NVCA Study Supports 12-Year Data Exclusivity Period

    By Donald Zuhn --

On Friday, the National Venture Capital Association (NVCA) released the results of a study suggesting that "a data exclusivity period of at least 12 years for innovator products is a critical fulcrum in the effort to balance cost with the preservation of biotech innovation."  The results of the NVCA-commissioned study were released during a Capitol Hill briefing hosted by Rep. Anna Eshoo (D-CA), who has introduced legislation (H.R. 1548) that would provide up to 14.5 years of data exclusivity.  According to a statement released by the NVCA, a trade association representing some 460 U.S. venture capital firms, the study's findings "are significant as they support a longer exclusivity period for innovators than is currently being proposed by some legislators with respect to a new Follow on Biologics (FOB) FDA approval process."  The NVCA release was likely referring to competing legislation introduced by Rep. Henry Waxman (D-CA) in the House (H.R. 1427) and Sen. Charles Schumer (D-NY) in the Senate (S. 726) that would only provide up to 5.5 years of data exclusivity.

In a separate statement accompanying the release of the study, the NVCA noted that the central question facing legislators "is how to balance the public's interest in lower prices for biological drugs, with continued vigorous investment in the development of new medical treatments and cures for patients suffering from debilitating diseases such as cancer, Parkinson's, and multiple sclerosis."  To determine where this balance lies with respect to data exclusivity, the NVCA asked Iain Cockburn, Professor of Finance and Economics at the Boston University School of Management, and Josh Lerner, Professor of Investment Banking at the Harvard University School of Business, to examine the cost of capital for biopharma companies.  According to the NVCA, "prior attempts to identify factors that drive investment in new drug development have failed to recognize the high cost of capital for small, innovative biotech companies that comprise the majority of the biotech industry."  The NVCA noted that prior estimates regarding the cost of capital in the industry had been based on larger, publicly traded companies (primarily because data on cost of capital for venture capital funded companies is proprietary and therefore not accessible to the academic community; the NVCA notes that Professors Cockburn and Lerner were given "unprecedented access to proprietary venture capital databases" for the purposes of their study).  Moreover, the NVCA argues that because "the biotechnology industry is overwhelmingly comprised of small, private, venture capital (VC) funded, entrepreneurial companies, . . . conclusions about how a biosimilars system will affect innovation in this sector cannot be drawn directly from experience with Hatch-Waxman in the pharmaceutical sector."

In explaining the link between cost of capital and investment in innovation, the NVCA states that:

Since the goal of any FOB system is to produce lower prices for biologics, then such a system will reduce the flow of earnings from a biologic to investors.  If the reduction in the expected flow of earnings reduces the value of the earnings stream below the 'cost' of inventing the drug, investment in this area of innovation will ultimately cease[.]

As a general rule, investments are made if the expected 'return on capital' is higher than the 'cost of capital'.  More importantly, investments are not made if the return is less than the cost.  If the FOB legislation has the intended result of reducing the stream of earnings from a future drug, the key question is whether the value of that 'return' has been reduced below the relevant investor's cost of capital, in this case the biotech segment of the venture capital industry.

The NVCA study indicates that the cost of capital for early stage biopharma companies is at least 20% -- or almost twice as high as policymakers have assumed.  In view of this result, the NVCA concludes that "the exclusivity period should be at least 12 years so that investors in innovation can exceed the [cost of capital] hurdle rate."  The NVCA notes that the cost of capital has been examined in other studies, including one conducted by economist Alex Brill, which "assumed a biotech cost of capital of 10%, based on publicly traded biotech companies, and determined that on average a 'data exclusivity' period of 7 years would permit an investor with an 10% cost of capital to make a positive return on its investment in the development of new biologics" (see "Former House Ways and Means Economist Claims 7-Year Data Exclusivity Period Is Sufficient").  The NVCA counters, however, that "7 years would not be long enough to clear the 20% hurdle rate for investing in early stage companies," and that a 7-year data exclusivity period would "drastically reduce such investments and thwart future innovation in a meaningful way."  The NVCA also notes that "[i]n its recent report on follow-on biologics drug competition, the Federal Trade Commission never even raised this question [i.e., whether the value of 'return' has been reduced below the relevant investor's cost of capital], let alone attempted to answer it."

The NVCA also takes the FTC report to task with regard to its conclusions concerning the role and importance of biologic patents in a follow-on biologics regulatory scheme (see "No One Seems Happy with Follow-on Biologics According to the FTC").  In particular, the NVCA states that:

With no abbreviated approval pathway today, biologics developers have little incentive to incur staggering development costs only to create me-too biologics that are marketed as merely "similar" to existing products with no opportunity for product differentiation.  The creation of an abbreviated approval pathway would change that -- it would create powerful incentives for biologics competitors to identify and exploit gaps in each others' patent portfolios that could be filled with "similar" products, developed at a fraction of today's costs.  In other words, "patent pressure" will increase by orders of magnitude -- pressure on originators to develop only those biologics that have the best patent protection, and pressure on subsequent competitors to tear down or design around these same patents.  Thus, it is by no means assured that a patent system that enables abundant biotechnology innovation today will continue to do so under a follow-on biologics system that incentivizes biologics competitors to invade rather than avoid each others' patent space, and to develop similar rather than different products.  The answer to whether reliance on patents alone is justified under such a new system allows no margin for error.

The NVCA also argues that the FTC report "glosses over the most relevant point with respect to patent protection for biologics under a biosimilars system," namely that follow-on biologics will not need to be identical to the innovator drug (as indicated by the term biosimilar).  Thus, in contrast with small molecule drugs under Hatch-Waxman, the NVCA posits that composition of matter patents will be less likely to protect innovator companies against biosimilars competition, arguing that "potent patent protection is much more easily avoided in the biosimilars context because the biosimilar developer has more design alternatives, i.e., greater opportunities to modify the innovator’s molecule in ways that avoid the patent but are still similar enough for abbreviated approval."  The NVCA contends that even if the FTC is correct in assuming that patent protection will be sufficient, providing 12 years of data exclusivity would be of no consequence since patent protection and data exclusivity run concurrently, and "[y]ears of experience under Hatch-Waxman has already demonstrated that existing patent barriers for small molecule drugs delay generic entry for 12 years."

Other notable findings of the NVCA study include:

• That 44% of VC investments in biotech result in either partial or total loss of capital.
• The VC fundraising rate for all sectors has declined by 50% in 2009.
• The VC biotech investment rate has declined by 75% in 2009.

Interestingly, in a related note, since OMB officials Peter Orszag and Nancy-Ann DeParle sent a letter to Rep. Waxman on June 25 stating that a follow-on biologics regulatory pathway providing a 7-year data exclusivity period would "strike[] the appropriate balance between innovation and competition" (see "White House Recommends 7-Year Data Exclusivity Period for Follow-on Biologics"), Rep. Eshoo's bill has picked up twenty additional co-sponsors (for a total of 127), while support for Rep. Waxman's bill has remained unchanged at 12 co-sponsors.

For additional information regarding the NVCA study, please see:
• "Cost of Capital for Early Stage Biotech Start-ups Found to be in Excess of 20 Percent," July 10, 2009 NVCA Press Release
• "The Importance of Evaluating the Cost of Capital for Early-Stage Biotechnology Ventures to Preserve Innovation," July 10, 2009 NVCA Executive Summary
• "The Cost of Capital for Early-Stage Biotechnology Ventures," PowerPoint presentation available at NVCA website

For additional information regarding this and other related topics, please see:
• "NCHC Sends Letter on Biosimilars to Senate Health Committee," July 9, 2009
• "Senator Kennedy Weighs in on Biosimilar Data Exclusivity Period," July 9, 2009
• "BIO CEO Provides Update on Follow-on Biologics Legislation," July 8, 2009
• "Follow-on Biologics in the News - No. 4," June 29, 2009
• "White House Recommends 7-Year Data Exclusivity Period for Follow-on Biologics," June 26, 2009
• "AEI Believes Advantages of Longer Data Exclusivity Period Outweigh Disadvantages," June 18, 2009
• "No One Seems Happy with Follow-on Biologics According to the FTC," June 14, 2009
• "Follow-on Biologics in the News - No. 3," April 27, 2009
• "Amgen VP Makes Case for Longer Exclusivity Period in Follow-on Biologics Legislation," April 22, 2009
• "Former House Ways and Means Economist Claims 7-Year Data Exclusivity Period Is Sufficient," November 20, 2008

Comments

[Norman]

If I understand correctly, the NVCA has released the results of the study and an executive summary, but it hasn't released the study itself. Is that right? I can't find the study on their website.

[Donald Zuhn]

Norman:

I could not find a copy of the study on the NVCA site, either. However, you can download a copy of a PowerPoint presentation that appears to have been prepared by Professors Cockburn and Lerner (the link for this document is entitled "Presentation," and it is located under the "Public Policy Highlights" heading on the NVCA homepage). Due to its length, I did not upload a copy to the post.

Don

[Carrie Catanzaro]

Would it be possible to provide links to the Ways and Means Economist Document and FTC Document? Might be more supportive of the arguement if all the data was available in detail for those of us who would like to read it. Thank you.

[Donald Zuhn]

Ms. Catanzaro:

Links to our posts on Mr. Brill's white paper and the FTC report were included in the post on the NVCA study (see posts entitled "Former House Ways and Means Economist Claims 7-Year Data Exclusivity Period Is Sufficient," November 20, 2008, and "No One Seems Happy with Follow-on Biologics According to the FTC," June 14, 2009), and links to Mr. Brill's white paper and the FTC report were provided in our posts on those reports (see http://www.tevadc.com/Brill_Exclusivity_in_Biogenerics.pdf and http://www.ftc.gov/os/2009/06/P083901biologicsreport.pdf).

Donald Zuhn