Drug Regulation and Product Liability in the Pharmaceutical Industry, Study notes of Introduction to Business Management

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BUS 590: Biotech and Pharma Law

Week 11

I. Overview of Drug Regulation

Drug regulation evolved because of a number of very bad experiences that occurred without government regulation (http://www.fda.gov/oc/history/historyoffda/default.htm). For consumers, it is virtually impossible to determine whether a drug is mislabeled or adulterated and so it is no accident that drug regulation is among the oldest forms of regulation in the U.S (http://www.fda.gov/oc/history/historyoffda/section1.html).^1 Major changes in federal statutes regulating drug sales often occurred in the wake of widely publicized events in which lots of people were injured or killed from mislabeled or adulterated drugs. The first federal statute regulating drug sales was the Pure Food and Drugs Act of 1906. This statute prohibited interstate transport of unlawful food and drugs, which were mislabeled products. For the first time certain drugs were listed as being dangerous, such as heroin, alcohol and cocaine, and were required to be listed on labels. The Pure Food and Drugs Act did not require pre-market approval and so violations of the Act were mainly discovered after a number of consumers were harmed by mislabeled drugs or exposure to dangerous substances, such as heroin or cocaine. In 1927 the Food and Drug Administration was created and it is now one of the oldest regulatory (administrative) agencies in Washington, D.C. In 1938 a major overhaul in drug regulation occurred with the passage of the Food, Drug and Cosmetic Act (FDCA) (http://www.fda.gov/oc/history/historyoffda/section2.html). In addition to prohibiting mislabeled food and drugs, the FDCA also mandates pre-approval for new drugs. The 1938 legislation was passed in the wake of a major drug-related tragedy, but another tragedy involving Thalidomide, a sedative that caused pregnant women to have grossly deformed offspring, provided the foundation for the Kefauver Amendments in 1962. The Kefauver Amendments required that drug manufacturers not only prove to the FDA that their products were safe but also that they were effective (http://www.fda.gov/oc/history/ historyoffda/section3.html) in treating the ailments they were designed to treat. The New Drug Approval (NDA) process created by the FDA is so extensive that it sometimes takes a pharmaceutical firm between to five and ten years to gain approval to sell the drugs commercially. Drug regulation has continued to expand due to perceived abuses in various functional areas. An overview of FDA regulation is available at: http://www4.ncsu.edu/~baumerdl/ bus590.htm. On the other hand, many of the more recent statutes have been enacted to deal with problems created in part by prior drug laws. In 1984 the Hatch-Waxman Act was passed by Congress in part to provide for abbreviated new drug applications (ANDA) on generic equivalents of previously approved drugs. The Hatch-Waxman Act (^1) The FDA is the oldest, federal, regulatory agency.

also allows for extending the duration of patents for which the FDA requires long testing periods such that patentees only had a few years to earn a return on their research investments (http://thomas.loc.gov/cgi-bin/bdquery/z? d098:SN01538:@@@D&summ2=m&|TOM:/bss/d098query.html|). In 1988 Congress passed the Prescription Drug Marketing Act (PDMA), which regulated drug distribution and prohibited of some of the worst abuses that have occurred in marketing prescription drugs (http://thomas.loc.gov/cgi-bin/bdquery/z?d100:HR01207:@@@D&summ2=m&| TOM:/bss/d100query.html|). After passage by Congress, the 1997 the Food and Drug Administration Modernization Act (FDAMA) was signed into law by President Clinton. The FDAMA includes provisions for accelerating approvals of new drugs that have high potential for saving lives and where there are no other alternatives (http://www.fda.gov/cder/guidance/105-115.htm). Congress and the FDA have had to deal with health claims made by firms that sell food and dietary supplements. In 1990 Congress passed the Nutrition Labeling and Education Act, which regulates claims made by food manufacturers and requires food labels to show ingredients, calories, and the percentages of recommended daily allowances of various vitamins and protein that an average serving includes (http://thomas.loc.gov/cgi- bin/bdquery/z?d101:HR03562:@@@D&summ2=3&|TOM:/bss/d101query.html|). The Dietary Supplement Health and Education Act (DSHEA) of 1994 also regulates labels on food products as well as health claims made by sellers of dietary supplements (http://www.fda.gov/opacom/laws/dshea.html/). Among the modern challenges to drug regulation are off-label prescriptions and distribution of drugs through websites. Although the FDA regulates the sale of pharmaceutical drugs, it does not regulate the practice of medicine. Physicians can legally prescribe drugs for off-label uses, but pharmaceutical companies are prohibited from promoting off-label use of their products. In aggregate about 40 percent of prescription drugs are prescribed for off-label uses; uses that are not approved by the FDA. Large pharmaceutical companies have a tremendous incentive to promote off-label uses, which often occur through sponsoring of medical conferences and bringing to the attention of physicians refereed journal articles that indicate or suggest prescription drugs have off-label utility (See Off-Label Use and Product Liability at: http://www4.ncsu.edu/ ~baumerdl/bus590.htm). State licensing laws regulate interstate practices of medicine (http://www.fsmb.org/) and pharmacy (http://www.nabp.net/index.asp). As the mobility of society has increased, interstate practices have become more common and yet states continue to regulate based on geography even though technology provides worldwide opportunities that were not available until recently. A vast market for prescription drugs is available on the Internet. For customers who do not have a prescription, the website will often supply them those this practice is illegal in most states. Drug prices are regulated and significantly lower in Canada than in the U.S. Reimportation is essentially an exploitation of arbitrage opportunities between the U.S. and Canada and has become a popular position among politicians catering to seniors. By and large reimportation occurs through websites and is also illegal. The gray and black markets for drugs are generally not regulated by the

FDA, which means that we are witnessing a return to caveat emptor for a significant portion of the drug industry (See Regulation of Drug Distribution at http://www4.ncsu.edu/~baumerdl/bus590.htm). Advances in information technology have created significant challenges to the privacy of medical records. The Department of Health and Human Services regulates acquisition, storage and distribution of medical information under Health Insurance Portability and Accountability Act (HIPAA) regulations that were first adopted in 2003 (http://www.ihs.gov/AdminMngrResources/HIPAA/ERRoom.cfm#HIPAA_Rules).

II. Product Liability for Pharmaceutical Drugs

Regulation of the sale of pharmaceutical drugs in the U.S. began because common law remedies for unsafe drugs were widely viewed as being inadequate. However, regulating various aspects of the drug market does not guarantee that all drugs will be safe. Further, it should be noted that FDA regulation does not eliminate product liability risk for pharmaceutical companies that comply with the rules for NDAs. In spite of FDA testing, which requires NDA applicants to prove that their new drugs are both safe and effective, the product designs of a number of FDA approved drugs have been found defective by juries in a number of courts, resulting in the award of large damages to plaintiffs. Unforeseen side effects of drugs that became apparent only after such drugs have been approved by the FDA and marketed commercially have been a foundation for liability in a number of product liability cases. In spite of ubiquitous FDA regulation, there has been some of the product liability cases filed against large pharmaceutical firms based on concealment of information of possible side effects by pharmaceutical firms seeking approval for their drugs. Additionally, statements made by sellers on labels, or in other advertising, could create warranties that are not easily disclaimed under contract laws. Common law product liability can take place if the manufacturer fails to do a number of acts that a court finds reveals negligence or that a drug is defective. The basic formula for product liability is that a manufacturer is liable for defective products that injure consumers. A product can be defective because it manufactured improperly, its design is defective, or product warnings are inadequate. The defect can be due Under product liability law, if a drug is adulterated or mislabeled strict liability applies, which means that the manufacturer is liable unless a narrow set of defenses applies. If a manufacturer is strictly liable, it means that the manufacturer is liable even though the manufacturer was not negligent and used state of the art safeguards. Pharmaceutical firms spend lots of money in order gain approval of their drugs for various uses. The uses for various pharmaceutical drugs are listed on FDA approved labels that are required to be included with selling instruments (on the bottle, on television and radio commercials, through “learned intermediaries” (physicians)). On the other hand, approved FDA drugs often have other uses that are not listed on the label, but are only discovered after the drugs are in commerce. FDA laws prohibit drug companies from promoting off-label uses for their drugs but such information often first appears in medical journal articles written by academics and staff at various medical institutes.