Bioterrorism--the dissemination of toxic organisms in order to inflict harm on a large scale--has been discussed in the medical and public policy communities for many years. During May 1999-June 2001, the Journal of the American Medical Association published consensus statements on dealing with anthrax, smallpox, botulism, the plague, and tularemia as bioterrorism weapons.[1] Nonetheless, bioterrorism has been extremely rare except among warring nations. The only documented case in the U.S. involved a non-fatal dissemination of salmonella in 19__. The only well-known anthrax episode involved the unintentional dispersion of anthrax in 1979 from a biological weapons facility in the Soviet Union, causing the deaths of at least 40 persons.[2] This sparse historical record had caused some public health experts to argue that preparations for bioterrorism would be an inefficient diversion of resources from other public health activities.

We are now dealing with a series of domestic attacks with anthrax (bacillus anthracis). This continuing episode apparently began with the Sept. 20 mailing in St. Petersburg, Florida, of a letter that a few days later infected Erin O’Connor, a staffworker for NBC newscaster Tom Brokaw. The role of anthrax in that episode remained unknown for some time, however. The first anthrax case to be discovered and made public emerged on Oct. 4 with news reports that the Centers for Disease Control and Prevention (CDC) had determined that a critically ill Florida man (who would die the next day) was a victim of inhalation anthrax (the most serious form). Because this was the first inhalation anthrax case since the late 1970s, the Department of Health and Human Services (HHS) began with the assumption that this so far isolated case did not involve intentional infection by an assailant or terrorist. Nonetheless, the FBI immediately joined CDC in a massive search for the source.

On Oct. 8, a second Florida person was diagnosed with inhalation anthrax. Both victims were treated with Cipro. Criminal and/or terrorist involvement was then very strongly suspected if not assumed.

These developments have yet to cease. By Oct. 31, CDC had confirmed 16 anthrax cases in Florida, New York, New Jersey, and Washington, D.C., including 6 subcutaneous (skin) cases and 10 inhalation anthrax cases, 4 of them fatal.[3] In addition, there were about 25 suspected cases of anthrax infection (which requires several days to confirm).[4] A much larger number had clearly been exposed to anthrax, and thousands were suspected to have been exposed and were taking antibiotics.

These events changed bioterrorism from a theoretical threat into an immediate one. Of course, we would like to prevent bioterrorism altogether. But we also need tools for dealing with bioterrorism when it occurs. Among these tools are pharmaceuticals. In the initial stage of the anthrax crisis, the most important drug was ciprofloxacin, which is sold under the brand name Cipro by the German firm Bayer (which has no present connection with the seller of Bayer aspirin). Bayer’s patent on Cipro expires in December 2003. A powerful antibiotic, Cipro was until very recently the only drug approved by the Food and Drug Administration for the treatment of inhalation anthrax (by far the most dangerous form). This situation was created by the Department of Defense and the FDA, which decided that Cipro was the most promising single drug for wartime use (largely because of the lack of bacterial resistance) and consequently asked Bayer to submit existing research results (on animals, of course) to the FDA and to request that anthrax treatment be added to the official Cipro label. Several other antibiotics also had FDA approval for treating anthrax when the first attacks occurred, but the labelling did not specifically mention the inhalation form.

Inhalation anthrax is exceptionally dangerous because it can release a fatal and almost untreatable toxin before the first symptoms appear. Persons exposed to anthrax must therefore take antibiotics as a precaution before learning whether they are actually infected. With Cipro the treatment of choice, many public figures who may have been exposed to anthrax announced that they were taking Cipro. NBC newscaster Tom Brokaw even concluded an evening newscast by showing a Cipro bottle and saying, "In Cipro we trust."[5] In fact, the Cipro market was altered from the very first public case. Consumer demand began to escalate on Oct. 4, and by October 9 this was very evident to physicians and observers.[6] Oddly, there was no noticeable surge in Cipro demand in the European Union (where Cipro is not approved as an anthrax treatment) as late as Oct. 24.[7]

Cipro is known both for its effectiveness against stubborn bacteria (especially pneumonia, urinary tract infections, and gastrointestinal infections), and its relatively rare but sometimes severe side‑effects ranging from nausea and dizziness to damage to the musculo-skeletal system. But Cipro is not the only treatment for anthrax, including inhalation anthrax. When the anthrax episode emerged, the FDA had already approved other antibiotics for anthrax without specifying whether the drugs were suitable for the inhalation form. Although Cipro was the first drug recommended in the May 12, 1999 JAMA consensus report on anthrax, that report said that other members of the same antibiotic class as Cipro could also be used, and doxycycline (a form of tetracycline widely available as a generic) or amoxicillin (also a generic) could be recommended if the anthrax was found to be susceptible to these drugs.

As the anthrax problem became obvious, other experts pointed out that it was possible to learn in a day or two whether the anthrax being treated was resistant to antibiotics other than Cipro, and if it was not, doxycycline or penicillin could be used. The obvious course was to start with Cipro for 5 to 10 days and then switch to one of the generic antibiotics. Both the CDC and the FDA quickly pointed out the value of alternatives to Cipro. An October 10 Q&A released by HHS simply noted that ciprofloxacin, tetracyclines (including doxycycline), and penicillins were all approved for treating anthrax and all could be taken by persons who had been exposed to anthrax. By Oct. 18, the FDA had formally approved several other antibiotics for treating inhalation anthrax (subject, of course, to the possibility of bacterial resistance). HHS Secretary Tommy Thompson also emphasized the availability of treatments other than Cipro at this time and again in his Oct. 23 testimony before a House of Representatives sub-committee.[8] An October 19 statement from the CDC recommended either Cipro or doxycycline for inhalation anthrax. Thus by Oct. 23, news reports were making clear the availability of effective drugs other than Cipro.[9] An October 26 update from the CDC recommended initial therapy of Cipro or doxycycline, switching to other tetracyclines or penicillin if susceptibility to those drugs had been demonstrated.[10] (Worth noting is the fact that tetracyclines, like Cipro, have rare but fairly serious side-effects, especially among children.) All these drugs are much cheaper than Cipro, typically costing under $100 for the standard 60-day anthrax regimen.

Press reports inevitably reflected confusion as to what drugs could be used to treat inhalation anthrax. This reflected the thinking among medical experts. There is no governmental authority on how to treat patients. When the FDA approves a drug for marketing, it specifies certain uses on its approved "label" (which is actually a document of many pages), but it does not regulate physician prescribing. The medical community therefore works out its own ways to use pharmaceuticals, sometimes quite independently of the FDA label, while occasionally putting together consensus statements that may or may not be closely followed. In the case of anthrax, there was no such body of knowledge or established practice among practicing physicians because there had been only 18 cases of inhalation anthrax in the United States in the 20th century, and none since 1978. Hence the May 1999 JAMA consensus report and the FDA label for Cipro were the primary guides to physicians and public health authorities when anthrax first appeared in early October. These guides were based on in vitro or animal research rather than experience with humans, however.

This meant that the medical community, including the CDC, had to learn what worked by observing the results of treating the anthrax outbreak itself. Some progress appears to have been made. Inhalation anthrax was believed to be nearly incurable unless antibiotic treatment began immediately, before symptoms appeared. Of 10 inhalation cases so far (Oct. 31), 4 have died but several have apparently recovered, and probably few if any of these were treated immediately after infection (because the role of anthrax was often not suspected until the illness had reached a fairly advanced stage).[11]

In the meantime, progress was also being made in related areas. Diagnosis remains difficult but at least the limits and accuracy of diagnostic tools are becoming better known. The CDC and others have been learning about the propensity for anthrax spores to spread from to many locations from, apparently, one or two sources in postal letters.[12] Considerable progress is being made in decontamination and cleanup, using diluted bleach or a new agent that is sufficiently benign to permit misting and other comprehensive measures that allow the decontamination of entire buildings within a day or two, something that was deemed infeasible in the 1999 JAMA consensus statement.[13]

The fact that inhalation anthrax becomes life-threatening before definitive symptoms can motivate victims to seek help means that exposed persons, or even those for whom exposure cannot be ruled out, should be treated prophylactically with antibiotics. Hence large numbers may need to be treated even when there are few known cases of anthrax infection. By Oct. 30, when there were 17 known cases, well over 10,000 persons were being treated.

During the first few weeks of the crisis, a lot of people wanted Cipro and nothing else. The universal assumption was that the federal government would supply Cipro to anyone for whom treatment was recommended. The number of such persons was unknown, of course, but could eventually run into the millions. Although antibiotics are typically taken for 5 to 20 days, usually 10, the recommended treatment for anthrax is twice daily for 60 days. This is because anthrax is usually spread in the form of spores, which can persist in the body for some time before being defeated by an aroused immune system.

Cipro is expensive for an antibiotic. Current wholesale prices for Cipro apparently are at about $450 to $500 for a 60-day anthrax regimen, although managed care organizations undoubtedly get substantial discounts. (Newer drugs in the same antibiotic category cost substantially more.) The federal government price of $1.77 per pill ‑‑ before the events described below‑‑works out to $212 for the 60-day regimen. The price in Canada (where the government sets price ceilings for patented drugs) is approximately $US1.30 per pill, while the U.K.’s National Health Service charges about $2 per pill.[14] Hence acquiring a sufficient supply of Cipro to treat millions of exposed persons could involve substantial government expenditure.

The first nation to react was Canada. Health Canada, which is roughly equivalent to our Department of Health and Human Services, quickly announced that it would ignore Bayer’s patent and place an order for one million pills from an established manufacturer of generic drugs. Health Canada emphasized that the issue was not price but ensuring an adequate supply for immediate use. Faced with this threat to its patent, Bayer agreed to supply the quantity Health Canada wanted at the existing regulated price of $1.30. As it turned out, the one million generic pills (for which the manufacturer was not paid) are being stored by Bayer in a warehouse as an emergency supply. Canada’s patent threat was not wholly unprecedented, as Canada had routinely violated pharmaceutical patents until the advent of the international trade treaties in the 1980s.

Far more important have been events here in the United States, especially the actions of Tommy Thompson, Secretary of HHS. The National Pharmaceutical Stockpile, part of an emergency response plan administered by the CDC, contains sufficient Cipro to administer 60-day regimens to two million persons. Thompson sought to add enough to treat 10 million more. (As a benchmark, approximately 10,000 were under some form of treatment for anthrax as of October 25, 2001.) The federal price for Cipro was $1.77 per pill. The standard twice-daily 60-day regimen would involve 120 pills costing $212 per person. That works out to $2.1 billion for 10 million persons. In comparison, worldwide Cipro sales had been running at about $1.6 billion annually.

There was little reason to think that HHS would ever want to use Cipro on such a massive scale, even if 12 million persons required treatment. The CDC and others recommend that if treatment starts with Cipro (which can have serious side‑effects and should be used as little as possible so as to reserve it to treat bacteria resistant to older antibiotics), it should be used for only five or ten days, after which a generic penicillin or tetracycline could be used unless the pathogen had been demonstrated to be resistant to those drugs. This would reduce the cost to well under $100 per person. That works out to about one billion dollars for the additional ten million persons for whom antibiotics were being sought.

On the assumption that the government would purchase only Cipro for treating anthrax, Senator Charles Schumer of New York proposed that the federal government invoke its longstanding power to purchase Cipro from other manufacturers at much cheaper prices, notwithstanding Bayer’s patent. He estimated that this would cut costs by about half.[15] Bayer would be left with no option but to petition the courts to award compensation, of an unknown level, after the fact. Several generic drug manufacturers in the United States and India offered to sell Cipro to the government.

At first, spokesmen for the Department of Health and Human Services said they saw no reason to abridge the Cipro patent. But attitudes changed as negotiations proceeded, no doubt partly because Senator Schumer’s campaign. In Congressional hearings on Oct. 23, Secretary Thompson threatened Bayer with patent abridgement unless it cut its price below its already heavily discounted federal price:

Rep. Bernie Sanders: Let me ask--am I incorrect in saying that they have told you that it would take them 20 months to produce all the Cipro you have requested? Am I correct in that?

Sec. Thompson: I think you’re wrong because they told me they could produce 200 million pills within the next 60 days.

Sanders: All right. And if you are unhappy with their performance, either in terms of speed of delivery or in price, are you prepared to go to generic companies?

Thompson: I am prepared to ask Congress for that authority.[16]

Sanders: OK. You know the Canadians have done that?

Thompson: I know. But I know that we have a different law than the Canadians.

Sanders: OK. But you are prepared, if Bayer does not cooperate with you, to do that?

Thompson: Yes, I am.

Later, Thompson told reporters that after a meeting with Bayer to discuss pricing, Bayer management was "in conference and in shock." Shortly afterward, Bayer agreed to sell one hundred million pills at a price of $0.95 per pill, or $95 million total, with an option to supply two additional lots of one hundred million pills at $0.85 per pill and $0.75 per pill, respectively. Altogether, this would be sufficient to treat 2.5 million persons with a 60-day Cipro regimen at a total cost of $255 million. If combined with other antibiotics, and would surely be the case, this supply would probably be sufficient to treat well over the original goal of twelve million people. At least one press report indicated that HHS had in mind using Cipro for only 5 days (10 pills), followed by other antibiotics, so that the first one million pills would supply all the Cipro needed to treat 10 million people.[17]

Throughout these negotiations, Bayer made clear that it could supply sufficient quantities of Cipro within a reasonable amount of time. As we just saw, Secretary Thompson agreed, telling a Congressional subcommittee that "The price is the question, not the supply."[18] The contrast with the Canadian negotiations is striking. HHS sought one to three hundred million pills, whereas Canadian authorities had argued that Bayer could not be relied upon to deliver a mere one million pills. HHS, however, already had a supply sufficient for two million persons (presumably 240 million pills). In addition, Bayer had started to ramp up manufacturing even before the first Florida case as fears of bioterrorism escalated in the wake of the World Trade Center attack, and had prepared to triple its output as the reality of an anthrax attack became apparent.[19] Bayer could also subcontract manufacturing to established generic manufacturers, some of which had already received FDA approval to manufacture Cipro.

Hence the only issue in the HHS-Cipro negotiations was price. As we have seen, Bayer agreed to provide a very large supply at half the federal discount price after Secretary Thompson threatened to seek authority to abridge Bayer’s Cipro patent. In the wake of the Cipro deal, other manufacturers rushed to offer their antibiotics for free. Some of these medicines had earlier been approved for use against anthrax, with FDA recently adding explicit reference to inhalation anthrax, and while other antibiotics were offered on the condition that FDA would approve them for anthrax.

The perception that Secretary Thompson threatened Bayer’s patent is extremely common, despite news reports that he has claimed not to have made such a threat.[20] A recent example of this perception is an approving Oct. 31, 2000 editorial in the New York Times, entitled, "The Urgency of Cheaper Drugs." Some news stories emphasized the threat in headlines: "U.S. Warns May Seek Cipro Patent Waiver Unless Price Is Cut."[21] Unless and until Secretary Thompson or an equal authority issues a definitive statement to the contrary, we can assume that negotiations over Cipro pricing were strongly affected by possibility that Bayer’s patent would be compromised by executive or legislative action.

These events promise to have consequences. One result, of course, is that HHS has saved the taxpayers on the order of one to two billion dollars, if events take a bad turn so that millions of people require anthrax treatment and standard antibiotics prove ineffective. (The anthrax encountered so far in this crisis has been almost fully susceptible to penicillin and tetracyclines.)

Other possible consequences, however, are cause for concern.

On November 9-13, the World Trade Organization will convene its 4th Ministerial Conference at Doha, Qatar. Among its many contentious topics will be implementation of the 1994 agreement usually referred to as TRIPS (for "trade-related aspects of intellectual property rights").[22] TRIPS agreement requires developing nations to take measures necessary to protect intellectual property in pharmaceuticals and many other products. The agreement, which is being implemented gradually, follows upon decades of urging by the United States and other advanced nations that developing nations should respect pharmaceutical patents even in situations that involve very large public health problems. These disputes have been motivated primarily by intractable difficulties in maintaining separate prices in economically undeveloped and advanced nations, so that poor nations would pay for little more than manufacturing costs.

Articles 8 and 27 of the TRIPS agreement provide very general escape provisions that permit nations to use compulsory licensing or other means to bypass patents in order to protect life or health. A coalition of developing nations, led by Brazil and India (both of which have large generic drug industries) wishes to interpret these provisions in a way that permits nations to cite public health as a sufficient reason to largely ignore the entire TRIPS agreement.[23] A small coalition led by the United States wants to maintain the various procedural and other checks in the TRIPS regime on such tools as compulsory licensing. Their argument is, essentially, that compulsory licensing (which amounts to opening up markets to generics) would compromise pharmaceutical research incentives and thus retard the development of new drugs that both developing and developed nations need.

In the Cipro episode, Bayer was threatened with abridgment of the Cipro patent purely on account of costs. Those costs amounted to about one or (at most) two billion dollars, which is less than two-tenths of one percent of annual U.S. health care expenditures.[24] This threat was made when the government was dealing with a public health problem that was extremely small in comparison to those faced by poorer members of the WTO. There are about 5.3 million new AIDS cases worldwide annually, the bulk of them in developing nations, with about 3.0 million deaths annually among the estimated 36 million with AIDS. This has resulted in a total of 22 million deaths so far.[25] Nonetheless, the U.S. has argued that there is no compelling public health reason for South Africa and other poor nations simply to ignore U.S. pharmaceutical patents. (One might note in this context that the price of a generic three-drug AIDS cocktail offered to South Africa by a leading Indian generic manufacturer was about $600 per patient per year, well in excess of the cost of a Cipro regimen for anthrax.) Malaria is another case in point. Africa and other tropical nations suffer some 500 million malaria cases annually, with 1.5 to 3 million of them fatal (mainly to children) -- while the U.S. had only 1,400 malaria cases in 1998, most of them imported by travelers.[26]

The U.S. and other developed nations have substantially relaxed their position on TRIPS in the past few years, offering the poorest nations (but not India or Brazil) a ten-year extension for most provisions. In the meantime, pharmaceutical manufacturers have made AIDS drugs available in Africa at more or less nominal prices (with little reason to expect substantial public health benefits, however).

Nonetheless, the U.S. and its allies have generally sought to prevent or reverse government policies that abridge pharmaceutical patents even when those policies are born of what the government believes to be continuing and extremely costly public health disasters. Developing nations are now prepared to argue at the Doha WTO meetings that what they wish to do is not qualitatively different from what Secretary Thompson sought to do with Cipro, but with greater justification in their case.

Clearly, the HHS-Cipro episode has seriously complicated the task of the U.S. trade representative. This is unfortunate, because the basic U.S. position is surely correct. If developing nations were to monitor transhipment of cheap drugs to wealthier nations (rather than facilitating those transhipments, as many of their corrupt governments do), while also respecting intellectual property in pharmaceuticals, they would permit self-interested pharmaceutical research firms to help solve their health problems far more effectively than they can under present conditions.

The HHS-Bayer negotiations and much of the accompanying public comment appeared to rely on the assumption that the nation faced a short-term crisis in obtaining pharmaceuticals to deal with bioterrorism, a crisis that could be solved by rallying the industry to provide large quantities of drugs for free or at very low prices. Advocates of patent abridgement act as if they think the medical research needed to deal with bioterrorism has already been done, and we can just pluck the ripe fruit. That is very far from the case. Here is a short list of what we now need to fight the bioterrorism threats that we already know about (ignoring unexpected threats that will surely emerge in this season of fatal surprises). We need an anthrax vaccine that was not built using four decades’ old medical technology, that works for inhalation anthrax, that can be taken by almost everyone, and that does not involve side‑effects that are so potent that they have generated considerable resistance to its use by soldiers about to go into battle.[27] We need better diagnostic tests, a tricky problem and one that is crucial because the most dangerous forms of anthrax can set the body on a course toward death before any symptoms appear. We may need new antibiotics to deal with new or newly resistant anthrax strains (which will surely emerge if we continue to use Cipro as widely as we did until the last few days of October). We would like very much to have an antidote to the fatal toxin created by anthrax.[28]

Anthrax is not the only bioterrorism threat, of course. We need a safer smallpox vaccine and perhaps a smallpox treatment. We need the same for botulism and the plague, and probably for other potential biological threats.

Creating these products, and others whose existence we cannot presently anticipate, will require considerable time, skill, and resources. This raises the question of whether there is money to be made in fighting bioterrorism.

Bayer was widely accused of profiteering when it sought payment for its most valuable asset (which may well be in demand by other governments around the world if the anthrax threat spreads abroad). An astonishing degree of currency has been given to the idea that there is something wrong with making money by fighting bioterrorism. Unfortunately, some industry leaders have assented to this view. The CEO of Bristol-Myers-Squibb, for example, was recently quoted as saying at an industry briefing that "Several of us have said we have no intention to make any profits on bioterrorism."[29] As we shall see in the next sections, he did not mean quite what he said, but his comment reflects the current mood. Secretary Thompson’s persistence in pushing Cipro’s price far below market levels to within reach of the costs of manufacturing and distribution is fully consistent with this mood and undoubtedly contributed to it.

Some of this thinking is driven by the idea that making a profit from an unexpected development such as the anthrax crisis is essentially a windfall profit for which no firm can make plans and which therefore cannot affect R&D incentives. This is very much mistaken. A large proportion of the profits from successful drugs are unexpected. One reason is the difficult of foreseeing the nature of competition, so that some profits may accrue simply because competitors take longer than expected to match an innovative product. More important is the fact that many of the most lucrative uses for new drugs are not discovered until after the drug is developed and marketed.

The statin class of cholesterol-reducing drugs, for example, have a much broader and more profitable market than anyone could have envisioned when Mevacor was introduced in the 1980s. Innovative antibiotics, in particular, have highly uncertain markets because it is impossible to foresee the full range of bacteria that will prove susceptible to the new drug, or which bacteria will develop resistance to older competitors. Today, Cipro has a new and unexpected use, but the Cipro bubble may not last long. Because the Cipro class of antibiotics is so valuable for its ability to treat antibiotic-resistant bacteria, the medical community will undoubtedly use Cipro as little as possible if it becomes necessary to treat large numbers of people for anthrax infection or exposure.

The danger now is that HHS has sent a signal that manufacturers should not expect to make large profits with drugs that fight bioterrorism. This brings us to the heart of the issue. The reason the U.S. has so forcefully defended patent rights is not for the sake of justice or fairness, but because we want firms to create the products that will be patented. Cipro became the gold standard for inhalation anthrax because it inaugurated an entirely new class of antibiotics, called flouroquinolones (or just quinolones), which are much less likely than older drugs to encounter resistance (either natural or bio-engineered by terrorists). Far more effective than older antibiotics for many serious conditions, Cipro also saves money in many cases by obviating the need for taking drugs intravenously in a hospital.[30]

The stakes in the Cipro patent abridgement threat are enormous. This dispute is not just about Cipro and Bayer; it is about what the research industry can expect our government to do in the future. Who is going to do the research necessary to create a really good anthrax or smallpox vaccine, or create a way to bring new treatments for anthrax or the plague to market as soon as a new strain appears--if they think that when the research is done and manufacturing is underway, Congress or HHS may exercise its right to open the market up to generic manufacturers? An abridgement of patent rights today is an abridgement of financial incentives to create the products we are going to need tomorrow.

The logical conclusion of this kind of thinking is perfectly clear to anyone paying attention to the battle against malaria. The history of malaria vaccine research is lengthy and rich, with many enticing mechanisms. The problem is getting from basic research to clinical trials, which is where the pharmaceutical industry always comes in. Yet in PhRMA’s exhaustive list of 137 medicines in development for infectious diseases, the largest single category consists of 42 vaccines--not one of which is for malaria. The United Nations and the World Health Organization are desperately searching for billions of dollars to fund research for vaccines against malaria and other tropical diseases because everyone knows that the nations that suffer most from these diseases would not respect the patent rights of an effective vaccine. Fortunately, Bill Gates’ charitable foundation is chipping in more than a billion dollars, but that may not do the job.

Governments or non-profit organizations seldom succeed in moving a breakthrough drug from the research labs through clinical trials to FDA approval. We would be very foolish to create a similar economic environment for anthrax and bioterrorism threats here at the international locus of world pharmaceutical research.

The threat that profits from bioterrorism drugs may be forestalled by government actions, combined with the obvious fact that new drugs, vaccines, and diagnostics are needed, has led to discussions of the possibility that HHS or the Defense Department could arrange for pharmaceutical firms to create these drugs on a contract basis. In fact, this approach was or less taken for granted in at least one recent Congressional hearing and in a recent industry press briefing.[31] The parallel with defense procurement is obvious, including the fact that private industry rather than government laboratories will have to do the bulk of the research and development to develop new drugs (because NIH and other non-profit organizations have never been successful at developing new drugs for market).

I believe this is a very dangerous path which should be taken only in cases where normal market arrangements are impossible. Hence we should distinguish between products that we can expect the market to produce (provided they are worth the cost) and those products that would encounter a market failure, in the sense that there is negligible market demand for a product that could prove the extremely valuable from the perspective of bioterrorism and national defense.

Vaccines almost certainly fall into the category of market-supportable products. I would guess that almost everyone would choose to use an anthrax vaccine that (unlike the current vaccine) is effective, convenient, and free of all buy very rare side‑effects. It seems unlikely that a price of $10-20 per inoculation would deter very many families from using the vaccine, even absent insurance coverage (which would almost certainly be forthcoming). That translates into a market of roughly $3-6 billion dollars in the United States alone, plus a comparable market in Japan and Europe. Also relevant is the fact that vaccine technology has accelerated in recent years (42 are in testing in the latest PhRMA report), and promises to make even more rapid progress with the advance of genomics.

Clearly, this are sufficient market incentives to generate vigorous anthrax vaccine research, but only if firms can reasonably expect to be able to charge market prices after their products are ready. The Cipro episode does not auger well in this respect, but it is by no means a fatal error for vaccine development. The current anthrax episode has revealed intense consumer demand to prevent even a very small probability of anthrax infection; this is clear from the very rapid rush to purchase Cipro after only one documented case of anthrax.[32]

The same analysis applies to vaccines for the plague, botulism, and other well-known bioterrorism threats. Effective preventatives for such greatly feared threats are likely to find substantial markets. Markets for improved diagnostic tests also seem promising, at least until vaccination is common. The costs of not having a quick, convenient, and accurate anthrax infection test are very large, including the costs of antibiotic treatment, the battery of tests now employed, and the pain and suffering of living with doubts about whether what feels like the flu may actually be inhalation anthrax. But again, markets for those products exist only if firms can be confident of charging prices reflecting what consumers are willing to pay for the benefits these products would provide. Of course, that does not mean that each and every new vaccine or diagnostic test must be profitable, any more than is true of other new drugs (most of which fail to cover full development costs).

Quite different are products that may never be needed at all, and which only governments have an incentive to stockpile. These may include certain kinds of supplies and distribution facilities for emergencies such as a large outbreak of bioterrorism-caused illnesses and injuries. In the case of pharmaceuticals, it may be necessary for governments to stockpile antibiotics or other drugs in order to provide rapid treatment for illnesses that in the absence of bioterrorism occur rarely if at all. And of course, problems unique to the military may require traditional military solutions.

The dangers of a military-pharmaceutical partnership in drug development (as opposed to partnerships in supply, distribution, and information-sharing) are substantial. One is the ease with which government R&D contracts can forestall more efficient private research. For example, if HHS let a five-year contract for an anthrax, it would have to agree to purchase a large supply even if another vaccine emerged from a competing firm. The temptation to make the government supply available at below-market prices would then be irresistible, which would eliminate profits from the privately produced vaccine. The threat of such an event could easily forestall private anthrax vaccine research unless the government clearly intends to stay out of this line of business.

Another problem is efficiency. The industrial-military complex has never been known for efficiency or low costs. The acceleration in genome mapping that occurred after entry by a private competitor to NIH is an illustration of the fact that in the absence of private competitors there is no way to know how rapidly biological research can proceed. The creation of anti-bioterrorism vaccines is far too important to leave to a series of exclusive government-industry contracts, although that seems to be what some have proposed.

Cost is another problem. The costs of developing new drugs cannot be known in advance. Recent history is replete with examples of new drugs that either failed late in the development process or failed to earn back their costs after FDA approval. Fixed-price vaccine development contracts with specified completion dates would inevitably encounter costly delays or unexpected scientific difficulties. One need only look back at predictions for an AIDS vaccine a decade or so ago to see the problem. With no competing vaccines in sight at the end of the contract period, there would be no choice but to extend contracts and increase payments, or recognize at the outset that government vaccine development is a kind of charitable activity with little or no expected profit. But the removal of profit incentives from fighting bioterrorism should be avoided rather than encouraged, for reasons that should be obvious by now. Moreover, the intimate relationship that would grow between HHS or DOD and a contractual sole supplier could easily compromise safety while leaving us with no way to know what could have been accomplished in a freer market. The long record of difficulties with the current anthrax vaccine is an illustration of what can happen. Now that the threat of anthrax is general rather that restricted to a narrow range of military campaigns, there is no reason to continue along the old path for vaccine development.

It may seem odd to think that the Cipro episode has implications for the design of a Medicare prescription drug benefit, but I believe it does. Most Medicare drug benefit proposals take one of two approaches. One is to create or permit private institutions such as pharmaceutical benefit managers or insurance firms to offer competing drug benefits, with the Medicare system supervising the market without specifying prices. This approach is often paired with a proposal to reform the Medicare system itself to make it resemble the managed care environment that emerged in the private health car market.

An alternative approach is simply to add a drug benefit to the existing Medicare system, presumably as a third major benefit in addition to hospitals and physicians. The most obvious problem with this approach arises from the fact that Medicare has come to exercise extremely detailed control over all prices for the services that it now covers. There is no reason to expect a drug benefit to be different. Then one must ask how Medicare drug prices would be set. It is clear from economic intuition as well as experience in other developed nations (almost all of which exercise some kind of control over drug prices) that price-setting authorities face powerful incentives to push prices downward toward marginal costs regardless of the impact this may have on R&D incentives.[33] After all, when it is time to set a reimbursement price, the most costly research has already been done. The manufacturer has little choice but to accept a price that yields a profit over manufacturing and distribution costs even if it fails to provide a long-term profit after taking into account development costs.

What the HHS-Cipro episode demonstrates is that there is a very real danger that if Medicare becomes the sole purchaser of drugs for the elderly, it will fall prey to the temptation to set prices with too little regard to research incentives. The Cipro negotiations clearly focussed exclusively on price. Discussions of future drugs for dealing with bioterrorism have focussed not on the hopes of obtaining valuable drugs through the market but on the possibility of bypassing markets through contracts, as was just discussed.

One might note that Medicare law is nothing like TRIPS law. There is no convenient escape clause, no desire to free-ride on another nation’s research. Nonetheless, the economics of the situation faced by Secretary Thompson in the Cipro episode were very similar to those that would be faced by a Medicare authority with complete reimbursement rate-setting power. What happened was that the secretary of HHS sought only to negotiate the lowest possible price, with the barest of medical emergencies as justification.

The implications are greatest, of course, for drugs that would be used mainly by the elderly. The forestalling of profits, caused by the bypassing of patents, can obviously blunt research incentives even for extremely valuable products. That has already happened in the case of malaria vaccines. The Cipro deal may have accomplished something like that for anthrax and plague vaccines. If the same kind of thinking dominates a Medicare drug benefit, we would get a similar dampening of incentives to pursue the costly, tortuous, adventurous research that is undoubtedly necessary to prevent Alzheimers and other diseases of the elderly that have eluded cures for decades.

Much of value has come from the anthrax crisis. The medical community has learned a great deal about treating anthrax, especially its inhalation form. There has undoubtedly been much progress in buttressing the infrastructure and methods necessary to diagnose the condition of possible victims and assess the nature of anthrax when it is found. Related activities of equal importance, such as cleaning up an infected site and preventing the dispersion of anthrax spores, have also seen rapid improvement.

But the threat of anthrax attacks and other forms of bioterrorism will continue and may intensify. The pharmaceutical research and development enterprise that provided the weapons that have so far kept casualties at very low levels can also provide the many new weapons necessary to prevent far larger disasters in the future. That can happen, however, only if we maintain the level of freedom in this market that it has prevailed in the past. The decisive movement of the entire pharmaceutical research industry toward the United States in the past two decades, during which European nations erected ever higher barriers to pharmaceutical research and marketing, is testimony to the importance of a free market in pharmaceuticals.

Recent events have moved rapidly toward the erosion of that environment as it relates to bioterrorism. The HHS threat to Bayer’s Cipro patent, in particular, sent a signal that the standards for maintaining the integrity of patents in the face of public health emergencies are surprisingly low. This makes it more difficult to maintain patent rights abroad. More important to us (if not to the millions of victims of malaria and other tropical diseases) is the fact that an adverse signal has also been sent regarding the development of new drugs and diagnostics for dealing with bioterrorism. One indication of this is the rapidity with which politicians, HHS personnel, and the industry have started to discuss a Department-of-Defense model for developing these needed products instead of relying on far more efficient market processes.

Secretary Thompson and HHS should immediately issue a definitive statement saying that they did not ever actually intend to abridge Bayer’s Cipro patent, and would not do so if they again faced even remotely similar situations. They should urge other nations to make similar declarations. They should also make clear that there would be no regulatory or legislative impediments to the marketing of new bioterrorism drugs. They could state, for example, that the developer of a new anthrax vaccine would be free to market it directly to consumers as well as to health care providers without the fear of price controls.

In general, it is necessary to ensure that the more important a drug is for public health, the greater is the financial incentive to create it--rather than the other way around, which is what one might reasonably infer from government actions in the bioterrorism crisis.

Notes

[1] Anthrax: May 12, 1999, ; smallpox: June 9, 1999; botulism: Feb. 28, 2001; plague: May 3, 2000; tularemia: June 6, 2001.

[2] A sarin gas attack in a Japanese subway involved chemical agents rather than biological ones, although the group that perpetrated the attack had unsuccessfully sought to develop anthrax as a weapon.

[3] CDC Update, October 31, 2001. The Washington Post maintains a webpage listing each with a link to the relevant news account, at www.washingtonpost.com/____

[4] Wall Street Journal, October 31, 2001, "___."

[5] Oct. 15, 2001 broadcast, as recounted in Washington Post, Oct. 22, 2001, "___."

[6] Washington Post, Oct. 5 and Oct. 10.

[7] London Times, Oct. 24, 2001.

[8] Washington Post, Oct. 10, 2001; Transcript of Oct. 23, 2001 hearings before the Committee on Government Reform, Subcommittee on National Security, Veterans Affairs and International Relations.

[9] New York Times, Oct. 23, 2001.

[10] MMWR, October 19 and 26, 2001.

[11] See New York Times, October 31, 2001, article by Gina Kolata.

[12] A good update on efforts to assess the propensity of anthrax spores to spread is Wall Street Journal, October 31, 2001.

[13] Washington Post, Oct. 29, 2001.

[14] London Times, Oct. 29, 2001.

[15] Schumer’s statement is available on his website.

[16] HHS apparently already has authority to purchase supplies without regard to patent rights, but would need legislation to avoid lawsuits seeking compensation. That is apparently what Secretary Thompson had in mind at this point.

[17] New York Times, Oct. 30. Most people under treatment seem to have been started with a 10-day supply of Cipro, however.

[18] Wall Street Journal, October 23, 2001, "U.S. Warns May Seek Cipro Patent Waiver Unless Price Is Cut," by the Associated Press. Also see Washington Post, Oct. 23.

[19] Wall Street Journal, Oct. 22, 2001.

[20] New York Times, October 31, 2001, "Industry Seeks U.S. Contracts to Develop Antibiotics," by Keith Bradsher.

[21] Wall Street Journal, October 23, 2001, by the Associated Press. The story begins, "Health and Human Services Secretary Tommy Thompson said Tuesday that he is prepared to go to Congress to seek a generic version of an antibiotic used to treat anthrax infection if the manufacturer doesn’t lower its price.

[22] The TRIPS agreement is technically Annex 1C of the Marrakesh Agreement Establishing the World Trade Organization.

[23] WTO Doha meetings backgrounder, p. 24.

[24] CMS data: estimated 2001 health care expenditures of 1.4 trillion. Cipro for 2.5 million persons at a little less than $2 per pill would cost less than $600 mill. One-tenth of one percent of total health care expenditures is $1.4 billion.

[25] Wall Street Journal, Feb. 8, 2001.

[26] PhRMA, New Medicines in Development for Infectious Diseases, 2001, p. 13, citing data from the National Institutes for Allergy and Infectious Diseases.

[27] A Department of Defense Q&A provides a brief history of the anthrax vaccine, which was developed in the 1950s and 1960s and first licensed in 1970. See ___. DOD has been working on a new anthrax vaccine; see ___ (DOD).

[28] Science, Oct. 19, p. 490-491.

[29] New York Times, October 31, 2001, "Industry Seeks U.S. Contracts to Develop Antibiotics," by Keith Bradsher.

[30] See Wall Street Journal, Oct. 22, 2001.

[31] Oct. 23, 2001 hearings, op cit. On more recent industry-government discussions, see New York Times, October 31, 2001, "Industry Seeks U.S. Contracts to Develop Antibiotics," by Keith Bradsher.

[32] See Washington Post, Oct. 6, 2001.

[33] This argument is elaborated somewhat in J.E. Calfee (2001) "Pharmaceutical Price Controls and Patient Welfare," Annals of Internal Medicine, v. 134, n. 1 (June 5), p. 1060-1064.

John E. Calfee is a resident scholar at AEI.