 To illustrate just how financially sound thedrug business actually is, consider the research and development costs of thelarge drug companies relative to their profits. The top ten drug companiesreport profits averaging 30% of their revenues—a substantial margin.169 “[I]n1999, the pharmaceutical industry realized on average an 18.6 percent returnon revenues,” which exceeds that of commercial banking (15.8%).170 Theseprofits are over and above the considerable governmental assistanceavailable from the National Institutes of Health (NIH) that subsidize much ofthe early pre-clinical research, as well as favorable tax treatment that enablesa rate of 16.2%.171 It is difficult, therefore, to characterize an industry that isconsistently the most profitable industry in the United States as risky.
167 Angell, supra n. 17. This figure has been criticized as an overstatement that includes marketing and promotional costs. Id. 171 See id. The comparable tax rate for other major U.S. Industries from 1993 to 1996 was IDEA — The Journal of Law and Technology
Despite low risks, the American drug industry fails to achieve true innovation. While the benefits enjoyed by consumers for the hundreds ofrecently launched drugs cannot be underestimated, it is difficult to reconcilethe observation that many other new drugs add little to the therapeuticarsenal except expense and confusion for consumers. Recall the layering ofpatents that are secured on several elements of a blockbuster drug so as topreserve its monopoly power and profit potential; or the cleaning up of olddrugs in order to secure a new patent on what is essentially a minimalvariation on the old version.
The surplus of "me-too" drugs additionally exemplifies the dearth of innovation in the drug industry. For instance, there are currently severaleffective drugs to treat high cholesterol, yet each one varies modestly interms of therapeutic benefit. To make a profitable cholesterol drug, acompany need only synthesize a chemical derivative of a preexistingblockbuster drug that is sufficiently capable of meeting the requirements ofpatentablity. With some extensive marketing, the new drug can then returnrevenues to the maker with minimal research and development costs. Thus,instead of expending funds on research and development for drugs that treatailments not yet treatable, many drug companies attempt to focus ondeveloping patentably distinct derivatives of preexisting drugs.
The American drug industry cannot be cited as the world leader in pharmaceutical innovation. “The United States accounts for 36 percent ofglobal pharmaceutical research and development.”172 “Europe accounts for37 percent and Japan for 19 percent.”173 Many other countries contributesignificantly to the research and development of new drugs, many operatingunder government regulations that provide far less protection for individualintellectual property rights.
The evidence suggests that the extension of patent rights over the past decade, due to exploitation of various legislative loopholes and cleverpatent applications, does little to stimulate the research and development ofnew therapies. This further places into question the justification of the strongintellectual property protection that is afforded to drug companies. TheUniversity of Minnesota College of Pharmacy's Prime Institute examined theimpact of extending to patents on eight brand name drugs. It concluded thatwhile the cost of patent extensions to the “American public would be morethan $1 billion a year for 10 years, the extensions would do little to stimulate Stretching the Limits of IP Rights research and development of [innovative] new therapies.”174 "TheCongressional Budget Office says lengthening patent periods is not the mostcost effective means of encouraging [research and development]. Reductionof FDA review times is a more effective means of stimulating research anddevelopment."175 The current state of the pharmaceutical industry indicates that intellectual property rights are being unjustifiably strengthened and abused atthe expense of competition and consumer welfare. The lack of riskiness andinnovation on the part of the drug industry underscores the inequity that isoccurring at the expense of public good. It is an unfairness that cannot becured by legislative reform alone. While congressional efforts to closeloopholes in current statutes, along with new legislation to curtailadditionally unfavorable business practices of the pharmaceutical industry,may provide some mitigation, antitrust law must appropriately step in.
"Congress has passed a lot of laws, all well intentioned, but they have been agreat windfall for the pharmaceutical industry. The current system appearsto be out of balance, and it is costing Americans billions of dollars."176 While antitrust laws have appropriately scrutinized certain business practices employed by the pharmaceutical industry, such as mergers andacquisitions and agreements not to compete, there are several other practicesthat need to be addressed. The grant of patents on minor elements of an olddrug, reformulations of old drugs to secure new patents, and the use ofadvertising and brand name development to increase the barriers for genericmarket entrants are all areas in which antitrust law can help stabilize thebalance between rewarding innovation and preserving competition.
Specifically, the FTC and the judicial system may revisit the underlying policies of Section 2 of the Sherman Act to find a mechanismwith which to mitigate the ills caused by the pharmaceutical industry. Whileit is true that courts, since the mid-1970's, have generally upheld efforts bydominant firms to develop new products and market their innovations,177 itmay be possible to limit drug companies' business practices, especially with 174 Information Access Company, Debate on Patent Extensions Intensifies, 21 Chain Drug 175 Id. (quoting Stephen Schondelmeyer, Director of Minnesota’s Prime Institute).
176 Scott Gottlieb, Drug Firms Use Legal Loopholes to Safeguard Brand Names, 321 Br.
177 See generally SCM Corp. v. Xerox Corp., 645 F.2d 1195, 209 U.S.P.Q. 889 (2d Cir.
1981) (rejecting attack on Xerox's creation of a patent wall around its dry paper copyingprocess); see also Memorex Corp. v. International Bus. Corp., 636 F.2d 1188 (9th Cir.
1980).
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regard to their intellectual property strategies, when their conduct is shown tobe motivated by a desire to maximize profit rather than innovation.
Intellectual property rights should be awarded to firms that are creating newdrugs that offer innovative health benefits. When patent rights are repeatedlygranted for one drug at the expense of research and development of otherpotentially beneficial drugs, courts are likely to infer that a firm's aimsconstitute the exclusion of competitors through their patent rights with noactual improvement in their existing product offerings. While this inquirywould require at least some investigation of the merits of the patents inquestion, it might serve as a disincentive by pharmaceutical companies toengage in business practices that are geared towards manipulating theoverworked intellectual property system for personal financial gain.
CONCLUSION
Robert Pitofsky, the current Chairman of the FTC, noted in a speech regarding intellectual property rights and antitrust law, that “[t]he age-oldbalance between antitrust enforcement and intellectual property protectionhas begun to tip in favor of the latter” which the pharmaceutical industryexploits in attempting to lengthen the patent life of their brand name drugs.178Pitofsky cited the sheer volume of approved patents, which are at an all-timehigh, as a characteristic of an intellectual property system that “drivescompanies to seek, and the government to grant, more flimsy [intellectualproperty] than is justified."179 The inability of the Patent and TrademarkOffice (“PTO”) to sufficiently handle the overwhelming number of patentapplications lends further credence to the notion that antitrust laws must takea more active role in matters pertaining to the intellectual property rights ofthe pharmaceutical industry. Since there exists the increased possibility thatsome intellectual property rights are invalid, antitrust law, therefore, needs tostep in to ensure that invalid rights are not being unlawfully asserted toestablish and maintain illegitimate, albeit limited, monopolies within theprescription drug industry.
178 Brian Krebs, IP Issues Cloud Antitrust Role in New Economy – Pitofsky, Newsbytes

Source: http://egov.ufsc.br/portal/sites/default/files/anexos/27471-27481-1-PB.pdf