Drug Makers Wrestle With World's New Rules

http://www.nytimes.com/2001/10/21/business/21DRUG.html?ex=1004774734&ei=1&en=d9e37c07ea89174e

October 21, 2001

BUSINESS

Drug Makers Wrestle With World's New Rules

By ANDREW POLLACK

The Associated Press

The spread of anthrax attacks has increased demand for the drug Cipro, putting pressure on its manufacturer, and has led to precautions in handling mail.

ITH fears of bioterrorism growing by the day, the nation's pharmaceutical companies are facing a quandary — trying to show that they are patriots, not profiteers, even as they protect their way of doing business.

In the last two weeks, as consumers and public health officials have scrambled to procure enough antibiotics to treat anthrax, the drug industry — especially Bayer of Germany, which makes Cipro, the antibiotic most in demand to fight the disease — has had its ethics questioned.

It has watched as the patent system, the bedrock of its business, has come under renewed attack, not as something that merely causes higher drug prices but as a threat to national security itself. On Thursday, Canada said it would ignore Bayer's patent on Cipro and buy one million tablets of a generic version from another company, saying it could not be assured of getting enough from Bayer. Senator Charles E. Schumer, Democrat of New York, has urged the American government to follow Canada's lead.

The drug industry has experienced renewed concerns about the pricing practices that have tarnished its image in the past, and which could deepen if the industry is perceived as unduly profiting from the nation's misfortune.

And as the need for new vaccines and treatments for protection against biological agents increases, it may well have to review and revise its research and development priorities.

"Recent events have been quite tumultuous in the drug industry," said David F. Saks, founder of the Saks Mediscience fund, an investment fund in New York. "The drug industry is now right at the top of the food chain of what's important to America."

Last week, in an attempt to rally to the nation's defense, the big drug companies formed a task force to work with the government to provide vaccines and drugs needed to protect against bioterrorism.

Coming all at once, these developments may lead to fundamental change in an industry that has enjoyed phenomenal success. Hugely profitable, the major drug companies have enjoyed double-digit growth in recent years and their business has held up better than virtually any other industry since the economy began to cool last year. So have their stocks, many of which have risen even since Sept. 11.

Pharmaceutical companies, often called defensive investments because spending on drugs tends to hold up even in recessions, are now literally becoming defense contractors, like the aerospace companies.

This could change the relationship between the government and the industry, which has typically been one of regulator and regulated. "I'd say the pharmaceutical industry up till now has taken a very defensive posture toward the government," said Peter A. Tollman, a vice president at the Boston Consulting Group who advises pharmaceutical companies. But in bioterrorism defense, the government becomes a partner and customer. "That's a marketing job, not a regulatory one," he said.

Congress is likely to pump millions or possibly even billions of dollars into the pharmaceutical industry for research and development of drugs that could be used for protection against biological agents, and perhaps lower regulatory hurdles for those drugs as well. That could mean more work going to two areas — vaccines and antibiotics — that the companies have paid little attention to in recent decades as they have raced to develop more lucrative drugs to lower cholesterol, treat ulcers and fight baldness.

But the money will not come without strings. Military contracting typically carries lower profit margins than the drug industry is accustomed to, and the government may well demand below-market prices for drugs. That is one reason the drug companies until now have been reluctant to make vaccines for the Pentagon. New security restrictions might impede the free flow of information that can speed research. And while it is good publicity now that the tools of biotechnology are being pressed into service in the nation's defense, in the long run the link between biotechnology and the military could be one more reason beyond cloning and genetically modified food that some people mistrust the new technology.

Yet for the big drug companies, defense work is likely to be a small part of their business.

None of those companies that were asked for interviews were willing to make an executive available to discuss the impacts of the bioterrorism issue on their business, saying it is too early to know. Even the Pharmaceutical Research and Manufacturers of America, the industry trade group that typically handles queries about issues the companies do not care to deal with themselves, would not comment.

But if the long-term changes are fuzzy, the immediate threat to patents is very real. There have been serious challenges to patents before. Critics and some foreign health officials have contended that patents preserve high prices that have made drugs unaffordable for millions in Africa who are dying from AIDS. Some consumer groups have blamed patents in part for high American drug prices that send busloads of older Americans streaming into Canada in search of cheaper pills.

The anthrax scare has brought the issue home to the average American, in what seems more like a potential life-and-death situation. Worried consumers are desperately trying to obtain Cipro, until last week the only drug specifically approved for inhaled anthrax, the deadliest kind. And the government plans to stockpile millions more doses. There is concern that Bayer cannot meet demand quickly enough, putting pressure on the government to break the patent, or find ways around it, and buy generic versions.

"The other pressures on the industry have been heavily about price," said John C. Rother, director of legislation and public policy for AARP, the advocacy group for middle-aged and older Americans. This time, he said, it is a matter of procuring enough. "This is a situation where the national interest is so clear that I think it will outweigh the normal business process."

What the industry has feared most is so-called compulsory licensing — a government basically allowing a patented drug to be copied. Even during the AIDS crisis, the industry managed to stave off that action, with several companies agreeing to supply a particular drug at a deep discount rather than see the sanctity of patents undermined.

That is why the action of Canada is so worrisome to Bayer and the industry. And if the United States were to do something similar, as Senator Schumer urges, it would set a precedent that would make it easier for other countries to follow suit with other drugs for various other medical emergencies.

In true crises, the rules may well change. "Extraordinary events sometimes call for extraordinary corporate compassion," said Thomas Donaldson, a business ethics professor at the Wharton School of the University of Pennsylvania. "The company cannot just look at profits but must look at the face of the victims."

So far, the Bush administration has insisted it is not necessary to break Bayer's patent, in part because there are other antibiotics that can also be used against anthrax.

But some ethics professors say Bayer should allow others to produce the drug. The panic about a possible shortage may itself constitute a public emergency, said John W. Dienhart, a business ethics professor at Seattle University. "We're dealing with life and death itself, not Post-it Notes," he said.

Bayer, for its part, said there is no ethical quandary because it can meet the demand. It is working night and day and reopening a German factory to triple output.

The industry also argues that allowing generic versions of Cipro is unnecessary. "We think this is a solution for a problem that does not exist," said Jackie Cottrell, spokeswoman for the Pharmaceutical Research and Manufacturers of America. "We don't have a supply problem with our medicines."

Some ethicists agreed. "If they can make enough, that solves the problem," said John R. Boatright, a business ethics professor at Loyola University of Chicago.

But others said Bayer was taking a big risk even if it truly could make enough Cipro. It could be perceived as a poor corporate citizen if it does not allow others to produce the drug. "Companies are often required to see the psychology as well as the objective facts," Mr. Donaldson said.

And Gerald C. Meyers, a former chairman of American Motors who is now a business professor at the University of Michigan, said: "They can't do anything other than license. They'll take such a hit if they refuse."

In fact, Bayer is exploring steps to prevent its patent from being broken by government decree. It can decide, for example, to license other companies to produce Cipro.

Still, even if Bayer escapes the immediate threat, pressure on patents may well continue — even the industry insists that they are essential to encourage innovation. On Thursday, reacting in part to concerns about anthrax, the Senate Judiciary Committee unanimously approved a bill that would make it harder for drug companies to stave off generic competition.

Moreover, the government, anxious to keep developing countries in its fragile political coalition against terrorism, might be less aggressive in protecting the interests of the American pharmaceutical industry in other countries through trade pressures. "The U.S. government is likely to feel embarrassed at a time when coalition members or countries with big refugee problems are perhaps going to join the list of countries looking for a break on pharmaceutical products," said Ken LaPensee, senior vice president of Cambridge Pharma Consultancy, an industry consulting firm.

Anxious to show they are rising to the cause, the large pharmaceutical companies formed an emergency preparedness task force of seven top executives to assist the government in meeting health needs and responding to bioterrorism. Drug companies like Merck (news/quote), the Aventis (news/quote) Pasteur unit of Aventis of France, American Home Products (news/quote) and Baxter International (news/quote) have talked to the government about making vaccines for smallpox.

Announcing the task force, the industry's trade association said the industry had always responded in times of national emergency, pointing to its role in developing penicillin and malaria drugs in World War II.

BUT that was more than a half- century ago, and in recent years the industry has been far less willing to respond to government needs. A report last year by a Pentagon advisory panel, made up mostly of pharmaceutical executives, noted that drug companies had "a decades-long trend of relatively inconsequential support of D.O.D. vaccine production requirements."

It was, after all, the Defense Department, not Bayer, that did the animal studies needed to have Cipro approved for use as an anthrax treatment — the very approval that will now yield a windfall for the company worth possibly hundreds of millions of dollars.

Vaccines in general have not been a good business, especially compared with drugs for heart disease, cancer or high cholesterol. Many vaccines are taken once in a lifetime rather than over and over, and prices have tended to be low because governments are often the buyers. Those problems, plus liability concerns, have cut the number of big drug companies making vaccines from more than a dozen to four — Merck, American Home Products, Aventis Pasteur and GlaxoSmithKline (news/quote) of Britain, plus several smaller ones. There have been shortages of some vaccines even for childhood diseases.

Legislation in 1986, however, alleviated some liability problems and better technology has started to make the business more attractive again.

Making vaccines against biowarfare agents has been considered even a worse business because there was a chance such vaccines would not be used. The job is also a big one. The Pentagon needs about 15 vaccines for different biowarfare agents, the advisory panel found. Yet the entire vaccine industry now produces vaccines for only about 20 diseases. To top it off, the defense contracting procedures are bureaucratic and needs are subject to change.

Antibiotics, as a category of drugs, have not received much emphasis in the last two decades because so many germs seemed to have been conquered. But even before the terrorist attacks, some companies had begun new research, largely because many bacteria are becoming resistant to existing drugs. Both start-ups and big companies are using new knowledge about the genomes of pathogens to design new ways to attack them. New funding in the wake of a national bioterrorism effort could give those efforts a boost.

The industry has asked Congress for reforms to make the production more attractive, like greater relief from liability, a long-term financial commitment by the government and quicker review of new vaccines by the Food and Drug Administration. Such measures could offer incentives not only for military vaccines but other vaccines and drugs as well.

This sudden need for treatments, vaccines and detection systems for biological agents may be a boon to start-up companies, for which a government contract can supply significant financing in the early stages. Just as spending on space and military projects helped nurture early semiconductor companies, a defense biotechnology buildup promises more biotechnology start-ups incubated by government grants.

But a closer relationship to the military also carries risks. Aerospace companies that became too dependent on government contracts had trouble adjusting to the faster pace of commercial markets.

There is also the danger that the same techniques and laboratory machinery that can be used to design defenses against biowarfare agents might be used to create more potent such weapons. A few years ago, the government began restricting the free flow of samples of pathogens used in research, and those restrictions might now grow tighter. If fears spread, there could be further government monitoring of sales of laboratory equipment or possibly even limits on the open publication of pathogen genome sequences.

"Certainly people in the industry are beginning to talk about how should or how could information flow like this be controlled," said Robert L. Erwin, chairman and chief executive of the Large Scale Biology Corporation (news/quote), a biotechnology company in Vacaville, Calif.

Any association with bioweapons could also raise another public fear about the implications of biotechnology at a time when the industry is already facing controversies over genetically modified food, cloning and stem cells.

"There's a concern that undue attention to biological weaponry may have a chilling effect on all of biotechnology," said Steven M. Block, a biology professor at Stanford. He said those worries helped explain why biologists and industry executives generally did not take active positions in trying to control biological weapons, unlike physicists who got active in nuclear arms control.

Indeed, the pharmaceutical and biotechnology companies opposed recently proposed revisions to strengthen global controls on biological warfare, saying the proposed inspections of their factories and laboratories would provide an opportunity for industrial espionage. That was one reason President Bush said the United States would not sign the new treaty.

Still, Carl B. Feldbaum, president of the Biotechnology Industry Organization, which represents biotechnology companies, and a former Pentagon official himself, seems pleased about the new relationship between the government and his industry.

"Defense contracting is pretty arduous and red-tape-heavy and many of the companies have shied away from it, frankly, as not really entrepreneurial," he said. "But I think a lot of that feeling might have been overcome by the events of Sept. 11."

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