Tuesday, June 30, 2009

In the Interest of Balance: A Clarification of My Recent FOB Post

In my post on FOB legislation I pointed out that the work of economist Alex Brill was supported by generic company Teva. A reader has correctly pointed out that Henry Grabowski's work was partially funded by the Pharmaceutical Research and Manufacturer's of America (PhRMA), a group representing innovators, and I have revised the post to note this.

Sunday, June 28, 2009

Follow-on Biologics Bill Threatens Innovation By Weakening Patent Rights

Congress is considering legislation that would provide FDA with an abbreviated marketing approval pathway for biologic drugs, similar to the abbreviated new drug application (ANDA) process currently available for conventional small molecule drugs. Proponents of the legislation anticipate that an abbreviated process would promote competition in the market for biologics that would translate into lower prices. However, there is a danger that lower prices could come at the cost of decreased future innovation in this increasingly important class of therapeutics. In particular, H.R. 1427 and S. 726, identical bills that have been introduced in the House of Representatives and Senate, tH.R.eaten to stifle innovation by impairing the ability of biologic innovators to maintain a sufficient period of market exclusivity to adequately incentivize future innovation. This post explores the role of marketing exclusivity in incentivizing innovation in conventional and biologic drugs, and considers the implications if H.R. 1427/S.726 (referred to hereafter simply as H.R. 1427) were to be enacted in its current form.

An appropriate period of market exclusivity for innovators is required to incentivize future innovation

Bringing a new drug to market is a notoriously expensive and risky endeavor, and the necessary investment time and capital will only occur in an environment that provides adequate incentives. Although grant funding and prizes play some role, the primary incentive driving drug innovation is the innovator's expectation of some period of market exclusivity in which to secure an adequate return on its investment. Market entry by generic versions of the drug dramatically drives down the price of the drug, and inevitably the innovator’s profits. Competition by “me too” drugs in the same class can also reduce innovator profits, albeit usually to a lesser extent than true generic competition. The optimal legal regime will balance the consumer's interest in timely generic competition with the recognition that innovators must be allowed to benefit from an adequate period of marketing exclusivity in order to incentivize adequate investment in order to maintain the desired pipeline of future drug innovation.

As with any innovative technology, patents play an important role in providing market exclusivity for drug innovators. However, drug innovators also rely heavily on FDA regulatory barriers to delay market entry by competitors. In the absence of an abbreviated approval process, a competitor is required to generate all the necessary clinical and nonclinical data to establish the safety and efficacy of its product, which can be prohibitively expensive and thus provide innovators with a potent barrier to competition independent of patent protection. The substantial role of regulation in maintaining market exclusivity distinguishes drugs from most other innovative products, and is one of the reasons why competition and barriers to entry in the pharmaceutical market has been the subject so much attention by Congress and the FTC.

Hatch Waxman reduced the regulatory barrier to competition in the market for conventional drugs by providing an abbreviated FDA approval process for generics

In 1984, Congress enacted the Hatch Waxman Act in order to promote generic drug competition and thereby drive down drug prices. One of the primary means by which Hatch Waxman speeds generic market entry is by providing the ANDA, an abbreviated FDA approval process for generic drugs that permits a generic drug company to establish the safety and efficacy of its product by providing data demonstrating that it contains the same active ingredient as, and is bioequivalent to, an already approved innovator product. The ANDA pathway eliminates the need for the generic company to sponsor independent clinical testing to establish safety and efficacy, and in effect allows it to free ride on the innovator’s investment in developing the drug and generating the expensive data necessary to achieve regulatory approval. As a result, a generic competitor can bring its version of the drug to market for a fraction of the cost incurred by the innovator. Thanks to Hatch Waxman and the ANDA, once an innovator’s patents have expired (and often earlier in cases where a generic company chooses to challenge the innovator’s patents) market entry by multiple generic competitors is the norm, as is the resulting sharp drop in drug price and innovator profits.

Note that by reducing the FDA regulatory barrier to generic market entry, the creation of an abbreviated approval process dramatically increased the importance of patents in providing drug innovators with a period of market exclusivity. Hatch Waxman does provide innovators with a five-year period of "data exclusivity" after granting marketing approval to innovator drug. FDA is not permitted to accept an ANDA relying on the innovator's data during this five year window, thereby providing innovators with some limited protection from generic competition even in the absence of patents. In most cases, however, drug innovators have successfully employed patents to maintain market exclusivity extending well beyond five years, averaging closer to 13 years by some estimates. Absent the prospect of effective and predictable patent protection, the short period of data exclusivity provided by Hatch Waxman would probably not be sufficient to incentivize the optimal level of drug development.

The current push for an abbreviated approval process for biologic drugs

Biologic drugs, particularly genetically engineered therapeutic proteins and monoclonal antibodies, represent some of the most important fruits of the biotechnology revolution. In recent years they have come to play a critical role in the US healthcare system, providing important therapeutic benefits over conventional non-biologic drugs. In fact, a recent report predicts that by 2014 the six top blockbuster drugs will all be biologics. The benefits, however, come at a price. For a variety of reasons, biologic drugs are substantially more expensive than conventional drugs, and with their increased usage have come to represent a significant and growing percentage of healthcare expenditures in the US.

While Hatch Waxman has been successful in promoting the availability of generic versions of traditional small molecule drugs, its ANDA process is not available for most biologic drugs, which are regulated under a different statute than conventional drugs. In effect, most biologics enjoy an infinitely long period of data exclusivity. The high cost of gaining regulatory approval to market a biologic results in a substantial barrier to market entry by competing biologic products. As a consequence, biologic innovators have been less dependent upon patents to protect market dominance than conventional drug innovators. When the regulatory barrier is insufficient to keep out competition, biologic innovators have had mixed success in using patents to maintain market exclusivity. Amgen, for example, has successfully used patents to block competition in the erythropoietin market. Other biologic innovators have been less successful, and there are numerous examples of competitors designing around patents intended to protect a biologic drug.

In order to address the high cost of biologics, some have proposed creation of an abbreviated approval process for biologics, similar to the ANDA, that would promote competition in the biologics market and thereby drive down prices. Although the term "biogeneric" is sometimes used, it is generally acknowledged that true generic versions of biologic drugs are unlikely to be technically feasible anytime soon. By definition, a generic drug employs the same active ingredient and is bioequivalent to the innovator product on which it is based, rendering the two products functionally interchangeable. This presumption of interchangeability is what allows pharmacists to substitute a generic product for a branded drug prescribed by a physician. Biologic drugs are much more chemically complex than traditional drugs, and safety and efficacy of the product can be affected by subtle variations in the reagents and processes used in the production of the biologic. This dependence of product on process, inherent in any biologically produced product, coupled with limitations in current bioanalytical technology, will for the time being likely preclude FDA from approving generic versions of biologic drugs, although at some point technical advances might render biogenerics a reality.

There is reason to believe, however, that an abbreviated approval process for biologics could reduce the regulatory barrier to entry for "follow-on biologics" (FOBs), by authorizing FDA to consider data generated by an innovator to establish the safety and efficacy of an FOB sharing structural and functional similarity to the innovator product. Proponents anticipate that FOB market entry would increase competition in the market for biologics and drive down prices, albeit probably not to the extent typical of true generic competition as exist in the market for conventional drugs. Because the products will not be presumed identical, at least some clinical testing for safety and efficacy of the FOB will be necessary even under the abbreviated process. Furthermore, potential for clinically significant differences in the safety and efficacy of the products would preclude any assumption that the FOB could be freely substituted for the innovators product.

H.R. 1427 creates an abbreviated approval process that would necessitate strong patent protection for biologic innovators

H.R. 1427 is one of two bills currently pending in Congress that would create an abbreviated approval process FOBs. The bill provides innovators with a period of data exclusivity that is even shorter than that provided for conventional drug innovators under Hatch Waxman. Recall that under Hatch Waxman, FDA will not accept an ANDA until five years after marketing approval of the innovator product, resulting in an effective period of market exclusivity for the innovator that exceeds five years by the period of time necessary for FDA to review and approve the application, which can stretch into years. In contrast, under H.R. 1427 an abbreviated application relying on innovator data to secure approval of a competing FOB could be submitted to FDA at any time, and FDA would be authorized to approve the FOB for market entry as early as five years after the innovator product first enters the market. As a result, the five-year data exclusivity period provided by H.R. 1427 is actually significantly shorter than the period provided by Hatch Waxman.

Some innovative biologics would receive an even shorter period of market exclusivity. Under H.R. 1427, a new biologic sharing structural similarity to a previously approved biologic would only be eligible for three years of market exclusivity before an FOB would be permitted to enter the market, even if the new biologic has significantly improved therapeutic properties relative to the previously approved biologic. For example, chemical modification of the protein backbone can result in substantially different and improved pharmaceutical properties relative to the unmodified protein. PEGylation, the attachments of polyethylene glycol (PEG) groups to a proteins amino acid backbone, for instance, has been used to modify and improve the therapeutic properties of some protein drugs. Because the backbone amino acid sequence of the protein has not been substantially altered, however, H.R. 1427 would appear to award the sort of important innovation with a mere three years of non-patent market exclusivity.

There has much debate over the length of market exclusivity necessary to adequately incentivize innovation in biologics. In a 2008 study, Duke University economist Henry Grabowski calculated that it takes between 12.9 and 16.2 years on the market for a biologic innovator to "break even." In response, Alex Brill published a critique challenging some of Professor Grabowski's assumptions and estimating that seven years of data exclusivity would be sufficient to maintain adequate incentives for biologics innovation. Mr. Brill’s work was supported by Teva Pharmaceuticals, a leading generic drugs company that would presumably prefer a shortened period of data exclusivity in order to hasten its entry into the FOB market. In any event, both estimates substantially exceed the paltry three to five years of data exclusivity provided under H.R. 1427. Unless the innovator can successfully employ patents to extend the period of marketing exclusivity, it will enjoy a period of marketing exclusivity that is substantially less than that currently enjoyed by conventional drugs, and less than the amount necessary as estimated by economists. [NOTE: A reader points out that Professor Grabowski's work was supported by the Pharmaceutical Research and Manufacturer's of America (PhRMA), a group representing innovators (Added June 30, 2009)]

In contrast, H.R. 1548, a competing proposal to legislate a pathway for FOBs that has been endorsed by biotechnology innovators, would provide innovators with at least 12 years of data exclusivity. An innovator could extend this period to 14.5 years by conducting pediatric studies of the drug and by gaining approval for a significant new use of the drug. This extended period of data exclusivity would approximate the length of time an innovator might expect to depend on patent protection, and also is in the range that many would argue is necessary in order to adequately incentivize innovation. As a result of the extended period of data exclusivity, patents would play a less critical role in incentivizing the development of innovative new products than they would under H.R. 1427.

The FTC recently concluded that patents provide adequate incentive for innovation in biologics

Proponents of H.R. 1427 argue that data exclusivity extending beyond five years is not necessary to incentivize innovation, because innovators will be able to employ patents to maintain an adequate period of market exclusivity. This was the conclusion of a recent FTC report, which based this prediction on an assumption that strong and effective patent protection is and will continue to be available for biologics. In the words of the FTC, "patent protection is likely to continue to provide strong incentives for innovation after introduction of follow-on [biologic] drug competition." Not only does the FTC report find that patents are sufficient to incentivize innovation, it also concludes that they are necessary, characterizing patent protection as the "fuel" that drives the biotechnology R&D engine. This view is shared by the biotechnology industry, which has been one of the staunchest advocates for strong and effective patent rights during the ongoing patent reform debates.

It is difficult to assess whether the FTC is correct in its assumption that patent rights will be sufficient to incentivize innovation in the absence of a substantial period of data exclusivity. There is some reason to think that patents may not be as effective for protecting biologics as they have been for conventional drugs. For example, Hatch Waxman requires that a generic version of a conventional drug employ the same active ingredient, thus rendering even a very narrow patent on the active ingredient highly effective in blocking generic competition. Generic companies almost never succeed in successfully challenging composition-of-matter patents claiming a drugs active ingredient, which can be practically impossible to design around. They have been highly successful, however, in challenging formulation patents, often by employing a different formulation that still results in a bioequivalent product.

In contrast, the abbreviated approval process provided under H.R. 1427 would authorize FDA to use innovator data to approve a chemically non-identical albeit "biosimilar" FOB, which could then compete with the innovator product. This could open the door for FOB producers to design around an innovator's patents, thus avoiding infringement, while maintaining sufficient biosimilarity to the innovator’s product to benefit from the abbreviated approval process. Ultimately, the effectiveness of patent protection in protecting biologics will depend on factors such as the scope of patent claim coverage afforded patents relating to biologics and the criteria applied by FDA to determine how close an FOB has to be to an innovator product in order to be classified as sufficiently biosimilar to take advantage of the abbreviated approval process. My previous study of human gene patent litigation identified numerous instances in which the manufacturer of a competing biologic successfully designed around the innovator's patents. Recent decisions in the courts, including Kubin and Bilski, and the PTO’s recent trend toward limiting biotechnology claim scope by a more stringent application of the Eli Lilly written description requirement (as exemplified by the Board of Patent Appeals and Interfences decision in Kubin), could adversely affect the ability of innovators to obtain adequate patent protection for some biologic inventions. In any event, there is little to suggest that patents are too strong in the area of biologics.

H.R. 1427 completely undermines any assumption that strong patent protection will be available to incentivize biologic innovation by substantially weakening the patent rights of biologic innovators, at the same time it dramatically reduces the period of data exclusivity. The patent weakening provisions of H.R. 1427, which specifically target biologic innovators, come in the guise of a pre-approval patent resolution process.

Before delving into the specifics of H.R. 1427, it will be useful by way of contrast to review the pre-approval patent resolution process provided under Hatch Waxman for conventional drugs in order to better appreciate the punitive nature of the H.R. 1427 process.

The patent provisions of Hatch Waxman balance interests of generic companies and innovators

Hatch Waxman created a pre-approval patent resolution process that encourages litigation of infringement issues prior to the grant of marketing approval to a generic drug. Generic market entry prior to resolution of patent infringement issues is often referred to as "at risk,” and for good reason. If a generic company enters the market and is subsequently found to be infringing a valid patent, the company could be liable for lost profit damages far exceeding any profits it could derive from selling the generic drug. If the innovator prevails, on the other hand, the generic company might not have the financial resources to provide adequate compensation. And once consumers (or, more often, the insurance company or governmental agency that pays the bills) would accustomed to paying a lower price for the drug, innovator might be unable to demand the same price for its product even after the generic is forced to exit the market. Thus, both sides can benefit from litigating disputed patents prior to at risk market entry.

Under Hatch Waxman, an innovator marketing an approved conventional drug is required to list all of its patents that claim the drug, or a method of using the drug, in an FDA publication known as the Orange Book. The Orange Book listing requirement only applies to drugs regulated under the Food Drug and Cosmetic Act (FDCA), and thus does not apply to most biologic drugs, which are regulated under the Public Health Services Act (PHSA). Listing a patent in the Orange Book not only provides notice to potential generic competitors of the most relevant patents, but also effectively puts a bounty on each of the listed patents, in the form of a 180 day period of generic exclusivity that is granted to any generic company that challenges an Orange Book listed patent by applying for approval to commence marketing of the generic version prior to patent expiration. The generic company must specifically allege that the challenged patent is invalid or would not be infringed by the company’s proposed generic product. During this 180 days, FDA will not authorize the marketing of any other generic version of the drug, a boon for the generic company and a substantial financial incentive for patent challenges.

Orange Book listing also provides substantial benefit to the patent owner. FDA will not approve a generic version of a drug until all of the Orange Book listed patents relating to the drug have expired, unless the generic applicant explicitly challenges a patent as described above. If a generic company does challenge an Orange Book listed patent, Hatch Waxman authorizes the patent owner to immediately file an infringement lawsuit before the proposed generic product has been approved for marketing. If suit is filed within 45 days, the statute specifies that FDA will not approve the generic application for at least 30 months. In effect, Orange Book listing allows the patent owner to obtain an automatic 30 months preliminary injunction blocking generic market entry, without having to establish the reasonable expectation of success and other equitable factors normally necessary to convince a court to grant a preliminary injunction. Ideally, the 30 months provides the parties an opportunity to resolve patent issues prior to generic market entry.

The benefits of Orange Book listing for innovators tend to balance other provisions of Hatch Waxman that worked at a disadvantage, such as the regulatory approval exemption from patent infringement that permits generic companies to conduct the tests necessary to achieve FDA approval prior to the expiration of the innovator's patents, along with the substantial benefit to generic companies of having an abbreviated approval process which allows them to gain marketing approval based on data generated and submitted by the innovator, and also permits FDA to authorize pharmacists to substitute the generic drug for branded drug prescribed by a physician.

The patent provisions of H.R. 1427 discriminate against innovators and would weaken patent rights

In stark contrast with a balanced approach of Hatch Waxman, H.R. 1427 would create a preapproval patent resolution process weighted heavily against the patent owner. Under H.R. 1427, any applicant or prospective applicant for approval of a follow-on biologic would be authorized to demand from any innovator marketing an approved biologic a list of all patents owned, licensed or controlled by the innovator that could potentially be infringed by a follow-on product. Not only would the innovator be required to identify patents claiming the biologic drug and methods of using it, but also components of the drug and processes that could be used to produce the product, regardless of whether or not the patented process is actually used in the production of the innovator's product. In other words, the innovator would not only be required to identify product-specific patents, but any patent covering a process or reagent which could conceivably be adapted for use in the production of a biosimilar product. To ensure innovator compliance, H.R. 1427 would punish the failure to list any patent by rendering that patent unenforceable, not only against the FOB applicant but against the world.

Facing the draconian threat of patent unenforceability, and uncertainty as to the range of potential variation that would be permitted under the nebulous concept of "biosimilarity," innovators will likely feel compelled to err on the side of over inclusion and list any patent that could conceivably be related to the production of a biosimilar product. Unfortunately for the innovator however, listing a patent will subject that patent will to a number of provisions of H.R. 1427 that dramatically limit the rights of the patent owner. For example, once a patent has been identified in such a list, H.R. 1427 would bar the patent owner from bringing a pre-marketing declaratory judgment lawsuit against the FOB applicant, forcing the innovator to wait until the FOB has entered the market at risk before commencing a lawsuit for infringement. In the past, innovators have used declaratory judgment actions to bring suit prior to market entry by the FOB, which allows them the opportunity to plead their case before a court, and when a likelihood of success on the merits has been demonstrated a court can enjoin the generic product during dependency of litigation or, thereby avoiding the risks associated with pre-resolution market entry. By barring the innovator from bringing suit until after the FOB has entered the market at risk, H.R. 1427 substantially weakens the patent rights of the innovator.

While innovators would be blocked from bringing a declaratory judgment action with respect to any listed patent, H.R. 1427 explicitly authorizes an FOB applicant to bring a declaratory judgment lawsuit alleging invalidity or noninfringement of any of the listed patents at any time. The bill would allow an FOB applicant to decide to challenge any patent anytime prior to approval and marketing, or to decide not to challenge any patent and enter the market at risk, while denying the patent owner any corresponding right to bring an action prior to market entry.

Not only does H.R. 1427 provide a unilateral right to an FOB applicant to bring a declaratory judgment action prior to marketing approval, it also provides an alternate mechanism for challenging a patent without bringing suit. Under the bill, An FOB applicant can, at anytime, provide notice to the innovator alleging that one or more of the innovators patents is either invalid or would not be infringed by the FOB product. The innovator would then have 45 days to bring in infringement suit. If a lawsuit is not filed within 45 days, the innovator will be barred from asserting the patent in court until the FOB product is on the market. And as punishment for not bringing suit within the 45 day window, H.R. 1427 would forever limit the innovator's remedy for patent infringement to reasonable royalty damages, even if the innovator ultimately prevails in court and proves that the FOB product infringes a valid patent. The more potent remedies that are available to any other patent holder – a permanent injunction to force the infringing product off the market, lost profit damages to adequately compensate the innovator, and enhanced damages for willful infringement - would be unavailable for biologic innovators. In effect, failure to file suit within 45 days would result in a compulsory license of the patent in favor of the FOB applicant.

As alluded to in the FTC report, in many cases 45 days will be insufficient time for the patent owner to thoroughly assess the merits of a patent infringement suit. H.R. 1548, the other FOB bill, would create a process for the FOB applicant to provide confidential information to an innovator regarding the specific nature of the proposed FOB product and methods of its production, in order to enable the innovator to make an informed decision as to whether he FOB product would infringe its patent. Patents claiming methods and reagents used in the production of a biologic play a critical role in protecting biologic drugs, much more so than in the case of conventional drugs, where composition of matter patents claiming the active ingredient play the leading role. H.R. 1548 includes provisions intended to maintain the confidentiality of the disclosed information. The FTC report criticizes the exchange of confidential information provisions of H.R. 1548, arguing that in practice it will be difficult to ensure adequate protection of the FOB applicant's confidential information. However, without this information it will be difficult in many cases for an innovator to assess whether an FOB product would infringe its patent, particularly since unlike a generic version of a drug and FOB product could differ substantially from the innovator product and be produced using a very different process.

Compounding the problem, there is nothing to prevent an FOB applicant from changing its production process, and consequently the nature of the product, after the 45 days have expired. Thus, an innovator might decide not to bring suit within 45 days because of its understanding of the proposed product and process, but subsequent changes to the production process could change the nature not only of the process but of the product itself, thereby rendering it infringing, but still the innovator’s remedies will be limited to reasonable royalties as determined by a court, which will likely fall short of adequate compensation for the innovator. The FTC report, which would reject pre-approval patent resolution processes altogether, notes that FOB applicant would be incentivized to engage in this sort of gamesmanship.

H.R. 1427 also includes a change of venue provision that authorizes an FOB applicant that has been sued for patent infringement to request that the court transfer the action to another judicial district. This provision would only operate in one direction, since no complementary right is provided for innovators to seek a change of venue in a declaratory judgment action filed by an FOB applicant. A court considering a request for change of venue under the statute would be required in making its decision to place the greatest weight on moving the case to district court which will adjudicate the matter most expeditiously. By prejudicing the ability of innovators to control the venue in which to enforce their patent rights, the bill further weakens the patent rights of innovators relative to any other participants in the patent system.

H.R. 1427 lacks the balance of Hatch Waxman and threatens innovation

There is broad consensus favoring legislation that would clear the way for FDA to provide an abbreviated approval pathway for FOBs, but it is vital to maintain some means for innovators to achieve an adequate period of market exclusivity to incentivize future innovation. H.R. 1548 would attempt to do this by providing innovators with an extended period of data exclusivity. H.R. 1427, on the other hand, would threaten innovation by providing only a brief period of data exclusivity and at the same time weakening the patent rights of innovators. Although H.R. 1427 purports to emulate Hatch Waxman, it lacks the balanced approach that has been critical to the success of Hatch Waxman in fostering generic competition without unduly compromising future innovation. It would be a mistake to disincentivize innovation in biologics at a time when their enormous potential for alleviating human suffering is poised to explode.