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Competition controversy

Without the economic reward of patents there is no incentive to research and innovate

books_hammer For the pharmaceutical sector, the dawn of 2008 meant a series of raids on the premises of several industry-leading stalwarts – the beginnings of a controversial EU inquiry into competition in the sector. In particular, the inquiry is seeking to examine the extent to which the patent system is used anti-competitively by originator companies. The final report is expected later this summer, but the Commission's preliminary report, published in November 2008, gave a clear indication of their uncompromising view.

Unsurprisingly, the pharmaceutical sector was far from backward in vocalising its views in the consultation period. Yet, although much has been made of their response, recent research by intellectual property (IP) specialist Marks & Clerk in its annual biotechnology report has shown substantial opposition from the biotech sector. Given its current funding crisis, biotech arguably has more to lose than its better established cousin, should the report's outcome prove damaging. Marks & Clerk's research was based on the responses given by 365 international biotechnology executives in a comprehensive survey into the state of play for the industry.

Nearly three-quarters of those who took part in the research disputed the Commission's key claim that the way the patent system is used unfairly favours originator companies over generics, with less than a quarter (23 per cent) of firms supporting patent reform that would enable generics to compete more easily.

The research also revealed concern over whether the Commission had any basis for investigating alleged anti-competitive practices in the first place. Just over half (51 per cent) felt that the pharmaceutical industry enquiry had no justification whatsoever.

The danger, in the view of 72 per cent of respondents, is that patent reform will result in the likely weakening of the system. The current economic climate is exacerbating this belief – 89 per cent of those who took part in the survey argued that current circumstances require, if anything, a strengthening of the system to reward innovation.

Moreover, the industry questions whether a rebalancing of the patent system in favour of generics will in fact help bring about a reduction in healthcare costs. Eight out of ten state that although reform in favour of generics would reduce healthcare costs in the short term, it would only undermine innovation and thus drug discovery in the long run. Even two-thirds of primarily generic companies supported this claim, indicating that the political desire to reduce healthcare costs should be tackled outside patent reform.

But politicians and consumers want cheaper drugs. As noted by Lord Justice Jacob, "before the invention of a new drug, we would willingly pay for it. After the risking and investment have produced a new medicine, there is a great temptation to say the price is too high". Yet for the Commission to focus on patents as an anti-competitive tool is somewhat obtuse, given that this is exactly the point of the system: granting time-limited monopolies to reward innovation. An expensive drug is better than no drug at all. Patents provide an essential economic incentive for research that would otherwise not take place.

Even if the outcome of the report proves more benign to originator companies than expected, there is a fear that poorly considered reform will have unintended consequences. Notably, most of those surveyed expressed a general lack of confidence in the Commission's attitude and understanding, with 84 per cent suggesting that the preliminary report demonstrated a lack of awareness as to the commercial realities facing the pharmaceutical sector.

On all the major points of the EU sector inquiry, Marks & Clerk's research revealed fierce disagreement – namely in the areas of: the average delay between patent expiry and consequent market entry by generic competitors; and the use of secondary patents and strategies of patent thicketing (overlapping intellectual property rights).

Generic entry
One possible way to reduce healthcare costs, as identified by the Commission, is to reduce the average time-lag between the expiry of a drug's patent and the subsequent market entry of corresponding generic competition.

The Commission notes that, in the period between 2000 and 2007, the initial price of generics entering the market was on average 25 per cent lower than the price set by originator companies prior to loss of exclusivity. It also notes that the prices for both drugs fall over time from the point of generic entry. Given that the average delay during this period was found to be "about seven months" (although for the most valuable products this figure drops to four months), the Commission's report calculates that savings of around €3bn would have been made had generic entry to the market been instant upon expiry of the originator's patent.

By contrast, the response from industry in Marks & Clerk's research was strongly opposed to this line of reasoning. Some 88 per cent suggested that the existence of this time-lag did not categorically indicate anti-competitive behaviour was at play. Interestingly, two-thirds of respondents working primarily within the generics subsector were similarly minded.

As it stands, the Commission's theoretical notion of instant generic entry is itself questionable, since biosimilars face similar obstacles to originator companies in terms of gaining marketing approval. Furthermore, no comparison was made by the Commission with the average time-lags in market entry across other sectors similarly dependent on patent protection.

Moves have been made recently to encourage earlier generic entry – in particular the '8+2+1' structure for data and marketing exclusivity and the entry into force of 'Bolar-type' provisions across the EU. These moves have probably been enacted too recently to have had an impact on the Commission's findings, and yet the EU report still fails to acknowledge how things may change without further intervention. The preliminary report admits that other factors may be at work with regard to the time-lag, yet it still remains to be shown that abuse of the patent system is a factor at all.

Secondary patents
The Commission's inquiry takes exception to the use, and perceived weakness, of secondary patent strategies. While acknowledging that it is "generally accepted that innovation is often achieved in incremental steps", the Commission suggests that patents relating to second-generation products are on occasion criticised as weak by other stakeholders, and only show a marginal (if any) improvement or additional benefits to patients.

The view of industry is again widely different. Eighty per cent of respondents to Marks & Clerk's research argue that secondary patents are vital to fostering and rewarding further drug development. As the Commission itself admits, drug development is more often than not incremental or uncertain in nature. As such, it is fair to argue that the widespread use of secondary patents reflects an essential commercial need to cover the sorts of risks R&D necessarily incurs.

Patent thickets
The EU inquiry also takes exception to the filing of numerous patents for the same medicine to form patent clusters or thickets. Documents gathered in the course of the inquiry confirm that an important objective of an originator's strategy is to delay or block the market entry of generic medicines.

Arguably, this critique fails to recognise the commercial reality of safeguarding IP protection and indeed the deployment of such techniques across all sectors similarly reliant on intensive R&D. This sentiment is reflected in the industry research findings, with 83 per cent of executives stating that singling out the pharmaceutical industry for its use of patent thickets is incoherent and unfair.

Medicines, especially the biologic therapies developed by biotechnology companies, are often complicated entities with various aspects and extending to particular methods of industrial production. Generally speaking, a narrower patent equates to stronger protection. The wider and less specific the net of IP protection, the more open the patent is to circumvention. This being the case, the logical commercial strategy is to acquire numerous narrower patents covering various specific features and techniques.

The same principle applies to other industry sectors reliant on patent systems, such as technology. Furthermore, it is far from clear how taking steps to undermine such techniques would increase the competitiveness of the sector or reduce healthcare costs in the long run.

The EU preliminary report illustrates its attack with a headline figure of an innovator company securing 1,300 patents for a single medicine. This figure has since been roundly dismissed as hyperbole – it appears that the Commission arrived at the figure by considering identical patents filed in each of the 27 member states as separate patents. Needless to say, examples such as this will only further fuel industry opinion that the Commission lacks the expertise required to conduct such an inquiry.

EPO opposition system
The EU report also questions whether the European Patent Office's (EPO) opposition system is unfairly weighted towards originator firms, finding that generic companies "prevailed in approximately 75 per cent of final decisions rendered by the EPO (including the Boards of Appeal) during 2000 to 2007, either by achieving revocation of the patent or by having its scope restricted".

This implies that originator patents are, as a rule, weak. Yet once again there is no appropriate comparison made with other sectors to suggest that the figure of 75 per cent is abnormally high. The argument is also undermined by the curious equivocation between revocation of a patent and restriction of its scope. A restricted patent is by no means an automatic defeat for the innovator company. The report fails to examine what proportion of those decisions, where the patent is merely restricted, subsequently lead to increased generic competition in the market.

It must also be remembered that any patent office is bound to grant bad patents, as they do not have the resources that a determined opponent or litigator can bring to bear. There are strategies currently in place with the aim of 'raising the bar' at the EPO, among them the imminent reform of the system for filing divisionals, as well as requiring a response to be filed to objections raised against Patent Co-operating Treaty applications entering the European phase.

Potential outcomes
While only nine per cent of respondents foresee a “radical” overhaul of the patent system resulting from the Commission's final report, the research finds that most of industry anticipates moderate reform. One in four believe follow-on patents will become harder to secure and nearly 30 per cent expect specific action to be taken against offending companies.

However, one point of agreement between respondents and the Commission centres on proposals for a single European Community Patent, with 80 per cent expressing support for such a proposal. However, it remains to be seen whether the inquiry will revive this long-awaited notion, with just 37 per cent expecting its creation will follow. A Community Patent would streamline and simplify the protection of healthcare products across European markets, but it would also carry the risk of a single decision opening up a market of 500 million people.

It is possible that the preliminary EU report was purposefully extreme, so as to render the final reforms modest by comparison and boost the chances of a broad consensus. It is reasonable to expect the force of originator opposition and the legal industry will outweigh that of generic competition, moderating the final outcome of the inquiry. Nonetheless, given their precarious position in the current economic climate, those within biotechnology are justifiably anxious as to what will result. It is down to policy makers to consider the impact of any reform, across the life sciences industry as a whole.

The Author
Dr Gareth Williams is partner at Marks & Clerk, patent and trade mark attorneys
To comment on this article, email

20th August 2009


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