Dormant and unmonopolisable therapies: can you help? - Part One

Patent law is commonly regarded as an attempt to foster innovation, rewarding successful innovators with a period of exclusivity which allows the recoupment of research investments and stimulates R&D efforts, promoting the diffusion of knowledge through disclosure (more on the dichotomy between ‘reward’ and ‘contract’ theory here), and securing the development of precious inventions that might otherwise have never been produced (Burk and Lemley here). The system exhibits a twofold nature, being technology-neutral in theory, and technology-specific in application (as explained in this paper): a characteristic that allows courts to differentiate the interpretation of the basic premises of patent law, adapting them to the peculiarities of the technologies examined. Induced flexibility, however, may not be a sufficient remedy for the rigid structure of patent law, when the innovation exhibits unique features. In this post, we will explore one of these cases, and the distortions that the current system generates, which are potentially capable of preventing it from reaching its primary aim of stimulating inventions of great social utility.

The IPKat is in New Zealand, this week!

Kat friend Savva Kerdemelidis is a New Zealand-based lawyer who is currently undertaking a Master of Laws thesis at the University of Canterbury on gaps in the patent system for otherwise potentially safe and effective medical treatments. Savva, who was also kind enough to comment on an early version of this post, explains that, in the pharmaceutical sector, the discrepancy between the length of the patent term and that of the overall process of R&D, which comprises pre-clinical research of compounds, clinical trials and regulatory approval, is threatening the development of new therapies. He describes two distinct phenomena:

- ‘dormant therapies’, an issue caused by the expensive and lengthy gap between invention of a therapy and market approval (often costing hundreds of millions and taking over 6-8 years). In particular, drug candidates which fail to attract funding or are dropped from development where the primary reason was perceived or actual insufficient patent protection (e.g. due to prior publication or insufficient patent length having regard to commercialization time required) as opposed to (i) perceived or actual lack of safety or efficacy or (ii) other commercial reasons.

- ‘unmonopolisable therapies’, which failed to attract funding or were dropped from development where the primary reason was perceived or actual lack of ability to enforce monopoly pricing over the therapy as opposed to (i) perceived or actual lack of safety or efficacy or (ii) insufficient patent protection per se. Examples of such therapies include second indications for cheap generic drugs or drug combinations for which patents cannot be used to prevent “off-label” use by doctors or patients. For the same reason, patents cannot be used practically to enforce monopoly prices for diets, dietary supplements, lifestyle interventions, surgical methods, “natural” remedies, and many complementary and alternative medicines. Therapies for neglected/third world diseases and other “unprofitable therapies” could also be considered a subset of this category, as an innovator company could not recover enough money from the market to justify significant R&D investment, even if they had patent protection.

This Kat endeavoured on a mission to find out more about these phenomena, which he examines below, in light of the unique features of pharmaceutical R&D. Readers who are already familiar with this matter may wish to jump to the end of Part Two, to find out how they can help Savva complete his research.

Characteristics of R&D in the pharmaceutical sector

Why is the pharmaceutical sector an ideal background for the development of these issues? Researchers repeatedly explored the economics of pharmaceutical R&D, and found that the process that leads to the commercialization of new drugs is long and complex. Patent protection is usually sought in the early stages of R&D, when the number of potentially useful compounds is still very high, and their properties undiscovered. Restricting the selection of ideal compounds, investigating their suitability and evaluating interactions, efficacy and bioavailability requires years of research. Before reaching the market, however, drugs still have to undergo rigorous clinical trials and receive regulatory approval. Throughout the whole process, many potential candidates may prove unsuitable, or be abandoned due to the high costs and long-term evaluation required, or fail to prove beneficial in clinical trials. Studies conducted in 1979 (Hansen), 1991 (DiMasi et al.) and 2003 (DiMasi et al.) showed that:

1. the average time required for the development of a new drug, from discovery to regulatory approval, increased from 8 years in the 1960s, to 12 years in the 1990s;
2. the average capitalized cost for the whole process (including research costs - and cash outlays for unsuccessful research efforts -, preclinical development costs, and time costs) rose from US $ 54 million (1976 dollars) for R&D conducted in the 1960s/1970s, to US $ 231 million in the 1980s (1987 dollars), and reached US $ 802 million (2000 dollars) in the 1990s. There appears to be further evidence that this upward trend continued in the last decade;
3. although it is difficult to verify the industry’s claim that only one or two drugs are developed out of 10.000 compounds investigated during R&D (see EFPIA’s 2010 report here), it is safe to assume that only a small percentage of the substances evaluated for possible use as drugs reach the clinical trial stage, where 80% of them are abandoned before regulatory approval or are rejected.

Recent research by the Office of Health Economics reached similar conclusions, finding an increase in R&D costs from US $ 199 million per new medicine in the 1970s to US $ 1.9 billion in the 2000s (2011 dollars), a decline in success rate for clinical development (from 1 in 5 in the 1980s to about 1 in 10 in the 2000s), and a steady growth in the time required for research and approval (from 6  years in the 1970s to 13.5 years  in the 2000s). By contrast, generic manufacturers usually invest about US $ 2 million to bring the product to the market, and forego the clinical trial stage. A 2006 study by leading US economists corroborated these data, warning, however, that there are substantial variations in estimated drug costs, which may depend on numerous factors, including the strategic decision making of the companies themselves.

Source: EFPIA - The Pharmaceutical Industry in Figures (2010)

Although the above findings, and the methodology implied to analyze the raw data, were criticized by some scholars (for example, Light and Warburton here), there seems to be little doubt on the fact that the development of a new drug is a lengthy, expensive and tentative process. In this context, companies rely upon strong patent protection, for a period of time long enough to offset the risks taken, and the investments made, in the R&D phase. On one side, patents are expected to guarantee effective protection against infringement, which may spread more easily than in other industries, in light of the general equivalence between patent and drug (in contrast, for example, with patents in the ICT sector, where the final products often embody hundreds of patents), and of the relatively ease of manufacturing generic versions of patented drugs. On the other, the right of exclusivity allows companies to recoup research investments, to recover expenses made for unsuccessful drugs, and to cross-subsidize the development of new drugs with lower profitability.

Strong patent protection, however, implies an inherent tradeoff, as it allows companies to charge premium prices for their products. In the pharmaceutical field, this tradeoff, which is necessary to ensure the recoupment of R&D costs and thus to stimulate investment in the first place, may generate two major negative consequences: (1) the misalignment between reward and market price, due to the difficulty of estimating the overall research expenses that the company is entitled to recoup, and the inability of the demand to shift towards alternative, cheaper alternatives; and (2) the so-called ‘deadweight loss’ effect, which prevents patients who cannot afford the expensive drug from benefiting from the invention to improve their health, or to save their lives. It is usually thought that this inevitable tradeoff is acceptable, in light of the high social return of pharmaceutical R&D investments (as highlighted by Lichtenberg here). Further, data showed that the absence of patent protection has a stronger impact on R&D expenditure in the pharmaceutical sector, where it causes a 64% decline, than in other industries, where the decline only reaches 8%.

The progressive lengthening of the R&D process, and its growing costs, appear to have had a severe impact on overall research investments, which rose from US $ 68 billion in 2002 to US $ 127 billion in 2010, and on the number of new drugs marketed for every US $ 1 billion of R&D expenditure, which fell from 50 in the 1950s to less than 1 in the last decade (detailed trends here). Consequently, the discrepancy between length of the R&D and patent term, as well as concerns about the patentability of drugs for lack of novelty or non-obviousness as explained in the second part of this post, drive pharmaceutical companies to continuously assess the patentability and protection offered to the candidate drug, abandoning its development if issues arise as to the possibility of recovering the high expenses involved. This situation leads to a tradeoff which, according to many commentators, is greater than that embedded in the patent system, as the public may never benefit from potentially safe and life-saving drugs. The phenomenon may have involved a relevant share of the 30,000 drugs dropped from development in the last thirty years (more here) and certainly deserves a closer look.