Intellectual Property Rights and Innovation Category

The cost and time required to develop new medicine can run into the billions of dollars and take over a decade. To protect their enormous sunk costs, pharmaceutical and biotech companies must be confident that competitors will not be able to launch copycat or generic versions of those medicines before they have been able to recoup their costs and make a profit. Intellectual property rights – limited terms of patent protection during which companies can market their products without competition – have been instituted to encourage investment in R&D intensive fields like drug development. MPT will discuss and explain the linkage between patents and other forms of intellectual property and incentives for medical innovation, and show how the “virtuous cycle” of patent expiration and innovation encourages companies to invest in new therapies while ensuring that consumers benefit from the wide availability of low cost generics.

The pharmaceutical industry - collectively and often individually - has tarnished its own reputation through unethical commercial practices such as off label promotions, bribery in China, covering up (or at best, not being as forthright as they might have been) safety concerns, and manufacturing problems leading to massive recalls. Besides creating their own problems, other players in the healthcare industry have pointed the finger of blame at pharma companies as a major cause of runaway costs.

Pharma companies are constrained in what they can say and how they communicate with key stakeholders such as the public or physicians. Whether they are marketing a particular product, or the company as a whole, they are limited by regulations and their message is likely to fall upon a skeptical (if not hostile) audience. Any attempt to get their own message out is undermined by the perception that they are greedy and self-serving.

While there has been increasing pressure for companies to publish all of their clinical trial data for some time, they can at least control the timing and method of its release. The publishing of data could be timed with the news cycle to enhance positive news and downplay anything that might harm the company's reputation.

Today, however, much of the data about marketed products is generated and stored beyond the control of the manufacturers, whose ability to manage their reputation is further weakened. As real-world evidence becomes more pervasive - and a more critical component of reimbursement decisions - control of that data will reside with payers, providers, and analysts more than with Pharma manufacturers.

Additionally, considering the abundance of unstructured and often non-validated data communicated about a product through "new media" such as health-care chat rooms, blogs, Facebook, and Twitter, it is easy to see how reputation management has become increasingly difficult for manufacturers to influence - let alone control.

Healthcare is one of the most popular topics discussed on the Internet. Chat rooms are full of patients, caregivers, and physicians discussing diseases, treatments, and side effects - all unregulated and often non-validated. While Pharma companies can monitor what people are saying, there's very little regulatory guidance on how they can and should participate. How should they be able to address misinformation? Do they have a duty to report side effects discussed in a chat room?

How Pharma companies manage their reputation in a world where the data is out of their control will be an increasing focus in the years ahead.

As a follow up to our post last week on Katherine Eban's disturbing article on Ranbaxy's massive fraud on the FDA, we thought we'd follow up with a closer look at the U.S.-India trade environment, particularly with regard to pharmaceuticals and intellectual property rights (IPR).

The U.S. runs an $18 billion trade deficit with India, of which approximately $4.5 billion (or 25 percent) is attributable to pharmaceuticals, primarily generic drugs. Although India is an attractive and growing market for U.S. companies, U.S.-based pharma companies have been hesitant to invest in India or to make more of their products available to Indian patients for fear that their IPR will be stolen by Indian companies - with the blessing of the Indian government and courts.

These concerns are not unfounded. In a May 2013 report from the U.S. Trade Representative, India was highlighted on the USTR's "Priority Watch List" for countries with weak IPR and enforcement.

While investors have been hoping for several years that India would strengthen its IP regime and begin to move up the pharmaceutical value chain by producing more innovative pharmaceuticals, it seems to be a case of one step forward, two steps back. The USTR notes that:

In many areas, however, IPR protection and enforcement challenges are growing, and there are serious questions regarding the future condition of the innovation climate in India across multiple sectors and disciplines. ...

In the pharmaceutical sector, some innovators are facing serious challenges in securing and enforcing patents in India. ...

The United States is concerned that the recent decision by India's Supreme Court with respect to India's prohibition on patents for certain chemical forms absent a showing of "enhanced efficacy" may have the effect of limiting the patentability of potentially beneficial innovations. Such innovations would include drugs with fewer side effects, decreased toxicity, or improved delivery systems. Moreover, the decision appears to confirm that India's law creates a special, additional criterion for select technologies, like pharmaceuticals, which could preclude issuance of a patent even if the applicant demonstrates that the invention is new, involves an inventive step, and is capable of industrial application.

The United States will also continue to monitor closely developments concerning compulsory licensing of patents in India, particularly following the broad interpretation of Indian law in a recent decision by the Indian Intellectual Property Appellate Board (IPAB).... In particular, India's decision in this case to restrict patent rights of an innovator based, in part, on the innovator's decision to import its products, rather than manufacture them in India, establishes a troubling precedent. Unless overturned, the decision could potentially compel innovators outside India - including those in sectors well beyond pharmaceuticals, such as green technology and information and communications technology - to manufacture in India in order to avoid being forced to license an invention to third parties.

In other words, India is clearly maintaining policies designed to bolster its domestic generic pharmaceutical industry profits at the expense of foreign competitors and IPR.

When the patent for Novartis' leukemia drug Glivec was overturned, for instance, Novartis was already giving away, for free, supplies that met 95% of the Indian oncology market, selling just 5 percent of its product to the small sliver of insured or affluent Indians that could afford pay a higher price or co-pay for the drug. That's hardly a record of profiteering on human misery.

Indian courts have also overturned patents on drugs like Glivec, Bexxar, and Viread.

At the end of the day, Indian generic companies don't subsist on charity. Indian companies make billions in profits from sales to customers in other affluent and mid-market nations, including the U.S. (about 40% of all pharmaceutical Indian exports), Latin America, and the European Union. Wealthy country taxpayers also underwrite the Indian industry, since 70% of the drugs purchased through international aid programs come from India.

Because generic drug companies don't have to conduct clinical trials to prove that their products are safe and effective, producing generic drugs for export is an enormously profitable business, allowing generic drug companies like Ranbaxy to become large multinational companies in their own right (Ranbaxy currently is the 9th largest drug company in the U.S.; overall, Indian exports around $11 billion in drugs annually.)

As the Ranbaxy case shows, however, the sheltered treatment of Indian generics firms like Ranbaxy from domestic regulators and international aid groups appears to have led to a culture of complacency, entitlement, and greed. As Eban writes,

[Ranbaxy's own] confidential report laid bare systemic fraud in Ranbaxy's worldwide regulatory filings. It found that "the majority of products filed in Brazil, Mexico, Middle East, Russia, Romania, Myanmar, Thailand, Vietnam, Malaysia, African Nations, have data submitted which did not exist or data from different products and from different countries ..." The company not only invented data but also fraudulently mixed and matched data, taking the best results from manufacturing in one market and presenting it to regulators elsewhere as data unique to the drugs in their markets.

Sometimes all the data were made up. In India and Latin America, the report noted the "non-availability" of validation methods, stability data, and bio-equivalence reports. In short, Ranbaxy had almost no method whatsoever for validating the content of the drugs in those markets. The drugs for Brazil were particularly troubling. The report showed that of the 163 drug products approved and sold there since 2000, only eight had been fully and accurately tested. The rest had been filed with phony data because they had been only partially tested, or not at all.

No corner of the globe was untouched by Ranbaxy's fraud - including drug's purchased by the World Health Organization's antiretroviral programs in Africa.

In other words, Ranbaxy fell into the trap that all domestic industries that are shielded from international competition eventually fall into: shoddy quality, bloated profit margins, and negligent management.

Competition is the best solution to this problem. Large Western pharmaceutical companies are increasingly recognizing that there is a business and a moral case to be made in pricing both new products and branded generics at prices that are affordable in many developing nations.

Partly, this is because the market for their products in wealthy countries is saturated, with sales flat or declining (thanks in part to patent expirations, the total value of the U.S. prescription drug market actually declined in 2012, according to IMS). Not only does the developing world represent a new sales and profit opportunity, Western companies can compete on quality - backing up, with their brands, the quality of their product in markets where fake or substandard products routinely sold to patients.

Broadly, Western companies are also making much better efforts to expand access to their newer products. GlaxoSmithKline, for instance, caps prices of its products in 49 of the world's poorest countries at 25 percent of their developed world prices.

GSK and Merck have also pledged to make their rotavirus vaccines available to developing countries at sharply reduced prices through the Global Alliance for Vaccines and Immunisations (GAVI). Gilead, a leading innovator in HIV/AIDS either sells its life-saving AIDS medicines at little or no profit in poor countries, or licenses them (as in the case of South Africa) to local producers who sell them at affordable prices.

How does this relate to intellectual property rights and Ranbaxy's fraud?

Strong IPR regimes in developing countries - including India - will encourage large Western firms to expand access and sales even more broadly in developing markets.

Protecting IPR would also open India's domestic market to more foreign direct investment, injecting the much-needed expertise, technology, and adherence to international regulatory norms into India's pharmaceutical industry. This would be a win-win, for India, which would be able to raise the quality of its generic products while also expanding into the production of branded drugs.

Generic companies that make excess profits selling substandard drugs are the only companies who have anything to fear from greater competition. Indian patients would benefit from improved access to higher quality, but still affordable generic and branded medicines.

Ironically, regulators in the U.S. and EU - when they pay attention, as they likely will now - already have enough muscle to police Indian companies. It is the world's poorest countries, where regulation is weakest, who have the most to gain from bringing international regulatory and IPR standards to bear on Indian manufacturers.

India won't likely get serious about fixing its lax regulations and weak IPR restrictions until Congress and the Obama Administration signal that the status quo is unacceptable, given the risk to American patients. And if they don't, America should look elsewhere for high quality generic drugs.

You have probably heard of the Indian Supreme Court's ruling regarding Novartis' Glivec patent in a case that was supposedly a struggle between public health interests and intellectual-property rights. In essence, the Indian Supreme Court said, "Patents? We don't need no stinking patents."

The argument of some is that intellectual property rights lead to expensive drugs, which prevent appropriate patients from taking their medicines. Weaken the intellectual-property protection and drugs become cheaper, resulting in more patients being treated and better public health. But is this true?

What if a drug company charges too high a price for a drug like Glivec? If Novartis charges too much, Novartis won't make any money because it won't have any customers and it is hard to stay in business without customers. Companies have a strong built-in incentive to price their medicines appropriately. Because of this, drugs are usually plenty cheap for poor people in India. Novartis reports that 95 percent of patients in India receive Glivec free of charge. You cannot get much cheaper than free.

What weakening intellectual-property rights does in the short-term is make drugs even cheaper because there is more competition from producers. What this does in the long-term is dissuade drug companies from investing in the research and development that will give us tomorrow's miracle drugs. Why invest a billion dollars if you have no hope of getting a return on your investment? Pharmaceutical companies are dedicated, but they are not stupid. So to prevent five percent of its population from paying "a high price" for Glivec, the Indian Supreme Court has created a situation where there will be fewer Glivecs in the future.

Of course, the pharmaceutical industry is a global industry and the return on research and development from other countries, notably the United States, still ushers many new drugs to market. Where does this leave India? As a free rider. India is trying to take advantage of the R&D that you and I pay for.

It is in everyone's interest to give drug companies an adequate incentive to invest in new drugs. To do so, drug companies must be able to price their drugs well above production costs to a large segment of customers to cover the expense of R&D. However, each individual government's narrow self-interest is to seek a low price on drugs--closer to the manufacturing cost--and let people in other countries pay the high prices that generate the return on R&D investments. Each government, in other words, has an incentive to be a free rider. And that's what India is doing.

This is not that complicated. Bandy about concepts like public health and people lose their ability to think clearly. As a thought experiment, take anyone who cheered the Indian Supreme Court's ruling--like The Times of India--and turn their very arguments back on them. Would The Times of India invest money in reporting the news if anyone could take its stories and distribute them for free? No. But it would be fun to try and get a "cease and desist" letter from The Times' lawyers. The Times believes that it owns its stories just as much as Novartis owns Glivec. There is no difference, and if you take away the ownership, you take away the reason to invest. And that hurts us all.

Last Friday, the Supreme Court decided that it will review the pending FTC v. Watson Pharmaceuticals case that deals with the controversial "pay for delay" practice. The way it works is that brand name drug manufacturers pay a sum of money to generic manufacturers to delay the production of generic versions of brand name drugs. On its face, it certainly appears to be anticompetitive - a company is using its financial resources to keep others out of the market - not very different from forming a trust/monopoly. If it were that simple, however, this issue would have likely been resolved years ago.

The FTC's argument is as expected:

These drug makers have been able to sidestep competition by offering patent settlements that pay generic companies not to bring lower-cost alternatives to market.  [They] block all other generic drug competition for a growing number of branded drugs.  According to an FTC study... [they] cost  consumers and taxpayers $3.5 billion in higher drug costs every year.

The response of the pharmaceutical industry, however, is a bit more nuanced and presents an interesting dilemma - the official response is that the attempt to ban pay for delay settlements presumes that such payments are always anticompetitive, and as such ignores the "scope of the patent" rule, which makes an exception for payments that don't exceed the patents exclusionary potential. These should be important considerations for the court, but there are other, economic reasons for the frequency of pay for delay settlements.

An important consideration is that the effective life of pharmaceutical patents has markedly fallen over the past several decades. A drug patent is valid for 20 years in the U.S.; however, most companies have a much lower "effective" life for their patents because of the time spent in development and receiving regulatory approval. While in the 80s the effective patent life hit a high of around 14 years, by the mid-90s it fell to around 11 years - compared to products in industries with no regulatory approval which have an effective life of around 18.5 years. This means that pharmaceutical companies are pressed to at least break even on a new drug in a shorter span of time; while patent law allows companies to recoup up to 5 years of patent life lost during drug testing and FDA review, this is capped (arbitrarily) at a maximum of 14 years.

That effective patent life has fallen, leads to one of the reasons for the fall in patent life - the Hatch Waxman Act of 1984 that allowed generic drug manufacturers to file a claim against a patent prior to its expiration. Though the law greatly increased the number of generic drugs available to consumers (a huge financial benefit), it helped set the stage for protracted patent litigation between generic manufacturers and brand name innovators - with generics having little to lose (since they haven't started manufacturing) and brand name companies having a chunk of their business on the line. Pay for delay should be seen as a natural response to the economic conditions created by the law, the inherent uncertainties of litigation, and as a vehicle for less expensive settlement of patent disputes.

Another more nuanced point should be made - it is likely that the gains from pay for delay are priced into brand name drugs. That is, with a ban on pay for delay, the prices of brand name drugs would likely go up during the effective patent period. Thus, the FTC's claim that pay for delay practices cost consumers $3.5 billion annually should be taken with a grain of salt as they seem to focus on the increased cost of not having generic drugs on the market sooner, without looking at the potential change in costs of other brand name drugs as innovators increase prices to compensate for an even shorter (potential) effective patent life.

This shouldn't be seen as an outright defense of pay for delay - it certainly appears to be highly anticompetitive. However, rather than more lawsuits, legislative remedies may help to ameliorate the situation, especially if it improves incentives for innovation in the industry, which is the point of patents to being with.

For instance, if the cap on restoration time to patents were to be lifted (or extended) a good portion of the incentive for pay for delay would potentially disappear. On the regulatory side, if the FDA streamlined clinical trial requirements it would reduce total development costs and time, thus increasing effective patent life without lifting the cap.

What will the court decide? It's hard to say. Whatever the decision, it will likely affect not only drug companies, but consumers and incentives for future innovation.   Recognizing the trade-offs is the first step in developing a good solution.

My article discussing the drug company KV Pharmaceutical and its drug Makena was published today by the Library of Economics and Liberty. Here's the blurb:

Since 1938, the Food and Drug Administration has required that pharmaceutical drugs be proven safe before they are allowed to be sold. In 1962, Congress added a requirement for proof of efficacy. So you would think that the FDA would be a strong enforcer of those requirements, right? Well, not in one case. Despite the law, the FDA, pressured by Congress, refused to enforce the standards on companies that made one particular compound. Thus, via a bait-and-switch tactic, the FDA pushed the only company actually following the rules into bankruptcy. Read on.

This decision came down from the federal court of appeals last week, and appears to have largely tracked expectations in terms of Myriad's patent being upheld.


For a very nice, short, non-technical summary of the narrow grounds of the case, see Derek Lowe's always interesting and informative blog, In the Pipeline. (Is he moonlighting as a patent lawyer on the side?)

As for the long term implications of the decision for the personalized medicine industry, see this helpful analysis from the Genomics Law Report:

Looking ahead, it appears increasingly unlikely that Myriad's denouement, when it finally arrives in 2013 or 2014, will produce a significant effect one way or the other on either Myriad or the personalized medicine industry. We think this is likely to be true regardless of the litigation's substantive outcome.

For Myriad, win or lose in court, its challenged patents will expire by the end of 2015. But the company's additional patents (the litigation involves only a small minority of Myriad's overall BRCA portfolio), its decades of experience as the sole provider of clinical BRCA diagnostic testing and its proprietary database of BRCA mutation information should allow Myriad to comfortably maintain its advantage in the marketplace against would-be direct competitors of clinical BRCA diagnostic testing.

More broadly, competition for single-gene diagnostic providers like Myriad is expected to increase thanks to a growing cohort of companies deploying next-generation sequencing platforms to develop multiplex or whole-genome diagnostic and interpretive products. The price for these broad-based products is expected to rival what Myriad and other similar companies currently charge to analyze only one or two individual genes. And the technology employed by these companies - which include Genomic Health, Foundation Medicine, GenomeQuest, Ingenuity, Personalis, Silicon Valley Biosystems and many, many others - may very well invent around any Myriad-style gene patents on isolated DNA sequences that manage to survive both legal challenge and patent expiration, although that proposition has yet to be tested in court.

So Myriad's patent will be upheld, but it's due to expire in a couple of years, and new technologies that look at multiple gene and/or gene-protein interactions will likely prove to be very powerful (and potentially superior) competitors to the incumbent's BRCA test.

Still, we haven't heard the final word from the Surpreme Court on the topic yet.

KV Pharmaceutical Co. developed a version of hydroxyprogesterone caproate with the brand name of Makena. After investing in the drug's development and successfully receiving the desired FDA approval and seven years of marketing exclusivity as an orphan drug, KV priced Makena at a level that would have been reasonable for a such a product if it were completely new. Unfortunately, compounding pharmacies had been charging a price that was one one-hundredth of Makena's price for unapproved hydroxyprogesterone caproate and so KV drew scrutiny from Congress.

The FDA had laid out a deal that KV accepted. Those companies that gave the FDA what it wanted by putting their "outsider" products through the FDA's expensive, risky, and lengthy approval process would be rewarded with seven years of marketing exclusivity. KV was successful at this task and thought it had received its prize. However, under political pressure, the FDA effectively made a mockery of the deal by refusing to take enforcement actions against the remaining compounding pharmacies.

I guess marketing exclusivity isn't what it used to be as the FDA showed that its rules are pliable and subject to the political winds. KV played by the rules but Congress and the FDA didn't oblige. The laws of economics, though, aren't so whimsical and KV has realized that it paid a premium price to develop what is effectively a generic product. Struck by a stark financial future, KV has now filed for Chapter 11 bankruptcy protection. I assume that other companies won't be as credulous.

The U.S. Court of Appeals for the Third Circuit handed down a decision on Monday holding that reverse payment - or so-called "pay to delay" - patent settlement agreements between innovator and generic drug manufacturers may constitute antitrust violations. (The New York Times and Pharmalot offer their views at the links.) That decision sets up a Circuit split that now seems ripe for Supreme Court review, as the Federal Circuit, Second Circuit, and Eleventh Circuit appeals courts have previously ruled that, in most cases, these settlement agreements are not anticompetitive.

To review, current law provides incentives for generic producers to challenge potentially weak drug patents in court. But when faced with the uncertainty of patent litigation, brand manufacturers sometimes offer to settle the lawsuits by paying the challengers to drop the litigation. The patents remain in place that way. But as part of the settlements, the brand manufacturers usually agree to let the generics on the market a few years before the patents in question expire.

The Third Circuit case involves the use of a patented extended-release formula for coating otherwise unpatented potassium chloride drugs. In 1995, two different generic manufacturers (Upsher-Smith Laboratories and ESI Lederle) submitted generic approval applications with the FDA claiming that their formulations did not infringe the patent held by Schering-Plough. Schering sued, alleging that the generic products did in fact infringe. And shortly before the federal district court was set to issue an opinion, the parties settled. Schering paid Upsher $60 million for various things, including an agreement to drop the suit, and it paid ESI Lederle $15 million.

The Federal Trade Commission hates these deals (see here and here) and calls them anti-competitive because successful patent challenges would get generics to market sooner still. That assumes, however, that all or even most such challenges would succeed, a point I address below. Since 2003, federal law has required that any such settlement must be reported to the FTC for antitrust review. And the agency has challenged dozens of these cases in court, almost invariably losing.

In an interesting turn of events, both the FTC and several private plaintiffs (mostly drug wholesalers and retailers) filed separate antitrust challenges to the same Schering-Upsher and Schering-ESI settlements, alleging the identical violations. The FTC case was brought in the Eleventh Circuit; the private plaintiffs filed in the Third Circuit. The Eleventh Circuit ruled in 2005 that the agreement was not anticompetitive, and the Supreme Court refused the FTC's request to hear an appeal (In 2011, the high court also refused to hear an FTC appeal from a loss in a different case.). But organizing the class action in the Third Circuit took a bit longer, so that court has only now issued its opinion.

In the FTC's view, the mere fact that a brand manufacturer paid a generic company to drop litigation should be viewed as evidence that the patent was probably invalid. And the Third Circuit seems to have bought that argument hook, line, and sinker. The court cites two studies (one conducted by the FTC) finding that generic manufacturers prevail in over 70 percent of these patent challenges.

Both conclusions have serious problems, though. For example, the FTC figure combines many dissimilar cases, and the methodology for calculating the figure is never revealed. The second study, conducted by RBC Capital Markets, concluded that generics win 76 percent of cases "when you take into account patent settlements and cases that were dropped". That, of course, presumes the truth of the matter in question: that the generic would have won if there was no settlement. When you count only the cases examined in the RBC study that actually resulted in a court decision, the generic challengers lost a bit over half of the time. And in a slightly older study published in the Michigan Law Review, the generic won only 42 percent of cases.

Thus, prior to reaching a settlement, it is not at all clear whether the patent holder or the generic challenger would prevail. That's why, in six cases decided by the Federal Circuit (here), Second Circuit (here and here), and Eleventh Circuit (here, here and here) Courts of Appeals, federal judges concluded that "a court must judge the antitrust implications of a reverse payment settlement as of the time that the settlement was executed," to quote the Eleventh Circuit in a decision handed down in April of this year.

The mere fact that a patent granted by the U.S. Patent Office might actually be invalid does not mean that a brand manufacturer's decision to settle should be seen, ipso facto, as anticompetitive. Indeed, the Supreme Court long ago held that, even though the PTO does err on occasion, and many granted patents are later found to be invalid or far narrower than their holders imagine, patent holders are entitled to presume that their patents are valid until a court finds otherwise. Thus, federal courts have repeatedly concluded that reverse payment agreements should not automatically be suspect, but are only illegal in certain circumstances.

What's more, as U.S. Seventh Circuit Judge Richard Posner wrote in a 2003 district court decision (it's a long story why a circuit judge was hearing a district court case), these settlement should often be seen as PRO-competitive, not anticompetitive, because the patent holder generally agrees to let the generic product come to market several years before the patent would expire. (In the Schering case, the agreements gave permission for the generic drugs to be sold a full five years before the patent expiration.) In that regard, given what is known at the time of the settlement, these agreements actually tend to accelerate the introduction of generics, not delay them.

Moreover, Posner wrote that U.S. courts, including the Supreme Court, have long believed that out-of-court settlements are an appropriate way for parties to resolve litigation, and "a ban on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger's settlement options." He therefore argued that it was the proposed ban on settlements, not the settlements themselves, "that might well be thought anticompetitive."

The Third Circuit Court of Appeals rejected all of these arguments, and it agreed with the FTC and the private plaintiffs that an issued patent should not be entitled to a presumption of validity. Curiously, though, the Third Circuit also argued that it should not matter whether the patent in question was valid or not. All that mattered was the fact that the patent holder paid a challenger to postpone manufacturing a drug (regardless of whether the patent holder did or did not have the legal right to use the patent to do exactly that).

Decisions of various Circuit Courts are not binding on other Circuits, but they are seen as persuasive authority. So, in order to explain away the prior decisions by the Second, Eleventh, and Federal Circuits, the Third Circuit trotted out two decisions from the D.C. Circuit Court of Appeals in which that court held that settlements in which the generic agreed to postpone commercialization were found anticompetitive. But in those cases, the settlements did not resolve the underlying patent disputes, making them entirely unlike the case in question.

In the end, the Third Circuit's decision in this case is a house of cards built on faulty assumptions, circular logic, and inappropriate analogues. The only bright spot is the fact that, by establishing a circuit split (a condition in which two or more Circuit Courts of Appeals have adopted contradictory rules), the Supreme Court may well finally agree to take an appeal in order to settle the matter once and for all.

Given the overwhelming weight of evidence that these settlements are not typically anticompetitive, and the fact that nearly every Circuit Court of Appeals to hear such cases has found them to be lawful in most circumstances, one would expect the Supreme Court to validate the practice. That surely will not end the FTC's vendetta against reverse payment settlements. But it may well put an end to much costly and unnecessary litigation.

If the FDA didn't exist, pregnant women who wanted to reduce their risk of preterm birth could go to a pharmacy and have hydroxyprogesterone caproate, a synthetic steroid hormone, compounded at a cost of $10 to $20 per dose.

The FDA does exist and the reason, purportedly, is that we need the FDA to make sure that the medicines we consume have been proven to be both safe and effective. Not everyone agrees with this rationale, so the FDA needs the teeth of the law behind it. These laws say that only medicines that have been proven save and efficacious can legally be marketed. However, many drugs are used off-label (outside the approved usage) or are too old or too obscure to have been subjected to the FDA's requirements. To reward pharmaceutical companies that take such "square peg" products through the FDA's approval process, a multi-year marketing exclusivity is granted. The FDA encourages this behavior because these "square peg" products cast doubt on the whole rationale for the FDA.

Of course, the FDA's approval process takes time, costs enormous amounts of money, and is risky. Those companies that successfully negotiate the challenge and receive an effective monopoly act rationally and charge more, usually a lot more, than those companies that didn't incur the costs and had to face aggressive competitors.

These higher prices are normally concealed by circumstances, but sometimes they are present for all to see. When a new drug navigates the FDA approval process, there are usually no existing unapproved products with which to compare and hence the high price of the new drug has no standard of comparison. Occasionally, everything is laid bare for us to see.

Senator Bernie Sanders (I-Vt.) proposed legislation (S. 1138, "Prize Fund for HIV/AIDS Act") to make AIDS drugs cheaper in the United States. He would eliminate patents for AIDS drugs but give prizes to the companies that discover and develop them. His bill aims "[t]o de-link research and development incentives from drug prices for new medicines to treat HIV/AIDS and to stimulate sharing of scientific knowledge." I commented on this proposal in a previous blog.

Under this legislation, the U.S. government would fund the so-called Prize Fund for HIV/AIDS by an annual amount equal to 0.02 percent of the gross domestic product, or approximately $3 billion per year. According to Sanders, the total market for HIV drugs in the U.S. is currently $9 billion. Sanders' bill would therefore cut the funds available to pharmaceutical companies by a factor of three. Of course, these companies would save on sales and marketing expenses--they would no long market these drugs--but sales and marketing expenses for HIV drugs are relatively small compared to other drugs and someone--the government--would need to pick up the slack for educating physicians about the availability and proper usage of HIV medicines.

So in one bold stroke, to solve the problem that HIV drugs are "too expensive," Sanders would cut revenues by 67 percent. Why stop there? Why not make the prize fund mere millions or even thousand of dollars? Look at how much money we would save. "Here's your prize of $873, Gilead Sciences, for developing a new nucleotide reverse transcriptase inhibitor. Thank you."

NIH Director Francis Collins has made a centerpiece of his tenure the National Center for Advancing Translational Science (NCATs), an effort to "repurpose" compounds under patent by drug companies that have passed early stage clinical trials, and thus have at least a baselline record of safety in humans. The purpose of the initiative to to look for additional uses for the drugs, and then launch them through final confirmatory (Phase III) trials if they look like promising treatments for other diseases.

Here's some detail from the NCATs mission page:

The Center strives to develop innovations to reduce, remove or bypass costly and time-consuming bottlenecks in the translational research pipeline in an effort to speed the delivery of new drugs, diagnostics and medical devices to patients.

Good luck, Godspeed, and amen. Overcoming bottlenecks and advancing translational research tools that can improve the productivity of the drug development pipeline are sorely needed. And NIH is arguably best positioned to drive this effort forward, since it works with all the key players involved, and has a much bigger budget than the FDA - and the FDA is also plagued by conflict of interest concerns from Congress about its nascent role in facilitating new drug development.

Today, the NIH released more details about its efforts, and announced new partners:

The National Institutes of Health (NIH) today unveiled the details of its $20 million program for finding new uses for abandoned drugs--along with five more participating companies. The program's expansion brings to 58 the number of shelved compounds that academic researchers can test for new uses.

Discovering New Therapeutic Uses for Existing Molecules, announced in early May, is the first major initiative from NIH's new National Center for Advancing Translational Science (NCATS). The idea is to give academic researchers access to compounds that made it through safety testing but were dropped by companies for business reasons or because they didn't work on a specific disease. Initially, three companies--Pfizer, AstraZeneca, and Eli Lilly--offered to share 24 compounds.

Now Abbott Laboratories, Bristol-Myers Squibb, GlaxoSmithKline, Sanofi, and Janssen Pharmaceuticals have signed on, bringing the number of compounds to 58. NIH has posted a table of the compounds that links to one-page fact sheets about the drugs that include the mechanism of action and summary clinical results. NIH is also taking preapplications (due 14 August) for the program's 2- to 3-year grants.

Again, I hope that this work succeeds. But I'm also curious: What tools is the NIH using, or proposing to use, to identify new targets for old compounds that industry doesn't have already? Assuming that new targets are identified, how will the NIH address remaining safety and efficacy concerns - after all, companies will still have to run Phase II and Phase III trials for FDA approval, with an awful lot of unknowns still unknown about how the drugs will perform in the clinic. These concerns are all tractable, and the sooner they become so the better off we'll all be.

But here's the final problem: patents. Assuming that these drugs have already been through significant preclinical and early stage clinical testing, how much time is still left on the patent clock to take them through to FDA approval?

I'm betting that NIH's industry partners carefully chose products with significant patent time left on the clock, but it's still a big problem if your intent is to re-use not just a few dozen, but the hundreds of promising compounds out there with little or no patent time left that have never advanced far into clinical testing.

Beyond the NIH, Congress could give a big jolt to repurposing old compounds with basic safety data by offering market exclusivity for any drug (not FDA approved for another indication) that didn't have enough patent time left to justify commercial development. The MODDERN Cures legislation developed by the National Health Council would be a significant help in this effort.

It would lead many more small and large companies alike diving into their compound libraries looking for therapies to rescue, and incentize additional investments in new diagnostics to spur the process along. This would be a synergistic approach that would leverage the NCATs approach across the entire industry - and lead to many more potential successes.

Later this week -- possibly as early as tomorrow -- a bipartisan majority in the United States Senate is expected to vote in favor of S. 3187, the Food and Drug Administration Safety and Innovation Act, which among other things, reauthorizes the Prescription Drug User Fee Act of 1992. MPT readers will, of course, be familiar with PDUFA and what it does. But in an article published in yesterday's Washington Times, I called it "arguably the most important piece of health care legislation [most people have] never heard of."

Before PDUFA, FDA typically took two years or more to evaluate new drugs -- that's after they already had been through some 10 or so years of clinical testing. The net effect was that American patients were often the last to benefit from important medical breakthroughs. Since 1992, the PDUFA user fees have enabled FDA to hire new medical reviewers and improve its scientific capacity. More important, the average drug-approval period was cut in half, to just more than a year.

As I wrote in the Times:

"Ideally, individual firms should not have to pay user fees to fund regulatory oversight that is ostensibly for the public's benefit. But in an era of tighter federal budgets, Congress has given the FDA more and more responsibilities but not the additional revenue to fund them. Without PDUFA, the FDA's budget shortfall would mean fewer new medicines reaching the patients who need them. Reauthorizing the user fees is a second-best choice, but in the face of a slow economy and pressure to reduce the federal budget deficit, it seems to be the best available option."

As a libertarian, I generally oppose efforts to give the government more money. But let's face it: given all the responsibilities Congress has given the FDA, if we starve that federal agency of resources, we'd only be shooting ourselves in the foot. I'd prefer that FDA have far less power and fewer regulatory authorities. But until that day comes, we are better off with an agency that has sufficient resources to review medical products in a timely fashion.

The Food and Drug Administration Safety and Innovation Act (FDASIA -- let's pronounce it Fudd-Asia) not only reauthorizes the user fees for prescription drugs, but it also reauthorizes the medical device user fees first introduced in 2002, and it establishes new user fees to fund FDA review activities for generic drugs and biosimilars. But what is especially noteworthy about this year's reauthorization, known to insiders as PDUFA V, is that it incorporates very few additional "Christmas Tree" amendments - measures unrelated to the primary purpose of a bill that are added to "must pass" legislation.

Prior PDUFA reauthorizations, typified by 1997's Food and Drug Administration Modernization Act (FDAMA) and 2007's Food and Drug Administration Amendments Act (FDAAA), included dozens of amendments to the statutes regulating drugs, medical devices, and even foods. FDAAA, for example, introduced new advisory committee conflicts of interest rules, gave the FDA new post-approval recall authority, established a public database of clinical trials, and even changed the way the agency regulates the safety of pet food.

This year, congressional leaders succeeded in getting relatively clean bills reported out of the House Energy and Commerce Committee and Senate Health, Education, Labor & Pension Committee. It's not that the bills don't incorporate a few non-user fee related items. They do. But for the most part, this handful of additional items will help to streamline the drug and device approval processes by expanding eligibility for the Accelerated Approval pathway, permitting FDA to expedite the testing and review of "breakthrough therapies," and requiring the agency to solicit the views of actual patients when assessing the safety and benefits of medical products.

Other provisions provide incentives for the development of new antibiotics and orphan drugs.The bills also permanently reauthorize the Pediatric Research Equity Act (PREA) and Best Pharmaceuticals for Children Act (BPCA), which give FDA the authority to require pediatric testing of already approved drugs (which I oppose) and give companies that do pediatric testing an additional six months of market exclusivity (which I support).

One provision would also instruct FDA to issue a long-awaited guidance document clarifying the rights of drug and device manufacturers when promoting their products on the Internet (an issue I wrote about here). And the bills even soften the harshest effects of the FDAAA conflict of interest rules.

Arguably, the worst aspect of the House and Senate bills are one provision requiring the FDA to consider stronger warning labels on sunlamps and tanning beds and another intended to address the drug shortage problem that MPT contributors have written about here, here, and here. It's not that I think the drug shortage problem needs to be addressed, though. I just happen to think that the drug shortage provisions of the FDASIA will do extraordinarily little to solve the underlying problem.

All in all, this bill may be about as good as we could expect. So, it'll be a good day when the Senate and House pass the legislation, and when President Obama signs it into law.

Senator Bernie Sanders (I-Vt.) floated a creative proposal to make AIDS drugs cheaper in the United States. He would eliminate patents for some AIDS drugs but give a prize to the companies that discover and develop them. These drugs would then enter the generic market, where their prices would be closer to their manufacturing costs, meaning they would be much cheaper than they are today. In other words, taxpayers would largely pay the drug companies, not patients, insurers, or AIDS Drug Assistance Programs. Sanders' plan would largely shift AIDS drugs from being "private goods" to being "public goods."

It is in our interest to give drug companies a sufficient incentive to invest in new AIDS drugs. To do so under the current patent system, drug companies must be able to price their AIDS drugs well above production costs to a large segment of customers to cover the expense of research and development. Pharmaceutical companies charge American patients a high price for AIDS drugs while charging African patients a low price. Why? Price discrimination. Americans are generally rich and Africans are generally poor; most Africans couldn't afford a high price.

I'm not aware of Senator Sanders using this language, but he is essentially saying that AIDS drugs are, or should be, public goods. Public goods are things like parks and national defense that are generally provided by government (i.e., taxpayers) and made freely available to everyone, regardless of their ability to pay. These new generic AIDS drugs wouldn't be completely free, but they would be close to it.

I finally had a chance to read the Supreme Court's recent decision in the Mayo v. Prometheus Labs case, which invalided two patents claiming methods for analyzing blood test results to determine correct drug doses. The decision is likely to have substantial impacts on the drug, diagnostic, and biotech industries because it calls into question the validity of a huge amount of intellectual property that those industries rely upon.

My take is that the Court got this one right as a matter of patent law - though it's a closer call than many intellectual property skeptics have claimed. Here, I should note that some colleagues and I contributed to an amicus curiae brief to the Court urging the justices to find the patents invalid. Even so, the decision raises several new questions about scientific innovation. And it may be worth reconsidering the structure of our patent laws or finding another way to incentivize the very important research work that could become less common in the absence of market exclusivity for these kinds of discoveries.

So, what's the case all about?

In an earlier posting, I described how India is trying to become a free rider, gaining the benefits of drug development without having to share in the costs.

The Indian government violated the intellectual property rights of Bayer and Onyx by breaking Nexavar's patent and giving a new license to Natco Pharma, an Indian company, to manufacture and market a generic version of Nexavar in India.

Roche has been paying close attention and sees the writing on the wall. Roche just announced that it would launch rebranded versions of Herceptin and MabThera/Rituxan in India at lower prices. Roche will, of course, sell a higher volume of these products at the lower price, but it is clear that Roche primarily aims to avoid "compulsory licenses." Facing the prospect of earning nothing or something, Roche has chosen the latter.

The Indian government was upset at Bayer and Onyx for not supplying Nexavar (sorafenib) in India at a "reasonably affordable price." India was also miffed that Nexavar was imported into India, rather than being manufactured there. Instead of just stewing, India took action. The government broke Nexavar's patent with a "compulsory license" and gave a new license to Natco Pharma, an Indian company, to manufacture and market a generic version of Nexavar in India until Bayer's patent expires in 2021.

What's really going on here?

Many governments have monopsony power when buying pharmaceuticals--that is, monopoly power on the buyer's side--and they use this power to get good deals. These governments are, in effect, saying that if they can't buy a medicine cheaply, their citizens won't have access to it. This ultimatum has two aspects. One, if the price is "too high," the pharmaceutical company won't sell a single bottle in that country. And two, if the government feels its citizens really need that medicine, it will break the drug company's patent. This threatened violation of intellectual property rights can bring a seemingly powerful drug company into quick compliance. When faced with a choice between making nothing or something, most drug companies choose the latter.

It is in everyone's interest to give drug companies an adequate incentive to invest in new drugs. To do so, drug companies must be able to price their drugs well above production costs to a large segment of customers to cover the expense of R&D. However, each individual government's narrow self-interest is to demand a low price on drugs--closer to the manufacturing cost--and let people in other countries pay the high prices that generate the return on R&D investments. Each government, in other words, has an incentive to be a free rider. And that's what many governments, like India, are doing.

Prometheus gave man fire, thankfully he didn't charge every time man lit a match. Prometheus Labs in contrast wants to charge patients for a rule that says when to increase or decrease a drug in response to a blood test. Quoting Tim Lee:

The patent does not cover the drug itself--that patent expired years ago--nor does it cover any specific machine or procedure for measuring the metabolite level. Rather, it covers the idea that particular levels of the chemical "indicate a need" to raise or lower the drug dosage.

Even this is not quite right for suppose a physician notes that the patient's metabolites are within the range where a change in dosage is not necessary; although the physician takes no action she still has used the patent and thus must pay Prometheus Lab a fee or infringe.

We already have significant incentives for producing pharmaceuticals (and thus the instructions required to best use those pharmaceuticals), we support medical research through universities and non-profit hospitals, and there is plenty of opportunity to profit from the manufacture of tests. Will we really get enough additional innovation to justify the monopoly prices and deadweight losses when we enforce patents on medical rules? Remember, we have to pay the higher prices on all the rules not just the ones brought into being by the patent.

And if medical patents why not economic patents? Will Scott Sumner now patent a rule for adjusting the money supply in response to metabolites the futures market?

Patents like this are a logical consequence of the extension of patentable matter to software and business methods but extending patents to software and business methods has created huge legal costs without any increase in innovation.metabolism1.jpg

Most importantly, patents can reduce innovation and are especially likely to do so in fields where innovations build on innovations. In fields of cumulative innovation, previous patents owners become veto players who can threaten to holdup the new innovation unless they are granted a share of the proceeds. In theory, bargaining can result in an efficient outcome. In practice, it means lawsuits, delay, waste and reduced innovation.

Since a smartphone may rely on many thousands of previous patents, the smartphone industry has heretofore been considered a classic case of how too many veto players can impede innovation. But now consider human metabolism, one of the most complicated systems known to man (just a tiny fraction of that system is shown at right), and note that if Prometheus is successful in this lawsuit that any correlation in that system can be patented. This is a recipe for disaster.

Addendum: Scotus Blog has a roundup of links. See Launching the Innovation Renaissance (Amazon link, B&N for Nook, also iTunes) for more on patents and their problems. Hat tip also to E.D. Kain who writes:

The world, it appears, is determined to turn me into a full-fledged libertarian. What with SOPA, PIPA, the NDAA, software patent trolling, police violence, and now patents on how doctors provide treatment to their patients, it's becoming more and more clear how pernicious the law can be when it's designed for powerful special interests, national security hawks, and big corporations.

Cross Posted from Marginal Revolution.

Merck announced this week that it's opening a new R&D center in Beijing, with 47,000 square feet of labs and 600 employees. And this isn't just for pre-clinical research, but for everything from drug discovery to clinical trials. Reuters reports that Merck isn't the only company ramping up investment in China:

Aiming to take advantage of China's lower costs and supply of scientists, global drug makers, including Pfizer, Abbott and Novartis, have made big investments in Chinese R&D operations in recent years.

Merck, known as MSD outside the U.S. and Canada, will also team up with biotech companies and academic institutions to develop new drugs...

Beijing is home to several of China's top universities as well as the country's food and drug regulator, whose approval is needed for medications to be sold in the country.

Now, on the one hand, this is all to the good. As China and other developing nations like India become more wealthy, and modernize their own R&D base, drug regulations, and improve patent protection, they naturally become more attractive markets for drug and biotech companies.

But this should also be a warning to U.S. policymakers and regulators: the R&D and manufacturing base of the biopharmaceutical industry doesn't have to stay in the U.S. It can - and will - move to other markets that offer a more attractive "ecosystem" for life sciences innovation.

To the extent that U.S. becomes less competitive in the biopharmaceutical sector, we'll lose those high paying jobs and tax revenues. And, to add insult to injury, because the U.S. taxes global profits of U.S.-based companies, American multinational firms are much less likely to repatriate profits generated abroad and reinvest them at home. In short, money and jobs that flow abroad are more likely to stay abroad.

This is exactly the point that former CBO Director Douglas Hotlz-Eakin and I make in our recent City Journal article, Liberating Medicine's New Frontier.

America is, and will likely remain for some time, the global leader in biomedical innovation. Of course, Detroit used to be the automobile capital of the world too.

Lipitor's domination of the cholesterol market ended when the blockbuster drug fell off the patent cliff on Wednesday. Less-expensive generics will eventually begin to flood the market, all but eliminating Pfizer's monopolistic share. But what would happen if Pfizer now made Lipitor available at a price differential so great that no one could afford not to continue to take it?

Let's start with the challenge of the patent cliff, the value of the Lipitor brand and the impact that Lipitor has had on the people who have been able to manage their cholesterol because of it. During the days Pfizer continued to support the patent-protected drug from a sales perspective, savvy insiders knew that "even a monkey could sell Lipitor." So why let Lipitor be substituted by a generic alternative? Why not let loyal Lipitor customers (patients and prescribing physicians) continue to take advantage of its enormous clinical value...and at a price point that can't be resisted?

A Federal Trade Commission report on so-called pay-to-delay drug patent settlements that was released this month has given new life to congressional efforts to ban the deals in which brand manufacturers pay potential generic competitors to drop patent challenges. A CBO analysis suggested that a ban could save federal health programs $2.68 billion over 10 years by getting cheaper generics to market sooner. And Democrats are pushing the deficit reduction super committee to include the ban in its proposals. In practice, though, a ban could actually delay the introduction of more generic drugs than it would accelerate, resulting in higher drug prices.

Current law provides incentives for generic producers to challenge potentially weak drug patents in court. But when faced with the uncertainty of patent litigation, brand manufacturers sometimes offer to settle the lawsuits by paying the challengers to drop the litigation. The patents remain in place that way. But as part of the settlements, the brand manufacturers usually agree to let the generics on the market a few years before the patents in question expire.

The FTC hates these deals and calls them anti-competitive because successful patent challenges would get generics to market sooner still. But that assumes that the majority of patent challenges would actually succeed, which isn't borne out by the data. Just over half of the drug patent cases that make it all the way to a court decision fail. And there is no evidence that settled cases would have been more likely to result in patent invalidation.

The FTC already has authority under existing antitrust laws to block patent settlements where evidence indicates consumers would be harmed by higher prices. But the agency loses many of those cases because the evidence isn't on their side. And, in the handful of cases where the FTC succeeded in blocking a settlement and forcing the litigation to go forward, courts more often upheld the patents than ruled them invalid.

As it turns out, settlements almost always result in a generic product reaching the market before the patent's expiration -- something a ban could not deliver. So, banning settlements altogether and forcing these cases into court would prolong the amount of time the typical brand drug enjoys a monopoly with no generic competition. That's why federal courts have so far refused the FTC's pleas to make these settlements per se illegal. In one decision, U.S. Seventh Circuit Judge Richard Posner wrote that "a ban on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger's settlement options." He suggested that it was the proposed ban, not settlements, "that might well be thought anticompetitive."

Collusion between competing firms in any industry often raises red flags that suggest anticompetitive, anti-consumer behavior. But at least in these pay-to-delay cases, cooperation among brand and generic firms does seem to promote overall consumer welfare.

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