Bayer, U.S. Deal on Anthrax Drug

Faced with the possibility of compulsory licensing of its Cipro antibiotic (used as an anthrax drug) for whatever royalties the government would set, Bayer agreed to supply 100 million pills to the U.S. for almost half price.

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By Tom Jacobs (TMF Tom9)
October 25, 2001

With big drug makers quaking in their patented boots, Germany-based drug maker Bayer AG (OTC: BAYZF) reached an agreement with the U.S. government for supplies of its Cipro anthrax antibiotic. Bayer will provide 100 million Cipro tabs for $0.95 each, a little more than half the $1.77 the government had reportedly been paying. This will give the federal government the ability to treat 12 million people for anthrax by January 2002, against 2 million now.  

The deal follows Canada's decision to "break" Bayer's patent and buy from a generic drug makers, and its sudden reversal of that decision. Tommy Thompson, U.S. Secretary of Health and Human Services, had apparently been threatening Bayer with the same patent action in the United States. Bayer decided to negotiate at gunpoint.

Compulsory patent licensing
Technically, a government does not abrogate a patent holder's right to its invention. A patent granted today in the U.S. gives its holder the right to prevent anyone else from using the invention without a license for 20 years. If the patent holder grants a license, it's usually in exchange for an upfront payment, future royalties, or other benefits such as cross-licensing of another company's patents or an agreement not to challenge certain patents or applications. The latter two benefits aren't chump change, by the way: It's smart to avoid patent litigation, which is expensive and can throw a business into uncertainty. 

But in recent years, some countries have passed laws allowing limited exceptions to the patent holder's absolute rights. These exceptions allow compulsory licensing, where a government requires the patent holder to license its invention to one or more selected entities at a royalty rate the government sets. In the U.S., compulsory licensing has mainly taken place through Federal Trade Commission (FTC) conditions for approval of drug company mergers, and other countries have dealt with it recently in the high-profile arena of drugs to treat AIDS. Bayer agreed to a contract for Cipro at a lower price rather than face the possibility of compulsory licensing, through which the government could at least theoretically grant another company the right to make Cipro and pay as low as a zero royalty. 

A host of industry and trade group representatives and consultants have been quoted on the Bayer-Cipro news, from the Pharmaceutical Research and Manufacturers Association of America to Pfizer (NYSE: PFE) Chairman and CEO Henry McKinnell and Accenture (NYSE: ACN) London partner Nicholas Edwards. It's not lost on anyone that the U.S. defended intellectual property strenuously concerning AIDS drugs in Africa, while Thompson now has taken the opposite approach domestically. But the industry undoubtedly prefers Bayer's deal at gunpoint rather a government pushed to the wall setting a worse precedent.      

Bayer doesn't need more problems
Bayer's drug business has stagnated in recent years. To bolster its thinly populated drug candidate pipeline, it has made several huge deals with Millennium Pharmaceuticals (Nasdaq: MLNM) and CuraGen (Nasdaq: CGEN) for drug discovery. Its pharmaceutical business has been the subject of repeated sale rumors, some acknowledged by the company. Bayer said last month that it would keep the operation as a "core business." Perhaps it hasn't received a high enough offer.

The company, whose shares trade in Europe but in the U.S. through the over-the-counter "pink sheet," had at one time scheduled to begin trading its shares on the New York Stock Exchange this month, but has apparently shelved its plans due to the unfriendly state of the market.

You can follow drug makers and learn more about the drug business through our InDepth: Pharmaceuticals page. This month's issue of The Motley Select also profiles a biotech company whose technology is in demand to optimize drugs.  

Tom Jacobs (TMF Tom9) worked in a pharmacy in high school and read the drug company bottle inserts for fun. He owns shares of Millennium Pharmaceuticals. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.

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