the evolution of pharmaceutical patentsjmparman.people.wm.edu/620-lecture-slides/intellectual... ·...

The Evolution of Pharmaceutical Patents

William E. Clarke Trade Card, http://dalessandris.net/clarke.aspx

J. Parman (College of William & Mary) Regulation of Markets, Spring 2013 March 18, 2013 1 / 38


The 1906 Pure Food and Drug Act

Forbids the manufacture, sale or transportation ofpoisonous patent medicines

Required labelling of contents and dosage for certaindrugs (alcohol, cocaine, heroin, morphine, etc.)

These drugs could be sold as long as they were labelled

Essentially the beginning of the Food and DrugAdministration (FDA)

Regulation was mainly about providing betterinformation to consumers but slowly begins to alsorestrict unsafe products (consider United States v.Forty Barrels and Twenty Kegs of Coca-Cola)



1930 Food, Drug, and Cosmetic Act

Gives authority to FDA to oversee safety of food, drugs,and cosmetics

Big change is that now drugs must be approved safe bythe FDA

Expanded just about every decade since originallypassed

Key change is Kefauver-Harris ammendment in 1962

Ammendment requires proof of efficacy



Stage TimeDiscover new drug ???Lab and animal testing approximately 6 yearsPhase 1 clinical trials (safety, 20-100 people) 1 yearPhase 2 clinical trials (effectiveness, 100-300 people) 2 yearsPhase 3 clinical trials (extensive randomized trials, 300-3,000 people) 3 yearsFDA review 2 yearsTotal time from discovery to approval: 14 years



This approval process is meant to ensure safety andefficacy of new drugs

The downside is that it makes drug development alengthy, costly process

Firms need some guarantee that they will be able tomake enough profits to justify the R & D expenditures

Problem is that chemical compounds are relatively easyto imitate

Further problem is the amount of failure: 75% of drugsentering clinical testing never get marketed, 70% ofdrugs marketed cover their total costs

A solution is patents



Selman Waksman isolates streptomycin, 1943


Basics of Pharmaceutical Patents

Chemical compound and its use can be patented

Patents are specific to the compound (incentives tomodify it to extend patent life)

Patents last 20 years from the date of file (not the datedrug enters market)

Operating alongside patents are exclusivity rightsgranted by the FDA


Basics of Pharmaceutical Patents

Exclusive marketing rights can be granted by the FDAfor a new drug

Similar idea to patents and can run concurrently withpatents or not

Exclusive marketing rights vary in length:

New chemical - 5 yearsPatent challenge - 180 daysPediatric exclusivity - 6 months added to existingpatents/exlusivityOrphan drug - 7 years


When the Patent Ends

At date of entryOne year after

entryTwo years after

entryAverage brand-name price index

1.00 1.05 1.09

Average generic price index 1.00 0.67 0.54

Average ratio of generic price to brand-name price

0.68 0.43 0.33

Average generic market share 0.20 0.64 0.73

Effects of Generic Competition on Price and Market Share



So the end of the patent doesn’t necessarily meanp = MC in the real world

There are a couple of barriers to entry for generics:

Brand loyalty for the name brand drugsCosts of meeting FDA standards for generics

Why do we care? Think about our models of optimalpatent length

Big reform to drug patents came in 1984 to try toincrease generic competition


Drug Patent Reform

Drug Price Competition and Patent Restoration Act of 1984

Big change to encourage generics was the AbbreviatedNew Drug Application (ANDA)

ANDA required bioequivalency be demonstrated, fullclinical trials weren’t necessary

Makes it much cheaper and faster to enter as a genericonce patent is up

Act also changed the way patent length worked

Patents began well before drugs were marketed,effective patent length was actually only about 8 years

Act extended patent length by sum of FDA review timeplus one-half clinical testing time


Drug Patent Reform


Drug Patent Reform

In 1998, CBO studied the net effects on incentives toinvest in R & D

Found that a pre-1984 drug new drug was worth $27million more than a post-1984 new drug

Returns on investing in a new drug were reduced byabout 12 percent

Study discussed two possible solutions:

Lengthen patents by an additional yearAccelerate FDA review process by one year

Suggestion: accelerate review process (think abouttiming and present value)

Since 1984 act, reforms have been focused on speedingup administrative and clinical trial process


Other Approaches to Encouraging Innovation

Tax credits that encourage R & D investments

Special exclusivity rights and tax breaks for orphandrugs (drugs for conditions affecting less than 200,000people in the US)

Issue is that markets are too small to be profitable fordrug companiesIn the decade before 1983 Orphan Drug Act fewer than10 orphan drugs received marketing authorizationIn the two decades after 353 orphan drugs wereapproved by the FDAInteresting equity/efficiency issues

Another approach: prizes



SpaceShipOne and the Ansari X Prize



Other X Prizes:

Progressive Insurance Automotive X Prize - 100mpg car

Archon Genomics X Prize - sequence 100 humangenomes within 10 days or less

Google Lunar X Prize - put a robot on the moon

Northrop Grumman Lunar Lander X Challenge -efficient small rocket systems

Qualcomm Tricorder X Prize - create a portable medicaldiagnostic device



Another big thing to think about is roles of privatefirms, government agencies, research universities

Different motives and resources for each group

Different restrictions for each group

Complicated overlap across groups

Consider 1980 Bayh-Dole Act


Issues with Encouraging Innovation

So there seems to be a fair amount of economicreasoning going into the treatment of intellectualproperty

That’s not to say that there aren’t some more lessstellar examples of regulation out there

Some of these cases are policy motivated by economicefficiency but doomed by the real world

Some of these cases are policy resulting from verydifferent objective functions


Diamond v. Diehr (1981)


In re Alappat (1994)



“To promote the Progress of Science and usefulArts, by securing for limited Times to Authors andInventors the exclusive Right to their respectiveWritings and Discoveries.” – Article I, Section 8,United States Constitution



Year Act Length of Copyright1790 Copyright Act 14 years + 14 year renewal1831 Copyright Act 28 years + 14 year renewal1909 Copyright Act 28 years + 28 year renewal1976 Copyright Act author life + 50 years1998 Sonny Bono Act author life + 70 years1998 Digital Millenium Copyright Act



Copyright and patents have some areas of overlap:

You want to guarantee people the ability to retain aprofit from creating intellectual propertyIt is becoming increasingly easy to copy and distributemusic, movies, software, etc.

But copyright has some unique issues as well:

Issues of fair useWhether to allow derivative worksPersonal copies and format shifting



Sources: Kristine Slipson, Yne Van De Mergel



123456

Source: Monaneko, DVD-Regions with key.png


Going to the Other Extreme



Issues raised by Boldrin and Levine:

Incentives are important but that doesn’t automaticallymean patents are

There are a variety of ways to profit in the absence ofpatents/copyrights

We observe many periods of innovation without strongpatent and copyright systems

More emphasis on rights/productivity of consumer ofideas



Product innovation Process innovation

Secrecy 51% 51%

Lead time 53% 38%

Complementary manufacturing 46% 43%

Complementary sales/services 43% 31%

Patents 35% 23%

Other legal 21% 15%

Percentage of firms indicating a technique is effective in appropriating gains from

innovation


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