In a co-authored Conversation piece yesterday I noted that that the Government had refused to release the report of the Pharmaceutical Patents Review noted elsewhere in this blog.
That refusal was regrettable, as the report would aid informed discussion about intellectual property law and public health policy.
The Government has now abruptly changed direction, presumably because of public shaming, and released the report. IP Australia states that "The current government has made the final report available in response to stakeholder interest".
The Government's statement [PDF] regarding that reversal reads
The Pharmaceutical Patent Review was commissioned by the previous government and conducted by an independent panel. The review panel provided its final report to the previous government in May 2013, which did not release the report.
The government notes that the report is one of a number of reviews of the pharmaceutical system conducted during the term of the previous government. The government has no plans to respond to the report at this stage but may take information in the report into account when considering future policy. The views expressed and recommendations made in the report are those of the review panel and do not necessarily reflect government policy.The report [PDF] comments that
The pharmaceutical industry relies on patents more than most: successful pharmaceuticals require significant prior investment in research and development (R&D), yet competitors can cheaply copy them once they are on the market. The patent system restricts such free riding giving patentees a period of market exclusivity. It allows a reward for past investments and, more importantly, provides incentives for continued innovation.
Patents also have negative effects. They may increase prices – and so restrict supply – by more than the amount required to provide the necessary incentives to innovate. These negative features are important because they impact on human health. And though innovators seeking to patent must disclose considerable information about their inventions - thus providing a platform to others for further innovation - patents can also restrict further innovation by increasing legal risks and constraining competition in follow-on innovation.
Thus 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. They can also constrain follow on innovation: too weak a patent system means patients will suffer because the industry has inadequate incentives to develop new drugs.
International Context
Judgements about patent adequacy and sufficiency are made more complex because the patent system operates within an international environment. Some critical features of Australia’s patent system have been set by international agreements. Larger developed countries that are major net IP exporters 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 but impose significant costs on users of patented technologies.
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 thus binding ourselves to this policy for the future was in our own economic interest.
In negotiating such agreements in the future, 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 that are 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 which are 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 3 offers recommendations about Australia’s stance in international forums where patent systems feature and it considers two pressing issues that have materially limited Australia’s welfare whilst providing little or no offsetting benefits to patentees. 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, for the drugs will be produced for the export market, but it prevents Australian business and its workers from producing them.
Secondly, for so long as a patent runs in Australia, current patent law prevents a generic manufacturer from stockpiling generic pharmaceuticals for future export or for future sale in Australia upon expiry of the Australian patent. This is an important issue, because the firm that first enters any generic market here or offshore enjoys 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 patent regimes or shorter patent lives.
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 and Resources estimated export losses of $2.2 billion from 2001 to 2009 unless patent laws were changed. Generic manufacturers continue to ask the Government to intervene. Yet little has been done to advance their cause in international negotiations. In Chapter 3, the Panel recommends that Government act on these matters
Most of the major pharmaceutical companies participating in this Review have opposed most of the Panel’s recommendations, including that they voluntarily not assert their rights to prevent Australian manufacture for export to markets where there is no relevant patent. The Panel believes that its suggestion is not just consistent with companies’ corporate social responsibilities: it would relieve them of the embarrassment of Australia lose pharmaceutical investment, employment and exports as a result of their enforcing IP rights which have little value.
Extensions of Term
An important part of the terms of reference of this inquiry is to evaluate the extension of term (EOT) 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 current scheme dates from 1998. It 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. The scheme currently provides an effective patent term of up to 15 years.
At the time that the EOT was introduced, the annual cost to the Pharmaceutical Benefit Scheme (PBS) was estimated to grow from $6 million in 2001-02 to $160 million in 2005-06. This cost arises because there is a delayed entry to the PBS of cheaper generic drugs. The estimate for 2012-13 is around $240 million in the medium term and, in today’s dollars, around $480 million in the longer term. The total cost of the EOT to Australia is actually about 20 per cent more than this, because the PBS is only one source of revenue for the industry.
Using the patent scheme to preferentially support one industry is inconsistent with the TRIPS rationale that patent schemes be technologically neutral. More importantly, particularly where there is already substantial patent protection and where the EOT comes into effect after the patent term has already run 20 years, patents are unlikely to be as effective as direct funding as a policy instrument for increasing pharmaceutical investment.
In 1984, the Government’s Intellectual Property Advisory Committee found it difficult to accept 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 gathers additional force in light of the post-TRIPS extension of the standard patent term to 20 years and the further five year EOT for pharmaceuticals.
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 EOT here, for it can qualify for the EOT whether or not its R&D was done here. More fundamental issues such as relative costs of R&D and skill availability are likely to drive the location of R&D spending. And indeed, the Review finds that the increased patent protection afforded by increasing patent life and establishing an EOT has not led to an increase in investment in Australian pharmaceutical R&D that is commensurate with the costs of the EOT to Australia.
The introduction of the EOT in 1998 provided a wind-fall to pharmaceutical companies: they were rewarded with an incentive for work they had already undertaken. And regarding R&D yet to be undertaken it would have been more efficient for the Government to provide a direct subsidy to support Australian-based pharmaceutical R&D, rather than the EOT. This reflects several factors including: the difference in discount rates applicable to Government and commercial firms; the effect of subsidising activity at the beginning and throughout product development, instead of during its period of marketing; and the ability of a subsidy to be linked to spending on pharmaceutical R&D in Australia.
An additional benefit of a direct subsidy is that it can target research for which patents provide inadequate incentives. Such areas include new antibiotics which, once developed, must be used sparingly to prevent the development of drug resistance, and pharmaceuticals to address rare diseases, paediatric illnesses and endemic health issues in low income countries.
The Panel considered several options to reform patent extensions. Australia is required by AUSFTA to provide some form of pharmaceutical EOT but its scope and length are not specified. Actual savings obtained from reducing the term of the extension would be affected by many factors, including price changes caused by increasing sales volumes, the 16 per cent mandated price reduction following the entry of a second drug, the influence of competing generic manufacturers and reductions from price disclosure mechanisms. But there are timing issues in reducing the EOT provisions immediately without compensation. Savings from the options considered in this report, including the recommendation to reduce the effective life of extended Australian pharmaceutical patents, would take several years to reach full effect.
Chapter 5 of the report canvasses some technical issues concerning EOTs. The class of pharmaceuticals that is eligible for EOT in Australia is narrower than that in some other developed countries (on the other hand, there are countries, such as Canada and New Zealand that do not provide for EOT). 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 it was justified by national interests.
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 and Ageing with information on Commonwealth money spent on drugs subject to an EOT. 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 or are useful. Complying with the requirement is costly and the Panel sees little reason for its continuation.
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 EOT available to a patent. The Panel recommends an amendment to this provision to address this.
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.
Patent Standards and Evergreening
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 large costs 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 a pejorative, relevant literature has dubbed such actions ‘evergreening’: steps taken to maintain the market place of a drug whose patent is about to expire. Chapter 6 discusses these and associated matters.
The Panel has little doubt that pharmaceutical manufacturers act to preserve the profitability of their products as they are legally required to do on behalf of their 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 Intellectual Property Amendments (Raising the Bar) Act 2012 (Cth) (Raising the Bar) was intended to moderate this problem somewhat, though the extent to which it will do so is unclear. The Panel sees a need for an external body, the Patent Oversight Committee, to audit the patent grant processes to help ensure these new standards are achieved, and to monitor whether they inhibit the patenting of follow-on pharmaceuticals which promote evergreening with no material therapeutic benefit. The Government should also review the effectiveness of the patent scheme when the impact of Raising the Bar Act has become clear.
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. Those implications are considered below.
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 7 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 partly because they lack finality (administrative decisions of the Patent Office can always be appealed to the courts).
As in other matters heard by Australian courts, patent challenges and patent infringement cases are very expensive and time consuming. 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 – and diminishing - margins from generic drugs make a challenge worthwhile. In addition, although the Government does not contribute to a challenger’s costs, it will typically be the major single beneficiary from a finding of patent invalidity. The benefits come from reduced drug prices for the PBS. On the other hand, the Government 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 Government 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 $9 billion 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. It recommends 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 listing was established, the Panel further recommends that the Therapeutic Good Administration (TGA) notify the owners of listed patents when a generic equivalent of the ARTG listed drug received regulatory approval.
Data Protection
When an originator seeks regulatory approval for a drug, it must provide data to the TGA demonstrating the drug’s safety and efficacy. Although these data remain confidential to the TGA, it 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 8 - 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 poorly targeted response to issues affecting a small number of pharmaceuticals. A policy of subsidising drug development discussed above seems more appropriate.
Chapter 8 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.
Biologics
Chapter 9 discusses the emerging challenge of biologics and biosimilars – the generic versions of biologics. Currently biologics have the same data protection period as small molecule drugs in Australia, although a longer period is provided for biologics in some other countries. Originators call for a longer data protection period for these types of drugs. However, given that standardised regulatory processes for registration of biosimilars are still under development in Australia and elsewhere, the Panel does not recommend changes at present.
Better Integration and attention to detail in governing the Pharmaceutical System
In concluding, Chapter 10 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 means that isolated consideration of particular features would likely not give optimum results. Agencies need to consider how their own issues impact on the responsibilities of other agencies. 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 and attention to the fine details of the system to identify the best options to promote the national interest. The Report shows that the Australian patent system has worked against Australia’s best interests. Patents are clearly necessary and important for the development of and access to needed drugs. But Australia’s patent system has allowed and will continue for some time to allow patents to be granted which would not be granted elsewhere; it has awarded a longer effective patent life than is provided in the United States or than seems necessary to underpin drug development in Australia; it has allowed patents to expire later in Australia than in its major trading partners. All of this has limited the generic manufacturing base, employment and exports and it has increased Australia’s pharmaceutical costs. The Raising the Bar Act which recently came into force may moderate this, but its efficacy will not be evident for some years, and there is the prospect that, even with the changes introduced by Raising the Bar, patent standards are still insufficient to moderate evergreening in the pharmaceutical industry. The Panel’s recommendations, if adopted, would only start the next phase of the repair work.
