Pharmaceutical manufacturers have suffered a major setback in their seven-year effort to prevent federal auditors from seeing key cost and price data on prescription medicines bought by the government at an annual outlay of at least $2 billion.
In a 2 to 1 decision APril 12, the 7th U.S. Circuit Court of Appeals accepted almost completely the Justice Department position that the laws do not grant drug companies an exception that is unavailable to government suppliers in any other industry.
The manufacturer in the case, Eli Lilly & Co. of Indianapolis, is seeking reconsideration by the three-judge panel or a hearing by all eight judges of the appellate court. Regardless of the outcome, the case is almost certain to be carried to the Supreme Court for final disposition.
The issues are basically the same in four cases pending in U.S. District Courts in the District of Columbia, Chicago, Philadelphia and New York. The companies involved are, respectively, Merck, Abbott Laboratories, Smith Kline & French, and Bristol-Myers.
All of the litigation centers on a standard clause in procurement contracts, including those signed by the drug companies. The clause was taken, almost word for word, from a 1949 law that gives the General Accounting Office, the auditing arm of Congress, the right to examine the records of any government supplier having a negotiated contract.
The law and the contract are intended to assure that the government is not overcharged. In the litigation, the government's position has been not that is is being overcharged, but that it is entitled to ascertain the facts.
The clause went unchallenged until the mid-1960s, when Hawlett-Packard Co., a defense contractor, resisted GAO. Lower courts ruled that it had to comply. The Supreme Court, in 1967, let the ruling stand.
In January 1971, Sen. Gaylord Nelson (D-Wis.), chairman of the monopoly subcommittee of the Senate Select Committee on Small Business, asked GAO to look into drug production costs.
But after 3 1/2 years of trying to see the records of the five firms, Comptroller General Elmer B. Staats, the GAO boss, abandoned voluntary approaches and formally demanded access.
In the multiple lawsuits that soon followed, the Justice Department took a sworn deposition in which a Merck vice president said it would be "impossible to develop meaningful information" on several major cost components, such as research and development, for any one medicine. Similarly, a Bristol executive said, "We don't know what the profit is" on a single product. When asked how Lilly set drug prices, a vice president for finance replied, "I can't tell you that." They acknowledged knowing manufacturing costs.
The government has indicated strong doubts that financial executives set prices without knowing true costs.
The first case to go to trial, in 1976, was that of Eli Lilly. Like Merck, Bristol and Smith Kline, it had sought to enjoin Staats from examining its data under the access clause. Abbott simply didn't comply with the GAO demand, leading the government to bring suit. The 7th Circuit ruling controls the Abbott case as well as Lilly's.
In contrast to these firms, Hoffmann-La Roche, the Swiss-based firm, believed to be the world's largest, and the last of the government's top six pharmaceutical suppliers targeted for the inquiry, opened its data to GAO.
Hoffmann-La Roche did so under an ironclad pledge of confidentiality made by Staats to all six firms: if given access to commercial secrets, GAO would never disclose them.
The Lilly case was tried by U.S. District Judge Cale J. Holder. He ruled for Lily, holding that the Comptroller General had exceeded his authority. Staat's purpose was to conduct a research study on the economics of the entire pharmaceutical industry Holder said, when the law authorized him only to audit contract negotiations and adherence to contracts.
Reversing the trial judge, the 7th Circuit agreed with the Justice Department that an access clause taken almost literally from a valid law had to cover Lilly just as it does all other government contractors. And, Judge Walter J. Cummings wrote for the court, Congress explicitly had directed GAO to oversee all federal expenditures.
In the dissenting opinion, Judge Wilbur F. Pell Jr. denounced the majority for "an unwarranted, and unfortunate, extension of the Big Brother concept into legitimate privacy in the industrial field . . ."
The case is another chapter in the continuing mystery of drug pricing. One example involves Valium, the extremely popular prescription transquilizer, sold by Hoffmann-La Roche.
In 1973, when the company was selling it here for three times the price charged in Britain, a 75 percent price reduction was ordered by the British government. Its monopolies Commission had found that the firm's profits on sales exceeded 60 percent.