Cutting the Term to Spite the Future:

An American’s Perspective of the European Union’s Debate over SPCs

*Article appearing also on Advocaxio in advance of discussion on 16 October 2018 on competition and pharmaceutical patents.

Some rivalries shape the world around them. Thomas Edison and Nikola Tesla embody the short and the long of power struggles. The competition between John McEnroe and Bjorn Borg, living forever as “fire and ice,” changed the face and interest of tennis. And in world policy, few tensions have run so long or had more impact than that between the pharmaceutical and generic industries.

As one of the most heavily regulated industries in the world’s economy, these tensions are understandable. Any discussion of reform, let alone introduction or enactment, within a region has the potential to impact not just their access to an economic market but also on the potential for investment in related research and development activities. It’s no wonder, then, that industry and policy eyes have begun to focus on the European Union’s proposed changes to the treatment of certain bio-pharmaceutical patents and allow for expanded manufacturing of generics during the end of their term.

Let’s back up a bit and talk about patents generally. For an inventor, whether an individual garage tinkerer or a large multinational corporation, patents are vital to growing and defending a business. They are a shield and a sword against infringement. More than that, they are the tangible guarantee on the exclusive potential for return that prospective investors need. Patents not only incentivize invention, but also investment in invention. How so, though?

In exchange for disclosing the nature of the invention, inventors obtain a limited period of exclusivity over their invention, generally not to exceed 20 years from the date of filing for the patent. For investors, this period of exclusivity is vital to ensure that there is a long period of marketability. Twenty years sounds may sound like quite a lot of time but different industries have different life cycles to their inventions.

The technology industry has notoriously short life cycles, with generations of inventions evolving over a short period of time. Twenty years ago, Sony introduced the Sony Memory Stick for its digital cameras and Google filed for incorporation. Think about how much has changed (big data, artificial intelligence, self driving cars, to name a few) since then. What was novel 20 years ago, today is, at best, standard practice and, at worst, obsolete.

The bio-pharmaceutical industry has a much longer life cycle. Prior to even filing a patent, many bio-pharmaceuticals may spend in excess of a billion in research and development of a discovery. Once a patent is issued, the product will still need to undergo years of clinical trials and regulatory approval, varying by region and nature of the intended treatment, to establish the efficacy and safety of a product for the consuming public. By the time the product receives market approval, well over half of the 20 year term and, in more complex and arguably vital treatment areas, occasionally nearly the entire term has passed.

Different countries have sought to address the lag between regulatory approval and marketability, generally by allowing for an extension of certain patents meeting different regional requirements.

The United States effectively created the modern generics pharmaceutical industry and a model for other countries to follow with the Drug Price Competition and Patent Term Extension Act of 1984, better known as the Hatch-Waxman Act. Balancing the interests of the brand name and generic pharmaceutical industries, the law creates concurrent tracks for brand name patent term extensions not to exceed five (5) years in limited instances of market delay resulting from regulatory review while also allowing for generic entrants to begin the market approval process before the term expiration of the brand name patent. The law, or more specifically the clarity that it provides, has created one of the most vibrant and highly funded bio-pharmaceutical startup ecosystems in the world.

The European Union has provided for supplementary patent certificates (SPCs) since 1992 to extend the term of brand name patents not to exceed five (5) years for products that have been authorized for the first time as medicinal or plant protection products in the European Union. However, since the EU has yet to move to a unitary patent system, a patent holder must seek an SPC in any and all relevant member state countries. Despite being over twenty-five (25) years old, significant questions surround the scope and application of SPCs. This is due in large part to the ambiguity surrounding key provisions of the European Commission’s SPC laws and the fragmented nature this ambiguity is then enforced by the various patent systems of the member states. These questions, compounded by a regulation rich investment environment, may frustrate many attempts to attract new investment. As the European Commission sets the stage for a new round of SPC related proposals / amendments, it does not look like clarity in the market is in the offing any time soon.

While a range of other countries also provide for extensions of bio-pharmaceuticals, there is one country of particular note: China. After significant growth in their domestic bio-pharmaceutical industry, the China Food and Drug Authority released a proposal in October of last year exploring, amongst other things, patent term extensions for bio-pharmaceuticals. While still have few details on the proposal, it is worth noting that the concept was put forth as an effort to support the growth of their domestic bio-pharmaceutical industry.

As these laws were created, debate, and amended a seemingly natural policy division in the bio-pharmaceutical brand name and generics industries emerged. One seeking to ensure they would be able to ensure they would have a means to obtain and recover investment. The other seeking to ensure they would have early and easy access to any given market.

This might be a good time to mention that I have spent well over a decade involved in intellectual property debates of all sorts. First, as the Chief Intellectual Property Counsel for the U.S. Senate Judiciary Committee, spending nearly five years of that tenure serving as an intermediary in discussions between the technology and pharmaceutical industries to craft language that eventually became the America Invents Act of 2011 (after I left). Then as a lobbyist (yes, I will use the dreaded word of influence) and strategist for the technology industry, both in-house (for the Intel Corporation) and outside (for the Franklin Square Group, a boutique firm focused on disruptive companies). Through this experience, I have seen first hand how deeply the differences in product life cycles impact how an industry utilizes regional patent systems and how proposed reforms either further or undermine their ability to innovate and invent. It is imperative for policymakers to understand this as well; to bear in mind that the purpose of patents is not only to protect but to foster investment in invention.

Which brings me back to the European Union and recent proposals by the Commission to amend the SPC laws. Rather than focusing on ambiguities in the current SPC system, the proposal contemplates introducing new exemptions to it. Namely, the potential new exemption would allow generics to manufacture a competing product within the EU during the life of an SPC so long as that product is intended for export to a region no covered by a patent. It has taken years of litigation and legal opinions to reach what little clarity currently exists in Europe regarding the application scope of SPCs. Adding a new exemption will only inject greater uncertainty into Europe’s already fragmented patent system, disincentivize investment and undermine the stated goal of the Commission in its impact assessment to “help ‘innovative sectors to be globally more competitive an increase the attractiveness of Europe as a hub for innovation and manufacturing.”

Bio-pharmaceutical companies within the European Union, particularly small and mid-sized companies, already struggle to secure international investment in the research and development and potential market growth of their products. This is due, in part, to existing regulatory barriers present at the member state level that disincentivize venture funding by smaller, more risk capable, nimble funds that have specialized experience in the market. To the extent funds have legal teams large enough to navigate the European regulatory investment environment, one of the primary factors to secure investment is the strength and life of a company’s patent portfolio. Investors are well aware of the importance of SPCs to ensure that marketability lost due to regulatory approval is recovered. As the exclusivity of that period is diminished, so too is the incentive to invest in potentially groundbreaking medicinal products — products that could save and / or improve the quality of health and care received by citizens not just of the European Union, but the world.

With that in mind, the timing of this proposal could not come at a worse time. Over the past several months, I have talked to investors who have noted that after more than a decade of legislative debate and litigation over the patent system in the United States, they are more seriously considering investments in the European Union to secure and diversify their returns. Why would they consider such an investment just as the Commission is considering potentially threatening the strength of a patent’s exclusivity at the end of it’s life? Submissions and commentary a like have already expressed this concern, but it is worth repeating again.

What should the European Commission do?

Some have argued that the Commission should do nothing at this point. There is logic in this request. The past one to two decades have been marked with evolving and seemingly never ending patent related discussions both in legislative bodies and the courts around the world — but most notably in the United States and in Europe. I will fully admit that I have done my fair share to push many of these discussions. However, the pace of these discussions are relatively unique in that one proposal never seems to be given the opportunity to settle in before another round of discussions begins, often centered around rolling back the changes that just took effect proposals. Put most simply, it might be time to give the system some time to cool and work itself out — to give inventors, corporations, and investors alike the opportunity to adapt and understand the economic impact of the system as it currently exists.

In lieu of doing nothing, and to further its repeatedly stated goal of becoming a more friendly environment for innovation, the European Commission should consider how to address existing ambiguities in SPCs before potentially injecting new concepts and mechanisms.

As I have argued in previous articles, clarity and predictability are integral to ensuring a vibrant environment for investment. Not just within a single member state, but across a region, and ideally internationally. Regulatory and legislative predictability: (1) allows investors to know the likelihood of a return on their investment, (2) companies to stage investment to focus their research and development strategy, and (3) inventors to identify new and unserved markets to engage. All of these will lead not only to new and innovative medicines but potentially a more diversified follow-on market, resulting in a more vibrant bio-pharmaceutical industry as a whole. However, the more questions that surround the functioning of a system, the more hesitant all of the above will be to engage. Instead, choosing to take a step back. To pause.

The 2016 study conducted by Charles River Associates for the European Commission has been the source of just about a much industry disagreement as the proposal that it support. While I will not take issue with the disputed findings, as others have already done that in a much more effective manner than I could here today. I do want to highlight one point that the study makes. Specifically, it states that the disparity in the application of different regulatory requirements amongst member states has been the source for hampering investment. This key point is overlooked by many. Disparity, inconsistency, and unpredictability are always a source of caution for investors. If reform must be made, then policymakers should first tend to these questions before introducing new ones into the market.

The European Union stands at an economic crossroads. It wants to become the “Innovation Union,” growing domestic creative / innovative / inventive industries. In so doing, it is considering how to balance incentives and public interests that will determine its future economy. One of the most central questions as Europe reconsiders the nature of its patent system is whether it creates an environment that attracts capital to ensure experimentation and innovation in the pharmaceutical and life science industries. Or will it undermine it.

Longtime Washingtonian turned expat in Paris working CET->PST on international policy trends in a tech dependent world — canaryglobalstrategic.com

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