The European Commission is reviewing the use of supplementary protection certificates (SPCs), a patent term extension motivated by the increasing length of market approvals for pharmaceuticals. The initiative is driven by EU Health Ministers thinking that changes in patent exclusivity rights will lower their expenditures on medicines. The generics industry’s push for a waiver has been backed by a promise to create additional jobs in the EU, but the evidence behind that promise is doubtful.
Available analyses suffer from a profound lack of appropriate data and disregard the opportunity costs of an SPC export waiver for EU Member States. In this paper, we will highlight that an SPC export waiver could prompt the EU’s innovative pharmaceutical companies to 1) reconsider their research and manufacturing activities in some EU Member States and 2) adapt product placement and pricing strategies in several high-income EU Member States to compensate for (the risk of) lower revenues. Given corporate strategies to overcome regulatory fragmentation, and experiences from market launch sequencing in the EU, an SPC export waiver could entail higher drug prices for governments and patients in Germany, the UK, France, the Nordics, and the Benelux.
The effective erosion of exclusivity rights in the EU would also come at the risk of losing innovative capacity and ‘high value-added jobs’ to other jurisdictions that offer a more attractive mix of IP protection and research and production costs. Moreover, the EU’s trade and investment policy has been to get other countries to allow patent term extension to compensate for revenue shortfalls due to longer regulatory approval times. If the EU allows for exports to these third markets when exclusivity rights are still active, it would erode the EU position vis-à-vis countries with weak protection of intellectual property.
Research assistance by Valentin Moreau is gratefully acknowledged.
There is yet again a debate in Europe about the protection of intellectual property (IP) in the pharmaceutical sector, and it is influenced by the calls for introducing an export exemption for Supplementary Protection Certificates (SPCs). This paper aims to take stock of the arguments and evidence for and against such a reform, and to map the different opportunity costs that would entail from reduced exclusivity rights. While most other existing studies have come to the conclusion that static economic activity in the EU would only marginally be affected by an export waiver in the SPC system, this study highlights the dynamic effects that would arise. In essence, additional erosion in the exclusivity rights would disincentivize originators and innovators in Europe. Moreover, an SPC export waiver is likely to cause divestment and higher prices for branded medicines in some EU Member States, primarily more affluent Western European countries.
While the SPC is a technical and, for many observers, somewhat opaque system, it rests on a simple observation. Patents grant pharmaceutical manufacturers (patent holders) the temporary right to exclude others from making, using, or selling these drugs. The exclusive aim is to encourage innovation as patent holders are likely to collect greater revenues if they are protected from imitation and direct competition. These revenues are intended to serve as incentives for new research in substances and the development of innovative pharmaceutical products that could improve public health. However, the effective exclusivity right gradually eroded over time because of the compulsory, and increasingly lengthy, testing and clinical trials these products require prior to obtaining regulatory marketing approval. Hence, the economic value of the patent has gone down (see discussion below). An SPC is intended to address the negative impact on sales and revenues.
Over the years, regulators have gradually introduced more restrictions on drug developers in order to safeguard public health. Extensive regulatory systems have been constructed by bodies such as the European Medicines Agency (EMA) and the US Food and Drugs Administration (USFDA), prescribing procedures for virtually all stages along the drug development process (Kashyap et al. 2013; Putzeist 2013). Additional safety and pharmacovigilance requirements, for instance, were added partly as a consequence of previous market withdrawals. Minimum requirements for functional pharmacovigilance systems were set during a WHO-mediated process in 2010 and then implemented by regulators around the world (WHO 2012). In the EU, the new pharmacovigilance legislation, which entered into force in 2012, was the biggest change to the regulation of human medicines since 1995. The new regulation had significant implications for applicants and holders of EU marketing authorisations, as well as for patients, healthcare professionals and regulators (see, e.g., EMA 2012).
Mandatory trial and clinical testing times as well as the costs associated with these procedures increased substantially over time. Longer approval times and higher costs contributed to a significant decline in pharmaceutical research and development productivity for many therapeutic areas. Accordingly, the purpose of introducing SPC’s was to effectively stabilise the commercial value of a patent by granting pharmaceutical innovators additional time to recoup the costs for investments in the research and development of new medicines (for discussions of recent trends in regulatory affairs and marketing approval procedures see, e.g., Eichler et al. 2016; DiMasi 2016; Mestre-Ferrandiz et al. 2012; Scannell et al. 2012). As a consequence, the commercial value of a patent would be significantly lower if marketing exclusivity was not extended.
In the EU, SPCs must still be applied for and are granted at the Member State level. Once granted, the SPC takes effect at the end of the term of the original patent and extends exclusivity rights. The additional exclusivity period is equal to the period which elapsed between the date on which the application for the original patent was lodged and the date on which the product was first authorised to be placed on the EU market, reduced by a period of five years. However, the duration of the SPC may not exceed five years from the date when it takes effect. Eventually, a pharmaceutical company that holds both a patent and an SPC can benefit from an overall maximum of 15 years of protection from the date its drug first obtains the authorisation to be placed on the EU market.
Source: own illustration derived from Pharmaceutical Compliance Monitor (2013). The figure shows two examples and how the SPC term is calculated based on the different times spent on development in two cases (in the first example 8 years and in the second example 10 years).
Should SPCs be Reformed?
The European Commission is now taking into consideration a change of the existing SPC legislation. It is following up on healthcare campaigners, the EU’s generic drugs industry and some EU health ministers who argue that pharmaceutical patents and other exclusivity protections ‘have gone too far, causing drug prices to skyrocket while patients struggle to access the latest treatments and cures’ (Colis 2017; Natsis 2017). While the generics industry wants to increase its sales, the motivation behind this initiative for governments is to reduce current or future expenditures on medicines.
Following the relevant communication of the European Commission (2017), the ambition is to (1) ‘create a level playing field for EU-based manufacturers of generic and biosimilar medicines by comparison with firms based in non-EU countries (both for export and for EU-market entry purposes).’ At the same time, the Commission aims at (2) ‘keeping a high level of SPC protection in the EU,’ which would, according to their view, ‘lessen reliance on imports of products that are essential to public health’ and help ‘innovative sectors to be globally more competitive and increase the attractiveness of Europe as a hub for innovation and manufacturing.’ Finally, the Commission (3) aims to ‘[m]aximise the benefits of the Unitary Patent system to those sectors relying on SPC protection, including a reduction of the fragmentation in the internal market that is associated with the current SPC system; and provide the upcoming Unified Patent Court with clear provisions reflecting best practice developed in Member States for these sectors.’
In addition to changes in existing SPC regulations, the Commission aims to ‘[m]aximise certainty and benefits of the Bolar patent exemptions, including a reduction of the fragmentation in the internal market that is associated with the current Bolar system’ and to ‘provide the upcoming Unified Patent Court with clear provisions reflecting best practice developed in Member States in relation to patent exemptions’ (European Commission 2017). The principle behind the Bolar exemption is that generic manufacturers should be legally permitted to take the necessary preparatory measures in order to be able to enter previously protected markets without delay once exclusive patent protection expires.
Where does the Industry Stand?
The generics industry emphasizes that a ‘manufacturing waiver for generic and biosimilar medicines during the SPC period would increase access to high quality medicines in unprotected markets, without changing the equilibrium between the originator and the generic and biosimilar medicines industries in the EU.’ It also claims that ‘an adapted legal environment that includes the SPC manufacturing waiver will boost investments in our sector and we stand ready to support job creation measures.’ (Medicines for Europe 2017a, 2017b) The generics industry also welcomes a study from early 2016 (released in October 2017) that was commissioned by the European Commission. This study concludes that the change in the EU’s current SPC regime will increase the net sales for the EU based pharmaceutical industry by 7.3 to 9.5 billion EUR and create 20,000 to 25,000 additional manufacturing jobs in Europe by 2025 (Medicines for Europe 2017c, CRA 2016).
R&D-intensive pharmaceutical manufacturers, most of which also produce generics, reject the idea of an SPC waiver. Industry representatives argue that it would weaken the EU’s incentives regime for pharmaceutical innovations and valuable new medicines. They also raise concerns about numerous practical challenges, specifically the inability of legal authorities to ensure that products manufactured under an SPC waiver are only exported. In addition, industry representatives are worried about products that are stockpiled for commercial purposes in the jurisdiction where manufacturing takes place, i.e. EU countries. Accordingly, an SPC exemption would effectively undermine the enforcement of IPRs, create additional administrative costs in the EU and increase litigation costs. Finally, the industry is worried about products that reach destinations other than the permitted countries, which would contribute to a further erosion of EU patent holders’ exclusive rights (IFPMA 2016).