By Donald Zuhn --
On Wednesday, Dr. Laurence J. Kotlikoff, a professor of economics at Boston University, released the results of his analysis of the impact of varying lengths of market exclusivity on innovation in the biotechnology sector. The 20-page report, entitled "Stimulating Innovation in the Biologics Industry: A Balanced Approach to Marketing Exclusivity," was funded by Teva Pharmaceuticals USA (see Teva press release). Coinciding with the release of the report, Dr. Kotlikoff (at right) also conducted conference calls on Wednesday and Thursday to discuss the study.
According to the report, innovation in the biotech sector would be best accomplished by providing innovators with the "appropriate degree" of "monopoly protection." To distinguish between "appropriate" and "inappropriate" degrees of "monopoly protection," Dr. Kotlikoff examined the exclusivity provisions in the four follow-on biologics bills before Congress, and concluded that "three of the four bills contain exclusivity provisions that run the danger of overextending monopoly protection" and thus "paradoxically, undermine innovation and the bills' own objectives." Dr. Kotlikoff argues that the three bills contain "lengthy" exclusivity provisions which "not only greatly delay[] entry by competitors with low-cost alternatives, but also exclude[] other innovators from building -- in a timely manner -- on the stock of prior knowledge." The report contends that Congress should look to the Hatch-Waxman model (which specifies exclusivity periods for chemical therapeutics) rather than adopt the exclusivity provisions in three of the follow-on biologics bills, each of which "would distort the market and undercut innovation." In particular, Dr. Kotlikoff concludes that "[t]here are, quite simply, no compelling differences between the chemical-based and protein-based medication industries to justify deviating from a policy that has succeeded for over a quarter of a century in both dramatically reducing drug prices and stimulating innovation."
Much of Dr. Kotlikoff's analysis focuses on the exclusivity provisions in four follow-on biologics bills pending before Congress. The bills include: "Access to Life Saving Medicine Act," (S. 623 and H.R. 1038), introduced by Congressman Henry Waxman and Senator Charles Schumer in February 2007; "The Patient Protection and Innovative Biologic Medicines Act of 2007" (H.R. 1956), introduced by Congressman Jay Inslee in April 2007; "The Biologics Price Competition and Innovation Act of 2007" (S. 1695), introduced by Senator Edward Kennedy in June 2007; and "The Pathway for Biosimilars Act" (H.R. 5629), introduced by Congresswoman Anna Eshoo and Congressman Joseph Barton in March 2008. Patent Docs has previously reported on both S. 1695 (see "Senate Committee Passes Biologics Legislation") and H.R. 5629 (see "New Follow-on Biologics Bill Introduced in the House"). With respect to their exclusivity provisions, Dr. Kotlikoff states that two of the four bills (H.R. 1956 and H.R. 5629) provide twelve years of data exclusivity followed by two years of approval or market exclusivity, one bill (S. 1695) provides four years of data exclusivity followed by eight years of approval exclusivity, and one bill (S. 623 and H.R. 1038) does not address data or approval exclusivity. (Data exclusivity refers to the period of time during which a potential generic drug supplier is prevented from using an innovator's clinical trial and related data to substantiate the safety of the generic's medically equivalent drug, and approval or market exclusivity refers to the period of time during which a generic drug supplier can file for, but not receive, FDA approval.) [UPDATE: A reading of H.R. 5629 indicates that contrary to the report's suggestion, this bill would provide a total of twelve years of exclusivity, of which four years would be data exclusivity.]
While Dr. Kotlikoff believes that "providing data exclusivity is tantamount to the government simply doing away with patents altogether and conveying exclusive product marketing rights to favored companies by fiat," and therefore, that such provisions are "at considerable odds with the principles of free markets," he accepts the "limited" data and approval exclusivity periods provided under Hatch-Waxman (generally four years of data exclusivity and one year of approval exclusivity) because the Hatch-Waxman scheme has proven to be a success. However, when Dr. Kotlikoff compared the effect of the follow-on biologics bills' exclusivity provisions on the overall length of protection, he found that three of the bills produced exclusivity periods that differed significantly from those of Hatch-Waxman. In particular, while the exclusivity periods of Hatch-Waxman and S. 623/H.R. 1038 would lengthen protection from the date of application filing by up to 25% (i.e., providing 25 years of protection instead of only 20 for non-drug inventions), S. 1695 would lengthen protection by up to 60% (32 years instead of 20), and H.R. 1956 and H.R. 5629 would lengthen protection by up to 85% (37 years instead of 20). Dr. Kotlikoff questions the need for exclusivity provisions that would tack on an extra 7-12 years of protection -- as compared with the provisions of Hatch-Waxman -- when the average development time for new biological drugs has been shown to be only 7.4 months longer than that for new chemical drugs.
The report provides much evidence that the Hatch-Waxman regulatory scheme has dramatically lowered drug prices while also ensuring strong incentives to innovate. For example, Dr. Kotlikoff notes that while annual pharmaceutical research and development costs ranged from 8-10% of sales prior to Hatch-Waxman, such costs are now running between 16-18% of sales (see Figure 1 from report below).
He also notes that the number of new drug patents issued by the U.S. Patent and Trademark Office rose dramatically after Hatch-Waxman was passed in 1984, and has continued to exceed pre-1984 levels in each year since Hatch-Waxman was promulgated (see Figure 2 from report below).
The report also questions two presumptions concerning "monopoly protection policy" and the drug industry: (1) that longer periods of monopoly protection promote innovation, and (2) that extending the duration of monopoly protection results in no overall economic loss. With respect to the first presumption, Dr. Kotlikoff argues that longer exclusivity provisions lengthen the time between innovations and therefore reduce the pace of innovation rather than stimulate innovation. According to Dr. Kotlikoff, once an invention has been made, the inventor's main goal becomes protecting and marketing that invention, as opposed to developing a dramatically different and better version of the patented product -- to do the latter would be to "diminish, if not vitiate, the value of the initial invention, which may have been undertaken at considerable cost." In other words, "monopolists don’t innovate" because "bringing new products to the market undercuts a monopolist’s revenues on his existing products." With respect to the second presumption, Dr. Kotlikoff argues that there is an overall economic loss because extended monopoly protection distorts consumer choice by maintaining artificially high prices of protected drugs, and these high prices in turn prevent uninsured and underinsured Americans from having access to effective biologic therapeutics.
The report concludes that limiting, rather than lengthening, monopoly protection will stimulate innovation. Dr. Kotlikoff argues that:
[E]ach innovation is part of a chain. Today’s innovation cannot proceed if yesterday’s is not accessible. And tomorrow’s innovation must wait until today’s innovation is available for use. Moreover, if the current length of monopoly protection suffices to incentivize today’s innovation, extending the length of protection will do nothing to increase current innovation. Instead, it will simply delay future innovation with the economy, over time, falling further and further behind with respect to the level of technology it would otherwise have available.
For additional information regarding this and other related topics, please see:
• "Congressional Fact-finding on Follow-on Biologics," August 13, 2008
• "CBO Releases Report on Senate Follow-on Biologics Bill; BIO Calls for Congress to Pass Biologics Bill in 2008," July 1, 2008
• "Follow-on Biologic Drugs and Patent Law: A Potential Disconnect?" March 25, 2008
• "New Follow-on Biologics Bill Introduced in the House," March 18, 2008
• "Dr. Robert Shapiro Discusses Follow-on Biologics Report," February 19, 2008
• "BIO CEO Provides Update on Patent Reform and Follow-on Biologics Legislation - Part II," February 14, 2008
• "Biologics Legislation Faces Unresolved Issues," December 28, 2007
• "Senate Committee Passes Biologics Legislation" July 5, 2007
Wow, who would have thought that a study funded by the world's largest generic drug maker would argue in favor of reducing the length of market exclusivity? It certainly reminds me of those tobacco industry funded studies that somehow came to the conclusion that smoking isn't bad for your health.
Posted by: Brian L. | September 19, 2008 at 08:58 AM