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CIAO DATE: 12/03
Patent Mistakes
On The Issues
November 2002
While President Bush has linked patents to high drug prices, it is important to remember that the profit earned from patented new drugs fuels further research and development. Washington must continue to guarantee drugmakers a certain period of exclusivity, but it should also increase the transparency of the patent system and close legal loopholes used by both drugmakers and their generic competitors.
When President Bush announced new rules removing regulations that drug companies use to protect their patents he was careful to tout the industry's entrepreneurial achievements, but there is little question that linking patents with lower drug prices will reinforce the perception that strong patents fuel high drug prices. The reality is patents have only been growing weaker over time, putting certain kinds of drug research in jeopardy.
At issue was the so-called thirty-day exclusion. Right now, generic drugmakers can decide that a branded drug's patents are up before the full term has expired and request permission from the Food and Drug Administration (FDA) to sell a knock-off version. But the branded drugmakers have certain protections from frivolous claims. Primary among them is the ability to challenge them in court, which automatically imposes a hold of up to thirty months while the dispute is settled.
This thirty-month protection applies only in cases where the generic drugmakers are looking for an early grab at the intellectual property. Generic competitors are notorious for filing shoddy challenges. Some industry insiders estimate that fewer than 10 percent of the generic challenges actually succeeded. But under President Bush's new rule, branded drugmakers will only get one thirty-month block. Generic drugmakers will challenge weaker patents first, forcing the branded maker to use up its only goalie early in the match.
Since the FDA does not take the validity of patent claims into consideration when it reviews generic drug applications, knock-offs could find their way to the market months, if not years before branded companies can win legitimate counterclaims, permanently eroding their market share.
The Federal Trade Commission charged that drugmakers were using the thirty-day rule to get inappropriate extensions on their patents. But this only amounted to a few instances. Most drugmakers have already been passing on many chances to prolong patents, realizing it made bad public policy. Eli Lilly recently refused to challenge claims made on Prozac. There is little question that both sides sometimes played games, as branded drugmakers tried to twist permeable patent laws in their favor. The president's new rules will not fully address these fundamental woes, nor did the original legislation setting up this arbitrary system.
Hatch-Waxman
That legislation is the Hatch-Waxman law, passed in 1984 to level the competition. Generic manufacturers received incentives to challenge branded drugs, such as the ability to tinker with them from day one--so they would be ready to introduce knock-offs as soon as patents expired--and the ability to bypass clinical trials so long as they could prove their products were chemically similar to the original. In return, branded companies would be compensated for part of the patent time they lost as drugs wound through clinical trials. The total time for which they would be eligible for compensation, however, could not exceed five years.
But as clinical trials stretch longer, more drug companies are exceeding that five-year cap. As a result, many new drugs make it to the market with an average of eleven years of effective patent protection left, or less. Such short intervals begin to encroach on the profit margins that make drug development worthwhile.
Right now the companies that pay the biggest price are the ones that develop drugs requiring unusually long clinical trials. These tend to be either drugs including some of the complicated cancer drugs now in development aimed at completely new molecular targets or drugs aimed at degenerative diseases, for which researchers need to follow patients over long periods of time to see an effect. In other words, the system is penalizing the most entrepreneurial drug companies developing the most innovative kinds of new medicines.
A large part of the reason clinical trials are stretching so long is regulatory skittishness. For example, the FDA is quietly asking some drug companies to double the size of Phase III trials in the hopes of capturing more safety data. In the 1970s companies tested drugs on an average of 1,500 patients; now they test them on more than 5,000. All of these delays eat into the patents that companies take out.
As safety concerns become paramount, companies are also spending longer in the laboratory trying to refine products before human testing begins. The FDA increasingly wants to see more preclinical data that new drugs were run against different laboratory screens that are supposed to mimic human tissue before they are tried in patients. All of this might lead to some safer drugs, but the clock is ticking. Companies take out patents on new compounds as soon as the molecule is discovered.
The problem of short patents is especially acute for academic research coming out of the National Institutes of Health. The NIH is historically slow to hand off its basic science discoveries to the biotechnology and pharmaceutical companies capable of turning them into products. As a result, the NIH faces a last-mile problem. With the doubling of the NIH budget, there are going to be a lot of patents taken out on drug discoveries with nowhere to go. By the time the NIH gets around to putting its research in front of drug companies, a lot of the patents will have eroded past the point where industry will be interested. So NIH researchers will be taking out patents on technology and effectively crowding out anyone capable of commercializing it.
The patent problems started more then a decade ago, when Congress blurred the distinction between drug regulation and the patent system in the original Hatch-Waxman Act. Drug companies took expansive approaches in listing patents that covered every aspect of their new products, and they hid behind the longest patent they received. This gave makers of generic drugs ample reason to contest their validity and gave makers of branded drugs multiple shots at blocking their claims. The president's new rules also aim to end this practice of filing fringe patents, but drug companies are already finding ways around the proposed restrictions.
In the end, few generic companies develop new drugs. Branded companies, by comparison, plow profits back into research on new medicines. A recent study in the journal Health Affairs found a direct correlation between higher margins and increased research and development spending. Cutting patent times further will eventually crimp research budgets.
The White House rule is unlikely to end the push among pharmaceutical critics for legislative changes to the generic-drug approval process. These foes are already lining up with their long knives. They are latching their rhetoric onto the president's link between patents and drug prices in calling for further patent limitations.
Recommendations
If President Bush wants to provide more equity and transparency in the patent system, he should first compensate the drugmakers for everything they lose to regulatory hand wringing and then close any lingering loopholes they use to eke out more patent time.
In Europe, branded drugs are effectively guaranteed at least ten years of patent protection after they make it to the market. That is probably too short to suit American drugmakers, but the idea is simple enough. At the minimum, President Bush could guarantee drugmakers the fourteen years they were intended to receive under the original Hatch-Waxman legislation. That way, everyone would know what they are getting. And the result would be fewer games, and less opportunity for legal wrangling.
Scott Gottlieb, M.D., is a resident fellow at AEI.
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