The US Congress is poised to give President Obama broad authority to conclude a binding international trade agreement known as the TransPacific Partnership (TPP). The topics covered in the agreement are diverse, spanning dozens of chapters on topics most people don’t even know belong in a trade agreement. While tariffs were the focus of many early 20th century trade negotiations, today the big issues are the regulation of banks and financial services, intellectual property rights, health and safety standards, regulation of the environment, pricing of new drugs and medical devices, privacy of your personal data, and other topics about which many of us have strong opinions. But our opinions are devalued, largely because of the asymmetric secrecy surrounding the negotiation. The secrecy is asymmetric because it does not apply to everyone. Of course all of the governments involved have access to the negotiating text, and so do hundreds of “cleared advisers” from the private sector on White House trade advisory boards. Basically, big corporations have access to the details of the negotiation — but you don't. The secrecy is all about diminishing your power, your voice, and magnifying corporate power (as if that was needed).
The lead agency in the TPP negotiation is the White House’s Office of the US Trade Representative (USTR), under the leadership of Michael Froman. Froman comes to the White House from Citigroup, the third largest bank holding company in the United States, and he has made the TPP his signature goal, while imposing an astonishing cloak of secrecy around this and other trade negotiations.
The few details we do know are consequences of leaks of a couple of chapters of the text. Among those leaks are the intellectual property and investment chapters of the agreement. These texts address some of the most controversial areas in the agreement, and here I will focus on one concrete illustration — the impact of the TPP on the prices of medicine. I have spent much of my professional career trying to lower drug prices (with more success outside of the United States than here), and I also have a personal perspective.
My wife is a stage 4 cancer patient. Specifically, she has a breast cancer that tests positive for a protein called human epidermal growth factor receptor 2, a condition referred to as HER2+. She is alive today, and doing fairly well, because she had access to several years of treatment involving two expensive drugs. The first drug was trastuzumab, a monoclonal antibody marketed by Roche using the brand name Herceptin. Injections of trastuzumab every three week kept her cancer relatively in check for most of five years. Last year she developed resistance to trastuzumab, and a number of new tumors. Now she has switched to another Roche product, T-DM1, also sold by Roche, under the brand name Kadcyla. This is a combination drug that includes trastuzumab (the T) linked to the cytotoxic agent DM1 (an agent also known as emtansine or mertansine, among other names).
Compared to the alternative, which is an early death, these drugs have worked pretty well. They don’t cure the cancer, but they certainly have extended her life, and as a bonus, the side effects are modest compared to some other drugs she has taken. The first drug, trastuzumab, kept her alive long enough that she could benefit from the new drug, T-DM1, which was approved by the FDA in 2014. Last year her oncologist told her she could “get a dog” and look forward to several more years. None of us knows what the future holds, but one possibility is another new drug, and even more years.
But the economics of all of this also important. The first drug, approved in 1998, was costing about $1500 per week. The new drug, which is basically the old drug plus DM1, seems to be twice that, or more than $3,000 per week. Access to these expensive drugs is limited. Almost no one in the developing world has had access to trastuzumab, despite its highly regarded therapeutic benefits. Access to the more expensive T-DM1 is restricted, even in higher income countries. In the UK, reimbursements for T-DM1 are not available in Wales, Scotland and Northern Ireland, and coverage is limited throughout the rest of Europe. In developing countries, it is as if the drug was never invented — it is not available to the general population.
For higher income countries, where newer cancer drugs are available, access is restricted in all sorts of predictable ways. Government and private insurers can refuse to pay when drugs are used off label — a fairly significant restriction for diseases like cancer, where off-label uses of anticancer agents may provide insight and therapeutic benefits when other approaches fail. Expensive drugs can also have higher co-payments. Palbociclib, a new drug for ER+/HER2- breast cancer, invented at UCLA and licensed to Pfizer, requires co-payments of roughly $2,500 per month, under some insurance plans, and not everyone is able or willing to pay this. Expensive drugs are sometimes held back until cheaper older drugs are tried. Trials involving combination therapies become costly, when conducted by entities other than the owner of an expensive drug. These are among the problems in the high income countries where the drugs are reimbursed at all.
The high prices are not an accident, the drugs are expensive by design. Governments grant monopolies to make and sell drugs, by issuing patents, but also by creating other deliberate barriers to competition, including in the United States, a 12 year monopoly on the right to rely upon evidence that a drug is safe and effective.
In the absence of these government granted monopolies, drugs would be far less expensive. One manufacture estimated they could manufacture trastuzumab for as little as $5 per week. Why grant these monopolies? There is only one justification, and that is to stimulate investments in research and development. Drug monopolies are a method of financing R&D.
While patents normally create exclusive rights, governments can limit those rights, for example, to curb abuses or to achieve a public interest objective, safeguards that are old as the patent system itself. In recent years, the White House allowed Apple to import iPhones and iPads that infringed Samsung patents, and courts have allowed companies like Microsoft, Direct TV, Toyota, Johnson and Johnson and Verizon to infringe patents subject to a modest court-set “running royalty” — a type of compulsory license on the patents. (More here).
The option of limiting or ending the monopoly associated with a patent or regulatory monopoly is the most direct and powerful option for influencing drug prices. Drug companies oppose anything that puts the monopoly at risk. When governments and private insurers are unwilling to put limits on the monopoly, they often respond by choosing to put the patients at risk, withholding or limiting reimbursements when prices are high.
How will the TPP change things?
In 1995, the World Trade Organization (WTO) came into existence, and among other things, created, in an agreement called the TRIPS, the first enforceable multilateral minimum standards for patents and other intellectual property rights. The WTO TRIPS standards included obligations to grant 20 year patents on pharmaceutical products.
The TPP is the latest and most important new trade agreement that seeks to create new standards for intellectual property that are more friendly to pharmaceutical companies and publishers.
The TPP chapter on intellectual property includes all sorts of obligations designed to expand and extend drug monopolies. There is a requirement not only to grant patents on drugs, but to grant patents even when the invention “did not result in an enhanced efficacy of the known product.” The TPP requires governments to grant extensions to the term of the patent beyond the 20 years required by the WTO, and to take measures to block the registration of generics when patents, including those of dubious relevance or validity, are claimed by drug manufacturers.
Among the most controversial provisions in the TPP is a proposal by USTR to require TPP members to grant 12 years of exclusive rights in the data providing the evidence that biologic drugs are safe and effective. The primary impact of this is to require a generic competitor to replicate the clinical trials that were used by the FDA to approve the drug, a task that not only is expensive, but which also may take years, and creates conflicts with standards for medical ethics that ban the repetition of experiments involving humans when the results are already known .
USTR justifies its proposal by citing a similar US law enacted in 2009 as part of a legislative compromise to enact the Affordable Care Act (ACA). Since then, the U.S. Office of Management and Budget (OMB) has called for a change, to shorten the term to 7 years. The US Federal Trade Commission would go further, and has opposed any monopoly for the test data, arguing that patents and trade secrets provide ample rights for drug developers.
USTR has proposed making the 12-year term in the U.S. law a permanent feature of the trade agreement. If this happens, the U.S. will be unable to reform our law, and other countries will also have to grant the 12 years data monopoly.
For patents, government can grant compulsory licenses on patents under the TPP, but in the most recent leaked version of the agreement, the US has insisted on a new standard for compulsory licenses that would make it much more difficult to justify breaking the monopoly. (See KEI TPP Briefing note 2015:1).
The TPP also proposes tougher norms for injunctions and damages for infringement of a patent, going beyond the requirements set out by the WTO. The new norms not only increase the risk to parties who consider infringing a patent of ambiguous relevance or validity, but it would nullify an important safeguard in the Affordable Care Act (ACA) designed to lower the risks for generic competitors of biologic drugs. The ACA eliminates the right to get an injunction, and caps royalties at a “reasonable royalty” when the incumbent seller of a biologic drug fails to make timely disclosure of the patents it claims will be infringed by the generic competitor. This safeguard is designed to give the generic drug maker more certainty that if they invest in a biosimilar version of the drug, they can actually sell it in the US market. USTR has proposed text that does not allow the government to limit damages, and indeed, mandates that patent owners can put any measure they like before a court, including “the suggested retail price” of a good, which for a biologic drug, is a big number.
The TPP rules on the test data monopoly are even more strict than the patent rules. While governments can create limitations and exceptions to patent rights, including compulsory licenses, the TPP proposes the monopoly on the test data be absolute, without the possibility of exceptions.
The White House is also insisting that the TPP include an investor-state dispute settlement (ISDS) mechanism, which will allow drug companies and other patent holders to enforce the provisions in the agreement against governments. If companies prevail, governments will have to pay millions if not billions in damages. In one closely watched case involving NAFTA, a smaller and less far reaching agreement, Eli Lilly is now suing the government of Canada for rejecting a patent claim, and asking for a half billion in damages — from the Canadian government. Even when governments “win” such disputes, they have to spend millions of dollars and years defending themselves before arbitrators.
How does will the TPP affect the price of medicine?
Today a number of new cancer drugs are entering the market with very high prices. For example, Bristol-Myer’s new drug for advanced melanoma, nivolumab (trade name Opdivo), can cost from $2,500 to $3,700 per week, depending upon the patient weight. The leading new hepatitis C treatments retails at $95,000. The newer chronic treatment regimes for HIV are close to $30,000, per year. Today several treatments for rare diseases are priced at more than $200,000 per year, and collectively, the cost of these programs is significant.
Prices of drugs are escalating faster than the rate of inflation, and importantly, the U.S population is aging. By 2015, 14.9 percent of the population will be 65 or older. This will increase to more than 16.8 percent by 2020 and 20.6 percent by 2030. The number of persons requiring treatments for cancer increase significantly with age. How will we pay for this?
If we can’t take actions to lower the prices of medicines, we can’t expect to have universal access in the United States, and we certainly can’t expect people living in developing countries to have equal access.
In the case of biologic drugs, like the ones that have kept my wife alive, the TPP is particularly significant. By eliminating the incentives to share the patent landscape with competitors (in current proposals, the TPP does not allow statutory limits on damages), the TPP would make it riskier for generic firms to making biosimilar versions of the drug. If a biosimiliar drug has an excessive price, governments can in theory break the patent monopoly, but not the data monopoly. It will be more expensive and take more time to develop a biosimiliar alternative. When and if competition does occur, there will probably be fewer competitors and with less competition, higher prices.
For all drugs, the expanded obligations to grant patents and to extend their terms, and the higher standards for damages relating to infringement, contribute to stronger, broader and longer monopolies. To make everything worse, there are also the proposals in the current negotiating text for new and more restrictive standards for the use of compulsory licensing of patents.
Most people will acknowledge that all of these features are designed to make drugs more expensive, and also, that by putting this PhRMA wish list into a trade agreement, it will tie the hands of Congress in the future, in terms of changing U.S. law — something that OMB already has proposed for biologic drugs, and others may want to do as regards patent issues.
Michael Froman is reportedly telling members of Congress that there is “no evidence” that trade agreements will hurt the poor, or create barriers to access. It is hard for me to assume that Froman is truly clueless and takes the pharma industry propaganda about the agreement at face value. He attended the Woodrow Wilson School at Princeton University at the same time that I was a graduate student at the same school. Later Froman received a graduate degree from Oxford, and a law degree at Harvard, where he meet President Obama. Brought up in a wealthy family, attending an exclusive private school before college, and then making the rounds of elite institutions of higher learning, before using those ties to land jobs at Citibank and the government, Froman has been on the receiving end of privilege all of his life. His signature achievement in government appears to be ramming the TPP through the Congress, and browbeating TPP member countries to trade the PhRMA wish list and greater market access to US banks and financial services companies, for some unknown set enhanced access provides to the US economy (including areas where US jobs will disappear). Froman may tell himself, and others who can vote on the deal, that they should trust him, and that the secret deal is actually good for America, despite what everyone else from labor to health and humanitarian groups are saying. But in this one area, Froman has to know that the current version of the TPP makes it the most anti-consumer and pro-pharma trade agreement, ever.
Ignoring, for a moment, the pharma industry “man bites dog” stories about how strong IP and higher prices don’t hurt poor people, consider also how the agreement will lock the United States into the spiral of increasing prices and increased rationing for expensive drugs.
Higher drug prices are defended on one ground and one ground only, that they stimulate more R&D. But high prices are certainly not the only way to finance R&D, and not a very efficient method either. For the last three years for which we have data, less than 8 percent of global pharmaceutical sales has been reinvested in global private sector R&D. (Link here). At least half of those expenditures tend to be wasted on products that offer little if any therapeutic advantages over existing medicines, or are disguised bribes to doctors to market products.
Governments could embrace all sorts of ways to protect or enhance R&D outlays, without endorsing unsustainable $3,000 per week drug prices. For example, some years ago, the Department of Health and Human Services insisted that Bristol-Myers lower the price of cisplantin, a cancer drug developed on a government grant, by 30 percent, and at the same time, provide $40 million to fund independent research on cancer drugs. A similar proposal was made by several GOP members of Congress in the 1990's, as part of a deal to extend the monopoly on the cancer drug Taxol. Funding R&D at any level the Congress or the Executive branch wants could be made a requirement for selling drugs protected by monopolies, and, at the same time, the government can condition the existence of the monopoly on an obligation to charge a reasonable price.
The government could also do much better, and implement full de-linkage of R&D costs from drug pricing, making products generics all the time, and funding R&D though a combination of expanded government grants and subsidies, and new innovation prize funds, with the level of the R&D rewards based upon a percentage of GNP or health care outlays. In 2012, the U.S. Senate asked the National Academies to consider such an alternative (Proposal here)
We could also make R&D financing part of the trade negotiations. Consider the following illustration. In 2010, the US FDA approved 10 new cancer drugs — the largest set of approvals for cancer ever. The US also subsidized much of the R&D for new drugs. One of the subsidies was the Orphan Drug tax credit, which pays for 50 percent of the cost of qualifying clinical trials. Clinical trials are the most important expense in the development of new drugs. For the 2010 cancer drugs, 9 of the 10 products qualified for the 50 percent tax credit. That tax credit comes at the cost of lower tax revenue from the drug companies, on their profits. Suppose the other TPP members matched the U.S. tax credit, and collectively, we paid for 100 percent of the costs of the qualifying trials? Would that have a bigger impact on R&D outlays than extending the terms of monopolies, or making prices even higher? The point is not that we should provide tax credits covering 100 percent of the costs of the trials for new cancer drugs, but rather, what else can be done in trade agreements to stimulate R&D, other than making drug monopolies longer and more expensive. USTR never asks those questions.