Should any criteria be excluded?
The purpose of patent extensions is linked to the purpose of the patent system, which, as discussed in Chapter Five, is arguably to incentivise innovation that benefits society as a whole. Therefore, incentivising unpatentable, unmonopolisable, and unprofitable therapies should not be excluded from the following analysis.
(a) Criterion one: incentivising unpatentable therapies
The main benefit of patent extension regimes is their ability to compensate for the unpatentability factor caused by lack of patent length. Although patent extensions would not address the other four unpatentability factors,23 they would help facilitate
‘evergreening’ if they are available for ‘secondary’ patents.24
As discussed in Chapter Three, there is limited empirical evidence regarding how many therapies are screened due to insufficient patent length. However, a five year patent extension would increase patent length by 25 per cent. Arguably, this would lower the rate of screening compared to the current patent system, and between 50 to 75 per cent of unpatentable therapies will not be screened out.25 For that reason, patent extensions receive a score of three out of five in respect of this criterion.
20 A Civan “An Alternative Patent Mechanism for Pharmaceutical Drugs for Tropical Diseases” (2009) 2(1) EJEPS 21 at 27.
21 See M Abramowicz “The Danger of Underdeveloped Patent Prospects” (2007) 92 Cornell L Rev 1065 at 1112-1116. The innovator would propose an auction for a patent extension length and allow third parties to make bids on purchasing the patent extension. The innovator would then be required to purchase the patent extension at a certain markup over the highest bid (for example 25 per cent), or will be liable to pay a fine.
22 At 1065.
23 Namely, lack of novelty, lack of inventive step, insufficiency/inutility, and unpatentability under law.
24 See above, n 8.
25 Compare the score of two provided for criterion one under the current patent system discussed in Chapter Five.
(b) Criterion two: incentivising unmonopolisable therapies
To the extent that the current patent regime fails to incentivise unmonopolisable therapies, patent extensions would also fail. As discussed when comparing the ideal criteria to the current patent system, patents can only enforce a monopoly price if is possible to prevent ‘off-label’ substitution of the therapy with a cheap ingredient. This problem would not be solved by a patent extension regime per se, therefore, it receives a score of one under this criterion.
(c) Criterion three: incentivising unprofitable therapies
As discussed in Chapter Three and Chapter Five, patent exclusivity does not provide adequate incentives for unprofitable therapies. Studies have already shown that the availability of patent protection has not increased the level of investment in neglected diseases.26 This is not surprising, given that developing countries cannot afford to pay the monopoly price required for an innovator to recoup their investment.27 For example, the above proposal by Civian to extend patents regarding treatment of neglected diseases would have relatively little value as the market for neglected diseases is non-lucrative. For that reason, patent extensions also receive a score of one out of five with respect to this criterion.
(d) Criterion four: balancing dynamic and static efficiency
Patent extensions share the advantages and disadvantages of the current patent regime under the fourth criterion. Increasing the length of exclusivity will provide greater private incentives for development, but will also delay competition and potentially increase the amount of deadweight losses and reduce consumer surplus, to the extent that payers cannot afford to subsidise the monopoly price.
Notably, exclusivity-based incentives may be self-correcting as innovators may charge a lower monopoly price due to a longer period of exclusivity, assuming only such a price will be reimbursed by payers. However, in practice, pharmaceutical companies will charge the highest price the market can bear, and may refuse to supply the drug to a country which cannot afford the monopoly price. This is no different to the position under the current patent system.
26 MK Kyle and AM McGahan “Investments in Pharmaceuticals Before and After TRIPS” (2012) 94(4) Review of Economics and Statistics 1157 at 1157; see also J Lanjouw and I Cockburn “New Pills for Poor People? Empirical Evidence After GATT” (2001) 29 (2) World Development 265 at 265.
27 As discussed below, while increasing the length of exclusivity may allow a lower price to be charged, the net amount payable is unchanged, because an extension would merely push monopoly costs into the future.
Flexible patent extensions could allow length of market exclusivity to exactly match the incentive required to motivate R&D expenditure required for commercialisation, However, this would be administratively difficult to accomplish. Further, as noted above with regard to Canada’s complaint to the WTO, attempts to vary patent length could be objected to under the anti-discrimination provisions in article 27.3 of TRIPS.28
Ultimately, patent extensions provide (1) private incentives because of a longer period of exclusivity rights, although there is delay as rewards are only obtained from sales over the period of exclusivity. There is also a longer delay before (2) competition. However, payer reimbursement can (3) minimise deadweight loss and (4) maximise consumer surplus, assuming the medicine is affordable.
Accordingly, patent extension regimes are equivalent to current patent system, and are awarded a score of three.
(e) Criterion five: linking rewards to improved health outcomes
As noted in Chapter Five, pharmacoeconomic principles used by payers to negotiate prices have the potential to maximise health impact, at least with respect to monopolisable therapies. For example, innovators are less likely to secure a premium for a me-too drug unless its incremental health benefit is justified, especially where cheaper generics are available. However, as with the current patent system, patent extensions do not reward unmonopolisable and unpatentable therapies. Therefore, because patent extensions, like the patent system, have the potential to maximise health impact for only one type of therapy, namely, monopolisable therapies, they also receive a score of three with respect to this criterion.
(f) Criterion six: minimising administration costs to determine rewards Administration costs for patent extensions are relatively low compared with prize-based ‘pull’ incentives and ‘push’ incentives discussed below. While some controversy exists regarding patent extensions for patents covering previously approved drugs, the determination of which patents qualify for extensions and calculation of patent length is straightforward. The enforcement of monopolies under the patent system also has significant legal precedent. While disputes between innovators and generic drug companies are expensive, these are not costs borne by administrators of the extension mechanism to determine rewards per se.
28 TRIPS, art 27.3.
Similarly to the current patent regime, patent extensions also operate within the current quasi-market model for determining pharmaceutical prices, which resemble a negotiation between a willing buyer and seller, although each seller has exclusivity over their product and there is a limited number of buyers. On the other hand, flexible patent mechanisms, such as those proposed by Civian and Abramowicz, would require a sui generis mechanism of determining patent length.
Assuming that flexible patent regimes require a sui generis mechanism, a rating of four is provided. Otherwise, patent extention mechanisms achieve a score of five, as the current patent system is subject to minimal administration costs. Averaging these gives a score of 4.5.
(g) Criterion seven: minimising waste/inefficiency
Patent extensions have many of the same waste/inefficiency factors as the patent system, namely, (1) incentives for excessive marketing, (2) litigation between generics and innovators, (4) arbitrage due to grey markets, (5) incentives to counterfeit, (7) incentives to develop me-too drugs, and (8) an anti-commons effect.
In addition, there is a potential for fixed patent extensions to encourage (9) rent seeking because, as discussed above, their implementation is typically imposed as a result of political pressure under “TRIPS-plus” agreements.29 Flexible patent extension mechanisms would have an even greater risk of ‘rent-seeking’ behavior if the amount of extension is at the discretion of a government agency.
As with the patent system, there is an (3) opportunity for gaming due to
‘evergreening’. Further, (10) free-riding may be an issue, especially where other jurisdictions have chosen to implement patent extension legislation. The only waste/inefficiency factor absent is (6) incentives for low transparency and races to regulatory approval, because exclusivity is provided from the date of filing the patent.
Therefore, as patent extensions have nine waste/inefficiency factors that are not absent, a score of one is provided under this criterion. By contrast, there are seven waste/inefficiency factors under the current patent system.
(h) Criterion eight: Incentivising incremental innovation and breakthroughs
As discussed in Chapter Five with regard to the existing patent system, patent extensions mechanisms allow broad ‘genus’ claims to reward pioneer innovators, and
29 Faunce, above n 18.
‘species’ claims to reward incremental innovation. However, there is a potential for me-too drugs to cannibalise profits from pioneering drugs to the extent it is possible to design around a broad claim.30 Therefore, a patent extension mechanism can significantly incentivise breakthroughs and optimally incentivise incremental innovation; a rating of four can be granted.
Summary
Patent extension regimes receive an average score of 2.56 out of five, slightly worse than the current patent system. Most of the major benefits and drawbacks provided by patent extensions are shared with the existing patent regime. While the patent extension regime improves private incentives to develop medicines due to insufficient patent length, there are more opportunities for waste and inefficiency due to increased rent-seeking (particularly for flexible patent extension proposals) and free-riding.
B Extended Regulatory Exclusivity
Chapter Two discussed how regulatory agencies grant limited periods of data exclusivity from the date of regulatory approval of a new medicine. The United States and New Zealand provide different lengths of data exclusivity for small molecule drugs and biologics.31 These rights fall outside the known categories of intellectual property rights. 32
Chapter Two described how data exclusivity prevents competitors from using clinical trial data results to obtain regulatory approval for their generic drug upon demonstration of “bioequivalence” with a branded drug irrespective of patent protection.33 However, data exclusivity does not prevent a competitor from conducting their own trials, although this rarely occurs in practice.34 The importance of securing data exclusivity is recognised in Article 39.3 of TRIPS, which requires signatories to protect data required to be submitted for regulatory approval against
“unfair commercial use”. 35
30 For example, a claim to any medicine that modulates a drug target could not be designed around.
However a claim to a medicine with an active ingredient that acts on a drug target could potentially be designed around to the extent the drug target can be modulated with another active ingredient.
31 Refer to discussion of regulatory environment in Chapter Two. Medsafe New Zealand provides five years of data exclusivity for all new medicines, whereas the FDA provides five years for small molecule drugs and 12 years for biologics.
32 Namely, patents, trademarks, copyrights, and trade secrets.
33 New Zealand Regulatory Guidelines for Medicines - Part D (ed 6.15, Medsafe, November 2011) at 11; see also 21 CFR § 320.1(e).
34 This would defeat the competitive advantage of generic drug companies relying on the innovators’
clinical trial data.
35 TRIPS, art 39.3.
Market exclusivity differs from data exclusivity in that it prevents competitors from obtaining regulatory approval over a drug for the exclusivity period regardless of whether the competitors undertake their own clinical trials.
In general, regulatory exclusivity has distinct advantages over patent exclusivity. It runs from the date of regulatory approval regardless of clinical development times, whereas patents run from the date of filing. Unlike patents, exclusivity periods are also not susceptible to invalidity challenges. As noted in Chapter Two, generic drug companies are incentivised to challenge an innovator’s patents, particularly for failure to satisfy any of the patentability criteria.
Certain academic commentators36 have highlighted the discrepancy between the requirements for a valid patent and the more onerous requirements for regulatory approval. The advantages of regulatory exclusivity over patents in this regard have led to various proposals for reform. For example, Eisenberg,37 Morgan38 and Roin39 propose that fixed length exclusivity regimes could be used as a replacement for patent monopolies. Basheer40 proposes a variable length exclusivity regime which depends, inter alia, on the health value of a drug.
However, the flexibility of regulatory extension regimes is also the source of its main disadvantage: exclusivity may be adjusted according to the political whims of the current government. By contrast, the minimum standards of patent protection under TRIPS cannot be amended without risk of WTO sanctions. Despite this, notwithstanding TRIPS, governments are also permitted to issue compulsory licenses to protect public health in accordance with the Doha Declaration, as discussed in Chapter Five.
36 T Cook “Regulatory Data Protection in Pharmaceuticals and Other Sectors” in A Krattiger and others (eds) Intellectual Property Management in Health and Agricultural Innovation: A Handbook of Best Practices (MIHR, Oxford, United Kingdom, 2007) at 438-439; S Benjamin and A Rai “Who’s Afraid of the APA? What the Patent System Can Learn from Administrative Law” (2007) 95 Geo L R 269 at 278; M Lemley and D Burk “Patent Policy Levers” (2003) 89 Va L Rev 1575 at 1678.
37 R Eisenberg “The Shifting Functional Balance of Patent and Drug Regulation” (2001) 20(5) Health Aff 119 at 123-124; see also R Eisenberg “The Problem of New Uses, 5 Yale J. Health Pol’y. L. &
Ethics 717 (2005) and R Eisenberg “The Role of the FDA in Innovation Policy” (2007) 13 Mich Telecomm & Tech L Rev 345 at 364.
38 MR Morgan “Regulation of Innovation Under Follow-On Biologics Legislation: FDA Exclusivity as an Efficient Incentive Mechanism” (2010) 11 Columbia Science and Technology Law Review 93 at 98.
39 BN Roin “Unpatentable Drugs and the Standards of Patentability” (2009) 87Texas Law Review 503 at 564.
40 S Basheer “The Invention of an Investment Incentive for Pharmaceutical Innovation” (2012) 15(5-6) The Journal of World Intellectual Property 305.