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European Biopharmaceutical Review

Patent versus Patient

Against a background of austerity and growing generics market, the balancing act of encouraging innovation and preventing unfair market dominance is more challenging than ever, and calls for a careful analysis of the interface between intellectual property rights and competition law.

Intellectual property (IP) rights are vital to all innovative industries and none more so than the patent-rich pharmaceutical sector. By giving exclusive rights to the creator of a new innovation and protecting them from imitation, these rights allow pharma companies to maintain profitability and ultimately secure investment for new research and development (R&D). The equation is a simple one: without patents and other forms of IP, there would be no incentive for companies to invest in new drugs and treatments that benefit everybody.

This is particularly true in times of austerity, when even the ‘recession proof’ life sciences sector is suffering from the pervading economic gloom. With drugs typically taking 10 to 12 years to develop, costing perhaps a billion pounds – and with no guarantee of success – a squeeze on finances has resulted in low R&D productivity and dwindling drug pipelines.

The industry has also been left exposed by the fast-approaching patent cliff and its devastating impact on revenues, as some of the biggest earning drugs lose out to competitive generic rivals. As a result, beleaguered pharma companies are cutting back on expensive and time-consuming R&D and diversifying into more gainful areas. Without IP rights to reward innovation and provide some measure of security in these tough times, we might well see the end of R&D in some areas or markets altogether. However, pharma companies are not the only ones to suffer from this austerity. Governments are also under increasing pressure to provide more cost-effective and accessible healthcare, especially as ageing populations and the increasing incidence of middle-class conditions such as obesity cause healthcare costs to spiral out of control. Although IP rights are vital to encourage innovation, in such circumstances, governments can sometimes decide to override them in favour of encouraging competition and driving down price.

This is particularly prominent in emerging markets where governments are looking to protect a poor population and ensure the best access to medicines, while also encouraging innovative companies to invest in their economy. In India, for example, until 2005 it was impossible to obtain a patent for a pharmaceutical product; only the process of making the drug was patentable. That has now changed with amendments to the law, but the Indian government still struggles to balance public interest with upholding IP rights, and often favours generic companies or allows generics to be manufactured despite a patent being in force.

One example is the case currently being heard at the Indian Supreme Court between drug-maker Novartis and India's patent office, which refused to grant a patent on the company's cancer drug Glivec. Although the dispute is focused on the level of innovation necessary to secure a patent rather than the specific interplay of IP and competition law, the underlying issues are very similar. A ruling in favour of Novartis will improve IP protection and encourage companies who have previously been wary of India’s lax IP laws to invest there. However, others are concerned that this will jeopardise India’s ability to supply the developing world with affordable generic medicines.

Striking a balance between encouraging innovation and preventing unfair market dominance has always proved difficult. Several international organisations – including the World Trade Organisation and the Organisation for Economic Co-operation and Development – have attempted to do so. Although they found that countries agreed that both IP and competition law are compatible and should co-exist, there was no consensus as to how this could be achieved. In 2009 the European Commission launched a sector enquiry examining the competitive relationships between both originator and generic companies. However, although the enquiry identified delay in the market entry of generic drugs and a decline in innovation (as measured by fewer novel medicines reaching the market), it gave no clear specific guidance on what is and is not compatible with competition law.

Despite this uncertainty, where governments feel that the exercise of IP rights could lead to an unfair advantage or run counter to medical need, competition law can come into play. One of the tools they may have at their disposal in some countries is compulsory licensing, where a government allows a third party to produce the patented product or process without the consent of the patent owner in some situations. This was one of the flexibilities on patent protection introduced by the World Trade Organisation in 1995. One example of this is the landmark decision earlier this year in which India granted its first ever compulsory license for Bayer’s cancer treatment Nexavar. The German pharmaceutical giant was ordered to license the drug to a home-grown generic drug-maker on the grounds that it was failing to make Nexavar accessible to more people.

Another manifestation of this difficult balancing exercise is seen in the concept of ‘exhaustion of IP rights’. Pursuant to this doctrine, once a product protected by patent or other form of IP has been marketed, the rights of commercial exploitation over this given product can no longer be exercised by its creator. In other words, the later resale or other forms of commercial use by third parties can no longer be controlled or opposed. This enables, amongst other things, parallel trade, because the moment a product is first put to market in a member state, the IP rights of the creator are ‘exhausted’. On the other hand, if the parallel trader fails to comply with certain criteria (for example, if they fail to give the trade mark owner notice of any repackaging), then the balance again moves to the side of the IP rights owner, who will have legitimate reasons to enforce its IP rights.

But there are also more positive ways of ensuring that IP is shared. Many companies are now voluntarily agreeing to cross-license patents with one another or even to participate in industry-wide open innovation patent pools. For example, this may give rise to industry ‘standards’ that may be set to agreed criteria to allow many parties to develop technologies incorporating the same (such as MP-3). Patent pools are well-established in the telecommunication and electronics industry, but remain a relatively new phenomenon in the life sciences sector. The industry’s first tentative steps, however, are to be welcomed as they encourage greater innovation and open access, particularly in the area of biotechnology.

It is easy to see IP and competition law as opposing forces in a case of patent versus patient. But in reality, both are different means of achieving the same ideal of innovation and improved medical treatment. IP rights allow companies to recoup sufficient income to reinvest in the development of new drugs, while competition puts pressure on companies to innovate in order to keep in stride with market rivals. Both drive the R&D necessary to find new drugs and treatments to benefit patients around the world. Some tension will always remain between increasing supply in the short-term, by opening up access to generic companies, and in the longer-term, by retaining the incentive to invest. In such cases it is up to companies, governments and courts to strike the right balance.

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Nick Beckett is a Partner at leading law firm, CMS Cameron McKenna, where he heads the Intellectual Property practice and life sciences industry group. He represents high-profile companies in the life sciences sector, and also coordinates pan-European patent enforcement and other intellectual property advice for a number of clients. He advised Takeda on its €9.6 billion acquisition of Swiss drug company, Nycomed, in one of the largest multi-jurisdictional pharma M&A transactions of 2011, and advised Eli Lilly in the leading pharmaceutical parallel trade repackaging case before the European Court of Justice. Nick is also on the Research and Innovation Committee of the ABHI.
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