Issue No. 52: Trade Deals Can Narrow Drug Price Gap With Europe, Protect U.S. Intellectual Property

Policy makers are recognizing that smarter trade deals – rather than European-style price controls – could be the key to narrowing the gap between what Americans pay for pharmaceuticals and what others in rich countries pay for the same medicines. Trade agreements are also seen as an efficient route to ensuring governments protect patents, which in turn are the spur to innovation.

Lately, the U.S. Mexico Canada Agreement (USMCA), the successor to NAFTA, has brought new visibility to the importance of pharmaceutical commitments in trade negotiations. We will examine the USMCA later in this newsletter, but first consider how trade can be a solution to one of the most vexing problems in drug pricing.

Securing Fair Value for Innovative Medicines Through Trade Deals

The disparity between pharmaceutical prices in the U.S. and other developed nations has become a torrid political issue. President Trump commented in October: “I’ve seen it for years, and I never understood. Same company, same box, same pill, made in the exact same location. And you’ll go to some countries, and it would be 20 percent the cost of what we pay, and in some cases much less than that.”

In an attempt to narrow the difference, the Administration last October proposed using an index of other countries’ prices to set U.S. prices of some for the most advanced U.S. drugs: a policy called “reference pricing.” Butcritics point out that this approach would almost certainly lead to a significant decline in pharmaceutical research and development, fewer new medicines, reduced health and shorter lives – both in the U.S. and abroad.

A study by the research firm Vital Transformation found that the IPI “penalizes innovation, targets companies with the most advanced, newest products in the market for what are often the most challenging diseases.”

Said an article in JAMA last year by three Harvard researchers, “Although the United States’ high prices of pharmaceuticals are controversial, these prices have been viewed as critical to innovation, including U.S. production of chemical entities.” The Vital Transformation study concluded, “Reducing revenue…via IPI impacts investment and radically impacts the probability of successful market entry” of new medicines.

Price controls severely weakened the European pharmaceutical industry, which as recently as 1990 was spending more than the U.S. on research and development. Henry Grabowski and Y. Richard Yang wrote in Health Affairsthat “U.S. firms overtook their European counterparts in innovative performance or the introduction of first-in-class, biotech, and orphan products. The United States also became the leading market for first launch.” As a result, Americans have faster, broader access, for instance, to the most advanced cancer medicines. Some 95% of the cancer drugs approved from 2011 to 2018 are available in the U.S., but only 74% are available in the U.K. and just 8% in Greece.

U.S. companies plough their revenues, mainly domestic, into research and development that helps patients everywhere. In typical examples, Merck’s 2018 financial report showed the company’s R&D spending represented 23% of total revenues; for Eli Lily, the proportion was 22%. In fact, for many large drug manufacturers, R&D spending annually exceeds profits. It is understandable that the President and others are distressed. Other rich countries are “free-riding, or taking unfair advantage of the United States’ progress in this area,” as a February study by the President’s Council of Economic Advisors (CEA), titled “Reforming Biopharmaceutical Pricing at Home and Abroad,” explained.

In a public letter 15 years ago, more than 200 U.S. economists tackled the price-disparity issue. They wrote: “The ideal solution would be for other wealthy nations to remove their price controls over pharmaceuticals. America is the last major market without these controls. Imposing price controls here would have a major impact on drug development worldwide, harming not only Americans but people all over the world. On the other hand, removing foreign price controls would bolster research incentives."

Exactly. But how to address those overly restrictive foreign price controls?

One answer heard more and more frequently is improved trade rules. After all,President Trump frequently refers to his ability to negotiate better trade deals. The use of trade deals to narrow the price gap should be right in his wheelhouse.

The current unfairness seems evident. When a Lexus is shipped to the United States from Japan, our government does not require that it be sold for only $20,000 so that more consumers can afford it. But that is exactly what is happening with U.S. drugs. Europe is saying, “Send us your medicines to save the lives of our citizens but only charge what we tell you to charge.” That kind of policy appears to flout the concept of free and fair trade.

President Trump has torn up some trade deals and renegotiated others. He has recognized the impact of unfair trade practices on the U.S. economy and, specifically, on American workers. Now, his Administration is beginning to require trading partners to change their ways when it comes to pharmaceuticals.

The U.S.-Japan Bilateral

Proof that the Administration is making headway could come in the U.S.-Japan bilateral agreement scheduled to be signed during his month’s United Nations General Assembly meeting in New York. The Office of the U.S. Trade Representative (USTR) set as one of its negotiating objectives: “Seek standards to ensure that government regulatory reimbursement regimes are transparent, provide procedural fairness, are nondiscriminatory, and provide full market access for U.S. products, particularly under relevant Japanese measures.”

As an example of the obstacles American firms face, consider the discrimination wrought by recent revisions to Japan’s Price Maintenance Premium (PMP) system. A London-based online journal last year described PMP as a program…

…that adds price premiums to innovative new drugs and protects this price for the duration of the period of exclusivity or patent period. This had made it more attractive for pharma companies to develop new drugs for Japan early as there was a mechanism in place to get a reimbursed price that would reduce towering research and development costs.  

In a letter to USTR, Jay Taylor of PhRMA, the U.S. industry trade association, wrote, “Under the new criteria, several U.S. global best-selling products have been deemed ‘non-innovative’ and stripped of their PMP eligibility. Further, the PMP company criteria appear to be inherently biased towards domestic companies and seriously call into question Japan’s commitment to fair and non-discriminatory policies consistent with its WTO obligations.”

Japan also provides weaker intellectual-property protection than the United States and suffers from deficiencies in transparency and enforcement. U.S. negotiators have the chance to bring Japan up to American standards, helping not just U.S. companies but Japanese consumers, who have access to fewer than half of newly developed cancer drugs.

The Potential U.S.-U.K. Trade Deal

Whenever the U.K. actually withdraws from the European Union – which could be as soon as next month -- the two countries will negotiate a new bilateral agreement. “We’re going to do a very big trade deal—bigger than we’ve ever had with the U.K.,” said President Trump recently. One element of that deal could be commitments to ensure fair value for U.S. medicines, ensuring transparency and due process in the pricing and reimbursement process.
 
“The United States, which sought to challenge a similar scheme in Australia during trade negotiations, argues that lower set prices are unfair on its pharmaceutical companies and leave U.S. consumers footing the bill,” said aReuters report earlier this year. But Boris Johnson, the British Prime Minister, said before meeting President Trump at the G-7 meeting in France that health care was not up for discussion.

“Americans have long wanted Britain to liberalize how the NHS [National Health Service] decides which drugs to offer British patients and at what prices,” said a Wall Street Journal editorial on Aug. 28. “Decisions on access are often driven more by cost than health benefit.” Because of reference pricing used in many other countries, “Britain’s price demands then become the basis for U.S. drug companies’ negotiations with buyers around the world.”

A Special Pharmaceutical Negotiator
 
In negotiations like these, Rep. Mark Meadows (R-NC), the chair of the House Freedom Caucus, believes the USTR needs help. So in April he introduced “The Fixing Global Freeloading Act” (H.R.2209). The bill, according to Meadows’s website, “would establish a Chief Pharmaceutical Negotiator” in the USTR’s Office. This new official would be “responsible for conducting trade negotiations and enforcing trade agreements to ensure that the United States’ pharmaceutical innovations are appropriately rewarded.”

In an op-ed in The Hill on May 7, Meadows elaborated:

For too long, we’ve let the world take advantage of the United States and nowhere is this problem worse than it is for medicines. In fact, many other American industries, such as agriculture and manufacturing, have negotiators advocating for, and protecting their innovation—it’s high time we assign a dedicated chief negotiator to the very industry most impacted by this freeloading from foreign interests who are supposed partners and allies.

In a Special 301 Report earlier this year, the USTR stated that it “has been engaging with trading partners, including Algeria, Argentina, Australia, Canada, China, Colombia, Ecuador, Egypt, India, Indonesia, Japan, Korea, Mexico, New Zealand, Saudi Arabia, Turkey, and the United Arab Emirates (UAE), to address concerns related to IP protection and enforcement and market access barriers with respect to pharmaceuticals and medical devices so that trading partners contribute their fair share to research and development of new treatments and cures.”

But other than USMCA, USTR has yet to score a major victory.
South Korea is our sixth-largest trading partner, and, in its revision of the U.S.-Korea bilateral trade agreement of 2012, the U.S. insisted that Korea end its policy of favoring its own pharmaceutical industry and restricting imported drugs to below-market prices. The USTR stated that as part of the renegotiation, “Korea will amend its Premium Pricing Policy for Global Innovative Drugs to…ensure non-discriminatory and fair treatment for U.S. pharmaceutical exports.” That treatment was supposed to have been ensured in the original KORUS bilateral deal seven years ago. Korea has agreed to comply in the new version, but it is still by no means clear that it will do so.

Biosimilars in the USMCA

One of the most contentious trade issues involving pharmaceuticals currently is a provision of the USMCA. The leaders of the three countries signed the deal November 30, but Democrats in the U.S. House are threatening to refuse to approve it. One major issue is enforcement of labor standards in Mexico, but another involves commitments designed to help manufacturers of biological products (“biologics”) – highly sophisticated large-molecule medicines – to protect their innovation. Biologics are the fastest-growing class of therapeutics.

Under Chapter 20 of the agreement, makers of biologics would be allowed 10 years of protection for the data they used to win approval. “After a decade has elapsed,” explains the New York Times, “competing drug companies are allowed to rely on the original company’s data to get product approvals for their own drugs, without repeating clinical trials, as long as they can show they have produced a similar drug.”

Currently, Canada provides eight years of data protection for biologics. Mexico provides five years – although some legal experts are skeptical of whether there is any real protection for biologics in Mexico. In the U.S., data are protected for 12 years, a duration that will not change with ratification of the agreement. The U.S. wants to set a minimum of 10 years in order, as President Trump put it, to “make North America a haven for medical innovation and development.” But the USMCA will also help advance a global standard for future trade agreements. Other developed countries, such as Australia, New Zealand, and Chile, have only five-year protections. (Japan has eight years, and the U.S. pharmaceutical industry has urged the USTR to extend the limit to twelve in a new bilateral.)

Democrats argued in a letter to the USTR, Robert Lighthizer, that “we believe it is critical that the United States remains the leader in health care innovation. However, we also believe that Americans are entitled to timely access to affordable health care and medicines.”

They worry that longer data protection means fewer biosimilars – that is, drugs that are, in the words of the FDA, “highly similar to” and with “no clinically meaningful differences from” existing FDA-approved reference biologics. Biosimilars hold enormous promise in the effort to constrain drug prices – in the same manner as generics for small-molecule medicines. But only 23 biosimilars have been approved in the U.S., and just nine of those are being marketed here.

A strong counter-argument, however, is that a short period of exclusivity will discourage innovation, so that there will be fewer biologics for biosimilars-makers to copy. Marc Bush, a professor of international business diplomacy at Georgetown University, wrote last month in the Detroit News:

It takes roughly $2.6 billion to create just one new medicine. Without a reasonable data exclusivity period, competing firms could simply copy a new biologic and sell it for a bottom-dollar price. It would be extremely difficult for investors to recoup their development costs. So innovators would have little incentive to invest in new biologic research in the first place.

If investment in biologics dries up, biosimilars will disappear too. That’s because scientists can’t reverse-engineer nothing, and without data exclusivity to seed research on new biologics, that’s exactly what there will be to copy: nothing.

U.S. Law Calls for Trade Deals to Bring Other Countries
Up to U.S. Standards

Opponents of the biosimilars provision of the USMCA have claimed that the pharmaceutical industry wants the 10-year restriction in the agreement in order to prevent future reductions in the U.S. standard by Congress. But a new paper by Miriam Sapiro, who was deputy U.S. Trade Representative in the Obama Administration, argues that “USMCA obligations would not constrain Congress’ authority or ability to revise U.S. law or policy.” Sapiro, who is a senior advisor to a group pushing to pass USMCA, writes:

If lawmakers have concerns with existing U.S. laws, they can work to change those laws at any time, regardless of whether there is a trade agreement in place with Canada, Mexico or any other trading partner…. The language of existing trade agreements – and their implementing statutes – preserves Congress’ ability to legislate at any point.
 
Sapiro also notes that Congress has clearly stated that trade deals should aim to bring other countries up to U.S. standards. She quotes Trade Promotion Authority (TPA) legislation:

[t]he principal negotiating objectives of the United States regarding trade related intellectual property are…ensuring that the provisions of any trade agreement governing intellectual property rights that is entered into by the United States reflect a standard of protection similar to that found in United States law.

According to a Congressional Research Service analysis that was updated this June, the TPA law, signed by President Obama in 2015, also specifically “seeks to eliminate government price controls and reference prices ‘which deny full market access for United States products.’”

It is these principles, approved on a bipartisan basis, that led USTR to negotiate commitments that could result in narrowing the gap between U.S. and foreign drug prices, while at the same time continuing to spur innovation and make people healthier – here and around the world.