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October 24, 2001 Wall Street Journal

October 25, 2001

The Cipro Circus

The circus tents have folded, at least for the time being. Yesterday Health and Human Services Secretary Tommy Thompson announced a deal to buy the anti-anthrax antibiotic Cipro from its maker, Bayer AG. But we can't let this sensible event pass without a few words about the amazing political grandstanding that preceded it. You'd think Bayer had spread the anthrax instead of selling a cure for it.

First up was the Canadian national health service -- the same folks who bring you long lines for routine health care -- that simply ignored Bayer's patent on Cipro and bought a million tablets from a generic manufacturer. Then came -- inevitably -- New York Senator Charles Schumer, who made his own patented lunge for the TV cameras to urge that the U.S. also ignore Bayer's property right. This coup de theatre was followed by Tommy Thompson's threat to override Bayer's patent if the company didn't meet his price.

This would merely be the usual federal folly except for one thing: Patents are the foundation of the U.S. drug industry. Prescription drug companies have high fixed costs but low variable costs. The high fixed costs result from a drug discovery process that takes many years and many false starts to produce one marketable drug. The time between the development of a laboratory compound and a drug approval can be 12 years.

The actual research time could be shorter, but the U.S. political system has decided to stretch it out, via the Food and Drug Administration, to ensure safety and efficacy. So the average cost of one new medicine can be $500 million. Once the high cost of approval is behind them, of course, drug companies can manufacture the pills at very low cost.

The American political tradeoff for this long approval process has been the property right known as patents -- that is, the granting of a temporary monopoly that allows drug firms to set prices to recover their fixed costs and make a profit. Without such a tradeoff, nobody in their right minds would try to invent a new drug. So if government undermines patents, it undermines the drug industry.

What makes the Cipro circus doubly disturbing is that it seems to have been motivated by concerns over price and not supply. Bayer seemed able to produce enough Cipro, and even if it were not it makes more sense to allow Bayer to license production to other companies rather than bust a patent.

As for the ability to set prices, it is the bedrock of patent rights. This does not mean that a large customer, such as a government, shouldn't be able to negotiate bulk purchase discounts. And indeed, after Bayer threatened legal action against Canada, the government agreed to buy a million tablets of Bayer's Cipro and let Bayer warehouse the generic competition. Then Secretary Thompson -- perhaps fearing a big fat lawsuit (for which the drug industry is famous) -- cut his own bulk-purchase Cipro deal.

All of this matters because this issue is likely to reappear in our brave new world of public health. Americans are going to need a variety of detection tests, antibiotics and vaccines to fight bio-warfare plagues. One advisory board recently noted that the Pentagon needs vaccines for 15 different agents. So somebody might explain to the political grandstanders that drug patent rights aren't a menace to national security; they're essential to it.