Patents Key for pharma innovation

Technological innovation is widely recognized as a key determinant of economic and public health progress. 1,2 Patents and other forms of intellectual property protection are generally thought to play essential roles in encouraging innovation in biopharmaceuticals. This is because the process of developing a new drug and bringing it to market is long, costly, and risky, and the costs of imitation are low. After a new drug has been approved and is being marketed, its patents protect it from competition from chemically identical entrants (or entrants infringing on other patents) for a period of time. For firms to have an incentive to continue to invest in innovative development efforts, they must have an expectation that they can charge enough during this period to recoup costs and make a profit. After a drug’s patent or patents expire, generic rivals can enter the market at greatly reduced development cost and prices, providing added consumer benefit but eroding the innovator drug company’s revenues.

The Drug Price Competition and Patent Term Restoration Act of 1984 (commonly known as the Hatch-Waxman Act) was designed to balance innovation incentives and generic price competition for new drugs (generally small-molecule chemical drugs, with some large-molecule biologic exceptions) by extending the period of a drug’s marketing exclusivity while providing a regulatory framework for generic drug approval. This framework was later changed to encompass so-called biosimilars for large-molecule (biologic) drugs through the separate Biologics Price Competition and Innovation Act of 2009. Other measures have been enacted to provide research and development (R&D) incentives for antibiotics and drugs to treat orphan diseases and neglected tropical diseases.

Discussion continues about whether current innovation incentives are optimal or even adequate, given evolving public health needs and scientific knowledge. For instance, the House Energy and Commerce Committee recently embarked on the “21st Century Cures” initiative, 3 following earlier recommendations by the President’s Council of Advisors on Science and Technology on responding to challenges in “propelling innovation in drug discovery, development, and evaluation.” 4

In this context, we discuss the importance of patents and other forms of intellectual property protection to biopharmaceutical innovation, given the unique economic characteristics of drug research and development. We also review the R&D incentives that complement patents in certain circumstances. Finally, we consider the pros and cons of selected voluntary (“opt-in”) or mandatory alternatives to the current patent- and regulatory exclusivity–based system (such as prizes or government-contracted drug development) and whether they could better achieve the dual goals of innovation incentives and price competition.

The Role Of Patents In Biopharmaceutical Innovation

The essential rationale for patent protection for biopharmaceuticals is that long-term benefits in the form of continued future innovation by pioneer or brand-name drug manufacturers outweigh the relatively short-term restrictions on imitative cost competition associated with market exclusivity. Regardless, the entry of other branded agents remains an important source of therapeutic competition during the patent term.

Several economic characteristics make patents and intellectual property protection particularly important to innovation incentives for the biopharmaceutical industry. 5 The R&D process often takes more than a decade to complete, and according to a recent analysis by Joseph DiMasi and colleagues, per new drug approval (including failed attempts), it involves more than a billion dollars in out-of-pocket costs. 6 Only approximately one in eight drug candidates survive clinical testing. 6

As a result of the high risks of failure and the high costs, research and development must be funded by the few successful, on-market products (the top quintile of marketed products provide the dominant share of R&D returns). 7,8 Once a new drug’s patent term and any regulatory exclusivity provisions have expired, competing manufacturers are allowed to sell generic equivalents that require the investment of only several million dollars and that have a high likelihood of commercial success. Absent intellectual property protections that allow marketing exclusivity, innovative firms would be unlikely to make the costly and risky investments needed to bring a new drug to market.

Patents confer the right to exclude competitors for a limited time within a given scope, as defined by patent claims. However, they do not guarantee demand, nor do they prevent competition from nonidentical drugs that treat the same diseases and fall outside the protection of the patents.

New products may enter the same therapeutic class with common mechanisms of action but different molecular structures (for example, different statins) or with differing mechanisms of action (such as calcium channel blockers and angiotensin receptor blockers). 9 Joseph DiMasi and Laura Faden have found that the time between a first-in-class new drug and subsequent new drugs in the same therapeutic class has been dramatically reduced, from a median of 10.2 years in the 1970s to 2.5 years in the early 2000s. 10 Drugs in the same class compete through quality and price for preferred placement on drug formularies and physicians’ choices for patient treatment.

Patents play an essential role in the economic “ecosystem” of discovery and investment that has developed since the 1980s. Hundreds of start-up firms, often backed by venture capital, have been launched, and a robust innovation market has emerged. 11 The value of these development-stage firms is largely determined by their proprietary technologies and the candidate drugs they have in development. As a result, the strength of intellectual property protection plays a key role in funding and partnership opportunities for such firms.

Universities also play a key role in the R&D ecosystem because they conduct basic biomedical research supported by sponsored research grants from the National Institutes of Health (NIH) and the National Science Foundation (NSF). The Patent and Trademark Law Amendments Act of 1980 (commonly known as the Bayh-Dole Act) gave universities the right to retain title to patents and discoveries made through federally funded research. This change was designed to encourage technology transfer through industry licensing and the creation of start-up companies. Universities received only 390 patents for their discoveries in 1980, 12 compared to 4,296 in 2011, with biotechnology and pharmaceuticals being the top two technology areas (accounting for 36 percent of all university patent awards in 2012). 13

University licensing trends have generated debate. For instance, there have been recent proposals to encourage the federal government to “march in” and require a university to license a patent or enforce reduced pricing or other terms. 14 The percentage of approved drugs with public-sector patents is relatively small. 15 Nevertheless, if the government exercised its march-in rights in this way, that action could have adverse effects on technology transfer activities and early-stage company investment, particularly if it were to disrupt existing expectations of grantees, licensees, and investors. 12 There have been four petitions to the NIH requesting it to exercise march-in rights on behalf of the federal government; none has been granted. 16

Patents And Exclusivity Provisions For Drugs And Biologics

The Hatch-Waxman Act created a low-cost regulatory mechanism for generic drug manufacturers to obtain marketing approval from the Food and Drug Administration (FDA) by submitting an abbreviated new drug application and demonstrating the drug’s bioequivalence to the innovative “reference” product. For innovators, the act restores some of the “patent clock” time lost during lengthy clinical trials and FDA review periods. It also provides a five-year regulatory exclusivity period for new molecular entities that runs concurrently with patent term protection, during which time an abbreviated new drug application cannot be submitted (four years in the case of a patent challenge).

The act also encourages generic manufacturers to challenge brand-name patents, in that the first company to file an abbreviated new drug application with a patent challenge is eligible to receive 180 days of generic drug market exclusivity, during which time no other generic competitor can enter the market. As a result, patent challenges have become a major factor in generic competition. Exhibit 1 summarizes the main provisions of the Hatch-Waxman Act. The act’s effects have been extensively analyzed elsewhere. 17,18