AIDS drugs manufacturers drop case

Today 39 pharmaceutical companies unconditionally dropped their case against the South African government. A turning point in the case may have been persuasive evidence that the companies have no economic basis for the huge prices they charge for AIDS drugs.

By | April 19, 2001

LONDON South Africa's Treatment Action Campaign and its friends are crowing with delight, as 39 pharmaceutical companies this morning withdrew their lawsuit to prevent South Africa from importing inexpensive generic copies of patented AIDS drugs. They will also pay defendants' costs. The manufacturers had argued their patent rights had been infringed by the South African government three years ago. The government had claimed the AIDS epidemic is an emergency under the TRIPS international patent agreements — and so it was free to import cheap generics. The manufacturers disagreed but now they have lost the war, and won only some appalling public relations for their attitude to Third World countries.

The South African Minister of Health has assured the Treatment Action Campaign (TAC) that no concessions have been made and that the government will now proceed to implement the 'Medicines and Related Substance Control Amendment Act', which led to the companies' action. Whether that will lead to the import of the drugs at low prices is still an open question however, as even the lowest prices previously quoted ($350 for one year's triple therapy from the Indian generics manufacturer Cipla) will be out of reach of the poor.

But why did the companies crumble so suddenly? A crucial part of the affidavit submitted a few days ago by the TAC in the case may be part of the answer.

The key element was an extraordinary and detailed report by James Love, Director of the US-based Consumer Project on Technology — founded by the consumers' friend Ralph Nader. Love argues that we've all been kept in the dark about the real — and low — costs to the pharmaceutical companies of developing AIDS drugs.

According to Love's affidavit, there has been wide confusion over drug development costs since a 1991 study that estimated the cost of new drug development at $231 million (J DiMasi, et al: Costs of innovation in pharmaceutical industry. Journal of Health Economics 1991). This was followed by a series of upward revisions, including one two years later by the US Office of Technology Assessment, which placed the figure at up to $359 million. Later estimates by the Boston Consulting Group and others reached figures of $500 million and more, says Love.

According to Love's analysis, however, these figures led to several misunderstandings. The $231–500 million figures were estimates of the costs of doing all the early discovery and pre-clinical work, the clinical trials and Federal Drugs Administration (FDA) regulatory approval. But for many drugs, says Love, "the US government paid for either the pre-clinical or the clinical work. In those cases, the companies' costs were lower."

In addition, Love says, these figures involved enormous adjustments for risk and excessive assumptions (15% per annum) for the cost of borrowing, and were not actual expenditures on R&D. "Few policy makers, journalists or analysts bothered to make the distinctions," Love says in his affidavit. "The cost… (in 1998 dollars) of drug development in the DiMasi work was $155 million in outlays. If one used a 15% (real) cost of capital, there was an additional $347 million for financing costs, which was 69% of the total cost of $502 million."

Another factor was the risk of failure, which must be legitimately included, but decreases at each stage of development. "Thus approximately one in five drugs entering Phase I trials are approved for marketing, approximately one in two entering Phase II are approved, and approximately 70% of drugs in Phase III trials are approved," says Love.

"In his 1991 study, DiMasi 'capitalized' clinical trials for the risk of failure, which roughly doubled (added 124%) the estimates of out-of-pocket expenses."

A further factor is the size of clinical trials, which can cost $3000–10,000 per patient and are often claimed as a major element in the total R&D bill. But AIDS drug trials were small, according to Love. In September 2000, the Consumer Project on Technology studied the mean number of patients for three classes of antiretroviral drug, including nucleoside analogue reverse transcriptase inhibitors (NARTI), protease inhibitors (PI) and non-nucleoside reverse transcriptase inhibitors (NNRTI). "For the NARTI products, the industry role was fairly limited. Industry-only trials were limited to an average of only 409 patients… Even if one takes the highest of the three AIDS drug categories (the NNRTIs) and ignores government sponsorship of trials altogether, the mean number of patients is only 1,310… When one looks at all 14 HIV drugs, the average number of patients in company-only sponsored trials was only 750, about 24% of the US Office of Technology Assessment three-drug average."

Love calculates that AIDS drugs trial costs were $2.3–7.5 million for the industry-only trials, and $3.7–12.2 million for all trials combined. And these figures are not adjusted for the US 'orphan drug' tax credit, which may cover as much as half the private sector costs of some trials, according to Love.

Love also looked at the time between research and marketing of a drug. Kenneth Kaitin and Elaine Healy, colleagues of DiMasi, found that the average period for clinical trials and FDA regulatory approval for AIDS drugs was 4.2 years. In his 1991 study, however, DiMasi had estimated the period from the beginning of the clinical stage to FDA approval to be 8.2 years, nearly double the estimate by Kaitin and Healy for HIV drugs. "This difference is huge," says Love, because at a 15% interest rate on capital, "an extra four years of development time increases costs by 75%."

"Thus, for example" claims Love, "Bristol-Myers Squibb (BMS) recently argued that the US government's outlays of more than $30 million for Taxol are not important, because BMS must have paid for the remaining $500 million to $1 billion it claims is spent on drug development. This is despite the fact that BMS did not invent Taxol, nor did it sponsor even one of the clinical trials used for the first approval of the drug. Had the government contributions been evaluated in the same supercharged way that the industry counts its own dollars, the story would have been particularly different."

Whether or not Love's evidence served to swing the case, it leaves the pharmaceutical companies with some questions to answer.

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