Health Action in Depth

June 2002

Games the RX Drug Industry Plays

When Fortune Magazine released its industry rankings for 2001, there was no surprise about the industry that topped the Fortune 500 list. For the last decade, the drug industry has consistently trumped all other industries in terms of profitability. That year, when so many sectors of the economy were tanking, the drug industry managed to generate profits representing an 18.5 percent return on income. How does this industry continue to stay at the top of the heap, in good economic times and bad? In part, it engages in "anticompetitive practices." It files bogus patents, buries its competition-generic manufacturers-in frivolous lawsuits, and even colludes with those manufacturers to keep lower-priced generics off the market. The industry also engages in fraudulent drug pricing and deceptive marketing, and it funds groups that claim to represent consumers opposed to strategies aimed at putting a lid on prescription drug prices.

Both litigation and legislation have taken aim at these practices in an attempt to make the drug industry play fair in the marketplace. In 1984, Congress passed the Drug Price Competition and Patent Term Restoration Act, more commonly known as Hatch-Waxman (for its cosponsors, Sen. Orrin Hatch [R-UT] and Rep. Henry Waxman [D-CA]). This bill was designed to foster generic competition by decreasing the time it took to bring generic drugs to market, and it worked: Consumers' access to lower-priced generics has increased because of Hatch-Waxman. From 1983 to 1995, generics went from representing 19 percent of the market to 40 percent of the market, although their share of the market has increased little since 1995.

However, Hatch-Waxman also includes provisions designed to protect drug patent holders. And over the years, the drug industry has gotten away with repeatedly manipulating the incentives and protections in Hatch-Waxman to delay generic competition and extend its brand-name monopolies. This has led to dozens of class-action lawsuits against brand manufacturers.

How Does the Drug Industry Take Advantage of Hatch-Waxman?
FDA approval of a generic drug usually takes about 18 months. However, if a generic manufacturer wants to sell a generic equivalent of a brand-name drug that is still protected by a patent, it must "certify" to the FDA that the generic will not infringe on that patent. One type of certification is referred to as a Paragraph IV Certification, which acknowledges that there is a patent on a brand-name drug but asserts that the patent is either bogus or will not be violated.

When a generic manufacturer applies for a patent using Paragraph IV Certification, the brand manufacturer has an immediate right to file a patent infringement lawsuit. This sets in motion a process that can stall approval of the generic for up to 30 months-two and a half years. At the end of that time frame, the FDA can approve the generic drug for marketing even if the suit hasn't been decided. However, the generic manufacturer may elect to keep its drug off the market until the litigation is concluded because if it loses the lawsuit, it has to pay damages to the brand manufacturer. Litigation in these cases lasts an average of 36 months (three years), but several cases lasted more than 77 months (over six years). During that time, the brand manufacturer is able to retain its monopoly.

The first generic manufacturer to file a Paragraph IV Certification receives 180 days-six months-of market exclusivity, meaning that no other generics can be approved. However, the 180-day clock doesn't start ticking until the generic is actually marketed. So, the generic company is in a position to delay the beginning of the 180-day exclusivity period-and generic competition-indefinitely. It is at this point that some "creative" brand manufacturers have stepped in and entered into sweetheart deals with generic manufacturers, where the generic is paid to withhold the generic drug from the market. One such arrangement brought a generic manufacturer nearly $90 million.
A brand manufacturer may also patent multiple attributes of its drug-aspects of the manufacturing process, tablet color, even a chemical produced by the body when the drug is digested. This forces the generic manufacturer to choose between waiting for all of the patents (even if bogus) to expire and filing a Paragraph IV Certification, which risks litigation and the attendant costs and delays.

Two-Pronged Approach: Going to Court, Legislative Reform
Numerous individuals and groups, including consumers, consumer organizations (including Families USA and PAL-The Prescription Access Litigation Project), pharmacy benefit managers (PBMs), employer-sponsored health plans,  generic manufacturers, and state attorneys general have filed class-action lawsuits against brand manufacturers. The lawsuits allege that brand manufacturers have engaged in at least one of three kinds of anticompetitive practices (see the box at the right for examples):

squashing generic competition through manipulating Hatch-Waxman or by other means,

engaging in fraud relating to drug pricing, or

engaging in deceptive marketing.

While a few of these suits have been resolved, resulting in settlements in the tens of millions of dollars, many are ongoing, with some in the very early stages of litigation.

To combat further abuses of Hatch-Waxman, several senators and representatives have introduced the Greater Access to Affordable Pharmaceuticals Act, more commonly known as McCain-Schumer (after its cosponsors, Sen. John McCain [R-AZ] and Sen. Charles Schumer [D-NY]). This legislation is aimed at closing loopholes in Hatch-Waxman: It would eliminate the automatic 30-month delay of approval for generic drugs when brand manufacturers sue generics for "patent infringement." It would also undercut the creation of sweetheart deals between brand and generic manufacturers. While there has been quite a dustup over this bill in recent weeks, no action has been taken on it since its introduction in May 2001. Sen. John D. Rockefeller (D-WV) has also introduced a bill aimed at reforming the generic approval process. Language from that bill is included in the House Democratic Medicare prescription drug bill, which we'll discuss in our next issue.

What Other Kinds of Underhanded Tactics Does the Drug Industry Use? Deceptive Lobbying
PhRMA-the Pharmaceutical Research and Manufacturers of America-is the drug industry's Washington, DC-based lobbying group. Over the last few years, PhRMA has funded the activities of several groups working to squelch legislation at both the state and federal levels aimed at controlling spiraling drug costs.

This spring, the United Seniors Association, a right-wing group working with PhRMA, launched a multimillion-dollar ad campaign in support of House Republicans and their Medicare prescription drug proposal. While the group's chairman initially claimed that the advertising was not underwritten by PhRMA and was a grass-roots effort, a PhRMA spokeswoman later said the group had given United Seniors an "unrestricted education grant" of $3 million. The Alliance for Retired Americans-a national coalition of unions and community-based organizations-criticized the move, saying that the drug industry keeps prices high to keep the profits flowing while buying influence with House Republicans.

Also this spring, the drug industry used a front group called The Consumer Alliance to lobby state officials against initiatives to control drug prices paid by state Medicaid programs. The Consumer Alliance, based in Michigan at the time, sent a flurry of faxes to grassroots groups across the country-especially faith-based groups and organizations of color-claiming that the state's poor and sick were in danger of losing access to prescription drugs if these initiatives were instituted. While the group claimed to represent the views of consumers and low-income people, the head of the Alliance has admitted that he was being paid by PhRMA to run just such a campaign in North Carolina, and he admitted that PhRMA financed the Washington, DC-based telemarketing firm that coordinated calls to state officials. In fact, calling the phone number on the faxes connected callers not with the Alliance or an in-state consumer group, but with that telemarketing firm.

Citizens for Better Medicare-another group founded and funded by PhRMA-claims on its Web site to be "a grassroots organization representing the interests of patients, seniors, disabled Americans, large and small businesses, pharmaceutical research companies and many others concerned with Medicare reform." Among the group's key members are PhRMA and the aforementioned United Seniors Association. The group is opposed to any governmental measures geared toward holding down the prices that drug companies charge for prescriptions, and it has spent millions of dollars on advertising on behalf of Republican candidates.

Other Deceptive Activity
In the fall of 2001, Newsweek put out a Special Edition entitled "Health for Life." What was probably not evident to readers, however, was that Newsweek crossed ethical boundaries by giving PhRMA exclusive advertising rights for the edition that resulted in articles consistent with the drug lobby's political positions. Newsweek essentially allowed the drug lobby to use a supposedly independent media outlet to promote its agenda. To add insult to injury, Citizens for Better Medicare used the Special Edition as a direct mail lobbying piece. Families USA, the Consumer Federation of America, the National Consumers League, Public Citizen, and United Auto Workers criticized this arrangement.

The Bottom Line
Prices for prescription drugs have skyrocketed in recent years, contributing to increases in health care spending overall and making the enactment of a prescription drug benefit within Medicare-a tough job to begin with-that much more difficult. Speeding the approval of generic drugs is one way of keeping down prescription drug costs. Passage of the McCain-Schumer bill will help close the loopholes that brand drug companies manipulate to prevent generic competition, and continued litigation will also help force the drug industry to play fair-or pay for its abuses. Lowering prescription drug prices will make everyone's drug coverage-and a Medicare prescription drug benefit-more affordable.