# Amicus Curiae Brief — Pharmaceutical Research and Manufacturers of America v. Walsh, Acting Commissioner, Maine Department of Human Services

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0492%3A09

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2003
- **Citation:** 538 U.S. 644

## Text

No. 01-188 SEP 19 2002

In the CLERK
Supreme Court of the Unite ates
+

PHARMACEUTICAL RESEARCH AND
MANUFACTURERS OF AMERICA,

Petitioner.
Vv.

CONCANNON, ET AL.,

Respondents.

+

On Writ of Certiorari to the United States Court of
Appeals for the First Circuit

+

BRIEF AMICUS CURIAE OF PACIFIC LEGAL
FOUNDATION IN SUPPORT OF PETITIONER

>

DEBORAH J. LA FETRA
Counsel of Record
Pacific Legal Foundation
10360 Old Placerville Road,

Suite 100

Sacramento, California 95827
Telephone: (916) 362-2833
Facsimile: (916) 362-2932

Counsel for Amicus Curiae
Pacific Legal Foundation

\ UY
wWN\ RN
) \\

i
QUESTION PRESENTED

Whether a Maine statute providing for affordable prescription
drugs, which penalizes companies that won’t drop prices for
uninsured residents, violates the Constitution’s Commerce
Clause.

TABLE OF CONTENTS

Page
QUESTION PRESENTED ...... 2... ccccccccsccccccccces i
TABLE OF AUTHORITIES .........cccccscccccccccvees iii
INTEREST OF AMICUS CURIAE ..... 2.0.2... 06 5c cee eees l
STATEMENT OF THE CASE .........ccccccccccvcceees l
SUMMARY OF ARGUMENT ...... 2... 6.66 c eee ee eens 3
Th Sc heses de cibcbbseeccccevecococececess 5

I MAINE RX IS PROTECTIONIST
LEGISLATION ENACTED IN VIOLATION
OF THE DORMANT COMMERCE CLAUSE ........ 5

A. A Statute Violates the Dormant
Commerce Clause If It Is Protectionist,
Regardless of Whether It Is Discriminatory ....... 8

B. Maine Rx Is Protectionist Because Its
Manipulation of Drug Prices for the Economic
Advantage of Maine’s Drug Consumers Causes

Significant Impacts on Interstate Commerce ...... 14
Il. MAINE RX DAMAGES THE
AMERICAN COMMON MARKET ..............+.- 20

A. By Reinvesting Profits into Research and
Development, American Pharmaceutical
Companies Lead the World in the Creation

of Life-Saving and Life-Enhancing Drugs ....... 20
B. Pharmaceutical Price Controls Have
a Direct, Adverse Impact on Research,
Development, and Innovation ..............45: 23
EB os sec cecdesoceeceeees 26

2 ener oe

iil

TABLE OF AUTHORITIES
Page
Cases
Adams v. Florida Power Corp.,
I i a a ]
American Trucking Associations v.

Scheiner, 483 U.S. 266 (1987) ........... ccc eeees 7
Associated Indus. of Missouri v.

EN Ne GA EE ED o oo ceccdéccccecesece: 3
Baldwin v. G. A. F. Seelig, Inc., 294 U.S. 511 (1935) ..... 3
Brown-Forman Distillers Corp. v. New York

State Liquor Authority, 476 U.S. 573 (1986) ..... 10-12

C & A Carbone, Inc. v. Town of Clarkstown,

es od ee ae ce enews 9,12
Camps Newfound/Owatonna v. Town

of Harrison, 520 U.S. 564 (1997) ...........4.. 10, 16
Chevron, U.S.A., Inc. v. Echazabal,

i ai ne co eanecenéeeseeses ]
City of Philadelphia v. New Jersey,

nat ee ck inenkbaneces 6, 10
CTS Corp. v. Dynamics Corp.

of America, 481 U.S. 69 (1987) ...........0005. 7,13
Edgar v. MITE Corp., 457 U.S. 624 (1982) ........... 13
General Motors Corp. v. Tracy, 519 U.S. 278 (1997) ..... 8
H. P. Hood & Sons, Inc. v. Du Mond,

EE re 5,9

Halliburton Oil Well Cementing Co. v.
ane a cnc cudetescedeses ll

iv

TABLE OF AUTHORITIES—Continued

Page

Healy v. Beer Institute, 491 U.S. 324 (1989) ........... 12
Hughes v. Alexandria Scrap Corp.,

Sy ST od ceucekesnbeasesuesennesec 5
Hunt v. Washington State Apple Adver.

Comm'n, 432 U.S. 333 (1977) ...........44.- 7,9, 11
McLeod v. J. E. Dilworth Co.,

i nD onc sbneuudededetadenevics 3
Kassel v. Consolidated Freightways Corp.,

SED cewede Secs sacecécoaceses Ses O
Oklahoma Tax Comm'n v. Jefferson

Eheas, Bad.. FOG UB. TIS CRSOOD cccccccccccccccces 13
Oregon Waste Sys., Inc. v. Department

of Envtl. Quality, 511 U.S. 93 (1994) ............4.. 6
Pharmaceutical Research and

Manufacturers of America v. Medows,

184 F. Supp. 2d 1186 (N.D. Fla. 2001) ............. 18
Pharmaceutical Research and

Manufacturers of America v.

Concannon, 249 F.3d 66 (2001) ........... 2-3, 17, 19

Pharmaceutical Research and Manufacturers
of America v. Commissioner, 2000 U.S. Dist.
LEXIS 17363 (D. Me. Oct. 26, 2000) .............. 15

Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) ... 3,6, 11

South-Central Timber Development, Inc. v.
Wunnicke, 467 U.S. 82 (1984) ............00000- 19

Southern Pac. Co. v. Arizona ex rel.
SL, BE Ge PS CUED cc cbccccccccceccecess y

eee

Vv

TABLE OF AUTHORITIES—Continued

Page
West Lynn Creamery, Inc. v. Healy,
DE CD cocnnchsencdctevavencavceses 7
World-Wide Volkswagen Corp. v. Woodson,
PP ED eehetccedeecdesdtdévccecceses 9
United States Constitution
ee EE OD cncudacneceeuetidesescesses 5
Statutes
3s § 8 SY Terre rere 2
ee GeO, Ses GER, Za, BH SEED cc ccccccccccccccceces 17
DE Sebudenecessescosecadessvecsoceses 2, 18
ie sccceseesdsccoueseseeecesoss l
DT CetbeneUbhbeeeeoeusceeneeresecseeaces l
DED cesacdenecenonseesinedessneccasue 17
DU btecbetedevebtneanesccsseesecoucodcas 2
DT ++tnbeddindedes aeiiecnnpsesececees 2, 18
DT hdd ocikenNdweneedentedadessséeeraveseeees 23
Dt This Court need not decide whether the protectionism or
discrimination was deliberate. See Hunt v. Washington State Apple
Adver. Comm'n, 432 U.S. at 352 (“[W]e need not ascribe an
economic protection motive to the North Carolina Legislature to
resolve this case . . . .”); Pike, 397 U.S. at 145-46 (finding intent
irrelevant); Halliburton Oil Well Cementing Co. v. Reily, 373 U.S.
64, 72 (1963) (acknowledging that state tax law at issue may have
discriminated accidentally but striking law down anyway). Most of
the dormant Commerce Clause opinions say nothing about intent.

> The Court was unwilling to “indulg{e] the . .. assumption” that the
state would be sensitive to Commerce Clause concerns in the
implementation of its statute. “The protections afforded by the

(continued...)

12

Similarly, in Healy v. Beer Institute, 491 U.S. 324, 336
(1989), the Court held:

[The] Commerce Clause . . . precludes the
application of a state statute to commerce that takes
place wholly outside of the State’s borders, . . . [and]
a statute that directly controls commerce occurring
wholly outside the boundaries of a State exceeds the
inherent limits of the enacting State’s authority, and
isinvalid ....

The critical inquiry in determining a state law’s validity is
whether it has the “practical effect” of regulating commerce
occurring outside the state’s borders. In Healy and
Brown-Forman, this Court held that a State may not regulate in
a manner that sets prices on transactions between buyers and
sellers in other States, to ensure a more favorable price structure
for domestic consumers at the expense of consumers in other
States. Under these cases, the laws were subject to a “virtually
per se rule of invalidity” under the dormant Commerce Clause.
It did not matter if the statute did not on its face regulate out-of-
state transactions.

In our federal system, uniform national standards, where
appropriate, are for Congress to set. As the Founders knew and
this Court’s dormant Commerce Clause jurisprudence has
recognized, allowing one state to impose its laws on commerce
nationwide would place commerce at the mercy of local,
parochial interests and create an anarchy of conflicting state
legal regimes which would destroy commercial confidence and
create hostility between the states. See, e.g., C & A Carbone,
Inc. v. Town of Clarkstown, 511 U.S. at 406 (O’Connor, J.,

> (...continued)
Commerce Clause cannot be made to depend on the good grace of a
state agency.” Jd. at 582 n.5.

—_—-

13

concurring) (differing state regimes regulating flow of solid
waste would result in “the type of balkanization the Clause is
primarily intended to prevent”). State laws regulating corporate
takeovers, for example, restrain share sales occurring entirely
outside the regulating state. They prevent some takeovers
altogether and raise costs of others substantially. This Court
struck down one such law in Edgar v. MITE Corp., 457 U.S.
624 (1982). In that case, the challenged Illinois statute
regulated corporations of other states, corporations doing little
or no business in the state, and corporations lacking local
shareholders. /d. at 645-46. The critical factor was that the
regulated transactions between buyers and sellers outside
Illinois were not sufficiently Ilinois’s affair to justify so much
interference. /d. at 646. (This was the largest point of
differentiation with CTS Corp. v. Dynamics Corp. of America,
481 U.S. at 93, upholding an Indiana takeover statute that was
confined to corporations that were chartered in the state, had a
large number of local shareholders, and were principally based
or had major operations there.)

In sum, an approach to dormant Commerce Clause
challenges based on protectionism furthers several compelling
policies: The approach prevents states from engaging in overtly
hostile acts against their sister states, thus provoking retaliation
by competitor states. Oklahoma Tax Comm'n v. Jefferson
Lines, Inc., 514 U.S. 175, 179-80 (1995). Striking down
protectionist legislation protects weaker states from acts by
bigger, stronger states offering benefits to their own citizens at
the expense of Americans outside their state borders.
Moreover, a rule based on anti-protectionism serves the virtues
of simplicity and certainty. See Economic Un’ ,63 N.Y.U.L.
Rev. at 113.

14

B. Maine Rx Is Protectionist Because Its
Manipulation of Drug Prices for the Economic
Advantage of Maine’s Drug Consumers Causes
Significant Impacts on Interstate Commerce

The protectionist nature of Maine Rx is demonstrated by
its impact on Maine residents versus non-Maine residents. The
Court should ask: “What is the potential impact on the rest of
the /.merican common market?”’ A manufacturer may offer
special pricing in a limited number of states. But there is a real
question as to how much a manufacturer could absorb if it is
expected to sharply cut prices for residents of many states.
Palumbo, Francis B., The Role of the State As a Drug
Purchaser, 56 Food Drug L. J. 267, 271-72 (2001) (Role of the
State). So while the facts of this case involve the relatively
small Maine market, the Court should consider what would
happen if California were to adopt a “California Rx” program.‘
Or if California joined with some other populous states to form
a “Big Multi-State Rx” program. This is not outside the realm
of possibility. For example, Maine Rx is not Maine’s first
attempt to obtain lower drug prices for its residents. In 2000, a
coalition of Maine, Vermont, and New Hampshire solicited
bids from pharmacy benefit manager organizations to run all
three states’ drug programs. The three states, which
collectively have programs with over one million enrollees and
one billion dollars in annual drug expenditures, sought to
capitalize on their combined market share power by negotiating
discounts without limitations. In any of these scenarios, the
price cuts for residents within states with these programs would
likely increase prices charged to customers in other states. See,
e.g, General Accounting Office (GAO), Report to
Congressional Requesters, Prescription Drugs: Expanding
Access to Federal Prices Could Cause Other Price Changes,

* In 2000, Maine had 1.27 million residents and California had 33.87
million residents. U.S. Census (2000) (http://quickfacts.census.gov)
(visited Sept. 10, 2002).

f-
:
:
:
f
‘
’

15

GAO/HEHS-00-1 18 (2000) (a study of whether Federal Suppl:
Schedule (FSS) prices should be extended to other programs
concluded that prices paid by others would have to rise). The
larger. the group that would be newly entitled to receive a
governmentally mandated price, the greater the incentive for
drug manufacturers to raise that price for other purchasers. /d.
So the states, in providing “coverage” for noninsured residents,
may indeed be passing on the bill to other citizens in the form
of increased premiums or decreased access in their private or
employer-based health programs, as these programs may reduce
coverage if the state steps in. Role of the State, 56 Food Drug
L. J. at 272.

Two aspects of Maine Rx demonstrate the statute’s
protectionist nature. First is the provision forbidding
companies from altering their distribution channels. Me. Rev.
Stat. tit. 22. § 2697(2)(D). No drug manufacturers are located
in Maine, and only one distributor resides there. As the district
court correctly noted, the Act’s purpose and effect is to lower
the revenues received by these out-of-state manufacturers on
drugs to be sold in Maine. See Pharmaceutical Research and
Manufacturers of America v. Commissioner, 2000 U.S. Dist.
LEXIS 17363, at *15(D. Me. Oct. 26, 2000) (observing that the
practical effect of the Act is to limit the revenue an out-of-state
manufacturer can obtain when it sells drugs to out-of-state
distributors that are destined for Maine). No valid argument
can be made that the Acct, in its intent or practical effect, does
not reach transactions between manufacturers and distributors.
Pancoast, Abigail B., Comment, A Jest Case for Re-evaluation
of the Dormant Commerce Clause: The Maine Rx Program,
4U. Pa. J. Const. L. 184, 19° (2001) (Test Case).

Maine correctly foresaw that leaving the state would
otherwise be the reasoned response of the companies. In a
boycotting effort, three prescription companies decided not to
ship their medicines directly to Maine, using out-of-state
wholesalers to supply non-Medicare recipients in the state.

16

Barrington, Conrad J., Note and Comment, Pharmaceuticai
Research and Manufacturers of America v. Concannon and
Maine's Prescription Drug Rebate Statute: A Twenty-First
Century Solution to the Medicaid Crisis, 23 Whuttier L. Rev.
1127, 1132 (2002) (AstraZeneca, Bristol-Myers Squibb, and
Smith-Kline Beecham). These companies’ quick departure
from the market vividly demonstrates the adverse
incentives created by Maine Rx. This Court has held
that “strong incentives,” in lieu of direct regulation, are
sufficient to implicate the dormant Commerce Clause. Camps
Newfound/Owatonna, 520 U.S. at 578.

Second, when Maine requires pharmaceutical companies
to offer discounted drug prices to Maine residents, the
companies can be expected to recoup their losses by increasing
prices paid by other people beyond Maine’s borders. The
GAO addressed this very issue in a 2000 study of whether
FSS prices should be extended to other programs. The GAO
concluded that prices paid by others would have to rise.
GAO, Report to Congressional Requesters, Prescription Drugs:
Expanding Access to Federal Prices Could Cause Other
Price Changes, GAO/HEHS-00-118. So Maine, by providing
“coverage” for noninsured residents, may be passing on
the bill to other citizens in the form of increased premiums or
decreased access in their private or employer-based health
programs. See Role of the State, 56 Food Drug L.J. at 271.
Maine Rx sets the goal of “negotiations” between the
manufacturers and the state to be FSS prices, which are the
best prices obtained by any private purchaser. A private
health plan cannot possibly negotiate a better price from a
drug manufacturer. Then, Maine Rx Program participants
are not subject to formularies, unlike the beneficiaries of
many health plans that negotiate discounts from drug

Tey
’

17

manufacturers. Uninsured and insured residents alike may all
enroll in the Maine Rx Program and rely on private purchasers
in other states to negotiate best-price discounts. In this
scenario, purchasers in other states will have to pay more
because drug manufacturers will be less inclined to give
competitive discounts when they have to give the same
discounts to the entire state of Maine. Stambaugh, Christopher
R., Note, State Price Control Laws Are the Wrong Prescription

for the Problem of Unaffordable Drugs, 12 Fordham Intell.

Prop. Media & Ent. L.J. 897, 924 (2002) (Wrong Prescription).

The State can be expected to respond to this argument by
asserting that the manufacturers voluntarily choose to provide
rebates to Maine Rx participants. But Maine did not intend
these agreements to be voluntary—in deciding to subject
uncooperative manufacturers to’ the prior authorization
requirement, the state had obviously determined that a
voluntary program would not be sufficiently effective. The
court below accepted the state’s argument in this regard,
holding that Maine Rx “merely says that the Commissioner of
the Maine Department of Human Services shall use ‘best efforts
to obtain an initial rebate amount equal to or greater than the
rebate calculated under the Medicaid program ... .”” PhRMA,
249 F.3d at 82 (citing Me. Rev. Stat. tit. 22, § 2681(4)(B)).

* Although Maine Rx describes the State's role as a Pharmacy
Benefit Manager (PBM), Me. Rev. Stat. tit. 22, § 2681(1), real
PBMs use formulanes to help contro! drug costs by (1) encouraging
the use of formulary drugs through compliance programs that inform
physicians and enrollees about which drugs are on the formularies;
(2) limiting the number of drugs a plan will cover; or (3) developing
financial incentives to encourage the use of formulary products.
GAO Letter Report to the Honorable Ron Wyden, House of
Representatives, Pharmacy Benefit Managers: Early Results on
Ventures with Drug Manufacturers, GAO/HEHS-96-45 (1995).
Maine Rx does not use formularies.

18

Thus the First Circuit held that the program was voluntary and
the manufacturers could withdraw at any time. /d.

This holding represents willful blindness. The statute says
manufacturers “shall” provide rebates (Me. Rev. Stat. tit. 22,
§ 2681(3)) and the very nature of the program demands
manufacturers’ compliance. First, the program contained the
unconstitutional “anti-profiteering” sections, threatening treble
compénsatory damages, punitive damages, and civil penalties
up to $100,000 if a company demanded terms the state
determined to be “unreasonable” or if a manufacturer alters its
business practices to avoid Maine’s new law. Me. Rev. Stat.
tit. 22, § 2697.° Second, Maine Rx imposes the prior
authorization requirement on nonparticipants. Me. Rev. Stat.
tit. 22, § 2681(7). Prior authorization means that a state
bureaucrat has to approve a medication a doctor chooses for his
or her patients. It slows down the dispensing procedure so
much that instead of waiting for approval, doctors and patients
are likely to seek alternative therapies. Wrong Prescription,
12 Fordham Intell. Prop. Med. & Ent. L. J. at 921. Asa
consequence, market shares of drugs that require pnor
authorization decline significantly. Pharmaceutical Research
and Manufacturers of America v. Medows, 184 F. Supp. 2d
1186, 1192 (N.D. Fla. 2001) (maming drugs taken off a
preferred drug list and requiring prior authorization: market
share of Imitrex fell from 60% to 6%; the market share of
Prilosec fell from 38% to 4%, and the market share of Allegra
fell from 17% to 1%). The two provisions combined can only
be construed as a requirement. Jest Case, 4 U. Pa. J. Const. L.
at 196.

* The district court declared these provisions unconstitutional and
the state did not appeal that ruling. They remain relevant to the
inquiry before this Court, however, as they demonstrate that Maine
never anticipated that manufacturers would voluntarily comply with

the “negotiated” rebates.

_ ee

19

This Court has expressly held that a state law using the
state’s leverage in one market where it does participate to
achieve a separate regulatory purpose is subject to the dormant
Commerce Clause as a state regulation and is not market
participation. South-Central Timber Development, Inc. v.
Wunnicke, 467 U.S. 82, 96-98 (1984) (holding that Alaska’s
Statute limiting buyers of its timber to those who agreed to
process the purchased timber in Alaska to be subject to the
dormant Commerce Clause). Jest Case, 4 U. Pa. J. Const. L.
at 198. The court below recognized that Maine is not acting as
a typical market participant as it neither buys nor sells
pharmaceuticals (PhRMA, 249 F.3d at 80), but it erred by its
failure to acknowledge the regulatory sanctions imposed by the
program. Thus, Maine Rx fails dormant Commerce Clause
analysis because it regulates extraterritonal economic
transactions by imposing either a rebate agreement or a prior
authorization requirement on drugs that are part of an out-of-
state sale between out-of-state manufacturers who do not grant
rebates, and out-of-state wholesalers and distributors. See Test
Case, 4 U. Pa. J. Const. L. at 198.

As shown above, Maine Rx is likely to harm non-Maine
drug consumers because pharmaceutical companies will seek to
recoup the discounts they are required to offer to Maine
residents by selling drugs outside the state at higher prices. As
additional, and more populous, states replicate Maine’s
Statutory scheme, the impact on consumers in those states
without an “Rx” statute becomes more severe, causing a
significant impact on interstate commerce as a whole. This
protectionist policy should be held to be a violation of the
dormant Commerce Clause.

20

MAINE RX DAMAGES THE
AMERICAN COMMON MARKET

For private enterprise to flourish, a federal system must
‘“prevent[] the lower governments from using their regulatory
authonty to erect trade barriers against the goods and services
from other political units.” Weingast, Barry R., The Economic
Role of Political Institutions: Market-Preserving Federalism
and Economic Development, || J.L. Econ. & Org. 1, 4 (1995)
(Market-Preserving Federalism). The creation and preservation
of a national common market is a central feature of “market-
preserving federalism”—federalism that fosters economic
growth by limiting the encroachment of a country’s political
system upon its markets. /d. at 3-4; Preserving the American
Common Market, 7 S. Ct. Econ. Rev. at 235.

A. By Reinvesting Profits into Research and
Development, American Pharmaceutical
Companies Lead the World in the Creation
of Life-Saving and Life-Enhancing Drugs

The American common market has created the most
successful pharmaceutical industry in the world. Among the
world’s top 15 companies in the innovative drug industry in
1991, 8 were based in the United States. GAO, Report to the
Chairman, Special Committee on Aging, U.S. Senate,
Prescription Drugs: Spending Controls in Four European
Countries, GAO/HEHS-94-30 (1994) (Prescription Drugs).
United States-based pharmaceutical firms developed over 40
percent of the new major global drugs discovered between 1970
and 1992. Jd. Success in this case is measured not only by the
number of dollars in revenue, but by the number of lives saved
and enhanced. American pharmaceutical companies generate
more new and improved drugs than any other country. The
reason can be traced to investment in R&D. Countries with
higher drug prices tend to be associated with more
pharmaceutical R&D and many new drugs. Conversely, in low-

21

price countries like Spain and Australia, R&D spending is low
and very few new drugs are developed. Prescription Drugs,
GAO/HEHS-94-30, at ch. 3:2.2. United States companies
invest in the drawn-out development of new drugs because
(1) they look forward to recovering their investment if the drug
makes it through the gauntlet to be certified by the Food and
Drug Administration (a process estimated to take |2 years with
an average cost of $194 million (1990 dollars, net of various
tax breaks) Office of Technology Assessment, Pharmaceutical
R&D: Costs, Risks, and Rewards, OTA-H-522 at | (1993)
(Costs, Risks and Rewards)). and (2) they enjoy national patent
protection for the first few years the drug is on the market.

Pharmaceutica! R&D is nsky and expensive. Grabowski,
Henry, Zhe /mpact of the Clinton Health Care Reform Plan
Health Reform and Pharmaceutical Innovation, 24 Seton Hal!
L. Rev. 1221, 1234-40 (1994) (Pharmaceutical Innovation). see
also Congressional Budget Office, How /ncreased Competition
from Generic Drugs Has Affected Prices and Returns in
the Pharmaceutical Industry 2-3 (July, 1998) (/ncreased
Competition). Drug developers invest heavily in R&D because
they expect to profit from it. /ncreased Competition at 2
(“Producers of innovator drugs invest heavily in research and
development (R&D), hoping to recoup that investment in
profits from future sales while a drug is under patent and they
have a monopoly on its manufacture.”); see also
Pharmaceutical Innovation, 24 Seton Hall L. Rev. at 1258 (“A
firm undertaking long-term nsky R&D programs on new drugs
must make an investment decision on the bases of
expectations.”’). Higher drug prices strengthen the incentive for
R&D. The GAO estimated that a 1% decline in drug prices
leads to a 0.68% decline in R&D spending. This is consistent
with previous economic analyses of the pharmaceutical
industry, in which other measures of the incentive for
R&D—for example, firms’ profit rates and market
shares—were positively related to R&D. GAO, Prescription

22

Drugs, GAO/HEHS-94-30, at ch. 3:3 (citing Comanor, William
S., The Political Economy of the Pharmaceutical Industry,
24 Journal of Economic Literature 1178 (1986)); U.S.
International Trade Commission, Report to the Committee on
Finance, U.S. Senate, Global Competitiveness of U.S.
Advanced-Technology Manufacturing Industries.
Pharmaceuticals, US ITC Pub. 2437 (1991).

The dramatic increase in real revenues to new drugs
throughout the 1980s sent signals to the industry that more
investment would be rewarded handsomely. The industry
responded by increasing its commitment to investment in R&D.
Costs, Risks and Rewards, OTA-H-522 at 104, Wrong
Prescription, 12 Fordham Intell. Prop. Media & Ent. LJ.
at 906. A few “blockbuster” drugs have generated incredible
profits for their patent owners. Stanton, Jerry, Lesson for the
United States from F oreign Price Controls on Pharmaceuticals,
16 Conn. J. Int'l L. 149, 169 (2000) (Lesson) (citing
Grabowski, Henry, Health Reform and Pharmaceutical
Innovation 13-25 (1994)). But laws that would limit the
amount that drug developers can make from future blockbuster
drugs would drastically reduce the expected profits for drug
developers, and therefore would drastically reduce investment
in pharmaceutical R&D. Jd.”

R&D innovation further depends on patent protection
because competing drug manufacturers would undersell the
developers before the developers recouped their investment in
R&D and made a profit from it. “Without patents, many new
drugs could be easily and quickly duplicated by other

” While other options for funding R&D exist, such as debt financing
and equity financing, these options are not feasible given the
extremely high cost—if not outright impossibility—of gathering
impartial information to provide to investors. This is why most
major pharmaceutical companies finance their R&D through retained
earnings. Prescription Drugs,GAO/HEHS-94-30 at App. V:2.2 n.8.

~~ -

23

manufacturers, preventing the innovator firm from obtaining
enough reward to justify its investment.” /ncreased
Competition at 3. With patent protection, a drug developer
looks to demand a pnce high enough to recoup the costs of
R&D and make a profit. Jd Patents do not guarantee a profit
for drug developers, but they make it a possibility by allowing
drug developers to demand higher prices than they could
without patent protection. Wrong Prescription, 12 Fordham
Intell. Prop. Media & Ent. L.J. at 903-04.

R&D clearly emerges as the primary cause of Amencan
dominance in pharmaceutical innovation. Moreover, by
advancing the state of scientific and medical knowledge, R&D
benefits society above and beyond revenue received by direct
sales of the resulting drugs. Prescription Drugs, GAO/HEHS-
94-30 at Appendix V:1. The national commitment to
maintaining America’s standing as the leader in pharmaceutical
development must not be undermined by this Court's approval
of a states’ efforts to reduce drug prices for their populations."

B. Pharmaceutical Price Controls
Have a Direct, Adverse Impact on
Research, Development, and Innovation

Possibly the biggest threat to pharmaceutical companies
who do business in Maine is the prospect of price controls if the
“negotiations” on rebates do not favor the state in the amount
the state deems appropriate. Me. Rev. Stat. tit. 22, §§ 2691,
2693(1). Price controls enacted by even one state can damage
the American common market in pharmaceuticals. But price
controls are unlikely to remain so contained. Protectionist
politics invite retaliatory protectionism by other states, unti]

* Congress may be willing to risk some trade-offs between price
reduction and R&D. See. e.g, H.R. 5186 (Drug Importation Act of
2002) (permitting reimportation of drugs from Canada at possibly
lower prices). The wisdom of such a choice is not before this Court,
and, at any rate, does not implicate the Commerce Clause.

24

protectionists dominate in all states. Economic Union,
63 N.Y.U. L. Rev. at 77. Specific to this case, twenty-three
states already have considered enacting “clones” of the Maine
Rx Program legislation. Woellert, Lorraine, The States Step
into the Breach, Bus. Week, Aug. 6, 2001, at 33. If this Court's
decision invites these other states to follow Maine’s example,
lessons learned by other nations’ imposition of pnce controls
suggest that American patients will surely suffer.

Canada, the United Kingdom, France, Japan, and other
countries have implemented pharmaceutical price controls for
many years. Lesson, 16 Conn. J. Int’! L. at 160-64; see also
Danzon, Patricia M., Pharmaceutical Price Regulation 15-29
(Ann Petty ed., 1997). The forms of their price regulations
vary, but they all stifle competition and discourage innovation
in the pharmaceutical industry. Lesson, 16 Conn. J. Int’! L.
at 165-71; Pharmaceutical Price Regulation at 58-64. In many
of these countries, purchasing power is lower than in the United
States, and in most of these countries, the level of research and
development of pharmaceuticals is not as extensive as in the
United States. Role of the State, 56 Food Drug L.J. at 269
(citing Kolassa, Eugene M., Elements of Pharmaceutical
Pricing 108-09 (Haworth Press 1997).

A study by Wharton economist Patricia Danzon used
empirical evidence to thoroughly examine the effects of each of
these countries’ price regulations on incentives for
pharmaceutical innovation, production efficiency, goals of
controlling total drug expenditures, and quality of patient care.
Pharmaceutical Price Regulation at 3-4. The evidence showed
that no country with price controls has had innovative success
in the pharmaceutical industry that matches that of the United
States. Jd. at 58-63. In fact, Danzon found “a rough negative
correlation between the stringency of a country’s price controls

25

and the innovative success of its domestic pharmaceutical

industry.” /d. at 63.

France, Germany, Sweden, and the United Kingdom have
adopted price restraint mechanisms. Although they differ in
their application, these countnes’ measures did lower
prescnption drug prices. However, these policies created a
conflict between the interest in containing prescription drug
costs and the economic burden subsequently borne by the
domestic pharmaceutical industry, particularly on
pharmaceutical R&D. This tension transcended the specifics of
each country’s pharmaceutical policies. Prescription Drugs,
GAO/HEHS-94-30, at ch. 3.1. Based on its analysis of the four
counties noted above, the GAO found that a reduction in
prescnption drug prices can be expected to reduce companies’
spending on pharmaceutical R&D because firms will have less
incentive to invest in R&D when they expect to receive lower
prices for their products. /d.

Price controls in other countries allow them to “free-ride”
on Amencan manufacturers who invest in innovation.
Pharmaceutical Price Regulation at 93. Controlled prices that
cover only slightly more than the marginal cost of
manufacturing a drug discourage pharmaceutical innovation by
making R&D a less profitable investment. Wrong Prescription,
12 Fordham Intell. Prop. Media & Ent. LJ. at 913.
Recognizing this cause and effect, the United States has
pressured other countries to relax their regulations on drug
prices. Harrison, Christopher Scott, Comment, Protection of
Pharmaceuticals As Foreign Policy: The Canada-U.S. Trade
Agreement and Bill C-22 Versus the North American Free
Trade Agreement and Bill C-9], 26 N.C. J. Int'l L. & Com.
Reg. 457, 457-62 (2001) (discussing how the United States

26

pressured Canada to abandon its compulsory licensing law for
patented pharmaceuticals).

From a public policy perspective, little can be gained from
the imposition of price controls over new drugs and a great deal
lost. Even if the government eliminated all profits from future
drugs coming into the market, the prospective savings in terms
of overall health care costs would be less thar one percent of
health care costs. Wrong Prescription, 12 Fordhain Intell. Prop.
Media & Ent. L.J. at 900. However, these actions would have
precipitous effects on the incentives for research on innovative
new medicines. Over the long term, patient welfare would be
lower and total health care costs higher. Pharmaceutical
Innovation, 24 Seton Hall L. Rev. at 1259.

Maine holds out the most feared consequence for
pharmaceutical companies’ failure to “negotiate” to the state’s
desired outcome: price controls. The certain adverse effect of
price controls on America’s premier pharmaceutical industry is
a factor this Court should consider as it analyzes the impact of
Maine Rx on the American common market.

+

CONCLUSION

Maine Rx would force pharmaceutical companies to
provide drugs to Maine residents at lower prices than are
available to the rest of the country. As a consequence,
Americans not residing in Maine are likely to pay higher drug
prices to make up the difference. Moreover, Maine’s threatened
price controls coerce cooperation in the Maine Rx statutory
scheme. This is protectionist legislation that cannot be
sanctioned under the dormant Commerce Clause.

- Co ee meme ©

27

The judgment of the First Circuit Court of Appeals should
be reversed.

DATED: September, 2002.
Respectfully submitted,

DEBORAH J. La FETRA
Counsel of Record
Pacific Legal Foundation
10360 Old Placerville Road,

Suite 100

Sacramento, Califorma 95827
Telephone: (916) 362-2833
Facsimile: (916) 362-2932

Counsel for Amicus Curiae
Pacific Legal Foundation

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0492%3A09. Public record. Not legal advice.