The Relevance of Intellectual Property for Pharmaceutical Innovation

By Mr Maarten Meulenbelt, Sidley Austin LLP*

---

In the pharmaceutical industry, the role of Intellectual Property (IP) as an incentive for product development is particularly important: each investor considering whether to invest in the development of a medicinal product must assess the risks and costs incurred, compared to the risks and costs associated with investment in other sectors[1]; the timing, scope and duration of expected global or regional revenues; and the likelihood that IP and regulatory rights existing at the start of product development will still be available at the stage of marketing authorisation (MA) and market entry.[2]

The EU has not been gaining ground recently in terms of pharmaceutical innovation, research and development, whether measured in terms of headquartering R&D companies or originating new treatments[3], clinical trials (in 2017, China became the country with the most registered CAR-T trials)[4] or access to new medicinal products (several products have been reported as launching years later than in the United States).

There are key distinguishing factors making the pharmaceutical sector riskier than other industries, including the lengthy MA process, and the high rates of attrition and failure.[5] Moreover, there is often a risk of products being copied after an MA has been obtained. For example, in some cases medicinal products can be physically copied using patent applications published for the originator product and/or pharmacopoeia monographs. In addition, the evidence of safety and efficacy confidentially submitted to obtain an MA (or published in summarised form by authorities granting MAs) can be used or relied on by follow-on applicants, within the same jurisdiction or in other jurisdictions, unless appropriate restrictions are in place.

To mitigate these long-standing risks, and to ensure that the pharmaceutical sector remains attractive for investors, several international agreements such as the WTO TRIPS Agreement lay down minimum protection levels for patent rights (Articles 28 et seq.), and for the protection of information confidentially submitted to regulatory authorities (Article 39.3 TRIPS); some jurisdictions such as the EU have introduced incentives not directly required by TRIPS, e.g. patent term restoration, and legislation to incentivise the development of orphan medicinal products.  Through free trade agreements, the EU has pursued[6] the maintenance or creation of IP and regulatory rights in third countries, e.g., provisions on patent term restoration (PTR) – called supplementary protection certificates (SPC) in the EU – and regulatory data protection (RDP).

The EU is at a crossroads, due to the confluence of COVID-19 (which has shown the value of having new medicinal products developed, and the costs and risks involved) as well as the Commission’s Pharmaceutical Strategy, which could affect IP and regulatory incentives by linking them to launch obligations and/or R&D cost transparency in future.[7]

The need for strong international and EU IP protection to encourage product development appears to be greater than ever given recent developments, including the following:

1. Economic reports have shown that the MA process has become longer in recent years (12 years)[8], more expensive (USD 2.6 billion per molecule), and riskier (12% approval rate for drugs entering clinical development).[9]

2. The race to bring COVID-19 vaccines to the market has confirmed the high costs of drug and manufacturing capacity development[10]; the risks of failure, shown by relatively high attrition rates[11]; and the need to invest in a broad portfolio of vaccines based on different technological approaches to maximise the chances of safe and effective products being brought to market[12].

3. RDP can be undermined where countries allow follow-on MA applications to be based on public assessment reports reflecting regulatory data that should still be protected.[13]

4. For some market segments, it is recognised that current incentives are not sufficient: investment in research and development has led to 2,121 designations of new orphan diseases and 164 authorised new treatments for about 90 such diseases between 2000 and 2018.[14] However, despite the adoption of the EU Orphan Medicinal Products Regulation in 2000, 95% of the thousands of rare diseases have no authorised treatment[15]; only one-tenth of products that have received an orphan drug designation (ODD) achieve a MA; and market failures affect the development of new antimicrobials.[16]

5. The demand side is more concentrated than in other industries, with purchasing power strong and getting stronger, and, in the EU, growing requests to disclose historical cost components permitting authorities to set prices ex-post, on a “cost-plus” basis, and without taking full account of development risks.[17]

6. There are growing calls for temporary IP waivers[18] or compulsory licensing (CL), especially in times of health crisis.[19]

COVID-19 has provided a ‘shock to the system’.  Companies, and some countries entering the COVID market as an investor have experienced first-hand how success requires long-term investment, risk-taking, and pursuit of drugs that will not make it to market, or that face challenges remaining on the market.  The legal and policy discussions, which are currently underway at global and EU level, will determine the extent to which IP rights will be confirmed and maintained as a driver for new product development and an element needed for future pandemic preparedness, and the extent to which the EU will remain attractive as a basis for R&D.

---

We invite you to join the discussion on social media using #IPinEUFTAs and bookmarking our Trade and IP Project webpage to capture all future updates.

---

*      The views expressed in this article are the author’s own, and do not necessarily reflect the views of Sidley Austin LLP or any of its clients.

[1]    A methodology commonly used in the pharmaceutical sector for comparing expected risks, costs and revenues across sectors is the risk-adjusted Net Present Value (rNPV) model.

[2]    This topic has recently been the subject of economic studies relating to orphan medicinal products. See E. Neez et al, Estimated impact of EU Orphan Regulation on incentives for innovation, available at

https://dolon.com/dolon/wp-content/uploads/2020/10/Estimated-impact-of-EU-Orphan-Regulation-on-incentives-for-innovation.pdf; and M. Berdud et al, Economic and Financial Challenges of Developing Orphan Medicinal Products, https://www.eucope.org/wp-content/uploads/2020/04/ohe-omp-regulation-28-feb-2020-fv.pdf

[3]     See the Pharmaprojects RD Annual Review reports for 2019 , 2020 and 2021.

[4]  See J. Wei et al, Clinical development of CAR T cell therapy in China: 2020 update,  https://www.nature.com/articles/s41423-020-00555-x.pdf

[5]   J. Jacobs et al, The cost of opportunity, A study on pharmaceutical R&D costs, available at https://gupta-strategists.nl/studies/the-cost-of-opportunity.

[6]     With results depending on the economic and political context.

[7]     In its Combined Evaluation Roadmap/Inception impact Assessment of 7 April 2021, the Commission stated that it might seek to “establish a new system of incentives that links rewards with possible obligations, including the placing on the market of the products in most/all Member States, or more transparency on R&D costs”.  See https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12963-Evaluation-and-revision-of-the-general-pharmaceutical-legislation.

[8] M. Kyle, https://ec.europa.eu/info/publications/economic-analysis-supplementary-protection-certificates-europe_en.

[9]     DiMasi JA, Grabowski HG, Hansen RA. Innovation in the pharmaceutical industry: new estimates of R&D costs. Journal of Health Economics 2016;47:20-33, available at https://www.sciencedirect.com/science/article/abs/pii/S0167629616000291?via%3Dihub.

[10]  According to analysis conducted by kENUP Foundation, the public sector alone spent EUR 93 billion on vaccine development in the course of 2020.

[11]   The WHO candidate vaccine landscape and tracker, consulted on 23 April 2021, shows The COVID-19 tracker of Regulatory Focus, consulted on 23 April 2021, shows 91 vaccines in clinical development, and 184 vaccines in pre-clinical development. Clearly, only a modest proportion of these vaccines will obtain a marketing authorisation and generate meaningful sales. See https://www.who.int/publications/m/item/draft-landscape-of-covid-19-candidate-vaccines.

[12]   https://ec.europa.eu/info/live-work-travel-eu/coronavirus-response/public-health/eu-vaccines-strategy_en.

[13] See European Commission reference to a 2016 Russian Supreme Court judgment  stating that regulatory data protection (RDP) does not apply to data made available by the European Medicines Agency.  See European Commission Staff Working Document SWD(2019)452 final/2, p. 27, available at https://trade.ec.europa.eu/doclib/docs/2020/january/tradoc_158561.pdf.

[14]    https://www.efpia.eu/about-medicines/development-of-medicines/intellectual-property/help-us-make-rare-disease-even-rarer/

[15]    https://eur-lex.europa.eu/legal-content/EN/AUTO/?uri=pi_com:Ares%282020%297081640

[16]    https://ec.europa.eu/health/sites/health/files/files/paediatrics/docs/orphan-regulation_eval_swd_2020-163_part-1.pdf.

[17]  The WHO noted that it has been suggested that “an undesirable effect of cost-plus pricing might be reduced incentive for manufacturers to invest in R&D, as only investments in a small proportion of pharmaceuticals actually reaching the market would be recovered, whereas costs of failed R&D efforts would not be compensated”. WHO, Systematic reviews for the update of the WHO Guideline on country pharmaceutical pricing policies, https://apps.who.int/iris/bitstream/handle/10665/335704/9789240011892-eng.pdf , p. 67.

[18]   See proposal by South Africa, India et al. , available at

https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/IP/C/W669R1.pdf&Open=True

See also a leaked proposal, which is currenty being discussed by South Africa, India, the United States and the EU, available at https://www.keionline.org/37544

[19]   See Report on the feasibility and analysis of “Impact Licensing Initiative” (ILI) for technology access during a health crisis, available at https://op.europa.eu/en/publication-detail/-/publication/8576381e-2ece-11eb-b27b-01aa75ed71a1/language-en.