Drug Exclusivities in the US: Is it justified? (Part 1 of 2)

This is Part 1 of a two-part Article.

Data and market exclusivities, often termed as TRIPS-plus obligations, have forced their way into the limelight with the ongoing COVID-19 pandemic. These terms i.e. ‘data exclusivity’ and ‘market exclusivity’ are fraught with ambiguity, due to authors often using them interchangeably. For the purpose of this post, I shall use these terms distinctly in accordance with their common understanding. Data exclusivity refers to a period of time during which the clinical data submitted by an inventor is kept confidential and cannot be relied upon to grant an approval to a generic or a biosimilar. Market exclusivity, on the other hand refers to a statutorily prescribed time period during which a generic or a biosimilar cannot enter the market, even after obtaining an approval from the regulatory authority.

These exclusivities were first introduced in the U.S. through the Hatch-Waxman Act, 1984 and were complementary to the monopoly term granted through the patent law. The U.S. experience and its effort to maintain the interests of its pharmaceutical industry induced it to push for the internationalization of data exclusivity at the Uruguay Round of the WTO TRIPS negotiations in 1986. The initial drafts of the U.S. (Art. 33), the European Community (Art. 28) and Switzerland (Art. 243) during these negotiations advocated for strict data exclusivity provisions, relying on Article 10bis of the Paris Convention. Due to the countervailing power of the developing countries, the Dunkel Draft included a toned down version of data exclusivity in the form of the current Article 39.3 of the TRIPS Agreement, which merely prevents ‘unfair commercial use’ of the submitted clinical data. However, the issue of data exclusivity has remained firmly on U.S.’ agenda, with various U.S.-backed FTAs bearing testament to the same. Additionally, the Special 301 Report annually released by the USTR has been consistently censuring countries for non-adoption of stringent data exclusivity laws in their respective jurisdictions.

Justification to the United States’ Exclusivity Pitch: Grabowski’s Findings

At present the U.S. exclusivity periods (other than patent exclusivities) are varied in nature and range from a minimum of 180 days to a maximum of 12 years, depending on the type of chemical entity and the designation attached thereto. The US Public Health Service Act grants the longest period of market exclusivity of 12 years to biological reference products (“biologics”), in addition to granting a 4-year data exclusivity period to drugs running concurrently with the market exclusivity period. Henry Grabowski’s findings in his paper titled ‘Follow-on Biologics: Data Exclusivity and the Balance between Innovation and Competition’ serve as a feasible justification for the long terms of exclusivities granted in respect of biologics.

Writing during the contemplation on enactment of a law to create an abbreviated pathway for follow-on biologics (later passed in the form of the Biologics Price Competition and Innovation Act, 2009), Grabowski stresses – the requirement of a data exclusivity provision as a necessary incentive for the development of biologics. Building a case in favour of data exclusivity, he notes various factors namely, patent challenges in the early stages, protection of narrow patents for biologics and risky investments undertaken to demonstrate their safety and efficacy. Further, he notes that longer data exclusivity is desirable in cases which either (i) involve costly and risky R&D or, (ii) produce outputs which grant important ‘external benefits to the society’.

In light of the aforementioned criteria, Grabowski takes up the first issue of R&D activity in respect of new biologic entities (NBEs). He points out various risks in the R&D process for the development of an NBE specifically, (i) financing by venture capital; (ii) high failure rates in the late-stages of drug development; (iii) consistently increasing development times; (iv) high development costs estimated to be ranging between 1.24 billion USD to 1.33 billion USD; (v) skewed sales distribution, with certain NBEs accounting for the highest proportion of sale and profit; (vi) and finally the importance of IP in financing life-science companies.

Subsequently, he focuses on the second point concerning the importance of NBE innovation, by noting that NBEs have a greater likelihood of being novel therapies as compared to new chemical entities (‘NCE’). In addition to being novel therapies, he observes that NBEs offer substantial improvements over previous therapies, a feat achievable through substantial investments in terms of costs, time and efforts.

This propels him to discuss the approximate break-even times for NBEs, which includes elaborate discussion on the sales trends, R&D and capital costs and discount rates and contribution margins in relation to them. Based on his study, he finds that the break-even lifetime for the portfolio made up of NBEs is 12.9 years at 11.5% real cost of capital and 16.2 years at 12.5% real cost of capital. He indicates the affinity of break-even times to discount rates, thereby serving as a testament of the substantial investments incurred towards the development of NBEs. These terms arrived by him are stated to be underestimated, if anything due to the adoption of conservative costs of capital. In conclusion, he urges that the legislation on follow-on biologics must enable the NBE to break-even and that may be successfully achieved by awarding it with a practical duration of data exclusivity – which by his implications should be 12-16 years.

The claims of Grabowski in respect of biologics may be declared weak due to a noticeable development. It is the introduction of ‘smarter’ and more capable technology which has heralded the world into a new age, and translated the idea of the Fourth Industrial Revolution into reality. This reality pervades all spheres of our lives, successfully influencing everything from entertainment to healthcare. A new paper titled ‘Reconsidering the Rationale for the Duration of Data Exclusivity’ by Kimball, Ragavan and Vegas argues that long exclusivity periods may no longer be justified due to the positive impact of technology on the drug development process. Such technologies, they argue, enable pharma companies to launch products quicker and in a more cost-efficiently than before (here and here). Having examined Grabowski’s position, in Part 2, I shall compare this with the findings of Kimball et al to determine if Grabowski’s findings carry weight today.

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