The Introduction states that -
The pharmaceutical industry relies on patents more than most: successful pharmaceuticals require significant Research and Development (R&D), yet competitors can cheaply copy those drugs. The patent system restricts such free riding by giving patentees a period of market exclusivity. It allows a reward for past investments and, more importantly, it grants an incentive for continued innovation.
Patents also have negative effects. They may increase prices – and so restrict supply – by more than the amount that would be required to provide the necessary incentives to innovate. This is important for pharmaceuticals because of their importance to human health. And though innovators seeking a patent must disclose considerable information about their inventions - thus providing a platform to others for further innovation - patents can also restrict follow-on innovators.
For these reasons, the question of how much patent protection to offer is crucial. Pharmaceutical patent rights that run for too long or that are defined too expansively will deprive people of drugs because purchasers, including governments, cannot afford them. An overly miserly patent system means patients will suffer because the industry has inadequate incentives to develop new drugs.
Judgements about patent adequacy and sufficiency are made more complex because the patent system operates within an international system. Some critical features of Australia’s patent system have been set by international agreements. Countries that are major net exporters of intellectual property have tended to seek longer and stronger patents, not always to the global good. The acquiescence of Australia and other countries to that agenda means that some features of Australia’s patent law are of little or no benefit to patentees.
International agreements also explain in some part why the patent term in Australia has been steadily increasing over time. The life of patent protection, originally 14 years and more recently 16 years, is now set at 20 years by the World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In signing the Australia-United States Free Trade Agreement (AUSFTA) Australia agreed that it would preserve a further extension to patents for pharmaceuticals beyond the 20 years that it had already legislated, without careful regard to whether this was in our own economic interest.
In negotiating such agreements, Australia needs a more active strategic engagement with the issues. While the patent system must be strong to be effective it should also be parsimonious, avoiding restrictions on trade and innovation where it is not necessary for it to deliver incentives to innovate.
Beyond this, international negotiations should address critical issues arising from the limitations of patents in providing incentives to innovate, including the need to develop drugs with high social value and not well rewarded in markets ....
There are signs that these past failures are being replicated in the current Tran-Pacific Partnership (TPP) negotiations because small, net importers of intellectual property, including Australia, have not developed a reform agenda for the patent system that reflects their own economic interests – and those of the world. Chapter three offers recommendations about Australia’s stance in international forums where patent systems feature.
Chapter four considers two pressing issues covered by international agreements that have materially limited Australia’s welfare without providing offsetting benefits to the patentee. One issue concerns Australia’s ability to manufacture generic pharmaceuticals for export to countries where there is no applicable patent (MFE). Perversely, if the applicable patent has not expired in Australia, it seems Australian generic manufacturers must establish manufacturing facilities overseas to serve those markets to avoid infringing Australian patent rights. This result offers no obvious benefit to the original patentee in Australia, but it reduces investment and employment in Australia.
The other issue relates to the manner in which current patent law prevents a generic manufacturer stockpiling generic pharmaceuticals for future export to a country or for future sale in Australia, in anticipation of the expiry of an applicable patent. This is an important issue, because the firm that first satisfies the market acquires strong ‘first mover’ advantages. This again imposes major restrictions on Australia’s ability to manufacture generic pharmaceuticals, while providing negligible benefits to the Australian patentee, for generics can be stockpiled and imported from other countries with weaker, or shorter patent regimes.
The above examples are not new, but they have yet to be rectified. A decade ago, the Productivity Commission identified MFE as an important issue. At that time, the then Department of Industry, Tourism & Resources estimated export losses of $2.2bn from 2001 to 2009 unless patent laws were changed. Generic manufacturers continue to ask the government to intervene. In Chapter four, the Panel recommends that the government act on these matters.
Extensions of Term
An important part of the terms of reference of this inquiry is the extension of term that the Australian patent system allows. It applies to some pharmaceuticals for which patentees have taken at least five years from the effective patent filing date to obtain regulatory approval for the pharmaceutical’s use. The scheme reflected a similar extension arrangement introduced in 1989 when the standard term of a patent was 16 years. The government then claimed that the extension would “encourage the development of the pharmaceutical products industry in Australia”. That arrangement was repealed in 1994 after TRIPS mandated a 20 year patent term. The current scheme dates from 1998. It too aims to attract investment in pharmaceutical R&D in Australia, as well as providing an effective patent term for pharmaceuticals more in line with that available to other technologies.
At the time, the annual cost of the extension to the Pharmaceutical Benefit Scheme (PBS) was estimated to grow from $6m in 2001-02 to $160m in 2005-06. The cost arises because there is a delayed entry to the pharmaceutical benefits scheme (PBS) of cheaper generic drugs. The estimate for 2012-13 is over $200m if the earlier figure is inflated by, say, 4% per annum.
Another way to measure the cost of the extension scheme is to estimate savings from reducing the length of the extension. AUSFTA requires that Australia has a pharmaceutical extension provision but it is silent as to the length of the extension. Actual savings obtained from reducing the extension term would be affected by many factors, including price changes caused by increasing sales volumes, the 16% mandated price reduction following the entry of a second drug, the influence of competing generic manufacturers and reductions from price disclosure mechanisms.
The Panel is still developing estimates of savings from reducing patent extension terms, but initial figures suggest they amount to some hundreds of millions of dollars a year. These amounts represent the subsidy which the government decided to provide to the pharmaceutical industry partly to effect an increase in pharmaceutical R&D investment in Australia.
Using the patent scheme to provide indirect subsidies to one industry appears inconsistent with the rationale that patent schemes be technologically neutral. More importantly, particularly where there is already substantial patent protection and where increased patent protection only comes into effect after a patent term has already run 20 years, patents are at the limits of their policy effectiveness and most unlikely to be as effective as direct funding as a policy instrument.
Commercial investment decisions are generally made before or early in the term of a patent and in such circumstances the net present value of some future extension of market exclusivity is much diminished over the course of a normal patent term. In 1984, the Government’s Intellectual Property Advisory Committee found it difficult to believe that the prospect of additional returns from an extension of the then 16 year standard patent life could materially influence investment decisions made many years beforehand. This argument remains valid today, and indeed gathers additional force in light of extension of the standard patent term to 20 years.
Even if it were increasing investment, it is difficult to see why a pharmaceutical firm would chose to conduct R&D in Australia, merely because the Government decided to offer an extension of term here. More fundamental issues such as relative costs of R&D and skill availability should influence the location of R&D spending.
It is posited in Chapter five that, if the government wishes to support Australian-based pharmaceutical R&D, it may be more efficient to reduce the five-year extension of patent term and to use some of the savings to provide a direct subsidy than to retain the five-year extension. A dollar of subsidy paid directly to a pharmaceutical research entity as it starts to develop a product may be more efficient in promoting Australian-based pharmaceutical R&D than an equivalent subsidy provided indirectly in the future through the PBS via the extension of patent term. This reflects several factors including the difference in discount rates applicable to government and commercial firms, the effect of subsidising activity at the beginning of product development instead of at the end, and the ability of a subsidy to be linked to spending on pharmaceutical R&D in Australia. Lastly, a direct subsidy has an additional benefit because it can be directed towards investment in pharmaceuticals which are not well addressed by the patent scheme (examples include too little research for new antibiotics – because once developed they must be used as sparingly as possible to prevent the development of antibiotic resistance). Likewise, even with stronger patents, the market cannot provide adequate rewards for pharmaceuticals to address rare diseases, paediatric illnesses and endemic health issues in low income countries.
The introduction of the extension of term in 1998 provided a wind-fall to pharmaceutical companies: they were rewarded with an incentive for work they had already undertaken. But there are problems in reducing the extension of term provisions immediately without compensation. Pharmaceutical research bodies would observe that they had embarked on projects in anticipation of the possible - even if remote - benefits available under those provisions.
Another option which the Panel is considering is to align more closely patent expiry dates in Australia with those in competing countries. The advantages available to first-movers have been discussed above. A disadvantage faced by Australian-based companies manufacturing generic pharmaceuticals is the propensity for patents to expire later in Australia than overseas. This can occur because pharmaceutical companies that have developed drugs (originators) tend first to seek regulatory approval overseas for marketing these drugs. There are also international differences in the speed with which regulators finalise applications for marketing approval. The misalignment of patent expiration can be partly addressed through deeming that the date of regulatory approval, for the purpose of calculating patent term extensions in Australia, is the date when approval was granted in specified countries. This would encourage originators to align as best they can approval dates in Australia with overseas approval dates. Alternatively, close alignment can be achieved by terminating an extension of term in Australia at the date it is terminated in specified countries. Again, this would encourage originators to achieve the optimum market time for each market.
Chapter six of the report canvasses some technical issues concerning extensions of term. The class of pharmaceuticals that is eligible for extension of term in Australia is narrower than that in many developed countries (on the other hand, there are countries, such as Canada, that do not provide for extensions of term). Originators call for a widening of eligibility to accord with that used in the United States and Europe. In considering these submissions, the Panel takes the approach that it would not recommend more generous patent protection than exists, unless there was evidence that such was justified by national interest considerations.
As mentioned earlier, there is evidence that the current patent term is inadequate to support the development of some drugs, such as those for some paediatric conditions. But for reasons discussed earlier, the Panel believes a direct subsidy would be more effective than additional patent extensions.
The Panel accepts recommendations from many parties that the Patents Act 1990 (Cth) (Patents Act) be amended to repeal the provision requiring applicants to provide the Department of Health & Ageing with information on Commonwealth money spent on drugs subject to an extension of term. Although these data - much of which appear to be inadequate - have been provided to the Commonwealth since 1999, there is no evidence that they have ever been used. Complying with the requirement is costly and the Panel sees little reason for its continuation.
Similarly, the Panel accepts that there is a technical anomaly with the legislative provision concerning the eligibility of drugs for extension. In one case, a court found that the presence of impurities in an earlier drug shortened the extension of term available to a patent. The Panel is inclined to support an amendment if it did not risk a costly broadening of eligibility.
A pharmaceutical company can indirectly infringe a patent if it supplies a drug specifically for a purpose which is different to another, patented use but where it is still possible that the drug could be put to the patented use. This infringement can occur even when the company has not induced or supported that use. As a number of submissions recommend, the Panel supports an amendment to the Patents Act to protect a pharmaceutical manufacturer that has taken reasonable steps to avoid indirect infringement.
Evergreening and Follow-on Patents
In most developed countries, including the United States and Europe, there are concerns about pharmaceutical manufacturers using patents and other management approaches to obtain advantages that impose a large cost on the general community. The cost arises because these actions impede the entry of generic drugs to the market. Although some find the term to be pejorative, relevant literature has handily summarised these actions as evergreening: steps taken to maintain the market place of a drug whose patent is about to expire. Chapter seven discusses these and associated matters.
The Panel has little doubt that pharmaceutical manufacturers act to preserve the profitability of their products. A failure to do so would rightly be criticised by shareholders. And it is logical that patentees will seek further patents for improvements to their drugs - so called follow-on patents - with an eye to extending the market life of the original drug. Similarly, patentees are entitled to market these newly patented drugs before the original patent expires.
It is probable that less than rigorous patent standards have in the past helped evergreening through the grant of follow-on patents that are not sufficiently inventive. The newly proclaimed Raising the Bar legislation should moderate this problem somewhat, though the extent to which it will address the problem is unclear at this stage. The Panel, however, sees a need for an external body to audit the patent grant processes to help ensure these new standards are achieved, and the government should ask the Productivity Commission to review the effectiveness of the legislation.
Another approach used to protect a product is to entangle it in a knot of patents, a so-called patent thicket, which raises costs for new entrants. Such thickets would stymie generic manufacturers or developers of new pharmaceuticals. Though opinions will differ as to whether the term ‘thicket’ applies, the interaction of patents, follow-on patents, and drug marketing practices may have an impact on pharmaceutical prices and the costs of the PBS. ....
Australia’s intellectual property system, like any other, works best when property rights are tightly delineated and there is an efficient adjudication system to resolve disputes. Chapter eight discusses these matters. There are three dispute mechanisms that involve the Patent Office. These non-judicial mechanisms have been affected by recent changes to the law, but they are not typically favoured by disputants as to the validity of individual patents because they lack the certainty offered by courts.
As in other matters heard by Australian courts, patent challenges and patent infringement cases are expensive. Where a generic manufacturer is the potential challenger of a patent, it must consider whether the small size of the Australian market and the relatively small margins from generic drugs make a challenge worthwhile. In addition, although the Commonwealth does not contribute to a challenger’s costs, it can be the major single beneficiary from a finding that a pharmaceutical patent is invalid. The benefits come from reduced drug prices for the PBS. On the other hand, the Commonwealth can incur important additional costs when an originator succeeds in obtaining an injunction for the sale of a generic drug. And the originator, with its higher margins from drug sales, has stronger incentives than its putative opponents to litigate.
The Panel is aware that the Commonwealth has started to seek costs from relevant parties because injunctions - and subsequent findings of patent invalidity can delay price reductions for the PBS. The Panel, however, recommends that the government - as the annual funder of the $9bn PBS - should become more closely involved in pharmaceutical patent cases. For example, there are likely benefits to the government from improving incentives for generic manufacturers to test the validity of patents.
As a result of AUSFTA, there are complex procedures that must be followed when a generic pharmaceutical manufacturer wishes to enter the market. Some submissions question the adequacy of these processes and others the impetus they provide to seek injunctions against the sale of the generic. The Panel recommends a mechanism to reduce the risk that generic manufacturers wishing to enter a market will inadvertently infringe a patent. The Panel also wishes to explore mechanisms to reduce the incidence of court proceedings when a generic manufacturers plan to enter the market. It is thus inclined to a system which requires each originator to list its relevant patents for a drug listed on the Australian Register of Therapeutic Goods (ARTG). That listing might not identify all applicable patents but it would capture all of the originator’s applicable patents. If such a register was established, the Panel further suggests it could be appropriate for generic manufacturers to advise originators of their application for regulatory approval. That latter step would provide originators with time to explore their options without immediate recourse to injunctions.
When an originator seeks regulatory approval for a drug, it must provide data to the Therapeutic Goods Administration (TGA) demonstrating the drug’s safety and efficacy. Although these data remain confidential to the TGA, the TGA may use them after a five year period to approve a generic or equivalent drug. This saves the pointless replication of tests to show safety and efficacy. A number of submissions argue that the five-year period of data exclusivity in Australia is too short.
A number of countries have a five-year exclusivity period; it is also the period Australia agreed under AUSFTA. Other countries, especially in North America and Europe, have longer periods. For many drugs the data exclusivity period is largely redundant because the relevant patent expires later. For some drugs, the data exclusivity period adds to the protection afforded by patent.
It is conceivable that drugs might not be brought to Australia, for example, because regulatory and marketing costs cannot be recouped within five years. Medicines Australia submits that some of its members chose not to supply a total of 13 drugs to the Australian market because of the inadequacy of the data exclusivity period. However, they are only able to identify three of these, and the Panel’s analysis - shown in chapter nine - suggests they are not convincing. AbbVie offers a more compelling example, but even there the Panel believes that expanding data exclusivity for all or for a wide class of drugs is a poor response to issues affecting a small number of pharmaceuticals. A policy of subsidising drug development discussed above seems more appropriate.
Chapter nine also discusses the desirability of publishing data used for regulatory approval, much as information provided in patent applications must be published. The Panel does not recommend that Australia unilaterally release data submitted to the TGA, such publication has international repercussions, but it recommends that the government work with other countries to achieve that end.
An Integrated Approach to the Pharmaceutical System
In concluding, Chapter ten considers the need for a non-statutory body to oversee and report to government and parliament on the complex inter-relationships and linkages between TGA, PBS, IP Australia, international agreements and industry, budgetary and economic matters. The complexity of these issues- especially as they inter-relate - means that isolated consideration of particular features would likely not give optimum results. Measured by dollars alone, the size of the pharmaceutical industry and the PBS and the economic consequences of patents warrant a mechanism that requires close collaboration between agencies in identifying the best options for the national interest.The report's draft recommendations are -
Draft Recommendation 3.1 - The Government should expeditiously seek a situation where Australia has strong yet parsimonious IP rights – that is, rights that are strongly enforced and that provide the incentive necessary to underpin an appropriate level of investment in innovation but that are not defined so broadly as to impose costs on innovation or other activity without commensurate benefits. For instance such strong yet parsimonious IP rights could provide a desired level of incentive to invest in pharmaceutical innovation without preventing our industry from servicing offshore generic markets, as current law does. Australia should take a leadership role in seeking consensus with jurisdictions with similar interests to identify and pursue a range of changes in international patent law and practice along these lines.The draft report also includes Draft Findings, including
Draft Recommendation 3.2 - The Government should ensure that future trade negotiations and renegotiations are based on a sound and strategic economic understanding of the costs and benefits to Australia and the world and of the impacts of current and proposed IP provisions, both for Australia and other parties to the negotiations. The Government should strongly resist changes – such as retrospective extensions of patent rights – which are likely to reduce world economic welfare and lead other countries in opposing such measures.
Draft Recommendation 4.1 - As an interim measure, the Government should actively seek the agreement of the owners of Australian pharmaceutical patents to voluntarily agree not to enforce their patents in respect of manufacturing for export.
Draft Recommendation 5 - Option 5.1 The current model of using the patents system to subsidise pharmaceutical R&D indirectly should be replaced with a direct subsidy. To this end, the Government should reduce extensions of term for pharmaceutical patents and use part of the associated savings to fund R&D directly. Some of this funding should be targeted to socially beneficial research for which patents provide inadequate incentives to conduct. Such areas include new antibiotics which, once developed, must be used as sparingly as possible to prevent the development of antibodies and pharmaceuticals to address rare diseases, paediatric illnesses and endemic health issues in low income countries. This option could also include an annual review of the savings delivered through any reduction in the length of extensions of term to be used in allocating funding to the replacement R&D subsidies.
Draft Recommendation 5 - Option 5.2 The Government should change the current extension of term provisions such that patents receiving an extension of term in Australia will not expire later than the equivalent patents in major trading partners. Potential ways of achieving this include:
(a) Providing an extension expiring up to 5 years after the original patent term or upon the expiry of the equivalent patent extension in one of a list of other jurisdictions including the United States and European Union. This option ensures Australian extended patents would not expire later than equivalent patents elsewhere. If originators are unable to seek regulatory approval in Australia at the same time as elsewhere, this option would reduce the effective patent life.(b) Changing the method of calculating the length extensions of term to provide an incentive to submit applications for regulatory approval in Australia earlier than is currently the practice. This could be similar to the US method described above. This option creates an incentive to seek regulatory approval in Australia as soon as possible, reducing delays in access to medicines for Australian health consumers. Under this system, one-to-one compensation is still provided for the time taken to process applications for regulatory approval.Draft Recommendation 6.1 The Government should maintain the current approach that allows extensions for drugs and formulations but not for methods of use and manufacture, which will continue to provide an incentive for the development and supply of active pharmaceutical ingredients and new formulations, without adding to the existing cost of medicines in Australia.
Draft Recommendation 6.2 Section 76A of the Patents Act should be deleted. The Pharmaceutical System Coordinating Committee recommended in Draft Recommendation 10.1 should consider whether a mechanism for reporting on the use of public and private research funds in pharmaceutical R&D, similar to that established by the PMPRB and superior to s.76A, can and should be developed.
Draft Recommendation 6.3 Section 70(3) should be amended to clarify that the ARTG registration on which an extension of term is based is that of the relevant product, the use of which would infringe the claim. The Panel requests feedback from stakeholders on the effects of clarifying the legislation in this manner.
Draft Recommendation 6.4 Section 117 of the Patents Act should be amended to provide that the supply of a pharmaceutical product subject to a patent which is used for a non-patented indication will not amount to infringement where reasonable steps have been taken to ensure that the product will only be used in a non-infringing manner. Policy should further impose a presumption that “reasonable steps” have been taken where the product has been labelled with indications which do not include any infringing indications
Draft Recommendation 7.1 - The Government should ask the Productivity Commission to review the effectiveness of Raising the Bar Act at the earliest opportunity and not later than three years from the commencement of the Act.
Draft Recommendation 7.2 - The Government should establish an external patent oversight committee that is tasked with reviewing grants and decisions issued by IP Australia and auditing the processes involved in making such decisions.
Draft Recommendation 8.1 - As the party that ‘internalises’ the most benefits of a successful challenge to a patent for a product on the PBS, the Government should take a more active role in managing the cost of the PBS where a patent relating to a PBS-listed pharmaceutical is successfully challenged in the courts. This could involve ensuring that the Government recoups more of the cost to the PBS arising from delayed generic entry. It should also include implementing measures to reduce disincentives for generic manufacturers to challenge patents by providing negotiated incentives for a party who successfully challenges a patent.
Draft Recommendation 8.2 - A transparency register linking therapeutic goods registered with the TGA with related patents should be introduced.
Draft Recommendation 9.1 - The Government should actively contribute to the development of an internationally coordinated and harmonised system where data protection is provided in exchange for the publication of clinical trial data.
Draft Recommendation 10.1 - The Government should establish a non-statutory Pharmaceutical System Coordinating Committee (PSCC) that reports to Parliament on an annual basis on the success and effectiveness of the patent, marketing approval and PBS systems, particularly where these interface. The PSCC should ensure there is sufficient engagement and coordination between the relevant agencies and take account of costs to government, efficiency of registration and approval processes and respond to issues raised by industry. The PSCC should comprise senior officials from at least DIICCSRTE, IP Australia, DoHA (Pharmaceutical Benefits Division and TGA), DFAT, Finance and Treasury (as chair).
Draft Recommendation 10.2 - When drafting the objects clause to be inserted in the Patents Act, as agreed to in the Government’s response to the Senate Community Affairs Committee’s Gene Patents report, the Government should take into account that the purpose of the legislation is to: • further Australia’s national interest and enhance the well-being of Australians, including by providing reasonable access to healthcare; and • provide strong, targeted IP protection - but only up to the point at which the costs (to consumers and the impediment of ‘follow on innovation’) are no greater than the benefits of incentivising innovation that would otherwise not occur.
Draft finding 3.1 - In their negotiation of international agreement, Australian Governments have lacked strategic intent, been too passive in their IP negotiations, and given insufficient attention to domestic IP interests. For example, preventing MFE appears to have deprived the Australian economy of billions of dollars of export revenue from Australian based generic manufactures. Yet allowing this to occur would have generated negligible costs for Australian patentees. The Government does not appear to have a positive agenda regarding the IP chapters of the TPP Agreement which comprehends national and regional economic interests. The Government has rightly agreed to only include IP provisions in bilateral and regional trade agreements where economic analysis has demonstrated net benefits, however this policy has not always been followed.
Draft finding 4.1 Governments appear to have shown little strategic interest in the issue of MFE, despite a number of opportunities to do so and the significant potential advantages MFE could provide for Australia. If MFE had been rendered unambiguously consistent with our international obligations, it is likely that Australia’s annual pharmaceutical exports would have been several hundreds of millions of dollars higher than they are.
Draft finding 9.1 The Panel considered whether data protection should be increased for biologics. The Panel is unconvinced that an extension of data protection would be beneficial. The Panel found no evidence to suggest that patents for biologics will be more difficult to obtain than patents for small molecule drugs, or that effective patent life would be substantially reduced by the complexity of biologics. Additionally, given that the generic manufacturer of a biosimilar cannot rely solely on the clinical data of the reference product to obtain regulatory approval, there is reduced advantage to be gained from granting an additional term of data protection. The Panel is of the view that given the substantial market opportunity that will arise in the near future for biosimilars, and the corresponding potential for cost savings to the PBS and consumers, competition in this area should be encouraged. At present the Panel does not have sufficient evidence to support an increase in data protection beyond the current five year period for biologics.
Draft finding 10.1 The patent system is of obvious significance to the pharmaceutical industry, trade negotiations and health policy. However, the government agencies with policy and program responsibility in these areas are not engaging sufficiently with each other and are not taking highly relevant issues into account. Each agency needs to be actively engaging from its own perspective – end users, innovation, industry and international implications – in order to optimise policy settings for the pharmaceutical system in what is a complex regulatory and service delivery environment. The areas of government responsible for regulating pricing of pharmaceuticals particularly have the need for and the resources to obtain a well-informed appreciation of the pharmaceutical patent system and its impact on a range of health issues. However, the only area in which they appear to have a strong view is in relation to gene patents.