American Journal of Law & Medicine

Ensuring the safety of genotech drugs through implied warranty theory.

1. INTRODUCTION

Genotechnology (genotech) is the subset of biotechnology (biotech) dealing with human genetics.(1) Even as a subset, however, genotechnology has a significant effect within the U.S. economy.(2) This impact is partly attributable to the federal government's efforts to nurture the industry.(3) Although these efforts have contributed to the American genotech industry's rapid growth,(4) the federal government has not kept pace in the legal and regulatory areas necessary to ensure that genotech drugs are marketed responsibly.(5) In fact, current federal policy has been characterized as "grossly short-sighted."(6)

The Food and Drug Administration (FDA) presently has approved more than thirty genotech drugs for general use.(7) Over 450 more products are currently under development,(8) with at least 120 of those in final testing awaiting FDA approval.(9) Cancer treatment products comprise the largest segment with 114 drugs either under development, pending approval, or finally approved for sale.(10)

As sales figures indicate, genotech drugs have already firmly entrenched themselves in the marketplace.(11) Should these drugs prove unsafe in the future, large segments of the population could be affected.(12)

Throughout recent debates centered on severely limiting the FDA's authority to control drug approvals, former FDA Commissioner David Kessler continued to utter a standard cautionary line, stating, "We might make a mistake."(13) This Note explores a potential judicial option for those circumstances when the FDA has made a mistake and an unsafe genotech drug reaches the marketplace.(14)

Part II discusses some relevant business aspects of the genotech industry, specifically focusing on the intense financial pressures both within and without these companies to get a new drug into the marketplace. Part III presents an overview of the current FDA regulatory scheme and highlights some of the changes that either have been proposed or are currently pending in Congress. Part IV looks at the standard legal theories courts apply when analyzing unsafe drug claims and the major method of cutting off patient claims brought against manufacturers. Part V introduces the concept of an implied warranty of safety, its content, application, and benefits as compared to currently applied legal theories. Part VI concludes that an implied warranty of safety is superior to current legal doctrines and proposes that courts adopt its use in unsafe drug cases.

II. THE BUSINESS OF GENOTECHNOLOGY

The genotech industry is a lucrative,(15) but risky business. With millions of dollars to be lost if projects fail, but potentially billions to be made if they succeed, genotech companies face enormous financial pressures.(16) This combination of great risk of loss and the potential for huge profit on an inherently dangerous product(17) underlies the day-to-day operations of genotech firms.

A. The Capitalization of Genotech Companies

The genotech industry is not financially self-sufficient.(18) Typically, genotech companies suffer through a long period between the dates of their initial start-up to the point of profitability.(19) Therefore, "[genotech] companies' financing strategies dictate their business strategies to a degree unparalleled in any other industry."(20) "[Genotech] companies' health is a balance between money and time."(21) An individual company's viability is measured by its burn rate(22) and its survival index.(23) In 1995, the industry average burn rate was approximately $726,000 with average cash reserves of approximately $11,475,000.(24) These figures yield a survival index of approximately sixteen months.(25) To continue operating past that critical deadline, companies must either get a product to market where sales will generate a sufficient cash flow to enable the company to continue operating, or find an alternate source of financing to add to their cash reserves.(26)

Finding alternative sources of financing is becoming increasingly difficult.(27) Genotech companies are typically small start-up companies founded by academics who possess promising ideas but little capital.(28) In the past, to finance further research and development efforts, these start-ups sought funding from the capital markets.(29) Companies usually found willing investors in both the venture capital and public equity markets.(30) Recently, however, available funds in both these markets have become increasingly scarce.(31)

Because genotech companies have large capital needs and long delays before their products reach the marketplace, they typically are ineligible for bank financing.(32) Thus, venture capital provides an important source of funding for the genotech industry,(33) and for some companies, it is the primary source of capital.(34) Venture capital is risk capital; it is money to be risked in commercial speculation.(35) For the genotech industry as a whole, it provides the most important source of early stage financing.(36) In 1994, venture capital funding for biotech companies in general accounted for approximately twenty-five percent of all venture investments.(37) Unfortunately for many genotech companies, that source of financing may be drying up as venture firms become increasingly cautious in their investments.(38)

Although venture capitalists accept some of the legitimate risks associated with genotech companies,(39) With this assumption of risk they expect large profits.(40) Venture investors seek annual returns on their aggregate investments of 16-18%.(41) Not only is this level approximately five points above the Standard & Poor's 500 Index for the public market, but it must also be recognized as a weighted average.(42) Thus, to get these results, investors must look for individual opportunities which far exceed those annual returns in order to account for the large number of unprofitable investments from unsuccessful ventures.(43)

In contrast, the public equity market has historically provided the bulk of later stage capital for genotech companies through initial public offerings (IPOs) of stock.(44) However, this financing source is also not what it formerly was. "Currently, ... the public market is in flight from biotech."(45) There are simply too many firms with too little influence on Wall Street to structure effectively the types of financing deals that a genotech company needs to issue an IPO.(46) When purchasing the IPOs which are issued, investors are currently more discriminating than in the past.(47) Now, investors place far greater emphasis on how companies conduct their clinical trials.(48) Sophisticated investors realize that clinical trials are very expensive and want to know exactly how much development will cost each step of the Way.(49)

With traditional sources of capital becoming increasingly difficult to obtain, many genotech companies are considering innovative financing methods to obtain access to capital.(50) one predominant Method includes strategic alliances with other companies such as large, well-financed pharmaceutical firms.(51) However, such alliances mean sharing potential profits with strategic partners who typically attempt to structure agreements to maximize profit sharing.(52)

Companies are downsizing and refocusing their efforts.(53) The double whammy of a loss in public market confidence and regulatory obstacles along the path to marketing new genotech drugs has prevented many companies from accessing vital sources of cash.(54) The current financing environment is a limiting factor for the growth, development, and continuing vitality of all genotech companies.(55) "Of all the challenges facing biotech CEOs, financing is the most constant."(56)

B. Internal Financial Threats

For those genotech companies with access to the public equity markets, capital is acquired through the sale of stock in an IPO.(57) The IPO brings capital into the company in exchange for shares of stock and the attendant expectation that dividends will be paid on that stock.(59) Thus, when shareholders invest in a company, they expect to see results.(59) When companies lose money, shareholders naturally look for ways to minimize their losses or recoup their investment.(66) For some of these investors, the way to accomplish this is by suing the very company in which they invested.(61)

Class-action securities lawsuits, sometimes known as strike suits, are themselves a $1.2 billion industry.(62) Shareholders have initiated such suits merely because of a decline in a company's stock price.(63) Plaintiffs claim that "they have been deceived by executives' unjustifiably optimistic projections about their company, or failure to disclose bad news in a timely fashion."(64) To prove such allegations, shareholders must prove that the company either intentionally or recklessly misled investors.(65) However, damage is inflicted through merely filing such a suit.(66) The majority of such suits settle before trial because executives simply cannot gamble the future of the company on the outcome of a long and complex jury trial.(67) Although insurance is available to protect against losses from strike suits, "high tech companies [such as genotech firms] face the highest premiums because their volatile stocks(68) Make them popular targets."(69) These suits have the ultimate effect of limiting investment in companies doing promising research.(70)

III. FDA REGULATION OF DRUG MARKETING: AN OVERVIEW

A. The FDA Approval Process for Genotech Drugs

Congress delegated the power to protect the public from unsafe drugs to the FDA because of the public's inability to protect itself.(71) This inability can result in severe injury or death when a person ingests an unsafe drug.(72) New drugs must be both safe and effective before reaching the marketplace.(73) To this end, the FDA has enacted a comprehensive body of regulations,(74) and courts have deferred to the FDA's determinations.(75) However, enforcement depends on the voluntary compliance of pharmaceutical companies and manufacturers disclosing the results of all studies pertaining to the drug they seek to market.(760 Although the system is mostly effective, some drugs do reach patients which are later proven unsafe.(77)

FDA approval processes seek a body of scientific evidence that can sufficiently predict whether a drug is safe and effective for human use.(78) The goal is to identify hazards and screen out risks that the drug's therapeutic benefits do not justify.(79) "Because all drugs have some risks, efficacy studies must show that the drug's contribution to patient care will be sufficient to overcome its hazards."(80)

The first step in the drug approval process is for a company to file an application for an investigational new drug (IND).(81) The submission of an IND application begins a 180-day "review clock."(82) The company must file the IND application thirty days before performing the first human tests to allow the FDA time to review the application.(83)

All studies conducted for the purpose of gaining FDA approval of an investigational new drug must be both adequate and well-controlled.(84) These studies provide the primary basis for determining whether substantial evidence supports the drug manufacturer's claims that the new drug is safe and effective.(85) After the FDA's initial review, Phase I studies are conducted on a small number of human subjects.(96) The goal of Phase I is to gather information on pharmacological effects and early evidence of effectiveness.(87) Phase II studies involve a larger group of patients, up to several hundred.(88) Their goal is to show the clinical effectiveness of the drug.(99) Phase III is the final testing stage. At this stage, the drug has usually been shown to be safe and effective.(90) All that remains is to determine what specific dose is required to be effective against the illness the drug seeks to treat.(91) It is during Phase III that disputes between the manufacturer and the FDA are most likely.(92) Common points of disagreement involve statistical methods and the significance of various events in the course of treatment.(93)

The second step in the approval process occurs when the manufacturer files a new drug application (NDA).(94) During NDA review, the FDA is primarily concerned with the results of Phase III testing, which should produce neutral, blind research results.(95) These results form the basis for risk assessments and label warnings.(96)

Finally, if the FDA is satisfied with the testing results, it will approve the NDA and allow sale of the drug.(97) However, the manufacturer must also meet the FDA's requirements for labeling(98) and manufacturing.(99) For genotech drugs, which fall into the category of biologics, there are additional barriers the company must overcome before it can market the drug.(100) Biologics are subject to regulation under both the Federal Food, Drug and Cosmetic Act(101) and the Public Health and Services Act (PHSA).(102) The PHSA focuses not on safety and efficacy, but on "rigid control of the manufacturing process,"(103) reflecting the particular scientific and historical concerns of biopharmaceutical products.(104)

B. Special Concerns with Genotech Drugs

Deoxyribonucleic acid (DNA) is the basic building block of life.(105) It is a chemical code that regulates the functions of the organism within which it exists.(106) Exactly how it works and what particular processes each part of a DNA chain regulates remain somewhat of a Mystery.(107) Scientists are now attempting to map the entire sequence of human DNA.(108) However, although scientists can map genes, each gene's function is not fully understood.(109)

Genotech drugs are most commonly created using recombinant deoxyribonucleic acid technology (recombinant DNA or rDNA).(110) In this process, viruses are typically used as vectors to insert new genetic material into a host organism, such as bacterium, which then begins to produce the desired substance, usually a new drug.(111) Recombinant DNA processes originally were greeted with the fear that new strains of bacteria, to which no immunity might exist, would escape the laboratory.(112) Although the currently prevailing scientific view seems to be that the d angers of genetic engineering were overestimated, fears of possible consequences were scientifically supportable.(113)

To prevent unsafe drugs from reaching the marketplace, companies must perform adequate testing. …

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