Brand-name drug companies sell more than $130 billion worth of pharmaceuticals in the U.S. market every year.

The high revenue stream is due in part to new drugs to treat new ailments, and an aging population that is living longer and taking more medications than previous generations.

But the foundation of the brand-name companies' spectacular revenues is the patent system. Once granted regulatory approval for a drug that meets the test for patentability (novelty, usefulness and nonobviousness), brand-name companies have exclusive rights to sell the product for the remainder of the 20-year life of the patent on the drug. The monopoly rights conferred by the patent enable the companies to charge far more than the cost of production, and to earn huge returns on each sale.

When the drug goes off patent and generic competition commences, prices plummet. The first generic competitor usually drops prices by 30 percent, and full-fledged generic competition with five or six competitors typically brings down the charge to the consumer by 70 to 80 percent.

Naturally, brand-name companies do everything they can to defer generic competition. Critics, including the federal and state cops on the beat, say the companies manipulate a complex legal and regulatory environment to block generics from entering the market. They charge the companies with using tactics including bogus patent claims, collusive settlements with potential generic competitors, new patents on methods of formulating drugs and special legislated patent extensions. The companies typically deploy these tactics in a strategic campaign run in tandem with ever-more elaborate marketing efforts, to ensure ongoing consumer reliance on expensive brand-name products.

These practices are now coming under challenge, as rising prescription drug costs spur new scrutiny of the pharmaceutical industry. Consumer groups, states and employers who provide insurance are now all pursuing lawsuits against the drug companies, alleging a host of improper and illegal manipulations of the patent and regulatory system to protect pharmaceutical company monopolies. The hope of the entities bringing these suits, as well as the lawyers who are helping pay for them, is that -- following the breakthroughs in the tobacco arena -- the cases will develop into the next round of major class-action litigation.

Although the pharmaceutical industry has taken some major public relations hits, it has not been isolated in the fashion of tobacco industry. It is vigorously defending the lawsuits, denying the consumer interest claims of patent abuse, affirmatively making the case for strong patent protection -- and pressing for expanded monopoly rights.

Patently Invalid
The first steps in a concerted effort to defend and extend a drug patent in the United States are to file for the patent, get regulatory approval from the Food and Drug Administration (FDA) based on a showing that the new product is safe and effective, and then to defend the patent against all comers.

The granting of a patent is not an exact science. Patents in the United States are routinely challenged; and as many as half of patents challenged in court are invalidated.

In the case of pharmaceuticals, there is a vested interest -- the generic pharmaceutical industry -- positioned to challenge bad patents.

Under the 1984 Hatch-Waxman amendments to the Food, Drug and Cosmetics Act, generic manufacturers can get regulatory authority to market copies of brand-name drugs by submitting an "Abbreviated New Drug Application" (ANDA). While makers of new drugs must show their product is safe and effective in a New Drug Application, ANDA applicants must only show that the generic version is chemically equivalent to, and works the same as, the brand-name product. This enables the generic manufacturers to avoid duplicative, unnecessary and expensive testing that would deter many from ever entering the market.

In filing an ANDA, the generic manufacturer must note the patent status of the brand-name version of their product. If the generic maker hopes to sell the drug during the term of the brand-name drug's patent, it must certify that the patent is either invalid or will not be infringed by the generic product. This is known as a "Paragraph IV Certification," and it triggers a right for the brand-name company to sue to enforce its patent and prevent the generic from coming to market.

Litigation over a patent's validity is frequently complicated and drawn out, and delays generic entry.

Critics say the brand-name companies often defend patents they know to be invalid; and resort to paying generic makers to stay off the market.

Tamoxifen is a case in point. Tamoxifen, a drug to prevent re-occurrence of certain kinds of breast cancer, is sold under the brand-name Nolvadex by AstraZeneca.

In 1985, Barr Laboratories, a major generic manufacturer, submitted an ANDA seeking FDA approval to market a generic version of tamoxifen. In 1987, it amended the ANDA to include a Paragraph IV Certification. Imperial Chemical, which held the patent, sued to enforce the patent. In 1992, following a trial, a federal judge ruled the patent invalid. Imperial appealed.

Then, in March 1993, Barr settled with Zeneca, a former subsidiary of Imperial. In the settlement, the parties agreed to ask the appellate court to vacate the decision holding the tamoxifen patent invalid. Zeneca agreed to issue a license to Barr to sell tamoxifen, and to supply Barr with the product. So long as the patent is not invalidated, other parties cannot enter the market.

The result, according to a coalition of consumer groups organized by the Prescription Access Litigation project, was a pricing duopoly. They summarize in their complaint against Barr and AstraZeneca: "As the seller of the only generic version of tamoxifen available, Barr is able to capture approximately 80 percent of the market by pricing the drug slightly below the price Zeneca charges for Nolvadex. Zeneca is able to maintain 100 percent of the market for tamoxifen because it sells the brand name, Nolvadex, itself, and the generic version to Barr. Zeneca's tamoxifen -- labeled as either Nolvadex or the generic sold by Barr -- is the only tamoxifen available."

The Federal Trade Commission alleges a similar fact pattern in the case of Schering-Plough's K-Dur 20, a potassium chloride supplement used to treat patients who suffer from insufficient potassium, a condition which can contribute to heart disease.

Potassium chloride is not patentable. Schering, however, was able to obtain a patent -- which runs until 2006 -- on the coating for its potassium chloride tablets. The coating enables controlled release of the drug over time.

A generic firm, Upshur-Smith, filed an ANDA with a Paragraph IV Certification in December 1995. On the eve of trial, in June 1997, the parties entered into a settlement. Upshur-Smith agreed to drop its patent claim. Schering agreed to pay the generic maker $60 million. Upshur-Smith agreed not to compete with K-Dur 20 until September 2001, after which Schering would license the product to Upshur-Smith -- avoiding a lawsuit which might have invalidated the patent and opened the market to other generic competitors. As part of the overall arrangement, Upshur-Smith agreed to license several products to Schering.

A year later, Schering entered into a similar arrangement with another generic maker, ESI. ESI agreed to stay off the market until 2004.

The effect of these agreements, the FTC alleged in an antitrust case filed against Schering and the generics, was to "restrain competition unreasonably and to injure competition by preventing or discouraging entry of generic K-Dur 20 products."

Schering says the FTC has the story wrong. There was no collusion, it says. It reached a reasonable settlement with Upshur-Smith, paying $60 million for the products in development for which it obtained rights, and agreeing to settle the patent litigation with Upshur by splitting the remaining patent period (giving Schering an additional five years of exclusivity, and enabling Upshur to enter the market five years before expiration of the patent). ESI's suit, Schering contends, had little chance of success; it settled with the company only under pressure from a judge.

While Schering says it "categorically denies that it agreed to make any �unconditional' payments of $60 million" to Upshur, the FTC argues in legal filings that the settlement agreement "explicitly states that the $60 million payment was in consideration for Upshur's agreement to stay off the market until September 1, 2001." Litigation in the case is ongoing.

The 30-month Delay
A strange feature of the Hatch-Waxman is the connection it establishes between patent disputes and issuance of regulatory approval for marketing of generic drugs.

Once a brand-name drug receives marketing approval from the FDA, it is listed in a publication called Approved Drug Products with Therapeutic Equivalence Evaluations, commonly called the "Orange Book." The brand-name maker is supposed to list any new patent that claims the drug or methods of its use. If a generic manufacturer files a Paragraph IV Certification and the brand-name maker elects to challenge the certification on the grounds that a patent in the Orange Book covers the generics product, an automatic 30-month exclusivity extension period kicks in. For two-and-a-half years, the brand-name manufacturer is able to maintain its monopoly position.

(An alternative would be to grant regulatory approval to any qualified generic, and let patent disputes be resolved in the courts. Generics that proceeded to market during ongoing litigation would risk a court order, in the event a patent was upheld, that they cease production and pay lost profits to the patent holder.)

The existing arrangement obviously creates incentives for legal mischief, and a wide array of lawsuits allege that it has been wrongly used by brand-name makers.

In a June 2002 lawsuit against Bristol-Myers Squibb (BMS), the attorneys general of 29 states and Puerto Rico, the Virgin Islands and the District of Columbia allege that the drug maker fraudulently listed patents for paclitaxel in the Orange Book to the detriment of consumers. BMS sells paclitaxel under the brand-name Taxol. It is used to treat ovarian cancer.

Because information on the drug -- which was developed by the National Cancer Institute -- was placed in the public domain early on, paclitaxel is not patentable. Because the drug is a new chemical entity, BMS was able to get a five-year exclusive marketing period beginning in December 1997 for paclitaxel under FDA rules.

BMS then proceeded to obtain two patents for methods of administering paclitaxel as an antitumor agent (these related to dosage levels over a prescribed time period). The state attorneys general allege that BMS obtained these patents by "(a) knowingly and willfully making numerous fraudulent omissions and misrepresentations to the PTO [Patent and Trademark Office]; (b) with clear intent to deceive the patent examiner; and (c) which material representations and omissions were the efficient, inducing and proximate cause of the issuance" of the invalid patents. The attorneys general list a series of documents that BMS allegedly withheld from the patent examiner. These documents, published long before the patent application, if known to the patent examiner, would have prevented issuance of the patents, according to the attorneys general.

Simply by listing these patents in the Orange Book, BMS received an additional 30 months marketing exclusivity, as it challenged a host of generic makers seeking to enter the market for paclitaxel in 1997. Eventually, the BMS patents were ruled invalid, except for specific parts which would not by themselves block generic entry.

In 2000, according to the attorneys general, BMS started the process over. In August, a drug company called ABI received a patent on certain dosage forms of paclitaxel. The attorneys general allege the patent was based on old information in the public domain, and that BMS knew the patent was invalid. Ten days after the patent was granted, ABI sued BMS. BMS and ABI "settled" their fabricated "dispute," according to the attorneys general, and then Bristol listed the patent in the Orange Book. Through a series of legal fits and starts, courts ordered BMS to delist the ABI patent from the Orange Book, but it then had it relisted based on subsequent BMS-ABI litigation. BMS did not withdraw its listing of the ABI patent until January 2002, following a court ruling that all claims based on the ABI patent against the generics were invalid.

"Before August 11, 2000," the attorneys general allege, "Bristol knew that the [ABI] patent was invalid and that any claims that taxol or generic taxol infringed the [ABI] patent would be baseless. Bristol was also aware that its listing of the [ABI] patent in the Orange Book would confront any manufacturer submitting an ANDA for generic taxol with further procedural delay and costs as well as the prospect of an infringement action."

Alleging violations of federal and state antitrust and consumer protection statutes, the attorneys general conclude that BMS's manipulation of the linkage between patents and regulatory rules enabled the company to delay generic competition in the paclitaxel market for more than three years.

Bristol-Myers Squibb CEO Peter Dolan responded to the attorneys general lawsuit in a letter to employees.

"Regarding the action by the state attorneys general," Dolan wrote, "the company has responded to their allegations by pointing out that the matter has been in litigation for some time and continues to be, and asserting that we will continue to make our case in the appropriate forums. Beyond that, we are limited in what we can say about both the merits of our case and the course of action we intend to pursue."

In his letter, Dolan also combatively responded to claims that, with paclitaxel, BMS has profiteered on an invention given to it by the federal government [see "The Great Taxol Giveaway," Multinational Monitor, May 1992].

"Whatever the course of this particular dispute," he wrote, "I urge you to keep this in mind always: not one life has been extended by incendiary and irresponsible commentary; not one new medicine has emerged from posturing and grandstanding; not one scientific advance has come about from the chatter of talk shows and message boards. New cures and scientific advances come only one way: from hard work and dedication by highly skilled, principled and talented people who are motivated by a vision of a healthier and better world that they are working toward every day."

Child Testing: The 6-month Delay
The patent extension game is not limited to the courts and the halls of the FDA. It also gets played out in Congress, where the pharmaceutical industry is among the strongest of lobbies.

Last year, the industry successfully rammed through Congress a reauthorization of "pediatric exclusivity" -- a provision that extends drug patents for six months.

Under the pediatric exclusivity rule, drug companies receive an extra six months patent protection if they test their product on kids.

Everyone agrees that testing in children is important, since children respond differently to medications than adults, and a drug safe for adults may be unsafe for children. Advocates for the pediatric exclusivity provision -- which was enacted in 1997 and authorized to continue through 2001 to give Congress an opportunity to review its record -- say the program has been a great success.

The provision "has been highly successful and should be renewed," states PhRMA's industry profile. "The new law is working just as intended: it is producing a significant amount of new knowledge about the safety and effectiveness of drugs commonly used to treat children. In just over three years, nearly 60 pediatric studies were performed under the new law."

However, critics say too high a price has been paid to induce the child testing. The average cost of child testing is around $4 million, according to a Tufts study. The FDA has requested child tests on 188 drugs (costing industry, in total, less than $800 million). The FDA estimates the pediatric patent extensions are worth 40 times that -- just under $30 billion -- in added sales for brand-name drug companies.

Led by Public Citizen, consumer groups say the pediatric exclusivity has conferred a windfall on the drug companies. Public Citizen estimates AstraZeneca will earn more than $1.4 billion in added revenue for Prilosec, thanks to the pediatric exclusivity provision, with Pfizer also crossing the $1 billion threshold for Lipitor. Drugs such as Prozac, Celebrex, Zoloft, Claritin and Cipro will bring their makers more than $300 million in added revenue, due to the provision.

Led by Republicans and some friendly Democrats, Members of the House of Representatives defeated in committee various amendments that would have capped these huge windfalls. These included proposals to guarantee drug companies a 100 percent return on pediatric test costs, limiting drug companies to a 10,000 percent return on certain drugs, and limiting the incentive for the best-selling drugs (for which the 6-month extension is worth the most).

The appropriate policy, say many public health advocates, would simply be to provide the FDA with authority to require companies to test drugs in children. "If the FDA had the authority to require testing, except under limited circumstances, there would be no need to offer a handout to America's most profitable industry to do what they should already be doing -- testing to make sure its products are safe for everyone who will use them," wrote Drs. Marcia Angell and Arnold Relman, both past editors of the New England Journal of Medicine, in an October 2001 letter. "Imagine the scandal if drug companies were to refuse to do the testing necessary to assure that their drugs are safe for women to use without additional patent life."

From Patent to Patent

The tactics of patent extension are deployed as part of an integrated approach by the brand-name companies that critics call "evergreening" -- meaning the patents never fall off the branches.

But even when the patent cycle finally runs out, the drug companies frequently have a strategic plan to keep patients reliant on their patented goods.

Consider the case of AstraZeneca's Prilosec, the heavily advertised "purple pill" that treats heartburn. Its patent expired in April 2001, but by employing an array of exclusivity-extending tactics, the company has been able to keep generic competitors off the market.

Conscious that generics cannot be held at bay forever, AstraZeneca is now spending hundreds of millions of dollars to promote its successor to Prilosec, Nexium. "Today's purple pill is Nexium. From the makers of Prilosec," say the new drug's ads.

Nexium is a slight chemical variant of Prilosec. As the Wall Street Journal's Gardiner Harris reports, AstraZeneca studies show the new drug to have only the slightest improved performance from Prilosec, not for heartburn, but for "erosive esophagitis," where burped-up stomach acid injures the esophagus. That slightly improved result enabled the company to launch a full-court press to get consumers to switch from the drug going off patent to the one just coming on.

On the market for little more than a year, Nexium had a 19 percent market share of new heartburn prescriptions in April 2002. Prilosec's market share had dropped to 25 percent, from 49 percent in 2000.

In another case involving one of the most heavily advertised drugs, Schering-Plough is attempting a very similar strategy with its allergy medicine Claritin. Having long sought to extend Claritin's patent protection through specifically legislated extensions, a variety of formulation patents and aggressive litigation, the company came under increasing pressure as insurers and others petitioned to move the product to over-the-counter status (where prices are generally much lower). In March 2002, Schering-Plough agreed, though it says it still intends to defend its formulation patents on Claritin.

The company was also ready with a back-up plan. It is now heavily pushing its new patented prescription product, Clarinex, a related product which received marketing approval in December 2001.

Restraints
The high price of medicines is now a hot topic in Washington, state capitols, and in corporate boardrooms, where employers are increasingly frustrated with the pharmaceutical-related costs of their health insurance premiums.

Many states are beginning to look at bulk purchasing arrangements, so that they can negotiate the cost of drugs they buy through Medicaid and other programs. By aggregating consumer power, bulk purchasing can significantly lower prices -- though only by so much, so long as the drug companies maintain monopoly control of the product.

Going more to the patent abuse issue, a rash of lawsuits have been filed against the drug makers by the Federal Trade Commission, the state attorneys general, and consumer coalitions including the Prescription Access Litigation Project and the SPAN (Stop Patient Abuse Now) Coalition.

Some consumer groups are optimistic about the prospect of these lawsuits to restrain abusive practices. If they can disgorge allegedly improper revenues collected by a drug company in even a single instance, they may send a powerful message to the industry. And as in the case of tobacco and other litigation, effective discovery (the lawsuit phase when litigants can demand documents from the other side) may change the political climate, if damning internal industry documents are made public.

The industry will defend these lawsuits vigorously, however, and continue to claim that it is merely enforcing legitimate patent rights and the protections afforded it under the current regulatory system. No one should doubt the industry's ability to defend itself effectively in court.

Another approach would be to change the regulatory rules, to end what many believe are abusive practices. Senators Charles Schumer, D-New York, and John McCain, R-Arizona, along with Representatives Sherrod Brown, D-Ohio, and Jo Ann Emerson, R-Missouri, have introduced legislation to reform the Hatch-Waxman amendments, to stop much of the protracted litigation that delays the entrance of generics.

The bill, known as the Greater Access to Affordable Pharmaceuticals (GAAP) Act (S. 812 in the Senate and H.R. 1862 in the House), would:

• Eliminate the automatic 30-month stay granted by the FDA to brand-name drug makers who file suit against a generic manufacturer's patent. Instead, brand name manufactures would seek a preliminary injunction from the courts. Brand-name manufacturers would be required to list all of a drug's relevant patents with the FDA, and to certify that th e list is complete.
• Enable generic drug makers to seek a declaratory judgment on any patent listed in the Orange Book.
• Require petition filers to certify that their petitions are factually based, warranted by existing laws or regulations, and not submitted for any anti-competitive purposes, such as to cause unnecessary delay. Any petitions believed to be used for anti-competitive purposes would be investigated by the FTC, and any company making false statements would be subject to existing criminal penalties.

"Lawyers have been able to pick Hatch-Waxman clean because our patent laws give them the carte blanche to file frivolous patent challenges that stop a generic's approval in its tracks," says Schumer. "With GAAP, if brand-name manufactures want to block generic alternatives, their lawyers will have to make their case to a judge."

The industry opposes the bill. "The bill incorporates the generic industry's long-standing �wish list' of legislative changes that are based on the generic industry's mischaracterization of how the current system successfully works," says Jackie Cottrell, PhRMA spokesperson. "Simply put, the Schumer-McCain bill undermines a system of research incentives that has brought more than 370 new medicines to waiting patients in the last decade."

The bill's supporters are hoping the legislation may gain support from employers, and thus offset the powerful interests of the pharmaceutical companies.

But with industry opposition high, passage in the near term seems unlikely.

Even as Schumer and McCain are seeking to address the problem of unmerited patent extensions, other Members of Congress are floating ideas to extend patent protections.

Apparently impressed with the pediatric exclusivity model, Senator Joseph Lieberman, D-Connecticut, will propose a bill to provide incentives for drug companies to perform R&D on products that may be useful to combat bioterrorism. Under the bill, companies that undertook the R&D would be entitled to a "patent bonus" that would allow them to extend patents of their choice on other products.

A spokesperson for the Pharmaceutical Research and Manufacturers Association told Reuters that this proposal is "constructive and encouraging."