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Executive Summary

BURROUGHS WELLCOME AZT AFTER-TAX PROFITS PROJECTED AT $1.3 BIL. by 1996 on a worldwide basis, according to a study by Thomas McLaughlin, Harvard Medical School. Cumulative profits for the period beginning in 1987, when the AIDS treatment was first marketed in the U.S., through 1996 "unadjusted for inflation are about $1.3 bil. for all markets, with the U.S. representing about 47% of this profit figure," the report states. Worldwide after-tax cumulative profits for Retrovir (zidovudine/AZT) during the period 1987-1992 are estimated by the report at $592 mil., or 42% of worldwide sales. The study projects cumulative U.S. and world sales of AZT to reach $1.57 bil. and $3.3 bil., respectively, by 1996. McLaughlin reports that cumulative world sales of AZT have totaled $1.35-$1.4 bil. since the product was first launched. Although AZT was approved in 1987, when average R&D costs for new chemical entities were estimated at $231 mil., McLaughlin subtracted from total sales $359 mil., the average pre-tax R&D costs for NDAs in 1993 as estimated by the Office of Technology Assessment ("The Pink Sheet" March 1, p. 14), to arrive at an estimate of 1987-1992 AZT profits of $427.2 mil. "Revenues beyond R&D costs associated with marketing of a new chemical entity, revenues beyond R&D costs and production, amount to $427.2 mil., an estimate of 1987-1992 pre-tax profits," he said. However, McLaughlin noted "FDA approved AZT in an expedited manner and the sponsoring firm was successful in acquiring orphan drug status for AZT, which gave Burroughs Wellcome major tax advantages." Consequently, "the $427 mil. before-tax profit estimate must be considered as a conservative estimate. A more realistic profit estimate accruing to Burroughs Wellcome is based on the average after-tax cost of R&D estimated by OTA, namely $194 mil.," McLaughlin wrote. "With after-tax costs, based on OTA figures," the report states, "AZT-associated profits are estimated at $592 mil." or 42% of sales. To the extent R&D costs can be attributed to the NIH and other academic centers, the profit estimate is even higher, McLaughlin added. Citing testimony from a March 1987 hearing before Rep. Waxman's (D-Calif.) House Energy & Commerce/Health Subcommittee, McLaughlin noted that Burroughs Wellcome said AZT development required 100-180 personnel years of effort, a cost estimated at $200 mil.-$500 mil. over a 10-year period. Scale-up and manufacturing costs constituted an additional $80 mil. in company expenditures. With other lesser costs, "Burroughs Wellcome estimated their expenses in bringing AZT to the market lie in the $300 mil.-$600 mil. range," the report points out. "Critics of Burroughs Wellcome claimed that AZT's expedited development was associated with substantial cost (and time) savings," the study notes. "It was argued that AZT not only received an expedited review and speedy approval by the FDA, thus extending the effective patent life of the product from an average of 10 years to 14-15 years," but also brought "considerable tax and other financial benefits" to the company due to the drug's orphan drug status. Those benefits included orphan drug tax credits, grants and market exclusivity and subsidization of future clinical trials through the NIH-funded ACTG. At his hearing, Waxman estimated that Burroughs Wellcome could receive "as much as a 72% tax subsidy of [its] clinical trials and...a 25% tax credit for increased" R&D costs. The study is expected to be submitted as evidence in patent infringement litigation scheduled to begin a jury trial in New Bern, N.C. federal court June 28. The trial could last as long as six weeks and the jury could hear testimony from as many as 260 witnesses. Burroughs Wellcome filed the complaint in 1991 against Barr Labs and Novopharm, which acquired nonexclusive marketing rights from the National Institutes of Health, acting as a co- developer/co-owner of AZT. On June 4, Judge Malcolm Howard denied Burroughs Wellcome summary judgment in the case ("The Pink Sheet" June 7, p. 3). Commenting June 24 on the upcoming trial, Burroughs Wellcome said: "NIH has made an unprecedented agreement with Barr whereby the NIH selected Barr to make the government inventor case in exchange for a 'license' to the NIH potential right and, if Barr prevails, to pay Barr's attorney fees. The patents in this lawsuit are valid and we believe the facts in the case will clearly show that the invention made by the five Burroughs Wellcome scientists was complete before anyone at [NIH] performed any work on the compound AZT. In fact," B-W declared, "the NIH scientists did not know the identity of the compound we sent them to test." Sen. Pryor (D-Ark.) in a June 23 floor statement introducing the report, invited Burroughs Wellcome to challenge McLaughlin's figures "by opening its books and telling us exactly how they justify the profits for AZT." He also called on the Justice Department to weigh in on behalf of NIH in the patent infringement suit.

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