(Bloomberg View) -- Late last year, at a Forbes magazine health-care conference, I heard Brent Saunders, the chief executive of Allergan PLC, talk about drug prices.
He said the drug industry’s reliance on big price increases to generate profits had gotten out of hand. He vowed that Allergan wouldn’t raise prices more than 10 percent a year, and described a patient assistance program that would ensure no one would lack an Allergan medicine because of cost. Saunders called it part of the company’s “social contract” with patients. He sounded downright statesmanlike.
Then again, you know the old saying: Watch what they do, not what they say.
Late Friday afternoon, Saunders and Allergan showed their true colors: The company announced that it would transfer the patent rights to one of its most important drugs, the eye medication Restasis, to the Saint Regis Mohawk Tribe. No pharmaceutical company has ever done anything like that before.
For the Native American tribe, the deal will generate a nice chunk of change: a $13.75 million upfront fee, and $15 million a year in royalties for “licensing” Restasis to Allergan. In the news release disclosing the deal, the tribe said its entry into the patent business would help make it less dependent on its casino in northern New York.
For Allergan, the deal means that, with the patents in the hands of a sovereign entity -- which is the legal status of any officially recognized Native American tribe -- potential generic competitors trying to overturn Restasis’s patents at the Patent Trial and Appeal Board will be stymied. Once the transfer takes place, the tribe plans to file a motion to dismiss those proceedings on the grounds that the patent office has no jurisdiction over a tribe. Assuming this is a winning argument -- and it will surely be contested -- Allergan’s Restasis monopoly, which reaps in the range of $1.5 billion a year, will continue.
The word Wall Street analysts used to describe the deal was “innovative.” In a fairly typical client note, Ken Cacciatore of Cowen & Co. called it “one of the most unique actions we have ever observed in the generic versus brand patent battles.”
Unique it may be, but I can think of a few other words to describe the deal. “Sleazy” comes to mind. Also: sneaky, unscrupulous and just plain wrong. To be sure, Allergan and Saunders haven’t violated any laws, but the deal offers a classic illustration of a law coined by journalist Michael Kinsley: The scandal isn’t what’s illegal, it’s what’s legal.
Allergan insists that it isn’t completely trying to evade efforts to void its Restasis patents. After all, it just went through a weeklong trial against four companies that hope to make generic Restasis -- and the company says it won’t use the patent transfer to try to stop the litigation. According to a note sent to Allergan employees by Jag Dosanjh, the senior vice president for eye care, the company expects to win that lawsuit.
It is only the proceeding before the patent office, called the inter partes review, that it wants to cut off. It says that having to defend the same patents in two different forums is a kind of pharma double jeopardy. The review process also moves faster than the courts, and the bar for overturning a patent is considerably lower.
This patent review process was passed by Congress in 2011, as part of an overhaul of the U.S. patent system, precisely to do what Allergan doesn’t like: speed things up, and make it easier to overturn patents. Congress wanted to shorten the amount of time companies could maintain monopoly prices on their drugs so that all Americans could reap the benefit of lower drug prices. Allergan has decided that because it doesn’t like the law it will simply evade it by using this too-clever-by-half maneuver. You can be sure that if Allergan gets away with this, every other drug company will follow its lead, and the patent review process will die.
There are two other reasons the Allergan-Saint Regis Mohawk deal is offensive. The first is that Restasis was first approved by the U.S. Food and Drug Administration 15 years ago. The original patent for its active ingredient was set to expire in 2014. In other words, consumers should have been getting the benefit of lower generic prices three years ago.
Instead, Allergan applied for, and won, a series of new patents that could extend the drug’s monopoly until 2024. It is the new patents that competitors are trying to void. I realize that every pharma company now routinely uses this tactic to hold on to their monopoly profits. And I also realize that Wall Street now demands this of pharma companies.
But that doesn’t make it right. The clear purpose of the law is being thwarted. And it is a big reason drug costs, which are estimated to approach $600 billion by 2021, have been consuming an ever-larger percentage of health-care spending. Put simply, the practice of tweaking medicine to get new patents and maintain monopoly prices is hurting the country.
Finally, there’s that “social contract” Saunders likes to talk about. Piously announcing that you won’t raise your drug prices by more than 10 percent is pretty meaningless when you’re using absurd loopholes to prevent generic competition that could save the health-care system millions of dollars.
I wanted to ask someone at Allergan how the company could square this deal with its social contract rhetoric. But the two representatives I reached out to didn’t return my email and phone call. In that note to his staff, however, Jag Dosanjh, the Allergan eye care honcho, spoke to the issue. He wrote:
Our Social Contract is about making the risky investments in R&D that can lead to new treatments, pricing treatments in a way to make them accessible to those who need them, assuring quality & safety and educating physicians about the appropriate use of our product.
That’s corporate-speak for: “We’ll keep our monopoly product on the market -- and charge our monopoly prices -- for as long as we possibly can, social contract be damned.”
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Joe Nocera is a Bloomberg View columnist. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is the co-author of "Indentured: The Inside Story of the Rebellion Against the NCAA."
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