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Unbound The Strange and Very American Liberation of Big Pharma
THE MAN IN THE ARENA: WHY PHARMACEUTICAL COMPANIES BECAME SO AGGRESSIVE
In the world of bureaucratic Washington, D.C., few if any possess the gravitas and smarts to get away with quoting Teddy Roosevelt. Lewis Engman, Richard Nixon’s 1973 appointee as chairman of the powerful Federal Trade Commission (FTC), was one of the few. A Midwesterner with traditional Republican inclinations, Engman had “the gift,” as one friend later put itpeople simply wanted to be around him. He was a handsome man, with a broad brow and piercing dark eyes, and he was a social creature, stylishly dressed and coiffed and noticeable on the D.C. cocktail circuit, where he could be seen in the company of many of the president’s closest advisers. Engman was a personable, if tightly wound, man as well, comfortable with business types and staff typists alike; when a young FTC appointee named Elizabeth Hanford (later Dole) had a minor accident and ended up in the emergency room on the day she was to be installed, Engman took his entire staff over to the hospital and swore her in while she was still in bed.
More importantly in a town of fiercely guarded opinions and fiefdoms, Lew Engman could take the heat of debate. He seemed to revel in it. Often he intentionally recruited lawyers with whom he did not agree. “The notion,” a former staffer recalls, “was that the tension would produce the best resolution.” That didn’t mean Engman was thwarted very often; yes, he could be imperious and even arrogant, but “he was so personable and passionate that you wanted to agree with the guy.” Frustrated with the slow pace of getting anything done in D.C., Engman loved to invoke TR’s famous “Man in the Arena” speech. “It is not the critic who counts; not the man who points out how the strong man stumbles or where the doer of deeds could have done better,” he would quote, his brow furrowing. “The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, but who knows great enthusiasms . . . so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.” It was an appropriate mission statement for a young man charged with running the FTC, which oversaw the business of the world’s most powerful, if at the time troubled, economy. The FTC itself had grown increasingly controversial. For decades the commission had operated somewhat like a European or Japanese finance ministry, not simply policing industry’s outright frauds and cons, but also regulating competition itself. The agencies under its purview, from the Civil Aviation Board (CAB) to the Interstate Commerce Commission (ICC), were so cozy with their respective industries that it was all but impossible for an upstart entrepreneur to compete. Traditionally the FTC chairman, in a tacit admission of the powerful regional political interests that had created that coziness, remained mute on the situation. “The policy was never to criticize another government agency,” recalls Art Amolsch, who worked for Engman at the time and went on to become the foremost observer of the agency. “That’s why the FTC was always known as the Old Lady of Pennsylvania Avenue. It was averse to almost any change and inclined to say no to anyone who dared suggest otherwise.” For a brief period in the late 1960s and early 1970s, responding to lawsuits and studies by Ralph Nader over everything from unsafe cars to overpriced drugs, the commission had gone on a proconsumer binge under Chairman Miles W. Kirkpatrick, and mainstream business types, the core of the imperiled president’s political base, had railed against him during the 1972 election season. To calm them, in 1973 Nixon appointed Engman; he was supposed to “restore order.” In other words, to put things back where they were before the Naderites inside the commission got out of control again.
But Nixon, and whoever had done the personnel file work, misjudged Engman’s consumer credentials.
Although he was a classic 100- percent-free-trade, procompetition Republican, Engman had developed a strong proconsumer bent. As Time magazine would later put it, Engman saw the world as a “Ralph Nader out of Adam Smith.” You could best serve the consumer, he deduced, by opening up the marketplace.
With that in mind and the national economy in troubleinflation was up and productivity was downEngman went looking for ways to use the FTC’s power to make the country more competitive and to make American life more affordable. Quickly he diagnosed a novel cancer on the nation’s economic corpus: the regulatory agencies themselves. By making it so hard for small businesspeoppppple to enter their respective industries, the CAB and ICC were hurting the consumer and inhibiting innovation, thereby retarding long-term economic growth and keeping prices unnaturally high. In a brilliant, landmark speech at the normally staid Financial Analysis Conference in 1974, he laid out his thesis: “Much of today’s regulatory machinery does little more than shelter producers from the normal competitive consequences of lassitude and inefficiency . . . [it] has simply become perverted.” As a result, “the consumer is paying plenty in the form of government- sanctioned price fixing.” It was time, Engman said, to consider serious deregulation.
Engman also went after what he called “professional conspiracy.” He sued the American Medical Association over its ban on physician advertisingsomething he believed deprived consumers of the ability to get the best doctor for the best price. He went after state medical societies for their bans on the advertisement of prescription drug and eyeglass prices. In fourteen months he filed thirty-four antitrust actions. “The consumer was always the bottom line for Lew,” recalls Bob Lewis, who served on Engman’s staff. “‘Is this going to benefit the consumer?’ That was always the question he asked at the end of the debate about anything.” By the time he left the FTC in 1977, when a Democratic administration was about to take office, Engman had succeeded in making deregulation a mainstream Republican goal. At age forty-two, he was a GOP legend.
And so it was hardly surprising that, in the fall of 1980, with a new president named Ronald Reagan onboard who was committed to getting government out of every aspect of American life, Engman would again be sought for his leadership skills. This time the organization in need of help was the Pharmaceutical Manufacturer Associations. The PMA represented the nation’s biggest brand-name drug makers, who were often referred to simply as “big pharma” or simply “pharma.” (The organization itself formally changed its name to the Pharmaceutical Research and Manufacturers of America, PhRMA, in 1994.) The PMA believed that the industry was in a crisis, suffering from increasing costs, slipping sales, foreign competition, and government overregulation. It was a crisis so severe as to provoke pharma CEOs to wonder out loud “whether there will even be a U.S. pharmaceuticals industry in twenty years.” Then again, just about every major industry wondered something like that in the early 1980s, when it was widely believed that Japan was doing to U.S. industry what it had failed to do with bombs thirty-five years earlier.
Some, if not most, of pharma’s immediate crisis was of its own making, although this was not something most drug CEOs would admit. As a group and individually, they had simply failed to invest in new drug sciences and drug development. Instead, they had relied on (and indeed encouraged) the FDA’s lack of a generic-drug approval process, giving pharmaceutical companies de facto monopoliesand huge profit marginson many widely used drugs. This state of affairs had provoked a legal backlash of its own; district courts from New York to California were actively contemplating, and in some cases ruling, that many traditional pharmaceutical patents were invalid. The Supreme Court itself had grown hostile to the very notion of patents. In the pharma executive suite of the time, there was only one word for that: shock.
Yet some pharma problems were largely out of the industry’s direct control. America in the late 1970s and early 1980s was going through one of its cyclical periods of what might be dubbed pharmaceutical stoicism. As a percentage of annual health expenditures, the Rx share was actually shrinking. And while cocaine might be hip, prescription drugs were uncool on a number of levels. On the cultural plane, drug makers were the domain of the blue-chip world, with which the baby boom had yet to fall in love. The growing alternative-medicine movement, with its reliance on herbs and vitamins, appealed to a generation concerned with what was natural. The movie version of One Flew Over the Cuckoo’s Nest rekindled old suspicions about psychiatric medications, one of the industry’s most profitable monopolies. News stories about abuse of Valium, one of the most profitable postwar drugs, led to its reclassification as a controlled substance in 1978, making it harder to prescribe. There were scares over new heart medications and horror stories about pharmaceutical industry negligence, and a new generation of ambitious politicians had no qualms about capitalizing on such fears. When a young congressman named Albert Gore learned from a staffer that a Pfizer attorney had made an off-the-cuff remark about how expensive it was to monitor the adverse events of one of his products (“What, are we supposed to schlep all over the world just to track down one goddamn side effect?” the attorney had sputtered), Gore promptly publicized the incident. Abroad and in D.C., big pharma was, more than ever, big fair game.
Worse from the point of view of pharmaceutical CEOs were attitudes and trends among young physicians and medical students. Many of them were deeply suspicious of the business end of medicine. Some of their attitudes grew from social activism by med students in the early 1970s, who were concerned with overmedication and polypharmacy. (Overmedication is the unnecessary use of medications in general; polypharmacy is the simultaneous use of several medications to treat one or more conditions.) The concern was deepest among young psychiatrists. “In our day, it was almost an aesthetic thing to be against polypharmacy,” recalls one. “It was more beautiful if you could do it with just one or two pills.” Many believed that growing rates of polypharmacy were fueled by pharma promotional activities, like giving out free samples and stethoscopes. “At national meetings, the idea we talked about was to reject the goodies,” recalls Dr. Terry Kupers, who was head of the Medical Committee for Human Rights in the 1970s. “[Pharma sales representatives] would show up at grand rounds, and we would confront them and turn down the goodies. We also went to our intern meetings within our institutions and told our supervisors that we did not want [the reps] on grand rounds. It was happening at enlightened medical schools around the country. We did it as a statement.” The statement registered in establishment realms, a further worry to pharma, when, in 1978, a number of influential medical journals began to consider banning prescription drug ads in their pages. As Steve Conafay, then a lobbyist for Pfizer, recalls, “There was definitely the feeling that the industry was under attack and that something big had to be done.” Donald Rumsfeld, then the CEO of G. D. Searle, Inc., makers of a wide variety of drugs and chemicals, summed up the general attitude when, upon greeting FDA Commissioner Donald Kennedy, he “sat down across from me,” recalls Kennedy, “slumped a little, and said, ‘What are we doing wrong?’” With Reaganism ascendant, the question quickly turned into: What is the government doing wrong? For Engman, now ensconced in PMA’s head office, the question should have been: What can I wring out of the new political realityReagan’s pronounced antiregulatory bentthat will directly benefit my membership, the nation’s brand-name drug makers? Certainly many of his members were clamoring for a preemptive strike, with several advocating an assault on the FDA and its much hated efficacy requirements. (Congress had passed a law in 1962, known as the Kefauver Amendments, changing the Food and Drug Act and mandating that makers of new drugs prove not just that their products were safe, but that they actually worked.) The chief of research at Pfizer, then as now one of the more politically active pharmaceutical companies, had been railing against the efficacy rules for years, saying they got in the way of delivering good new drugs.
But Engman didn’t think that way. He wasn’t interested in deregulation for deregulation’s sake.
Perhaps it was that consumer bug, or perhaps it was his heady experience as leader of an agency that served “the public.” Whatever the exact source of Engman’s reservations, his eventual choice of legislative priorities finally came down to one issue: patent restoration. The subject had bubbled under the surface of FDA-industry relations for years. Simply put, the industry believed that the FDA was eating up the length of its patents, and profits, because of its slowness in processing new drug applications.
Companies with a new discovery had to file for a patent as soon as possible, to establish ownership of the idea, but then had to wait years for approval. By the time the drug was approved, the company might have as little as half the original seventeen years of patent life usually guaranteed to innovators. That led to higher prices, longer waits for new drugs, and a general disincentive to invest in new medications. It was true that the studies proving the case for patent restorationfor laws that would give pharma additional compensatory patent timewere weak and inconclusive, but the essence of the industry argument struck a nerve with Engman: here again was a case of overregulation hurting the economy of the nation and depriving the consumer of an improved product.
What should Engman’s PMA do? Sometime during the fall of 1980, he got an idea. He would use his old political contacts to shepherd legislation to extend pharmaceutical patents, adding up to seven years of exclusive marketing time for new drugs that had taken too long to get through the FDA approval process.
For a while, all of the old Engman magic seemed to work. He circulated studies showing exactly how industry suffered from FDA bureaucracyand how few new important drugs made it through the system. He lined up experts from leading medical schools to testify on the subject before Congress. By late 1982, he had managed to push the political process as well. A bill extending patent life was passed by the Senate and referred to the House for an expedited vote.
Yet the worldand particularly Washington, D.C.does not lie under the spell of magic for long, and Engman’s bill went down to unexpected defeat. One reason was the weather; a dense winter storm had settled over Foggy Bottom on the morning of the vote, delaying the arrival of several key supporters. Then there was another, less natural phenomenon: a man named Henry Waxman.
Waxman, a short, balding, mustachioed man who represented the Westside of Los Angeles, was the quintessential manifestation of the new post- Vietnam liberal legislator. In just nine years he had risen from relative obscurity to the chairmanship of the powerful Subcommittee on Health and Environment of the House Energy and Commerce Committee. This ascent he accomplished via the unabashed use of a political action committee, by which he funded the campaigns of like-minded fellow Democrats, who would then support his nomination to important committees. Perhaps more importantly, Waxman was a single- focus legislator by design, rather than by circumstance. “I recall him coming up to me at a fundraiser very early is his career and telling me he had found the key to his political life,” one longtime supporter remembered. “He said, ‘It’s health. Who can be against health?’” If Waxman’s concern seemed calculated, it was also genuine. Some of Waxman’s earliest supporters were older, less affluent Westsiders who were constantly kvetching to him about the price of prescription drugs.
“There was no way that Henry was going to give the industry seven more years of protected profits,” says Bill Corr, then head of Waxman’s committee staff. “The more we looked at Engman’s so-called studies, the more we saw something else.
For their most profitable drugs, the brand-name companies had actually received a substantialsometimes lengthyperiod of monopoly patent protection.” There was another less tangible but, in the end, highly potent factor at play in Waxman’s position as well: the belief that many of the brand- name pharma CEOs were anti-Semitic.
Waxman had arrived at that conclusion after a series of initial meetings with the CEOs and their representatives. “Whenever they talked about the generics guys, the word they like to use the most was ‘parasite,’” Waxman recalls. “Then they would talk about how greedy they were, how they throve off of the back of people who did the real work. I thought it was anti-Semitic. You could feel it. They were so disdainful, these New Jersey country club types.” Waxman’s antibrand name inclinations were further in- flamed by another political bomb-thrower, a man named Bill Haddad. Haddad was the head of the Generic Pharmaceutical Industry Association (GPIA) and the owner of a small copycat drug company, but he was no industry hack. He had a long, distinguished (if eclectic) liberal heritage dating back to his days on the staff of Senator Estes Kefauver, the author of the important 1962 efficacy amendments. It was through Kefauver that Haddad picked up the emotional component of his antibrand name jihad, the rhetoric of which often included such unconventional words as “liars” and “immoral” to describe his opponents. As Haddad saw it, it was the industry’s intransigence on such issues as generics and open pricing that had pushed Kefauver over the edge physically, eventually causing his death from a heart attack in 1963. (Kefauver’s legislation had been rewritten at the last minute behind his back by Kennedy administration staffers and brand-name lobbyists, who deleted the senator’s beloved generics provisions.) Haddad loved to tell the story of how he had visited Kefauver’s grave in the rain and swore: “I’ll get those bastards, senator.” For two decades, he had done just that, first through a series of journalistic exposés (Haddad had extensive family media connections and earlier had won a Pulitzer Prize for a series on price fixing in the antibiotics industry), then, in the 1970s, through his work in the New York state legislature. There, as a staff member with subpoena power, he had forced the brand-name firms to disclose which drugs were off patent. He then put together a powerful case against then prevalent anti-generic-substitution laws, which pharma executives had pushed through state legislatures across the country, thus making the prescribing of generics almost impossible. After New York repealed its antigeneric laws, Haddad put together a how-to kit for repeal and sent it out to “every ambitious young state legislator across the country.” Within a few years every such law in the country had been wiped from the books.
But Haddad’s biggest beef with the industryand the FDAhad provoked little in the way of action. By 1982 there was still no workable economic method for getting a generic drug approved even after a patent ran out. That was because the FDA still required any maker of a generic version of a brand-name drug to undertake the same lengthy, costly, and sometimes dangerous series of clinical trials to prove its product was safe and efficacious. Technically, this process was totally unnecessary. Time-proven methods of reverse engineering, along with sophisticated ways of assaying copycat compounds, could assure that any generic was biologically equivalent. “It was totally immoral to insist that the generic maker do all that again,” Haddad argued. “But they don’t care . . . they don’t care about the senior citizens, they don’t care about the poor single mother, they don’t care . . .” Many inside the FDA agreed, but the political power of the PMA, along with institutional inertia, cowardice, and plain old bureaucratic ass- covering had precluded any meaningful reform.
Then, in mid-1982, just as the PMA and Engman were using a new, ostensibly “independent” study to convince Congress that patent life had been dramatically shortened by FDA red tape, Haddad got a letter from a woman in Florida, a statistician who claimed she had been an author of the supposedly independent study. “She said that not only had the numbers for the study been prepared for her by the industry, but that the brand names had paid for the study and then insisted that it be presented as ‘independent.’” Haddad used the disclosure to stir up discontented seniors in two Miami Beach districts, who in turn “drove their congressman crazy” about why patent restoration was wrong, not to mention political suicide. Using Haddad’s activism to mobilize opposition votes and Al Gore’s willingness to vilify the industry in general, Waxman defeated Engman’s patent-extension legislation.
For a time following his defeat, Engman worked on a number of other industry-relief efforts. Certainly the time was still right for anything that offered a way to make the nation more competitive. Congress had passed the Bayh-Dole Act in 1981, which made it easier for the industry to use research discoveries that originated in publicly funded laboratories. For pharma, that opened up a wide range of lucrative partnerships with researchers at the National Institutes of Health (NIH), where scientists were making breakthroughs in developing new molecules that could treat everything from heart disease to depression. The law also made it possible for government researchers to accept consulting fees from pharmaceutical companies.
This opening-up processin essence doing away with old church-state separations that favored institutional or scientific independence over commerce of almost any kindwas the subject of a lengthy inquiry from some of the nation’s leading experts in pharmacology and drug regulation, who were joined by Engman.
Commenced in the late 1970s under Tulane University’s Dr. Gilbert McMahon, the Commission on the Federal Drug Approval Process was originally created as an evenhanded, fact-finding mission to discern whether many of the industry’s complaints about the FDA were justified. Under Reagan, it essentially became an industry organ, funded not by the government butunder the guise of budgetary efficiencyby private interests and philanthropists in tune with the president’s deregulatory impulses. As a result, the commission’s official discussions about opening up the FDA took place off the record and out of media view at a Virginia resort owned by a friend of the president.
By the time the commission presented its report in late 1982, almost every discordant (i.e., antibrand name) note had been tuned out. Instead, what Congress heard was a venerable choir of scientific voices demanding that the FDA cut the red tape and speed up approvals. The commission then presented Congress with its list of recommendations, many of which would eventually make it into the law books. Instead of requiring extensive, multiple studies for approval, the commission asked that “effectiveness should be found to have been demonstrated either by twoor, when appropriate, oneadequately designed and well-controlled studies.” Foreign studies should also be admissible and given equal weight with domestic studies, even if the populations were different. The commission also advised lifting stodgy old conflict-of-interest restrictions that barred the use of industry-paid experts in FDA advisory committee meetings. Lastly, “the FDA should provide guidance to its staff to encourage all review personnel to conduct timely, forthright, and evenhanded discussions with sponsors that arise at any time during the review process.” “That last one was the one that really mattered, long-term,” says Jonah Shacknai, then a commission staff member and now the president of Millennium Pharmaceuticals. “The real importance of the recommendations was a closer relationship between FDA and manufacturers. It used to be a solid Chinese wall. Now it had good windows in it.” But “good windows” into a regulatory agency were not what Lew Engman had in mind. He had patent reform in mind. True, there was now a little bit of obsession at work“he could get very wound up about it”yet as he listened to Waxman and Haddad talk, there were also other legitimate pinpricks on his conscience. What if Haddad was right? What if the PMA was on the wrong side of history? After all, in a recent district court ruling, Bolar v. Roche, a Brooklyn judge had ruled that it was not an infringement of a patent if a generics maker used a patented drug for experimental purposes in preparation for a regulatory hearing.
That meant that more generics were inevitable. It would become known as the Bolar exemption.
There was also troubling momentum on the Hill. Waxman had introduced new legislation that would make it easier for generics to get approvaland with no provision for patent term restoration for the brand- name companies at all. Waxman had, in fact, shifted the entire debate. Now the “greedy” ones were the brand-name companiessomething he repeated with nauseating regularity any time the media tuned in. And there was the quintessential Engman worry: Was the PMA’s opposition to a faster generics processan abbreviated new drug application (ANDA)not all that different from the FTC countenancing the Civil Aviation Board’s coziness with industry? Weren’t all those FDA regulations requiring duplicate testing another form of overregulation that hurt the economy and the consumer? What if Haddad was morally right?
Slowly, Engman started to talk about the whole issue differently, recalls Bob Smith, one of his closer staff aides at the PMA. “The companies are basically using human testing to protect the pill patents,” he recalls Engman saying one day. It wasn’t the first time anyone had put it quite that way, but it was the first time the head of the PMA had, or at least the first time one had done so out loud. Not long after, Engman assigned his lead counsel to begin negotiations with Haddad andWaxman’s staff to cut a deal: the PMA would trade its opposition to generics for a guarantee of patent term restoration. A deal was struck with Waxman’s staff. It included the Bolar exemption, thus putting into the law books what had only recently been rendered by a district court. Generic companies could now use formerly protected brand-name compounds to develop their low-price alternatives.
Immediately, a small but loud group of pharma CEOs called for Engman to abandon the deal. “I thought Lew had gone out of his tree,” says Irwin Lerner, then the head of Hoffmann- LaRoche, which made Valium. “He was embarrassed by it, I could tell. But he was also arrogant about it. He wasn’t going to back off the deal. His attitude was, ‘Who the hell are these guys around the table telling me what to do?’ He thought he was still the head of the FTC.” “All of the sudden, these guys who had been for the deal started freaking out,” recalls Bob Smith. “All of a sudden, everyone had an exceptionWhat about my Valium? What about my Inderal? They were all afraid that one company would get an advantage the other would not. Lew wasn’t totally surprised by it, but he was determined to live up to his deal with Waxman.” Joe Williams, then the chairman of the PMA board and the head of Parke-Davis, was furious. He asked for Engman’s resignation. The man in the arena was fired. To derail the new bill, Williams and Lerner turned to an unexpected source, a man named Gerry Mossinghoff. Tall, owlish, and charming in an old-school sort of way, Mossinghoff was the U.S. commissioner of patents and trademarks.
As such, he was committed to traditional patent law, and barely an official phrase passed his lips without Mossinghoff uttering something about “classic, hornbook patent law,” referring to the nineteenth-century case books that informed his views. He was also a textbook Reaganite, inclined to look unfavorably at regulatory or legislative limits on patent life. He had helped the president establish and populate a new, conservative patent court. Just who “requested” that he get involved and testify before Congress on the probrand name side is unclear, and there were recriminations all around. It was an unusual position for a paid public servant to be in.
But it was too late. Bill Haddad had made sure that the legislation would not get sabotaged by going directly to the congressman most likely to do so: Senator Orrin Hatch of Utah.
Socially and fiscally conservative, Hatch was a supporter of pharma, but he had a pronounced populist streak as well. He had a yearning to transcend his narrow reputation as a conservative firebrand. To exploit that, Haddad hired Hatch’s longtime chief of staff, who had just gone into private practice as a lobbyist, to convince his old boss to come onboard. Here was a great opportunity to expand and broaden his image, and, as Hatch was told, “generics seemed to be the right thing to do” to boot. Hatch agreed. The Waxman bill became Hatch-Waxmanthe order of the names reflecting not effort but cloutand was signed that fall.
The reaction in big pharma’s executive suites was startlingly clear and everywhere evident. There was now a new reality in the business, and that new reality was fearfear of not exploiting drugs fast enough and hard enough before generic competition eroded profits. And there was only one way to do that: get more new drugs approved faster and find new ways to milk them once they were approved.
To help ease the political way, the brand-name companies hired a new PMA president. His name was Gerry Mossinghoff. As Roche’s Irv Lerner said, “He had all the tickets we could possibly want.”
Copyright © 2005 by Greg Critser. Reprinted by permission of Houghton Mifflin Company.