By Kevin E. Noonan —

There may be some good news with regard to the safety of generic drugs obtained from China.  Despite recent evidence that the U.S. Food and Drug Administration has been woefully deficient in inspecting generic drug manufacturers overseas (see "The Effect of Foreign Generics on the U.S. Drug Supply – Part I") and instances of contaminated excipients obtained from overseas manufacturers appearing in a variety of pharmaceutical products (see "The Effect of Foreign Generics on the U.S. Drug Supply – Part II"), it is possible that the situation is less dire when it comes to prescription drugs.

A story by Jean-Francois Tremblay in the June 18th issue of Chemical and Engineering News (published by the American Chemical Society), reports that the FDA inspects generic active pharmaceutical ingredient (API) makers more regularly than for other products, particularly over-the-counter (OTC) medications (see "Trusting Medicine from China").

The recent scandals include glycerin tainted (or substituted with) diethylene glycol, which has resulted in several deaths in Haiti and Panama and a massive recall of counterfeit toothpaste sold in cut-rate retail outlets in the U.S.  Also, a former Chinese government official in charge of drug safety was recently convicted (and executed) for taking bribes resulting in approval and sales of unproven (and unsafe) pharmaceuticals.  These events have prompted officials from China’s Pharmaceutical Producers Association (CPPA) to decry the implication that drugs produced in China are unsafe.  For example, the article quotes Yan Zhou, general secretary of the CPPA as acknowledging the
counterfeiting problem in China, but asserting that this does not represent the country’s largest drug exporters.  She is quoted as saying she knows of no instance where APIs produced in Chinese factories have not been inspected by the FDA.

Despite this good news, the Synthetic Organic Chemical Manufacturers Association (SOCMA) has continued to call for more FDA inspections.  This group may have a point, in view of the fact that the FDA conducted a total of 200 plant inspections in Indian and Chinese drug companies selling or supplying drugs to the U.S. market over the past seven years.  In contrast, the agency conducted 1,222 quality-assurance inspections in U.S. drug manufacturing plants in the past year alone.  And these inspections may be questionable in some cases, since the kind of inspections conducted abroad are rarely as rigorous as those U.S. firms routinely undergo, and are always arranged in advance (unlike the "surprise" visits American drug companies are subject to; see "The Effect of Foreign Generics on the U.S. Drug Supply – Part I").

The Chinese officials are not accepting complete blame.  According to Xiao Dong Li, deputy director of technical operations at Shanghai Pharmaceutical (one of China’s largest drug producers), although he would welcome additional FDA inspections, foreign importers "bear big responsibilities" for the recent tainted drug incidents.  His basis for the statement is that Chinese companies produce products for the foreign market according to their customer’s specifications.  If these specifications are unsafe or inappropriate, the responsibility lies outside China, according to Mr. Li.  He also maintains that the labeling for prescription drug APIs are "extremely difficult to falsify" and in any event, they are tested again by the FDA "upon receipt."  And he discounts the efforts for increased FDA inspections urged by SOCMA, since "[s]ometimes SOCMA or other organizations urge quality control as a trade barrier to protect the interests of their members."

In fact, it appears that the FDA concentrates their efforts on APIs used in prescription drugs, and exempts from inspection plants making components of OTC drugs.  Instead, the FDA inspects only those factories that make "pills, syrups or ointments" prepared from ingredients sourced from uninspected suppliers.  The FDA uses a variant of the honor system, depending on the manufacturers having "systems" in place for ensuring ingredient integrity, as well as relying on the manufacturers being able to identify substandard reagents (which evidently did not work with regard to glycerin; see "The Effect of Foreign Generics on the U.S. Drug Supply – Part II").  Since 2002, however, the FDA has increased its systematic determination as to which factories it inspects, using a "risk-based" method, and in 2004 instituted a higher degree of regulatory oversight and inspections for factories making prescription pharmaceuticals or APIs.  While the agency justifies this approach as "best allocat[ing] its oversight resources," it is less than reassuring for consumers of OTC products that have escaped the more rigorous inspection procedures.

Despite these difficulties, the economic realities dictate that more and more APIs and OTC drugs for the U.S. market will be produced in countries like China and India.  These realities make it critical that the FDA establish a more reliable format for protecting American consumers from the inevitable adulteration, intentional or accidental, that can be expected to occur in future.

    By Kevin E. Noonan —

The crisis in global drug pricing that has arisen since the institution of the World Trade Organization (WTO), and in particular with regard to the Doha Declaration (see "The Law of Unintended Consequences Arises in Applying TRIPS to Patented Drug Protection in Developing Countries"), is well-recognized.  While the international community has not been able to address the resulting disruptions in expectations, for both innovator drug companies and citizens of the developing world, proposals are beginning to emanate from academic commentators.

One of these, Professor Daniel R. Cahoy (at right) from the Pennsylvania State University, set forth his schema for an international drug pricing regime in a forthcoming edition of the Georgia Law Review (see "Confronting Myths and Myopia on the Road from Doha").  In his article, Professor Cahoy evaluates the bases for patent protection for pharmaceuticals, and how the WTO/Doha regime has (or hasn’t) lived up to the expectations of various constituencies.  Professor Cahoy recognizes the problems, both economic and political, behind the current situation, and he advocates abandonment of the "unitary" system that treats patent rights and royalty/lost profit rates equally in developed and developing countries.  His proposal for remedying the current problems maintains but modifies the compulsory licensing practices sanctioned by TRIPS.

Professor Cahoy proposes a "three-tier" compensation model.  The default provision would be "full compensation," which would apply outside the public health arena and to instances where the patent holder refused to enter the market and would be based on traditional compensatory royalty considerations (although the burden of proving the quantum of damages required for adequate compensation would fall on the patent holder).  Under this regime, licensing negotiations between a patent-holder and an individual government prior to grant of a compulsory license would not be required; Professor Cahoy characterizes this requirement as a "complex and ambiguous conditional" aspect of TRIPS as it now stands.  However, there would be no cost savings associated with this type of license either.

These considerations change in the case of a public health emergency, such as AIDS in Africa and elsewhere in the developing world, and globally if a bird flu pandemic occurs.  Then the "three tiered" model would come into play, where there is:  (1) a high compensation level for industrialized nations (substantially the same as the default "full compensation" situation), (2) a development-factored royalty rate for developing countries, and (3) a zero-royalty state for least-developed countries, with disputes as to whether a particular country belongs to one or the other of the categories being mediated by the WTO.  Professor Cahoy envisions the consequences of this system to be that industrialized nations pay the majority of the "compensation burden" to the patent holder, while countries less able to pay the full compensation burden would contribute commensurate with their economic development status, thus increasing access to needed drugs.

The operability of this system depends on a prohibition on parallel imports of patented drugs into industrialized countries, along the lines of proposed and actual legislation in the U.S. restricting importation of lower-priced drugs from Canada.  Professor Cahoy also envisions a degree of "discount royalty pricing" to extend to even developed countries under limited conditions of a public health crisis (such as a flu pandemic or a bioterrorist attack).  And although he considers it controversial, perhaps one of the strongest features of his proposal politically is that least developed countries would pay no royalty to the patent holder for a patented drug (although the proposal is limited to patent rights and not trade secret or other intellectual property).  This is not very different from the types of programs some pharmaceutical companies have instituted themselves in the world’s poorest countries facing public health disasters such as AIDS (see "Not Getting It about Patented Drug Prices at The Wall Street Journal").

Professor Cahoy advocates integrating into TRIPS his proposed compensation scheme for compulsory licensing of pharmaceuticals, because only in that way can the required level of global uniformity be achieved.  His scheme would result in "preferential" treatment for developing countries, which appeals to his perception of "fairness" in the international community.  Of course, it also smacks of philanthropy and paternalism, which have their own costs (see "Africa (Still) Depending on the Kindness of Strangers in Anti-AIDS Drug Pricing").  However, it would also foreclose access to the Doha compulsory licensing provisions for developed nations, which at present rest merely on a "pledge" by countries like those of the EU, the U.S., Canada, and Japan not to exploit those provisions.  Professor Cahoy questions the strength and enforceability of such pledges in view of the U.S. government threats to compulsorily license the antibiotic Cipro® during the anthrax scare after the September 11, 2001 attacks, and in the face of a possible "bird flu" pandemic.

The benefits to patent-holding pharmaceutical companies include the certainty of being able to project the expected profits from a given R&D investment in a particular drug.  Placing the compensation burden where it can best be carried – industrialized nations – will ensure innovation incentives for future drug development and investment.  Professor Cahoy posits that the more efficient resource allocation stemming from negotiated pricing even in "single-payer" regimes will reduce the propensity for some industrialized nations to attempt to "free ride" and thus avoid their responsibilities in this scheme.  Another advantage of the proposed system is to limit parallel importing of patented drugs, one of the most powerful weapons developing nations obtained under the Doha declaration.  The availability of parallel importing created incentives for countries without the industrial capacity to make a patented drug, such as Thailand, to compulsorily license, and an incentive for a developing country such as India to supply a generic equivalent of the drug.

The benefits of this proposal seem less certain than others that tie drug prices to, for example, per capita income.  First, the sorting of countries into the three categories is arbitrary under the self-selecting WTO formula.  Unlike a scheme based on objective criteria, a country’s changing circumstances will be inefficiently addressed, requiring WTO involvement and leading to "micro" free-riding during the interval after a change in status has been achieved.  There are also incentives to avoid changing categories, particularly a change into the "full compensation" industrialized category, which will be most valuable to countries such as Brasil, China, and India that can be expected to resist the costs attendant upon the status change.  The benefits of a more objective system than the one proposed by Professor Cahoy are apparently appreciated by Canada, which has tied its compensation scheme for generic copies of patented drugs to the United Nation’s Human Development Index; however, royalties are capped at 4%, which may not be realistic.

The need for a solution to the problem of global drug pricing is pressing.  Although Professor Cahoy’s proposed solution has some shortcomings, its strength lies in the attempt to provide a stable economic and political framework for addressing a heretofore intractable, and growing problem.  For that we should be grateful.

"Developing countries" are defined (actually, self-defined) under TRIPS.  They include:  Antigua and Barbuda, Argentina, Bahrain, Barbados, Belize, Bolivia, Botswana, Brazil, Brunei Darussalam, Cameroon, Chile, Colombia, Congo, Costa Rica, Côte d’Ivoire, Cuba, Cyprus, Dominica, Dominican Republic, Egypt, El Salvador, Estonia, Fiji, Gabon, Ghana, Grenada, Guatemala, Guyana, Honduras, Hong Kong, China, India, Indonesia, Israel, Jamaica, Kenya, Korea,  Kuwait, Macau, Malaysia, Malta, Mauritius, Mexico, Morocco, Namibia, Nicaragua, Nigeria, Pakistan, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Qatar, Saint Lucia, Singapore, Sri Lanka, St. Kitts and Nevis, St. Vincent and Grenadines, Suriname, Swaziland, Thailand, Trinidad and Tobago, Tunisia, Turkey, United Arab Emirates, Uruguay, Venezuela, and Zimbabwe.

"Least-developed countries" include:  Angola, Bangladesh, Benin, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad, Congo, Democratic Republic of the, Djibouti, Gambia, Guinea, Guinea Bissau, Haiti, Lesotho, Madagascar, Malawi, Maldives, Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Senegal, Sierra Leone, Solomon Islands, Tanzania, Togo, Uganda, and Zambia.

For additional information regarding this and other related topics, please see:

• "Pharma Sanity Lacks Global Reach," July 13, 2007
• "Brasil Prevails in Dispute with Abbott over AIDS Drug Pricing," July 9, 2007
• "Africa (Still) Depending on the Kindness of Strangers in Anti-AIDS Drug Pricing," May 29, 2007
• "U.S. Trade Policy Becoming Less Pharma-Friendly," May 18, 2007
• "The "Unfairness" of World Intellectual Property Protection According to The New Yorker," May 17, 2007
• "Worldwide Drug Pricing Regime in Chaos," May 9, 2007
• "Not Getting It about Patented Drug Prices at The Wall Street Journal," May 6, 2007
• "A Modest Proposal Regarding Drug Pricing in Developing Countries," May 2, 2007
• "The Law of Unintended Consequences Arises in Applying TRIPS to Patented Drug Protection in Developing Countries," May 1, 2007
• "Abbott Agrees to Offer AIDS Drug at Reduced Price," April 12, 2007
• "No New Abbott Medicines for Thailand," March 14, 2007
• "More Compulsory Licensing in Thailand," February 1, 2007
• "Thailand Compulsory License Still in the News," December 18, 2006