Effective patent life in pharmaceuticals

International Journal of Technology Management

Volumn 19, Issue 1, 2000, Pages 98-120

  Grabowski, Henry G ^a,b   Vernon, John M ^a,c,d  

^a DUKE UNIVERSITY   (United States)

^b Pharmaceuticals and Health Economics

^c Economics Department

^d R and D ^*

Author keywords

[No Author keywords available]

Indexed keywords

COMPETITION; COMPUTER SIMULATION; DRUG PRODUCTS; LAWS AND LEGISLATION; MARKETING; PUBLIC POLICY;

EFFECTIVE PATENT LIFE; GENERIC COMPETITION; INNOVATION;

PATENTS AND INVENTIONS;

EID: 0033873835     PISSN: 02675730     EISSN: None     Source Type: None    
DOI: 10.1504/ijtm.2000.002803     Document Type: Article

References (41)

1. DiMasi, J.A., Hansen, R., Grabowski, H. and Lasagna, L. (July 1991) 'Cost of innovation in the pharmaceutical industry', J. Health Econ., Vol. 10, pp.107-142.
2. Levin, R.D., et al. (1987) 'Appropriating the returns from industrial research and development', Brookings Papers on Economic Activity, No. 3, pp.783-820.
3. Mansfield, E. (1986) 'Patents and innovation: an empirical study', Management Science, Vol. 32, No. 2, pp.173-181.
4. Grabowski, H.G. and Vernon, J.M. (1997) The Search for New Vaccines: The Effects of the Vaccines for Children Program, Washington, D.C., American Enterprise Institute.
5. Grabowski, H.G. and Vernon, J.M. (1996) 'Longer patents for increased generic competition: The Waxman-Hatch Act after one decade', PharmacoEconomics, Vol. 10, Suppl. 2, pp. 110-123.
6. Public Law No. 103-465, 108 Stat. 4809 (1994).
7. US Senate, Judiciary Committee (1996) Hearing on the Drug Price Competition and Patent Term Restoration Act.
8. Nordhaus, W.D. (1969) Invention, Growth, and Welfare: A Theoretical Treatment of Technological Change, Cambridge, MIT Press.
9. Grabowski, H.G. and Vernon, J.M. (1994) 'Returns to R&D on new drug introductions in the 1980s', J. Health Econ., Vol. 13, pp.383-406.
10. In a prior study, we performed some simulation analyses relevant to this issue. This was done in the context of examining the effects of price controls directed to breakthrough products (one of the possible outcomes of Clinton's Health Security Act). In particular, we curtailed the returns on the top decile NCEs to a breakeven rate of return, while leaving the expected returns on all other NCEs unchanged. The effects on R&D returns were striking. This change caused the representative NCE to go from a moderate positive net present value to a highly negative one. See the summary of these results in Grabowski [11] and also the discussion in Scherer [12].
11. Grabowski, H.G. (1994) Health Reform and Pharmaceutical Innovation, Washington, D.C., American Enterprise Institute.
12. Scherer, F.M. (1995) 'US industrial policy and the pharmaceutical industry', in Adrian Towse, (Ed.) Industrial Policy and the Pharmaceutical Industry, London, Office of Health Economics, pp.26-39.
13. Joe DiMasi and colleagues at Tufts University Center for the Study of Drug Development are undertaking an updated study of R&D costs. Aggregate industry data suggest that real R&D costs have grown significantly over the past decade [11]. At the same time, there is evidence that pharmaceutical firms are making strong efforts to reduce development times and launching new drugs on a global basis in order to achieve more rapid market diffusion, given the dramatic decline in sales revenue that now typically occur when patents expire.
14. In this regard, the original Nordhaus model has been generalized to take account of various factors including the presence of rivalry, patent races, spillovers, patent scope and other factors. For a further discussion, see Chapter 17 of Scherer and Ross [15] and Gilbert and Shapiro [16].
15. Scherer, F.M. and Ross, D. (1990) Industrial Market Structure and Economic Performance, third edition, Boston, Mass, Houghton Mifflin Co.
16. Gilbert, R. and Shapiro, C. (1990) 'Optimal patent length and breadth', RAND J. Econ., Vol. 21, pp.106-112.
17. There were also demand-side barriers to generic prescribing and substitution. The state antisubstitution laws had only recently been repealed in many states. Furthermore, the health care system in the USA was dominated by fee-for-service reimbursement. In that system, physicians were the key decision-makers, and they often exhibited strong brand loyalty to the brand name products. Hence, many physicians in that era prescribed the brand name product and prohibited generic substitution on their prescriptions by checking 'do not substitute' and taking other such actions as required by state law [18]. Managed care was in its infancy, and only a small segment of the market was very price sensitive, e.g., state Medicaid programs. The market's receptivity to generic usage has changed dramatically with the growth of managed care penetration over the past decade and other related demand-side changes. This is discussed further in Section 4.
18. Masson, A. and Steiner, R.L. (1985) Generic Substitution and Prescription Drug Prices: Economic Effects of State Drug Product Selection Laws, Federal Trade Commission.
19. Merck & Co., Inc. versus Kessler, 1996 US App. LEXIS 6296 (Fed. Cir., April 4, 1996). The USA Court of Appeals for the Federal Circuit affirmed a lower court ruling that the WaxmanHatch extension could be added to either the traditional 17-year term or the new 20-year term. The only exception is with respect to patents still in force on June 8, 1995 only by virtue of their Waxman-Hatch extension. In this latter case, the firm is entitled to the longer of the 20-year term without an extension or the 17-year term with an extension.
20. Grabowski, H.G. and Vernon, J.M. (1992) 'Brand loyalty, entry, and price competition in pharmaceuticals after the 1984 drug act', J. Law and Econ., Vol. 35, No. 2, pp.331-350.
21. Studies of generic competition in the pre-1984 period by Statman [22] Caves et al. [23], and other researchers had revealed little generic entry or competition for a period spanning several years after patent expiration. The main exception was antibiotic drugs. This therapeutic category, in fact, was governed by a separate monograph system in the pre-1984 period in which generic firms could enter the market by demonstrating that their compound met the standards for the product set forth in the monograph. As discussed above, other types of drug products had to repeat safety and efficacy testing (if this information was not publicly available in the scientific literature). This constituted a very significant entry barrier, and little generic competition occurred in these classes.
22. Statman, M. (1981) 'The effect of patent expiration on the market position of drugs', in Robert B. Helms (ed.), Drugs and Health, Washington, D.C., American Enterprise Institute, pp.140-166.
23. Caves, R.E., Whinston, M.D. and Hurwitz, M.A. (1991) 'Patent expiration, entry and competition in the US pharmaceutical industry', Brookings Papers on Economic Activity; Microeconomics, pp. 1-66.
24. The rate of generic sales erosion has become so rapid for major products in recent periods that many brand name firms have begun using a 'two tier' pricing approach to patent expiration. Under this strategy, the brand name firm either licenses rights for a generic product to another firm or produces and markets it through a separate subsidiary while maintaining the market presence of the original product at a premium price. Furthermore, the brand name firm will typically launch the generic version in advance of the patent expiration date in order to take advantage of possible first-mover advantages. These two-tier pricing strategies have achieved mixed commercial success to date. They are also under the continued scrutiny of the FTC for possible anti-trust violations.
25. Over this period, an increasing share of pharmaceutical prescriptions have been turned over to pharmacy benefit management firms (or PBMs). They employ a variety of strategies to achieve cost savings in pharmacy expenditures. Generic substitution is one of the core strategies employed by PBMs [26]. Strong financial incentives are typically incorporated into the benefit plan design to insure high rates of generic substitution once a product becomes multi-source (e.g., lower co-payments on generic products, caps set equal to the generic price reimbursement, mandatory generic utilization, etc.). Our work also indicates higher absolute margins are earned by pharmacists on generic products which give them a strong incentive to dispense these products whenever possible [5].
26. Grabowski, H.G. and Mullins, C.D. (1997) 'Pharmacy benefit management, cost-effectiveness analysis and drug formulary decisions', Soc. Sci. Med., Vol. 45, No. 4, pp.535-544.
27. Process patents are considered the weakest form of protection in pharmaceuticals because more than one process can usually be employed to produce a particular compound.
28. As noted in [19], patents still in force on 8 June 1995 only by virtue of the Waxman-Hatch Act cannot add the Waxman-Hatch extensions to the 20-year term from filing date. It also should be noted that for some NCEs, the increased life from a later expiration date due to GATT is exactly offset by a shorter Waxman-Hatch extension. This will be the case when the 14-year constraint on Waxman-Hatch extensions is binding under both determinations of patent life. In these circumstances, firms do not receive any net benefits in terms of increased effective patent life. However, in principle, they receive some possible benefits in terms of patent scope. This is because at the point in time when the Waxman-Hatch extension goes into effect, the scope of patent protection narrows to cover only approved FDA extensions. However, a generic firm that wants to come on the market with a new indication during the Waxman-Hatch restoration period would have to do a regular NDA, not an ANDA, on the new indication.
29. Karin Tyson of the US Patent Office provided a list of patent expiration dates and extensions that were compiled by the Special Program Law Office as of May 1997. This list has now been put on their internet site and is regularly updated under the title, Patent Terms Extended Under 35 USC - 156. For those NCEs in our sample whose extensions were not yet approved by the US PTO, we used the Federal Register notices of the FDA to obtain the relevant IND and NDA periods. These data were then coupled with information on patent filing and grant dates (which is available on the US Patent Office web site) to compute effective patent life and Waxman-Hatch extensions. Another source of information on patent expiration dates is provided by the FDA's web site listing and publication on approved drug products (often denoted as 'The Orange Book'). These data are also available through FOI Services [30].
30. FOI Services, Inc. (1997) Drugs under Patent, 1997, Gaithersburg, Maryland, FOI.
31. Shulman, S. et al. (1992) 'Implementation of the Orphan Act: 1983-1991', Food and Drug Law J., Vol. 47, No. 4, pp.363-404.
32. We separated our analysis of the 1980s period from that of 1990s introductions because the transition features of the 1984 law are much more important for 1980s NCEs. In addition, the ability of NCEs to benefit from the GATT transition rules differs significantly across the two periods.
33. Fourteen NCEs had potential extensions constrained to zero because they had EPLs in excess of 14 years. Furthermore, three NCEs had zero extensions because they failed to apply to the PTO for an extension (this must be done within 60 days from NDA approval). Finally, 11 NCEs obtained their primary protection from the five-year exclusivity period.
34. In this cohort, 20 of the 127 NCEs had their extension capped at two years because they were in clinical testing and already patented on September 24, 1984.
35. The NCEs that actually switched to the 20-year term received an average increase in EPL of just over one year (reflecting an average patent pendency period for these NCEs of approximately two years).
36. Of the 127 NCEs in the 1990s sample, 3 NCEs had patents which expired prior to June 8, 1995, and 15 NCEs had their maximum protection under the five-year exclusivity provision in either case. Of the remaining 109 NCEs, 57 had patent pendency periods of less than three years, leaving them with longer EPLs before the application of the Waxman-Hatch extensions. However, eight of these NCEs were constrained to a 14-year EPL (i.e., after applying the Waxman-Hatch extensions in both the pre- and post-GATT worlds). This leaves 49 of the 127 NCEs with positive net benefits from GATT in the 1990s cohort.
37. The drugs are Ornidyl, Aredia, Vantin, Cognex, Flumadine, Univasc, Azelex, and Sular. Removing these drugs from the sample changes only slightly the results in Table 1. That is, the benefit of GATT for the full sample for 1990s NCEs was 0.40 years; the benefit for the sample used here is 0.42 years.
38. Redwood, H. (1990) Pharmaceutical Patent Term Restorations for the 1990s, Oldvicks Press.
39. For further discussion of the EC law, see Hansen and Hill [40]. As noted, both the EC and Japanese laws have a five-year cap on product extensions as in the USA, but are less restrictive in other dimensions. In this regard, individual EC countries have enacted data exclusivity periods of six to ten years compared to the five-year period in the USA. The European Commission is currently considering harmonizing the data exclusivity period to ten years for all EU countries.
40. Hansen, B. and Hill, C. (June 1994) 'Obtaining an SPC in Europe', Patents and Licensing, pp.27-30.
41. Eliminating the 14-year cap completely is almost the same as changing it to 17 years. The EPL increases by only 0.06 years over the 17-year cap, and only six NCEs benefited.