Written By: Sally Wang
Edited By: Charlie Stiernberg
Drug marketing faces the problem of an arms race — competitors attempt to out-compete each other by boosting their marketing efforts, at great expense, only to find that the baseline level of marketing needed to maintain the status quo has increased accordingly. These inefficiencies are costly and often harmful to the stakeholders — drug companies, patients, payors (e.g., Medicare/Medicaid or health insurance companies) and physicians. The Food and Drug Administration (“FDA”) is in the most strategic position to correct these inefficiencies, not only because it is currently tasked to monitor drug marketing, but more importantly because it oversees drug approval and labeling that creates the right to market in the first place. The FDA is also intimately familiar with the workings of the industry, allowing it to tailor its regulatory measures to achieve the most optimum results both for the public and the industry. However, several First Amendment cases on drug marketing have severely curtailed the FDA’s ability to regulate in this area. Using the First Amendment to limit the FDA’s regulation of drug marketing creates a legal paradox: if a pharmaceutical company were able to sell a drug the same way as a consumer electronics company sells a TV, then the entire approval process would be undermined. Selling a TV does not require complex regulatory pre-approval that then limits the advertising to the contents of a governmentally or scientifically-proscribed label. Therefore, drug marketing is a very unique space that requires a unique solution to its arms race problem. Because intellectual property (“IP”) law provides the basis upon which drugs may be approved and marketed, as in the market exclusivity that is granted upon approval and the close tethering of patents to regulatory scheme, it serves as a better framework for determining the appropriate level of regulation for drug marketing as the resulting legal landscape provides for more flexibility that can address the current inefficiencies. This IP “carve-out” to the standard First Amendment rule of commercial speech is comparable to existing exceptions, such as spectrum regulation by Federal Trade Commission (“FTC”) and censorship by the National Endowment of the Arts (“NEA”), where there is a government conferred benefit and a strong public interest for such regulation. This comment argues that the FDA approval process has essentially carved out a similar exception to the standard First Amendment commercial speech doctrine, whereby the ability to market drugs stems from the IP rights generated through the regulatory process (e.g., market exclusivity and regulatory patent extensions) and that is inherent in the products (e.g., original patents issued by US Patent and Trademark Office). Therefore, pharmaceutical marketing regulation should be considered in a legal framework that respects that IP origin.
Current State of the Marketing “Arms Race”
Marketing is major cost expenditure for pharmaceutical companies and a significant portion of a brand’s budget. In the United States, pharmaceutical companies spent $57.7 billion on marketing in 2004, according to 2008 estimates.[i] The estimates include physicians detailing ($20.4 billion), which typically accounts for about one third of the marketing budget, and samples ($15.9 billion), as well as direct-to-consumer advertising, post-market research, promotional meetings and talks, and print and internet advertising.[ii] Based on their annual reports, the top ten largest global pharmaceutical companies spent a total of $739 billion on “marketing and administration” between 1996 and 2005, compared to $288 billion on R&D and $43 billion on capital improvements.[iii] Another estimate that includes only Direct-to-Consumer advertising (DTC), physician detailing, journal advertising, and samples, found that the total spending on pharmaceutical promotion grew from $11.4 billion in 1996 to $29.9 billion in 2005, at an average annual rate of 10.6%.[iv]
The immense cost of marketing, R&D, and regulatory approval puts tremendous pressure on brands to achieve their sales goals. But under the conventional wisdom of the pharmaceutical industry, marketing generates sales. Pressure to increase sales then leads to yet more marketing, often without regard to the diminishing returns of further investment. This costly cycle translates into an arms race among competitors in the same disease indication or drug class. As each player invests more in marketing with the hope of increasing sales, the overall level of investment required to stay in the game increases, without benefit to any of the players. Moreover, each player is unable to unilaterally decrease the level of marketing without unilaterally shouldering the harm; therefore, no one company is willing to break the vicious cycle, even if the problem is apparent — a classic “prisoner’s dilemma,” where the fear of being betrayed keeps every player in an inferior position. Examples of promotion wars are plentiful: Claritin-Zyrtec, Ambien CR-Lunesta, the statins, and the atypical antipsychotics. A tell-tale sign of the marketing arms race is that industry as a whole has experienced diminishing returns on its promotional spending: the percentage of sales spent on promotion increased from 14.2% to 18.2% in the decade between 1996 – 2005.[v]
Not only is the arms race in marketing is hurting pharmaceutical companies, but also it is contributing to the high costs of healthcare, as indicated by several studies. The cost of marketing is at least partially passed to consumers and payors through higher prices for medicines. Collectively speaking, the end result of the arms race is a “lose-lose” situation for the various stakeholders in the healthcare system. This “prisoner’s dilemma” could be resolved by transforming it into a cooperative “stag hunt,” where each party work in synergy for the ultimate prize, in this case increased profits and lower costs, through the use of a neutral and universally respected body.[vi]
FDA Regulation of Marketing
The industry has made some efforts to reduce marketing costs, such as PhARMA’s 2009 Guidelines that prohibit non-educational items and recreational activities in all shapes and sizes — from pens that preeminently display drug names to the legendary vacations that top prescribers of a blockbuster drug receive. However, these efforts are addressing the symptoms but ignoring the cause. The largest marketing expenses — physician detailing (sales visits to the physician’s office) and samples — are not being addressed. A public or government entity may be the most objective and effective arbitrator to transform the prisoner’s dilemma into collective action, since it will treat each private entity fairly, while also considering the public interest. As a major regulator of drug marketing, the FDA is well poised to be this arbitrator that helps the industry move away from the arms race. Currently, the FDA has an entire division, the Office of Prescription Drug Promotion (“OPDP”), devoted to the oversight of pharmaceutical promotion, nested within the Center for Drug Evaluation and Research (“CDER”), which is responsible for the regulation of drugs (e.g., brand and generic drug approvals, post-market review). Given sufficient resources, the FDA has the institutional knowledge, industrial relationships, and technical and regulatory expertise to help the industry overcome excessive marketing — reversing an arms race that is hurting both industry and the patients it serves.
First Amendment Limitations
The single biggest hurdle against FDA regulation of drug marketing is a series of First Amendment commercial speech rulings that attempted to limit the FDA’s ability to regulate off-label marketing, marketing that outside the indications of the prescribing label, and dietary supplements.[vii] Though the D.C. Circuit in Washington Legal Foundation v. Henney, 202 F.3d. 331 (D.C.Cir. 2000) partially overturned the district court’s broad application of the commercial speech doctrine in Washington Legal Foundation v. Friedman, 13 F. Supp.2d 51 (D.D.C. 1998) and Washington Legal Foundation v. Henney, 56 F. Supp. 2d 81 (D.D.C. 1999), and the FDA’s ability to regulate drug marketing beyond what is off-label was not at issue, these defeats at the district court level have resulted in the FDA’s taking a rolled back and cautious approach to drug marketing. With off-label marketing regulations in peril of being declared unconstitutional by the courts, the thought of more general regulation of marketing is assumed to be legal (and political) poison.[viii] This tepidness is reflected in that fact the Department of Justice has filled the regulatory void left by the FDA and emerged as a dominant persecutor of off-label marketing through a series of high-profile investigations and multi-billion dollar fines on several major pharmaceutical companies. However, given the long history of the FDA’s authority over off-label marketing, which has existed for more than 80 years since the passage of the Food Drug and Cosmetics Act (“FDCA”) in 1938,[ix] more general regulation of marketing is almost certainly constitutional.
IP Basis in FDA Regulatory Process
What the D.D.C. overlooked in their considerations in Freidman and Henney is that drug marketing differs significantly from standard commercial speech: the ability to sell the drug, the source of the right to market the drug, rests on a bed of IP rights granted by the regulatory regime of pharmaceuticals. Fundamentally, the drug companies received the license to sell their products only after demonstrating safety and efficacy through rigorous clinical trials and approval processes. As a reward, the products receive “market exclusivity,” effectively a government granted monopoly, and regulatory extensions on the patents for the time that the product was under clinical testing and FDA review. Market exclusivity lasts from three years (e.g., for new indication or formulation) to seven and half years (e.g., for an orphan drug with pediatric indication), depending on the product’s designation by the FDA.[x] Regulatory extensions can be a maximum of five years, bringing the total patent life to up to 14 years from the product’s approval date.[xi] Because “market exclusivity” serves the same function (blocking competition) and has the same source (R&D) as patents protecting the products granted by the U.S. Patent and Trademark Office (“USPTO”), it can be accurately characterized as an IP right.[xii] Together with the underlying patents, the market exclusivity and regulatory extensions form a bundle of IP rights, generated by approval from the FDA, which keeps competitors from selling and marketing a drug of the same chemical composition and formulation for the uses approved.
In fact, the original IP rights of the drug (e.g., patents) are closely intertwined with the entire regulatory lifecycle of pharmaceuticals. These patents are part of the New Drug Application (“NDA”) submission for FDA approval, the path to gaining the ability to market the product. After approval, the FDA meticulously lists the drug’s patents on the Orange Book, a database called the “Approved Drug Products with Therapeutic Equivalence Evaluations.” The Orange Book is so termed because when generic manufacturers seek FDA approval through the Abbreviated New Drug Application (“ANDA”) process established by the Hatch-Waxman Act,[xiii] the generic companies must file a patent certification with respect to each patent of the branded drug listed in the Orange Book.[xiv] If such a “Paragraph IV” certification is filed, in effect claiming that the unexpired of the listed patents are invalid or not infringed, the branded drug company may challenge the generic applications through patent infringement proceedings in federal court, which triggers a 30-month litigation stay on the ANDA application and gives the branded drug additional market protection.[xv] Essentially, the bundle of IP rights that is generated through the FDA approval process is what creates the right to market the drug and defends the brand company’s market share against generic erosion, thereby giving the brand company more incentive to market their product. The integral role that patents play in the FDA regulatory process is an additional indication that an IP framework is a more fitting lens for examining and understanding the marketing of pharmaceuticals.
IP = Marketing Rights Defined: the Label
The IP rights of the product gained by regulatory approval is summarized in a “label,” which accompanies the product as an insert and outlines the scope of information that the company has rights to market. In other words, the company is only legally permitted to market the indications or uses that are listed on the label in the language prescribed by the label, which has been carefully determined by the FDA to be an accurate representation of the efficacy and safety of the drug.[xvi] Marketing beyond the label, commonly known as “off-label” marketing, is a serious offense that can subject the company to punishment demanded by FDA (e.g., running correction advertisements), multi-billion dollar fines by the DOJ, and litigation by whistleblowers under the False Claims Act. The strict proscription of what can and cannot be marketed — often down to minute details over a few words on the label or ten seconds too long of promotion of benefits in a direct-to-consumer (“DTC”) advertisement that disturbed the delicate balance of presentation of benefit versus risk — is a reflection that free speech in drug marketing is inherently curbed by the stringent approval process. Drug marketing already receives a very different legal and regulatory treatment from general commercial speech.
Without ownership of these IP rights, there is no right to market, despite the over-arching First Amendment protection of commercial speech, because to sell, and thus to market without a label, would make the product illegal. The FDCA of 1983 marks such drugs as adulterated, and excludes them from U.S. Commerce. And under the Central Hudson doctrine, which provides the primary test for constitutionality of commercial speech, the speech must be legal to be protected by the First Amendment.[xvii]
Unknotting Legal Paradox with an IP Framework
The fact that drug marketing is an exception to general First Amendment commercial speech doctrine can be demonstrated by the legal paradox that results if it were to apply. On a fundamental level, selling drugs is different from selling TVs due to the regulatory scheme that governs the market. Consumers have free access to the product and full decision-making power with the purchase of TVs, but not drugs. There are multiple gatekeepers between the patient and the manufacturers: FDA approvals, physician prescriptions, pharmacy cross-checks, and payor reimbursements. While only the first two are absolute, these barriers to access make selling pharmaceuticals very different from that of the average consumer product. The classical commercial speech model breaks down with drug marketing.
In the world of pharmaceuticals, the right to promotion is tethered to the right to sell, because otherwise such acts would be illegal. Why is it illegal to promote prior to approval? Because marketing unapproved claims would compromise the drug approval scheme, not only by causing confusion in the marketplace and potentially harming patients — the very vice that FDCA seeks to address — but also by disadvantaging the companies that made the R&D investment and received approval, the good players in the market. In fact, such unapproved marketing would infringe on and interfere with the exercise of the rights of approved drugs, whether that right is commercial speech or intellectual property, as intellectual property gives rise to the speech right in the case of pharmaceutical marketing. Thus, the only way to ensure that the companies receive what is fairly theirs — their intellectual property/speech right — is to have marketing dictated by approval and circumscribed by a label that is the product of approval.
The courts have tried to reconcile the approval/label requirement for drug marketing and the First Amendment commercial speech doctrine by calling what is not approved by the FDA “illegal,” thereby failing the legality prong of the Central Hudson test.[xviii] Yet, the courts’ reasoning is circular and avoids the real issue. If the First Amendment is applied in full force and in its true spirit, then marketing should be allowed before approval, because speech should have no bearing on action (e.g., you are protected by the First Amendment to proclaim that you want to commit murder, but you are prohibited to do so by criminal law). The discomfort of fitting drug marketing into the classic First Amendment doctrine is apparent, but it is resolvable by applying an IP framework to the problem. The speech rights follow from the IP rights gained by FDA approval and conferred by the government in the form of a monopoly market. While the drug companies lose to rights to speak freely about their product without any restrictions, as compared with their TV-selling counterparts, they receive a government granted monopoly through new and reinforced inherent IP rights for many years in return.
Mirroring Existing Commercial Speech Exceptions
Government-granted benefits have served as the rationale for carving out several public policy exceptions to First Amendment commercial speech doctrine, many of which share commonalities with drug marketing:
1) Broadcasting Spectrum: The Federal Communication Commission grants exclusive rights to segments of wavelength in the broadcasting spectrum through auctions. In exchange for these exclusive rights, a government-granted monopoly, the broadcasters are prohibited from using profanity. [xix]
2) National Endorsement of Arts: The NEA practices censorship on the content and form of the art that received government grants (e.g., obscenity).[xx]
3) Solomon Amendment: The amendment allows the denial of federal grants by the Department of Defense to colleges and universities if they prohibit or prevent ROTC or military recruitment on campus. 10 U.S.C. § 983.
Similar to these exceptions, the market exclusivity and patent term extensions for drugs are benefits voluntarily conferred by the government in the interest of public policy — to reduce healthcare costs and incentivize medical innovation, two initiatives of high priority that directly impact the health and wellbeing of Americans and the U.S. economy. The granting of a bundle of IP rights through market exclusivity and patent term extensions as well as the highly regulated pharmaceutical environment mirror the FCC’s and NEA’s grants: the regulatory process or government benefit that generates the IP rights (e.g., spectrum allocation and copyright) also gives birth to the commercial speech rights.
Conclusion: Creating a Stag Hunt: An IP Basis for Flexible Drug Marketing Regulations
Nesting drug marketing within an IP framework is not so avant-garde a challenge to the standard commercial speech as it may initially seem. The privilege to a market monopoly, embodied in the new IP rights generated by the regulatory process, should not be treated differently than the other government conferred benefits. An exception to the standard First Amendment rules should be granted to FDA regulation of drug marketing, not only because the long tradition of give and take of speech rights in exchange for government conferred benefits, but more importantly the exception will offer a collective action “stag hunt” solution to the ongoing arms race, that is harming stakeholders, including the branded drug manufactures whose commercial speech rights are at issue. While it is beyond the scope of this comment to discuss the details of the FDA regulations and the Congressional action (e.g., legislation) required to implement these suggestions, interpreting these speech rights through an IP lens certainly opens to door to greater flexibility in addressing the public policy problems facing drug manufacturers and patients alike.
[i] Marc-André Gagnon & Joel Lexchin, The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United State, 5 PLOS Med 29, 29–32 (2008).
[iv] Julie M. Donohue, Marisa Cevasco, & Meredith B. Rosenthal, A Decade of Direct-to-Consumer Advertising of Prescription Drugs, 357-7 New Eng. J. Med. 673, 675–76 (2007).
[vi] See Douglas Baird, Robert Gertner, & Randal Picker, Game Theory and the Law 188–217 (1998); Brian Skyrms, The Stag Hunt and the Evolution of Social Structure 1–4 (2003).
[vii] Concerning regulations on commercial speech about pharmaceutical products (off-label marketing): Washington Legal Found. v. Friedman, 13 F. Supp.2d 51 (D.D.C. 1998); Washington Legal Found. v. Henney, 56 F. Supp. 2d 81 (D.D.C. 1999); Washington Legal Found. v. Henney, 202 F.3d. 331 (D.C.Cir. 2000); Concerning regulations on commercial speech about pharmaceutical products: Pearson v. Shalala, 164 F.3d. 650 (D.C.Cir. 1999).
[viii] Personal communication with FDA officials in Office of Commissioner, CDER and experts in FDA law.
[ix] See Peter Barton Hutt, Richard A. Merrill & Lewis A. Grossman, Food and Drug Law: Cases and Materials 98 (3d ed. 2007).
[xii] While the USPTO grants original patents that make up part of the bundle of IP rights, the FDA would be more suitable regulator of drug marketing, because its statutory authority and expertise in the area.
[xvi] See Krista Hessler Carver, A Global View of the First Amendment Constraints on FDA, 63 Food & Drug L. J. 151, 151–52, 156–57 (2008).
[xvii] Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n, 447 U.S. 557 (1980). Center Hudson Doctrine, a four part standard on government’s limitations of commercial speech:
1. Is the speech protected? That is it must be lawful, and not be fraudulent or misleading?
2. Does the government assert a “substantial” interest?
3. Does the regulation “directly” advance the government interest asserted?
4. Is the regulation the least intrusive way of advancing the government’s asserted interest?
[xviii] See Henney, 56 F. Supp. 2d at 87.