Market exclusivity, data exclusivity and S. 3921

There has been some confusion lately regarding the distinction between “data exclusivity" and "market exclusivity.” For most newly approved drugs, US law only provides "data exclusivity," five years for small molecule drugs and 12 years under the newly enacted biosimilar legislation. During the period of data exclusivity, generic competitors are prevented from relying on data generated and paid for by the innovator to secure FDA approval for a generic or biosimilar version of the innovator drug. This is not the same as market exclusivity, because a generic company is free to generate all of its data from scratch to obtain marketing approval for their generic version of the drug, although in practice is rarely if ever happens. True market exclusivity would completely preclude generic competition, while data exclusivity simply provides a period of time during which generic competitors are not permitted to rely on innovator's data to obtain marketing approval.

In contrast, the Orphan Drug Act provides a period of true market exclusivity for certain orphan drugs, which precludes FDA from approving a competing version of the same or highly similar drug product to treat the same orphan disease for a period of seven years. The key difference between marketing exclusivity and data exclusivity is that a competitor cannot circumvent marketing exclusivity by generating its own data and submitting a new application for FDA approval, it is an absolute bar to FDA approval of the same drug for the same indication.

Recently, members of Congress sent a letter to the FDA seeking to clarify this point. In the letter, signed by four Senators including Orrin Hatch and John Kerry, the Senators point out that in a recent notice published by FDA seeking comments on the newly enacted biosimilar legislation, FDA incorrectly states that the biosimilar legislation provides a 12 year period of “marketing exclusivity.” The letter quite correctly point out that the biosimilar legislation in fact that does not include any marketing exclusivity period, but rather a 12 year period of data exclusivity.

Perhaps FDA should be excused for the lapse. Reporters and commentators routinely refer to the data exclusivity provided for biologics as "market exclusivity." To see what I mean, just do a Google search for “Obama budget biologic marketing exclusivity,” and you will pull up numerous reports from leading news agencies and bloggers reporting that the Obama budget proposes reducing the market exclusivity period for biologics from 12 years to seven years. In fact, there is no market exclusivity period for biologics, only data exclusivity, they should all read the letter from the Senators and stop propagating the misperception that the biosimilar legislation provides a period of market exclusivity.

I suspect part of the reason people have taken to characterizing data exclusivity as market exclusivity is because it suits the purposes of those who would like to speed to market entry by generic competitors by lowering the barrier to entry of generic competition. When you characterize it as market exclusivity, it sounds like market competition has been completely blocked for 12 years, which is very different from a 12 year period in which competitors cannot free ride on data paid for by the innovator.

For example, in a report on biosimilar legislation prepared by the FTC in 2009, a report of which I've been highly critical, the FTC repeatedly refers to the data exclusivity provisions of biosimilar legislation as marketing exclusivity. FTC's mischaracterization of data exclusivity as marketing exclusivity might have been an attempt to strengthen its argument by implying that no biosimilar product could enter the market during the 12 year data exclusivity period, when in fact this is not the case. But this mischaracterization has spread, apparently leading to confusion even at FDA, and thus necessitating this letter from the Senators.

Related to this debate is the "Ethical Pathway Act of 2010," (S. 3921), a bill introduced into the Senate by Senator Sanders on September 29, 2010, which would effectively eliminate any data exclusivity period for both conventional drugs and biologics. Under this proposed legislation, as I read it, an innovator would be forced to share its clinical and animal data with a competitor, to be used by the competitor to obtain FDA approval for a generic or biosimilar product. The bill includes provisions for a "cost-sharing arrangement," pursuant to which the generic company would be required to compensate the innovator for some of the costs incurred in generating the data. If the innovator and generic company cannot agree on the amount, they are required to submit the matter to an arbitrator who is to determine a "reasonable and fair fee.”

The bill identifies specific factors to be considered in determining the "reasonable and fair fee," including "actual out-of-pocket costs of the applicable clinical investigations, the risk of the investigations, as reflected in the probabilities that similar investigations result in successful applications for marketing, any federal grants, tax credits, or other subsidies that reduce the net cost of the investigations, the expected share of the global market for the product involved, by the party seeking to rely upon the investigations for marketing approval, and the amount of time the holder or holders of the relevant applications for licenses has benefited from exclusive rights, and the cumulative revenue earned on the products that relied upon the regulatory tested at issue."

I think it is reasonable to predict that innovators are highly likely to be undercompensated by this imposed "cost-sharing arrangement." Essentially, after the innovator company has taken on a huge amount of risk bringing a drug to patients, and then establishing a market for the drug, this bill would allow a competitor to free ride off all of this risky investment by simply paying some fraction of the cost for clinical trials. As reported last Monday in Reuters, a survey has found that traditional small molecule drugs have only a 7% chance of making it from phase I through FDA approval. The success rate is even lower for some of the most important drugs-4.7% for cancer drugs, and 5.7% for cardiovascular drugs. There needs to be powerful financial incentives to invest huge amounts of money when there is such a low probability of a payoff, which I think helps explain why we are seeing such a dramatic drop-off in pharmaceutical R&D spending and in the rate of new drug approvals.

When generic competition hits the market, the innovator does not just lose a piece of the pie, the pie shrinks dramatically. Innovators need some substantial period of exclusivity on the market in order to bring in the profits that ultimately drive innovation. Patents play an important role in this regard, but patent protection is unpredictable and not always available, even for important and innovative life-saving drugs, and this is particularly true in the case of biologics.

To me, this is analogous to me going to the racetrack with a friend, and deciding to bet $1000 on a longshot horse. If the horse comes in, and I win $25,000, it is certainly not fair for my friend to wait until the race is won and then demand that I accept $500 (half the price of the bet) in exchange for half of the winnings ($12,500). But this is essentially what the "cost-sharing arrangement" under the proposed legislation would entail. In fact, it's even worse than that, because to take the analogy further, since generic competition reduces profits for everyone, we're not talking about sharing $25,000 anymore, but substantially less than $25,000.

While the legislation would hurt innovators, and ultimately innovation, it is premised upon a quite legitimate ethical concern, i.e., conducting clinical trials on human beings when we presumably already know the product is safe and effective raises substantial ethical issues. While I agree this is an entirely valid concern, I don't think it should be addressed in a manner that substantially reduces incentives for future innovation.

I would suggest that perhaps the best way to deal with these concerns is to provide drug innovators with an actual period of marketing exclusivity, independent of patent rights and independent of data exclusivity. This would give innovators a period of market exclusivity in which to recoup profits that incentivize innovation, without having to worry about patent challenges, and without subjecting human subjects to unnecessary clinical trials.