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.
Reviewing the Evidence – Studies of SPC Reform
As outlined by Pugatch et al. (2017), the case for an SPC waiver builds on the potential economic gains that have been outlined by Vicente and Simões (2014). These authors argue that an SPC manufacturing exemption would boost economic activity in the EU and create about 8,890 new direct jobs and 35,560 new indirect jobs. Vicente and Simões also state that, although the EU is one of the most IP-protected regions in the world for pharmaceuticals, high protection levels do not translate into greater rates of innovation.
A key argument brought forward by Vicente and Simões is that ‘the current European patent framework constitutes a serious obstacle to the competitiveness of local pharmaceutical manufacturers. Besides not being allowed to supply generic medicines to markets where patents have expired before expiration in Europe, the authors argue that these firms are also indirectly blocked from playing a relevant role in the supply of generic medicines to Europe. The authors also claim that EU-based pharmaceutical firms are ‘overtaken’ by competitors operating outside Europe since they ‘may launch their products immediately after SPC expiry.’ Vicente and Simões (2014, p. 46)
Vicente and Simões indeed make a strong point about national differences in IP protection, potential forum shopping and the exploitation of regulatory arbitrage. However, they do not provide any information about how much production is actually ‘overtaken’ by foreign suppliers and precisely which takeovers occur due to existing patent and SPC regulations.
Sussell et al. (2017) replicated the Vicente and Simões (2014) study. Contrary to the findings of Vicente and Simões, they estimate that potential job growth would be much smaller and, if uncertainty is taken into consideration, the estimated number for direct and indirect jobs is not statistically distinguishable from zero. Another study conducted by Logendra and Troein (2017) concludes that the actual market potential for EU generics companies to export to non-EU countries is relatively low as success on the markets depends to a large extend on local business practices, customer and patient preferences and is at the same time affected by prevailing trade barriers (for the high discriminatory impact of import tariffs on drugs, see Bauer 2017).
Logendra and Troein also argue that EU generics manufacturers face structural disadvantages as domestic companies often win the majority of business both initially and in the longer term, including the major non-EU markets such as Brazil, Russia and Turkey. Similar findings can be found in the European Commission’s pharmaceutical sector inquiry, which indicates that generics are slow in penetrating European markets. Differences in market shares between countries can, inter alia, be attributed to differences in local pricing and national reimbursement regulations, prescription policies, and diverse generic substitution laws (European Commission 2009), and they are to a large extent driven by well-considered product placement strategies of branded drug companies (Hess and Litalien 2005).
In addition, Logendra and Troein (2017) explain that generics manufactured in Europe are more likely to compete for market share with the original brands while at the same time EU’s branded drugs manufacturers would lose exports and market shares in non-EU countries. The authors also show that, for many drugs, SPC expiry dates in EU countries even precede those of non-EU countries. Finally, it is argued that the opportunities for European companies in relation to export markets are limited as, according to the authors, there is only a short or non-existent period of time to market these product that would be created by an SPC waiver.
The most comprehensive study on the impact of an SPC export waiver was only recently released by the European Commission (CRA 2016). It uses multiple methodologies and examines the impact of a SPC export waiver on both EU-based manufacturers of generics and producers of biosimilars. They also took into consideration business lost by branded manufacturers due to the entry of EU generics companies in non-EU markets. The authors estimate that additional sales of European branded and unbranded generics manufacturers would amount to 7.6 billion EUR by 2025 and 8.7 billion EU by 2030. For biosimilars, a different methodology was chosen. The estimated market size available to EU-based biosimilar producers – during the period between the protection expiry in the third country and the SPC expiry in Europe – ranges from 463 million EUR to 2.97 billion EUR by 2025. At the same time, innovative EU drug manufacturers are estimated to lose third country sales of up to 278 million EUR by 2025. Innovative European biologics manufacturers could lose sales of up to 1.7 billion EUR. In sum, CRA (2016) finds that the EU pharmaceutical industry could gain additional net exports of up to 8.56 billion EUR due to an SPC export waiver.
The authors note, however, that their estimates suffer from a serious lack of relevant trade, price and market share data for both branded drugs and generics medicines. While the methodology has generally been developed in a careful way, the numerical outcomes crucially depend on a number of simplifications, assumptions and approximations. For generics, two effects were taken into consideration: 1) a hypothetical market share that EU producers could achieve in eight major pharmaceutical markets (i.e. Canada, China, the US, Brazil, Russia, Japan, Turkey and Australia) based on the share of EEA imports to each of these countries and these countries overall pharmaceutical sales, and 2) additional sales due to market share effects that result from first-mover advantages, which, importantly, tend to generate relatively high numerical effects on the study’s ‘lost sales’ estimates.
It is estimated that generics companies entering a market one year after the first generic entrant would be able to reach a market share of up to 27 per cent of that of the first entrant 12 months after the entry of the later entrant, and up to 36 per cent 24 months after the entry of the later entrant. Market shares are expected to decline considerably the longer it takes for foreign market entrants to enter the market. The authors acknowledge that ‘there could be factors other than the delay related to the SPC term that affect the time to entry into an export market, such as e.g. delays in preparing the dossier and receiving regulatory approvals, delays associated with pricing and reimbursement to the extent that these apply in third countries, among others.’ (CRA 2016, p. 111). These factors could impact on the time it takes for third market entry, but would not be affected by the date of protection expiry in third countries. Defence strategies of incumbent companies, including originators companies who might engage in ‘flanking’ or ‘value-extending’ strategies (as outlined by Glazier et al. 2016), are not taken into consideration.
Concerning the calculation of market shares, the authors acknowledge that there is ‘no reliable data on the share that European generic and biosimilars achieved in sales in third countries,’ which is why calculations in their study are merely based on aggregate EEA export data that do not distinguish between generics drugs, biosimilar drugs and branded drugs. Accordingly, it is assumed that the ratio of imported generics/biosimilars to originator products was the same as the ratio of generic pharmaceutical sales to originator sales in the importing country (CRA 2016, p. 113).
In other words, the estimations provided do not account for dynamic changes in market shares. Such changes would emerge over time due to altering forces of supply and demand. For example, there would be price and volume changes due to the displacement of branded drugs imported from the EU. What is important from the perspective of EU governments: price and volume changes for branded drugs would occur within the EU due to a strategic reconsideration of prices set by pharmaceutical companies in countries where their products are still protected by market exclusivity rights. Moreover, since the data applied does not allow for a differentiation of branded and unbranded generics, the conclusions do not differentiate between ‘pure’ generics manufacturers and brand-name manufacturers that also serve generics markets (CRA 2016, p. 112).
For biosimilars, the authors also highlight that they had to work on the basis of simplifications, assumptions and approximations due to the lack of sufficient market data for EU and third countries. EU market penetration rates, for example, have been applied for third countries as third country penetration rates are not available for biosimilars. A similar lack of data is reported for the actual volume of sales of biosimilars in third countries.
Non-availability of data is also reported for the volume of branded drugs and branded biosimilars that EU exporters sell in third countries. Similarly, the authors were unable to collect data for prices and price elasticities in third countries, which is why they assume constant prices for originator products after the entry of generics due to the expiration of the SPC protection. At the same time, it is argued that ‘recent papers have found that branded medicines prices do drop somewhat or remain flat following protection expiry in the US, Canada and European markets’ (CRA 2016, p. 135), indicating that originator manufacturers prices’ are actually likely to be exposed to downward pressure due to rising generics competition.
To sum it up, even though this and other studies are carefully done, the results should be interpreted with caution. Reliable quantitative analysis requires reliable data. Reflecting the lack of data and methodological choices to circumvent the absence of hard quantitative facts, the results of all available studies differ substantially in size and the direct and indirect effects on EU production and employment. In addition, the analyses suffer from a lack of sufficient industry data, particularly projections and case studies from individual EU generics manufacturers and impact analyses provided by their industry bodies credibly backing the generic industry’s promise to invest and expand exports.
What unites available studies, however, is that they all point to marginal effects on overall EU economic activity if a waiver is introduced. At the same time, they also ignore the dynamic effects of changes in the EU’s incentive regime for pharmaceutical companies that engage in knowledge-intensive research and development activities, i.e. the effects on prices of drugs that still benefit from patent protection and exclusivity rights. Importantly, all these studies fail to address the opportunity costs that an SPC export waiver would create for patients and public health systems of EU Member States as the result of strategic changes in product placement, pricing and investment behaviour by innovators.