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Strong worldwide patent protection is essential to spur pharmaceutical innovation. The painstaking research and testing needed to discover and develop a new drug requires a substantial investment. Once a drug is discovered and developed, it is often relatively easy to reproduce. By protecting intellectual property, patents provide research-based pharmaceutical companies with a necessary period of market exclusivity to recoup their huge investments and generate the capital necessary to develop the next generation of medicines and vaccines. Without patent protection, it is highly unlikely that a company would be rewarded for its invention—or, more importantly, that patients would receive many new medicines.

A survey based on a random sample of 100 U.S. firms in different industries confirms that patent protection is essential for companies investing in pharmaceutical R&D.¹ Drug companies indicated that 65 percent of their medicines would not have been developed or commercially introduced if patent protection were not available—a much higher figure than reported by any other industry [Figure 8-1]. In other industries, technological advances may be more difficult and costly to copy or companies may rely on trade secrets rather than patents to compete in an environment of rapid technological change.

The U.S. Constitution underscores the importance of patents. In the 4,486 words of the original Articles of the Constitution ratified in 1789, the only mention of a "right" is the clause granting inventors and authors the exclusive right for a limited period of time to their writings and discoveries. More recently, in 1995, patent rights were recognized and harmonized internationally in the World Trade Organization's TRIPS Agreement. Among many other provisions, TRIPS established an international minimum standard for patent term length of 20 years from the time the patent application is filed.

Pharmaceutical patents do not provide a monopoly for treating a disease. They only confer a right to prevent others from producing and selling the specific patented medicine without the permission of the patent holder. Other manufacturers are free to produce and offer different medicines to treat the same disease. Patents also provide for the disclosure and publication of information about the patented products. Thus, patents are a kind of contract in which an inventor is granted a limited period of exclusivity to make and sell an invention in exchange for agreeing to disclose data about the invention, which encourages the dissemination of information and continuing scientific progress.

In the United States, the Office of Technology Assessment in 1993 estimated that the fully capitalized cost of developing a new pharmaceutical was $359 million in pretax 1990 dollars for drugs that first entered human testing in the period 1970-1982.² Because of the increasing complexity and cost of research, the cost is now estimated at approximately $500 million for drugs introduced in 1990.³ In contrast, the cost of demonstrating the bioequivalence of a generic product is currently estimated at approximately $1 million.⁴

In recognition of the huge investment required of innovators to generate clinical data to obtain regulatory approval of their products, countries with research-based pharmaceutical companies have provided a period—distinct from the patent term—during which others may not "free-ride" on such data. Free-riding occurs when a generic manufacturer seeks to copy an innovator's discovery and gain regulatory approval for its product by citing the innovator's safety and effectiveness data, rather than conducting its own clinical trials to obtain such information. The period of data exclusivity, when free-riding on the originator's data is prohibited, assures some minimal measure of fairness and encourages clinical trials of drugs that may not be patentable.

Current U.S. law protects an innovator's data for five years. This five-year data-exclusivity term compares to a period of 10 years in European countries with a world-class research-based pharmaceutical industry, such as the U.K. and Germany [Figure 8-2]. Aside from patent law, nothing prevents a generic company from generating its own safety and effectiveness data. The fact that this is rarely, if ever, done underscores the magnitude of the initial expense undertaken by innovator companies.

Unlike most other patented products, pioneer pharmaceuticals require regulatory approval of their safety and effectiveness before they can be marketed. In the U.S., after expiration of the data exclusivity period, generic copiers of pioneer drugs are not required to generate clinical data demonstrating the safety and effectiveness of their products; they need only reference the innovator's data and demonstrate "bioequivalence"—i.e., that their copies are chemically equivalent to pioneer drugs.

The TRIPS Agreement provides strong support for—indeed, requires —member governments to protect data required to obtain marketing approval for prescription drugs against unfair commercial use.

PATENT TERM RESTORATION IN THE UNITED STATES

The Drug Price Competition and Patent Term Restoration Act of 1984 significantly altered the U.S. pharmaceutical market. Under the law, innovator products received market exclusivity for limited periods and restoration of some of their patent periods lost as a result of FDA regulatory oversight and review. Generic products were granted expedited approval by being allowed, after a specified period, to use the safety and efficacy data developed by the pioneers.

For generics, the law created the Abbreviated New Drug Application (ANDA), under which a generic product needs only to be shown to be "bioequivalent" to an innovator drug and can be approved once the innovator's patent and market exclusivity have expired. A generic applicant must certify one of the following conditions in its ANDA:

• patent information on the drug has not been filed,

• the original patent has expired,

• the patent will expire on a specified date, or

• the patent is invalid or will not be infringed by the manufacture, use, or sale of the new drug for which the application is submitted.

The 1984 law provides that a generic drug is considered bioequivalent to an innovator drug if "the rate and extent of absorption of the drug do not show a significant difference from the rate and extent of absorption of the [pioneer] drug." FDA's regulations state that "bioequivalence means the absence of a significant difference in the rate and extent to which the active ingredient or active moiety in pharmaceutical equivalence or pharmaceutical alternatives becomes available at the site of drug action...."

Innovator drugs were provided partial restoration for the patent time lost during FDA regulatory review, subject to a number of restrictions, including the following:

• Only half of the development time (from the filing of an IND to the filing of an NDA) can be restored.

• No product may receive more than five years of patent extension restoration.

• No product whose patent is extended may receive more than a total of 14 years of patent life.

• Only one product per patent is eligible for an extension.

• Only one patent per product is eligible for an extension.

The average period of effective patent life for new drugs introduced in the 1990s has been only 11-12 years. Innovators in other industries typically receive 18.5 years of effective patent protection. [See Figure 8-3.]

The 1984 law also instituted the current five-year provision of data exclusivity for innovator products. This means that applications for generic copies cannot be submitted until five years after an innovator drug has been approved. For new indications for existing products, the data-exclusivity period is three years and a generic application may be approved on the date the exclusivity period expires.

Although a generic version of a pioneer product may not be labeled with the new indication during the three-year period, physicians and pharmacists can still dispense the generic for the new indication. This substantially diminishes the effectiveness of the three-year data-exclusivity provision.

The Food and Drug Administration Modernization Act of 1997, discussed in detail in Chapter 3, applied the data-exclusivity provisions to antibiotics. The new law also provides six months of additional market exclusivity for drugs for which pediatric studies are conducted at FDA's request.

LOSSES FROM INADEQUATE INTELLECTUAL PROPERTY PROTECTION

In a 1998 report to the Office of the United States Trade Representative (USTR), PhRMA estimated that trade barriers—particularly lack of adequate and effective intellectual property protection for pharmaceuticals and market-restricting price controls—cost U.S. drug firms more than $9 billion a year.

PATENT PIRACY

Patent pirates in some developing countries freely copy (pirate) innovative medicines that are under patent in the United States and other countries without compensating patent holders. The Congressional Research Service estimates that U.S. companies lose $1 to piracy for every $3 worth of products shipped overseas.⁵ U.S. pharmaceutical firms are projected to invest over $26 billion in R&D in 2000 alone, but the U.S. International Trade Commission found that global patent piracy reduces annual R&D investment by $720-$900 million annually.⁶

Among the nations that condone pharmaceutical patent piracy, Argentina, India, Egypt, and South Africa pose particular problems:

• Argentina: In 1996, Argentina passed legislation that effectively weakened its patent regime. Under the legislation, pharmaceutical product patent protection was deferred until October 2000. However, due to the lack of protection for medicines in development and other significant deficiencies, effective pharmaceutical product protection cannot be expected even after the year 2000.

• India: There has been no major change in the protection of intellectual property in India, which remains one of the world's worst violators of patent rights. India only provides seven years of process patent protection for pharmaceuticals, which is less than the average 12-15 years required to develop a new drug. Because patent protection is absent, bulk manufacturers located in India are able to freely pirate the intellectual property of the world's pharmaceutical industry. Two WTO dispute-settlement panels have found that India had not implemented even the most basic provisions in the TRIPS Agreement on the protection of intellectual property. Despite this ruling, India has taken little action to stop the rampant piracy of pharmaceutical patents. PhRMA is currently estimating total losses in the Indian market.

• Egypt: The Egyptian patent law specifically excludes pharmaceuticals from product patentability. While manufacturing processes for pharmaceuticals are patentable, the term for process patents is only 10 years, resulting in no effective patent protection. Like India, Egyptian government has failed to implement current TRIPS obligations.

• South Africa: In 1997, the "Medicines and Related Substances Control Act Amendments" was signed into law in South Africa. The law appears to allow the Department of Health to abrogate all pharmaceutical patents in South Africa, "notwithstanding anything in the Patents Act," at ministerial discretion. The legislation represents a direct challenge to the improvements in intellectual property protection achieved under the TRIPS Agreement. South Africa's Constitutional Court recently invalidated the 1997 amendments.

Other countries and trade areas where intellectual property protection is problematic include:

• Andean Community (Bolivia, Colombia, Ecuador, Peru, Venezuela):Legislation passed in January 1994 by the governments of the Andean Community does not conform to the TRIPS Agreement. The legislation falls short of providing adequate and effective pharmaceutical patent protection because of the following major flaws: (1) lack of protection for products in the pipeline; (2) open-ended compulsory licensing; (3) allowance of parallel trade in prescription drugs, as discussed in Chapter 7; and (4) unjustified restrictions on biotechnology innovation. Individual country efforts to strengthen intellectual property protection have been prevented by Andean Community entities. Current Andean pact negotiations threaten to further weaken patent protection for "essential medicine."

• China: In 1992, the U.S. and China negotiated an agreement to protect pharmaceutical patents, including 7.5 years of marketing exclusivity for U.S. pharmaceuticals not introduced during a designated "Administrative Protection" (AP) period (1986-1992). Chinese law implementing the agreement states that anyone who has not obtained an AP certificate is prohibited from manufacturing or selling the subject product during the term of exclusivity. The law also provides that the owner of the certificate can request the authorities to stop local companies from manufacturing or marketing the drug and can institute legal proceedings to recover economic damages for infringement. In 1994, however, new legislation was passed that nullifies this patent protection for U.S. pharmaceuticals.

• Israel: In 1998, the Israeli Knesset approved an amendment that seriously weakened Israel's patent law. Israel had provided protection to all inventions across all fields of technology without discrimination. The recent amendment, however, permits what otherwise would be infringing activities solely for pharmaceutical and agricultural chemical products—i.e., for products that require marketing and regulatory approval before they may be sold. Specifically, the amendment allows Israeli companies to export patented products for the purpose of seeking regulatory approval before their patents expire. Thus, the amendment interferes with the normal use of the patent, and unreasonably prejudices the legitimate interests of the patent owner. Israel also approved legislation that allows for the parallel importation of pharmaceuticals, another policy that violates the TRIPS Agreement.

• Canada: Canada allows generic companies to use pioneer pharmaceuticals prior to patent term expiration to register products in Canada, start commercial-scale manufacture, and export the generics. The European Union has filed a WTO case against Canada for violation of the TRIPS Agreement. Canada has responded by defending its practices and filing a counter-suit against the EU.

• Turkey: Turkey's new patent law, negotiated as part of its Customs Union with the European Union, formally extended protection to pharmaceutical patents on January 1, 1999. Many sections of the law do not appear to measure up to the TRIPS standards, and industry is watching carefully to determine how the law will be implemented.

• Intellectual property protection is also an important issue in Indonesia, Jordan, Korea, New Zealand, Pakistan, Taiwan, and Thailand.

COUNTERFEIT DRUGS

Counterfeit drugs are another problem, particularly in developing countries. In developed countries, including the U.S., consumers can be confident that medicines are manufactured by ethical companies and that FDA is regulating and overseeing the market. That is because drug regulatory systems are strong, and governments and companies have laws and law-enforcement resources to combat counterfeiting.

However, in developing countries, where drug-regulatory systems are weak or criminal laws are not adequately enforced, counterfeiting poses a serious problem. Dr. M. Ten Ham, chief of WHO's drug-safety unit, says, "The less a country has an inspection and control system in place, the more likely you will find counterfeit drugs on the market."

A counterfeit medicine is a compound that is not made by the authorized manufacturer, but is presented to the consumer as if it were. Counterfeit drugs may not contain an active ingredient, may not have enough active ingredient to be effective, or may contain an improper ingredient, sometimes including a toxic substance. Even in less extreme cases, counterfeit drugs can do serious harm. A person taking a counterfeit "antibiotic" with little or no active ingredient, for example, can die of an infectious disease and/or exacerbate public-health problems by allowing the disease to spread to others and by promoting drug-resistant infections.

A number of cases have been documented where counterfeit drugs have caused tragedies in developing countries. In Haiti, for example, 30 children died after ingesting counterfeit anti-fever medications that contained diethylene glycol, an industrial solvent found in anti-freeze. In Nigeria, 109 children died after taking a counterfeit medicine sold as a medicinal syrup that contained the same solvent.⁷

While the pharmaceutical industry has no power to act directly against counterfeiters, it is working with foreign governments, international regulatory bodies, and law-enforcement agencies to combat counterfeiting.

Many research-based companies are working through the Pharmaceutical Security Institute (PSI), a counterfeit-intelligence forum that is conducting worldwide investigations. The PSI is establishing, and will maintain, a database of information obtained in collective inquiries into counterfeiting. Information on illegal activities will be provided to governments and international agencies, which are responsible for proceeding against counterfeiters.

PROGRESS IN INTELLECTUAL PROPERT PROTECTION

Basic intellectual property protection includes the following:

• Pharmaceutical Product Protection: Pharmaceutical products should be patentable and the patents should be enforced.

• Twenty-Year Patent Term: Patents should be in effect for a minimum of 20 years from the date of filing.

• Pipeline Protection: Products already patented elsewhere, but not yet marketed in the country in question (still in the pipeline), should be covered by a new patent law.

• Importation and Working: If a country's patent law has a requirement that a patent be "worked," the importation of the patented product into the country should satisfy that requirement.

• Compulsory Licensing: There must be strict limitations on a country's ability to force patent holders to license their products to other parties.

• Patent-Term Extension: Patent time eroded due to regulatory delays in the approval process should be restored.

By those criteria, measurable progress has been made in strengthening intellectual property protection over the past decade—through both bilateral and international agreements [Figure 8-4]. For example:

• In 1986, Korea, which had not previously protected pharmaceutical inventions, agreed to do so. The Korean law included "pipeline" protection, a 20-year term, and limits on compulsory licensing.

• As the Soviet Union weakened and disintegrated, countries formerly under its rule quickly realized that intellectual property protection was necessary for economic development. The Czech and Slovak Republics passed laws protecting pharmaceutical patents in 1990. Bulgaria and Belarus followed in 1991, Romania, Russia, and the Ukraine in 1992. Poland enacted patent protection for pharmaceuticals in 1993, and Latvia began pharmaceutical-patent protection, including protection for products in the pipeline, in 1995.

• In 1991, Mexico implemented a world-class patent law, including pharmaceutical-product protection, a 20-year term, pipeline protection, a satisfactory "working" requirement, and limits on compulsory licensing.

• Canada strengthened intellectual property protection through legislation passed in 1987 and 1993. The 1987 law restricted, and the 1993 law ended, compulsory licensing. The 1993 law also includes a 20-year patent term.

• Brazil, which once condoned pharmaceutical-patent piracy, enacted 20-year patent protection, including pipeline protection, in 1996.

• Of the two landmark multilateral agreements on intellectual property protection concluded during the 1990s, NAFTA is stronger than the TRIPS Agreement. NAFTA includes a 20-year patent term, pipeline protection, a satisfactory working provision, and limits on compulsory licensing. The 1995 TRIPS Agreement includes all of the above provisions except pipeline protection for pharmaceuticals. TRIPS also allows too long an implementation period for developing countries.

• In 1999 Jordan opted TRIPS consistent patent legislation as part of larger WTO Accession effects.

BENEFITS OF INTELLETUAL PROPERTY PROTECTION TO DEVELOPING COUNTRIES

Progress in intellectual property protection has occurred because countries all over the world have recognized that such protection encourages investment, innovation, and economic growth. Strong intellectual property protection not only benefits research-based pharmaceutical companies and the patients they serve; it also helps developing nations by enhancing the conditions for investment, encouraging the development of local industry, and enabling more goods to be produced.

A 1994 World Bank study found that "the strength or weakness of a country's system of intellectual property protection seems to have a substantial effect, particularly in high-technology industries, on the kinds of technology transferred by many U.S. firms to that country.⁸ According to the study, 86-100 percent of leading U.S., German, and Japanese chemical and drug companies reported that a country's system of intellectual property protection has a major impact on their decision to invest—or not to invest—in research and development facilities in that country [Figure 8-5].

This Conclusion Is Supported by Real-World Examples:

• Italy instituted strong patent protection for pharmaceuticals in 1978. In 1978, there were only 123 billion lira invested in local pharmaceutical R&D. Ten years later, that investment had more than quadrupled, and is still growing.⁹

• Korea adopted pharmaceutical-patent protection in the late 1980s. Since that time, local pharmaceutical companies have increased their share of the Korean pharmaceutical market.

• Mexico adopted a strong patent law in 1991. Since then, U.S. R&D investment in pharmaceuticals in Mexico has more than doubled.

• Canada, after strengthening intellectual property protection, experienced dramatic growth in R&D investment. In 1979, 2.7 percent of pharmaceutical sales was invested in R&D. That figure had increased to 15.7 percent by 1997, according to the Pharmaceutical Manufacturers Association of Canada (PMAC) [Figure 8-6]. Between 1987 and 1997, pharmaceutical research spending in Canada rose by more than 700 percent, and new R&D investment exceeded $4.6 billion. The PMAC estimates that almost 3,500 new jobs have been created as a result of the strengthening of pharmaceutical-patent protection.¹⁰

• Brazil enacted strong intellectual property protection for pharmaceuticals in May 1996. Since it became clear that Brazil would protect pharmaceutical patents, multinational pharmaceutical companies have announced investments worth hundreds of millions of dollars in the country, creating jobs, stimulating the economy, and improving health by making state-of-the-art medicines available.¹¹

Some developing nations have argued that they cannot afford patent protection for pharmaceuticals because their people need inexpensive medicines. Experience has proven, however, that lack of patent protection not only deprives people in such countries of state-of-the-art medicines, but also impedes the competition that can lower drug prices.

A 1990 study by the Latin American Economics Foundation stated that "the non-patentability of pharmaceutical products, that was in its beginning a device designed to safeguard public health, has presently turned into an instrument to protect local industry."¹² In countries that provide pharmaceutical patent protection, consumers benefit from the lower prices brought about when patents expire and generic competitors enter the market. For example, the ulcer drug Tagamet (cimetidine) lost U.S. patent protection in 1994. Within weeks, generic copies were introduced at prices 30 to 60 percent lower than that of the original product.¹³

By contrast, in countries without pharmaceutical patent protection, there is little price competition. What competition exists is based on the strength of sales forces, the date of introduction of the products, brand loyalty, and other factors of little benefit to consumers. In fact, a survey by the Latin American Economics Foundation of prices in Argentina found that copied drugs in that country are, on average, priced higher than an originator's product.¹⁴

In such cases, the consumer pays twice. First, the consumer often pays a higher price—relative to income, prices of the original product, and even prices in the United States. Second, the price the consumer pays does not contribute to pharmaceutical research for future medical breakthroughs. In the U.S., for example, about 20.8 percent of the revenue of research-based companies is reinvested in R&D.

Strong intellectual property protection is absolutely essential for pharmaceutical companies to invest in research—which leads to the discovery and development of more cures and better treatments for patients all over the world.

Endnotes

1. Barfield, C.E., and Beltz, C., "Balancing and Rebalancing the National Interest in the Patent System," American Enterprise Institute, October 1995.

2. Congress of the United States, Office of Technology Assessment, Pharmaceutical R&D: Costs, Risks, Rewards, February 1993.

3. Boston Consulting Group, Sustaining Innovation in U.S. Pharmaceuticals: Intellectual Property Protection and the Role of Patents, January 1996.

4. Barfield, op cit.

5. Ibid.

6. U.S. International Trade Commission, Potential Impact on the U.S. Economy and Selected Industries of the North American Free Trade Agreement, U.S. ITC Publication 2-596, January 1993.

7. United Press International, April 14, 1998.

8. Mansfield, Edwin, Intellectual Property Protection, Foreign Direct Investment, and Technology Transfer, The World Bank, 1994.

9. Farmindustria Indicatori Farmaceutici, 1994.

10. Pharmaceutical Manufacturers Association of Canada, Annual Review, 1998-1999.

11. "Pharmaceutical Patents: Brazil Sets the Pace," The Buenos Aires Herald, June 18, 1996.

12. FIEL (Fundacion de Investigaciones Economicas Latinamericana), "Protection of Intellectual Property Rights: The Case of the Pharmaceutical Industry in Argentina" (ISBN 950-99645-0-6).

13. IMS data.

14. FIEL, op cit.