Tuesday, December 9, 2008

Data Exclusivity for Follow-On Biologics- John E. Calfee

Data exclusivity promises to be more important for biologics than it has ever been for small-molecule drugs. Because patents of newly approved biologics may prove more open to challenge than small-molecule patents, new biologics could be subject to competition shortly after initial FDA approval if there is no period of data exclusivity. Should early patent challenges and early follow-on entry become a real possibility, such a prospect would be taken into account in planning future biologic R&D, with obvious adverse consequences for R&D investment.
The EU is farther along than the United States in dealing with follow-ons and data exclusivity. The EU has already approved several follow-on versions of older and simpler biologics and has constructed a law to govern the approval of follow-ons for newer, more complex biologics. That law provides for ten years of data exclusivity, with an additional year for new indications approved within eight years of initial approval (Grabowski 2008; Woodcock et al. 2007).
Several follow-on biologic bills have been circulated in Congress. S 1695, sponsored by Senators Edward Kennedy (D-Mass.), Mike Enzi (R-Wyo.), Orrin Hatch (R-Utah), and Hillary Clinton (D-N.Y.), would provide twelve years of data exclusivity. S 1505, sponsored by Senator Judd Gregg (R-N.H.), would provide twelve to sixteen years. HR 1956, sponsored by Representative Jay Inslee (D-Wash.) with support from the Biotechnology Industry Organization, a trade group, would provide twelve to fifteen years; HR 5629, sponsored by Representatives Anna Eshoo (D-Calif.) and Joe Barton (R-Tex.), would provide twelve to fourteen years. However, HR 1038, sponsored by Representative Henry Waxman (D-Calif.), would provide no data exclusivity at all.
The Problem of Setting Data Exclusivity Periods. How long should data exclusivity be? For years, economists have debated the analogous question for patents, arriving only at the conclusion that it all depends on many factors and that there is no reason why patent length should be the same for every industry. Nor is there a solid foundation for setting different periods for different industries. For the time being, a unitary system prevails in which the same rules apply to all industries. But data exclusivity is a tool that comes into play when patents fail to provide reasonable protection for innovation. Data exclusivity is arguably more important for modern biologics than for any other industry, and we have to think afresh about exclusivity and how it works in this unusual industry. Given the stakes--a substantial amount of future R&D hangs in the balance--Congress should exercise an abundance of caution in designing follow-on biologic legislation so as not to endanger valuable future research.
One approach to data exclusivity is to examine the record of biologics approved in the past decade or two and estimate how long it took for those products to generate profits after taking account of the time and expense of R&D and the risks of failure (DiMasi and Grabowski 2007). Working with those data and assuming that postapproval research increases financial outlays by 35 percent, Grabowski (2008) estimated payback periods of between 12.9 and 16.2 years depending on the cost of capital (which, in his model, ranged between 11.5 percent and 12.5 percent). Such results might serve as a guide to a suitable period of data exclusivity.
This approach is fraught with peril. Aside from a possibly nonrepresentative sample, the exercise involves numerous assumptions about the cost of capital, profit margins, and prices after the first follow-on enters the market. Reasonable changes to these assumptions can easily affect the results by 30-40 percent (Brill 2008). Another almost insuperable difficulty is how to take reasonable account of the financial risks in biotechnology R&D, in which most products and, indeed, most firms fail before realizing any revenues at all, not to mention profits. Furthermore, one of the most fundamental characteristics of biologics--the dominant role of postapproval R&D--is highly variable and is impossible to predict in terms of either costs or medical value. In particular, because the drugs with the most promising postapproval R&D agendas have reached the market only in the past few years, there is no way to extrapolate from recent experience in order to estimate the future volume, costs, and medical value of postapproval R&D expenditures--although it is already clear that, for many of the most valuable biologics, those expenses will be large relative to initial R&D and will continue for many years.
A Sensible Approach to Data Exclusivity
What makes sense is to rely on a few basic principles and a deep sense of caution about the threat of suppressing R&D. A signal consideration is that if Congress errs by establishing too short a period for data exclusivity, the R&D it suppresses will never be observed, nor will the products that the missing R&D would have created. Also important to thinking about data exclusivity is the remarkable speed of inventing around in many biotech-based biologic drug classes and the vigor of crossover competition, which are causing biologics markets to be surprisingly competitive, partly as a byproduct of postapproval research.
In thinking about how long data exclusivity should last, a useful starting point is the exclusivity period typically created by patents. Although patent law provides for twenty years from the time a patent is filed, the research-intensive pathway to FDA approval tends to leave perhaps ten to twelve years of postapproval patent life. That relatively brief period has to generate--at least on average--sufficient revenues and profits to encourage firms to pursue more research in search of molecules, few of which will ever show a profit (DiMasi, Hansen, and Grabowski 2003). The market's strong record in providing broad benefits from postapproval research in competitive therapeutic classes, such as statins, suggests that lengthy research agendas are often extremely beneficial. This in turn suggests that when there is just one drug in an innovative therapeutic class, limits on patent life may suppress valuable research on the class. Although there has been considerable debate over some of the tactics that pharmaceutical firms use near the end of patent life, such as developing variants that are sufficiently attractive to keep some patients from switching to generic versions of the original drug, there seems to be very little evidence that patent-based exclusivity for small-molecule drugs is too long.
Grabowski (2008) reports that in his sample of biologics, development times increased almost linearly from the early 1980s, reaching more than nine years for drugs approved in 2005-2006, leaving less than eleven years of postapproval patent life. That hardly seems excessive, if it were the determining factor in practical marketing exclusivity. There are sound reasons for thinking that modern biologics provide so many benefits from postapproval research extending over many years that exclusivity, whether provided by patents or data exclusivity provisions, should be at least as long as for small-molecule drugs. The fact that some of the same scientific attributes of biologics that generate extended research streams also generate vigorous competition among drugs in a class and across classes suggests that the social losses from providing for fairly long exclusivity periods (twelve to fourteen years) would be small compared to what are likely to be substantial social gains from exclusivity.

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