Patrick Duxbury and Emma Tuck ask whether the increasing cost of drug development, and the declining numbers of drugs being approved, mean that Intellectual Property (IP) protection for life science products should be reevaluated.

According to the European Federation of Pharmaceutical Industries and Associations (EFPIA), by 2006 the cost of researching and developing a new chemical or biological product had reached on average €1,059 million ($1,318 million). Increasing regulation, price control, competition and challenges from generics are often cited as contributory reasons for the continuous and substantial increase in development costs. When you add to this the decreasing number of drugs being approved today, perhaps it's time to take a fresh look at the IP protection (in particular the duration of protection) given to pharmaceutical products.

A standard level of protection

The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) sought to even the playing field and ensure a standard level of protection for IP rights. In relation to patents, this included a minimum duration of protection for patents of at least 20 years. This is the basic starting point for the protection of inventions.

While a 20-year monopoly may at first glance appear to give a significant protection, it has long been acknowledged that medicinal or pharmaceutical products deserve extra protection. This was primarily driven by the lengthy time taken to bring a product to market in the pharmaceutical sector. This results from the long and highly regulated process of applying for and obtaining authorisation and approval to market. In Europe, Council Regulation (EEC) Number 1768/92 came into force on January 2 1993 and created a supplemental protection certificate (SPC) for medicinal products to compensate for the years lost as a result of obtaining regulatory approval, to give back to the patent owner more marketing time in which to sell their product and re-coup the costs of research and development before the patent expires.

An SPC (in respect of a product rather than the patent itself) is granted for a term equal to the period between filing of the patent and the date the first authorisation of the product in the Community is received, less five years. The SPC cannot exceed five years. In practice, this means that where the period between filing for the patent and obtaining the marketing authorisation is less than five years, no SPC is granted. Where the period is between five and 10 years, an SPC can be granted for the number of years it took following the fifth year after filing. Where marketing authorisation approval takes longer than 10 years, the SPC will be granted for the full five-year term. A similar system exists in a number of other countries, each having as their objective the need to compensate life science companies for the length of time taken to get a product to market.

Regulation (EC) 1901/2006 (aimed at developing medicinal products for paediatric use) provides for a six-month extension of the term of any SPC beyond the maximum five years if the requirements of the Regulation are met.

In addition, the sector has the benefit of data exclusivity. In Europe, Directive 2001/83 (as amended) provides that no data from the original marketing authorisation application of the reference product can be used by a generic company seeking to apply under the abridged procedure for the authorisation of generic product until eight years has elapsed from the date of authorisation of the reference product. The Directive provides that another two years must pass before a generic medicinal product can be placed on the market and a further one-year protection may be available if during the first eight years the holder of the marketing authorisation obtains an authorisation for one or more new therapeutic indications. This is known as the 8+2+1 rule and affords additional protection to innovators of new drugs separate from patent protection.

So far so good. On the face of it, the special nature of the life sciences sector is addressed in the particular IP protection provisions that apply. However, the cost of developing new drugs continues to escalate at the same time as the number of new drugs being approved for sale by the regulators has been falling. As can be seen from figure 1, within a period of about 30 years, the costs of research & development (R&D) have increased nearly 10-fold from $138 million in 1975 to $1,318 million in 2006. Further, according to EFPIA: "Of every 5,000 molecules tested, only 250 promising new substances will enter preclinical testing; 10 will enter clinical development and only one will be approved by the regulatory authorities and make it to the market.

Half the medicines that reach the final stage of clinical trials fall at that hurdle and once on the market, only three out of 10 marketed medicines produce revenues that match or exceed average R&D costs before losing patent protection."

An additional theory for the reduction in the number of new drugs being approved is that all the easy research areas have been cracked, leaving only the fruit on the very upper branches for picking in the future. These fruit are much more difficult and therefore costly to get at.

Why is this? One possible reason is increasing regulation in relation to medicinal products, combined with more risk-averse regulatory bodies. While vital to ensure patient safety, increasing regulation adds to the cost of drug development and shortens the effective life of patent protection. Figure 2 shows the number of new molecular entities being first launched worldwide from 1990 to 2006 (according to the Centre for Medicines Research International) and figure 3 provides an illustration of the length of time it takes to get a product to market and the remaining time a company has before protection expires.

Over and above this, once products are approved for market, most countries impose price controls to limit the maximum price of prescription medicines and the profits of their manufacturers. In the UK, there is the Pharmaceutical Price Regulation Scheme. In addition, we have the National Institute of Clinical Excellence (NICE), an independent institution that provides health guidance and evaluates new drugs to produce guidance on their use within the National Health Service (NHS). Any drugs recommended by NICE in its guidance must be funded and made available by the NHS within three months of publication of the relevant guidance. Having a product recommended by NICE for the NHS may be an aid in recouping costs of development but if a product does not make it onto the recommended list, this can provide yet another hurdle to pharmaceutical companies attempting to recover the costs of development. The difficulties could be said to be even more pronounced when it comes to biologics, which are in general even more costly and risky to develop. It is estimated that depending on the cost of capital, the break-even point for a biologic products does not occur until between 12.9 and 16.2 years after launch. The initial development stages can be unpredictable and even when a product makes it to trial stage, the results of animal trials cannot be relied upon as a good indicator of the effects that the same product might have on humans.

According to Henry Grabowski, of those products that manage to make it to clinical trials, only 30% succeed in those clinical trials. He suggests that as a result of the unpredictable process of developing biologics and the high rate of failure even in the later stages of development, it can be difficult to fund development of biologics unless a broad portfolio of products is maintained. With a larger portfolio, the likelihood of one of the products within the portfolio becoming a real success story increases. It is not all products within the product portfolio that make a biotechnology company profitable.

Only those one or two special products that become blockbusters make the company profitable by compensating for both the loss of other candidates at earlier stages and for the products that, notwithstanding the fact that they have made it to market, cannot generate profitable sales. Current patent measures were conceived years before biologics took off and did not take into account the peculiar complexities of this technical field. Generic products may only be similar to the original biological product and patents covering biologics are typically narrower than those for chemical compounds and so are more open to challenge from generics who find it easier to circumvent the original patent, though few generics companies have the ability to make biosimilars. Also, because of the high development costs of biosimilars, the price difference with the branded drug is likely to be less than for other generics.

A more recent factor affecting pharmaceutical companies' patenting and protection strategies is the European Commission's stance on antitrust law in an IP context. The AstraZeneca decision (Commission Decision of June 15 2005 (Case COMP/37.507 – Generics/AstraZeneca)) together with the Commission's continuing sector enquiry have left the industry facing a great deal of uncertainty over what it will be permissible for a company to carry out in its IP and commercial strategy, particularly when in a dominant position. The Commission's definition of the market in the AstraZeneca case seems to unfairly penalise the innovative company by creating a structure where the innovator that is first to market with a new class of drugs will inevitably be in a dominant position.

Potential solution: incentivising innovation

While the availability of patents, SPCs and pharmaceutical data exclusivity provide some protection for inventions in the life sciences sector (and thus incentivise research and development), many of the laws behind that protection were conceived many years ago and long before the state of the market today. Should the current protection measures in place be reevaluated to determine whether they compensate fairly for the cost and difficulty of pharmaceutical innovation? This of course raises additional questions about incentivising R&D in a general sense, not just in the life sciences sector.

Fairer protection for pharmaceutical innovation might be achieved by a uniform increase in the patent term for life sciences inventions. Although the TRIPs Agreement imposed a minimum patent term, there is no maximum imposed. This does not make the patent any less open to challenge but may compensate somewhat for the effective loss of some of the 20- year monopoly through complying with regulatory requirements.

The SPC regime does this to some extent but is it enough given the issues described above? If the basic term of the patent were to be extended, this could be done in tandem with an increase in renewal fees. As Mark Schankerman, professor of economics at the London School of Economics suggests, "raising fees substantially will help to weed out the low-valued patents". If the fees rose (more substantially than they now do) with the age of the patent, this would mean that more thought would be given to renewal and only those worth renewing would be maintained.

Small firms should not be adversely affected by such increases as it is presumed that a particularly valuable patent would generate sufficient revenue to cover the cost of renewal. The problem with the current patent system is that it does not distinguish between the relatively minor incremental invention on the one hand and the major breakthrough invention on the other. The one-size-fits-all approach does not, it could be argued, fairly compensate real breakthrough innovation. The special protections given to the pharmaceutical sector do not go far enough to recognise the special issues it faces.

One interesting solution is proposed by Schankerman. He argues that patent protection should be extended for inventions that bring a disproportionate benefit to mankind. He starts with the assumption that the more valuable patents are those for inventions that are or were most costly to develop. This he says only takes into account private value but does not factor in "the social value of innovation". He suggests that in not taking into account the social value, the most valuable patents for companies are not necessarily those providing the most benefit to society. If we were to distinguish between those patents with high and those with low social benefit and reward at a higher rate those that benefit the community to a higher degree, this better incentivises innovation. It may encourage greater investment in new technologies and drugs rather than in the development of small incremental improvements to an existing blockbuster drug or so-called me too products.

Of course, any proposed solution would need to take into account the realities of healthcare budgets. Health costs are rising year on year and governments are finding it harder and harder to meet the rising costs. Any increase in patent term would therefore have to be introduced as part of a package of measures that assist in balancing medicines budgets.

In reality, the pharmaceutical industry is finding its own solution to extending the protection its inventions receive. It has become common practice to seek to extend the patent monopoly of a medicine through filing numerous follow-on patents covering formulations of the drug, manufacturing processes, crystalline forms and the like. These thickets of patents of variable quality create uncertainty and divert resources into expensive patent battles. A potential benefit of a new proposal to extend the life of patents could be to replace or dilute the patent thicket approach with a longer more certain form of extension to the basic patent.

Time to review protection

Increasing cost of drug development, coupled with declining numbers of drugs being approved, means that it may well be time to review IP protection for life science products. While weighting reward to encourage pharmaceutical innovation in areas considered to be of greater social value sounds great in principle, the difficulty lies in finding a reliable method of evaluating social value, which may in fact not become apparent until several years down the line. That is not in itself a reason to avoid trying to find a system that does compensate fairly for the cost of discovery and development, recognising the benefit to mankind that many of these inventions bring.

Further reading

EFPIA, The Pharmaceutical Industry in Figures, 2008 edition

J A DiMasi and H G Grabowski, "The Cost of Biopharmaceutical R&D: Is Biotech Different?", Managerial and Decision Economics 28 (2007)

Centre for Medicines Research International Henry Grabowski, Nature, Volume 7, June 2008, pages 479 to 488

Mark Schankerman, Presentation at the International Association for the Protection of Intellectual Property, May 2008, London 

Published in Managing Intellectual Property in January 2009.