Characteristics of the Pharmaceutical Industry

Bringing a new drug to market requires the investment of a great deal of time and money in research and development (R&D).  The cost of developing a new drug by a major pharmaceutical company often ranges from USD 4 billion to as high as USD 11 billion1.  As shown by the Pharmaceutical Research and Manufacturers of America ("PhRMA" ) report, of 5,000-10,000 compounds under research, only one will be approved by the FDA and be brought to market.  Thus, developing drugs is risky business indeed.

The R&D stage for a new drug includes: drug discovery, efficacy confirmation, preclinical work, clinical trials (phase I, phase II and phase III) and FDA review.  Through these stages, the company can obtain market approval in order to bring a new drug to market.  On average, it takes 10-15 years to discover and develop a new drug, as indicated by PhRMA.  Therefore, compared to other industries, the pharmaceutical industry is very research-intensive, and the return-on-investment for a drug often doesn’t start for a decade or more after the research begins.

Incentives for Developing New Drugs

Protecting the intellectual property of new drugs is complicated but essential for pharmaceutical companies.  In this respect, patents are an important method to provide intellectual property protection.  However, patents, by themselves, do not always sufficiently create a favorable environment to encourage drug development.  In light of this, the Hatch-Waxman Act was enacted in 1984 to allow for the patent right term to be extended under certain conditions and to provide for a new form of protection known as “Data Exclusivity.”

  1. Patent – refers to an exclusive right to prevent others from exploiting an invention without the patentee’s consent.  The patent term for an invention, such as a drug, is 20 years from the filing date.  However, even if a company receives a patent for a drug, the company cannot bring it to market without FDA approval.  As mentioned, clinical trials are needed in order to pass the FDA review.  But, years are needed to conduct such clinical trials, for example, 6-7 years.  Therefore, by the time the drug hits the market, the patent may only have a few years of protection left.  To address this problem, a patent-term-extension mechanism was created in order to compensate for the time lost in obtaining market approval, such that the drug innovators remain incentivized to develop new drugs.
  2. Data Exclusivity – refers to protection of drug clinical data submitted to the FDA for market approval.  Under the protection of data exclusivity, such data cannot be relied on by other companies for a limited period of time for obtaining market approval without the holder’s authorization, though other companies are not precluded from generating their own data to obtain market approval.  For example, in the US and Taiwan, a new molecular entity ("NME") is given five years of date exclusivity.  However, after those five years are up, other companies can apply for market approval using the same data, and thereby avoid the costs associated with generating their own data.  Therefore, such data exclusivity doesn’t ultimately prevent other companies from obtaining market approval, but it can slow them down a bit to incentivize the original holder.

The Competition and Cooperation between Patents and Data Exclusivity

  1. The Patent System is limited

 In view of the high cost of developing a new drug, most drug innovators make determinations as to the likelihood of obtaining patents before further investing the time and money for the clinical trials.  If they conclude that it is likely that a patent will be granted, they will generally apply for patent protection in order to get monopolies in the market to recoup their investments more quickly.  However, if patent approval seems unlikely, they usually won’t invest the considerable time and money needed to conduct multi-phase clinical trials.  As a result, potentially beneficial drugs may never come to market.

  1. Limitations Resulting from Patentability Requirements

In order to meet the novelty requirement, a patent application for a drug is typically filed as early as possible.  However, such a drug patent application may be denied for various reasons, including: the early research results for the drug may fail to prove its therapeutic efficacy, and thus fail to meet the utility requirement; the earlier disclosure of original failed research can preclude patent protection due to the novelty requirement; or a minor improvement to an existing drug may not meet the non-obviousness requirement.

  1. Exercising Data Exclusivity

Due to the limitations resulting from patentability requirements, such as utility, novelty and non-obviousness, as mentioned above, companies may forgo pursuing patent protection for some new drugs.

Furthermore, the progress in developing NMEs has slowed down, while drug development expenditures have increased significantly.  This trend results from multiple factors.  One key factor lies in needing clinical trials in order to pass FDA review.  Another key factor is that it is getting harder and harder to find new precursor drugs.

In such an environment, making continued improvements to existing drugs has become a major strategy for many drug companies.  Even though the technical progress involved with such improvements might not be significant enough to allow patent protection, such improvements can still bring important benefits to patients and, in turn, have profit potential.

In cases like this, the data exclusivity mechanism fills the need, such that potentially beneficial drugs—though ones that may not be eligible for patent protection—can be given protection by another kind of intellectual property and brought to market.  Therefore, for drugs involving improvements that are not significant enough to allow patent protection, seeking data exclusivity may be the way to go.

Data Exclusivity in Taiwan

According to Article 40-2 of the Pharmaceutical Affairs Act, an NME is given five years of data exclusivity in Taiwan.  In order to be eligible for data exclusivity, market approval must be sought through Taiwan's FDA within three years from the NME initially being approved for marketing in any other country.  Although other generic pharmaceutical companies may apply for market approval after three years of data exclusivity by referring to the same data, market approval for other generic companies won't be issued until the exclusive five years are up.  Therefore, the provision of Pharmaceutical Affairs Act provides a balance between rewarding the holder of data exclusivity and simplifying the procedure for other generic companies to obtain market approval for the same drug.