14 April 2013

Pharma Patents Review Proposes Reduced Term Extensions

PiggyOn 2 April 2013, the Australian Government’s Pharmaceutical Patents Review published its draft report.  I last wrote about the review when the panel released its Issues Paper last November.  The draft report is some 250 pages long, including appendices, and I do not intend to attempt a full review here!  Interested parties are encouraged to read the complete draft, bearing in mind that the period for providing written responses is extremely short, expiring on 30 April 2013.

The draft report includes 15 draft findings, many of which (if implemented) would not result in substantive changes to the provisions of Australian patent law.  For example, there are recommendations as to how the Government should conduct itself in future international trade negotiations, for future reviews of the performance of the patent system to be undertaken, and for changes in the way the regulatory approval process, the Australian Register of Therapeutic Goods and the Pharmaceutical Benefits Scheme are managed and documented.

Here, I wish to focus on just one area of the draft report, namely its two alternative proposals for a reduction in the extension of term available to pharmaceutical patents as compensation for the effective loss of benefit due to delays in obtaining regulatory approval.  It appears to me that, perhaps as a result of the very short timeframes provided to the review panel, these proposals have not been adequately thought-through. 

Arguments for a reduced extension of term are bolstered by a dizzying array of tables, calculations and charts, which in my view serve only to obscure the basic policy question underlying the provision of an extension of term on pharmaceutical patents – for how long, in any given case, is Australia prepared to pay a premium for a patented drug before the introduction of generic competition?  Currently, the answer to that question is ‘for up to 15 years’.  Reducing this period would obviously save money – which is the primary argument presented in the draft report.

However, it is a basic fact of modern life that we must pay for the things we want, and that (by and large) we get what we pay for.  Yet there is a notable absence in the draft report of any evidence that a shorter term would provide a better ‘balance’ between the interests of the originating drug companies and those of the Australian community.

Option I: Simple Reduction of Maximum Extension

It is axiomatic that extending the term of pharmaceutical patents represents a cost to the Australian community.  Clearly, the longer a drug is protected from competition by a patent, the longer the manufacturer will be able to charge a price premium for its product.  In Australia, the cost of this premium is borne largely by the taxpayer, since the majority of widely-used drugs are subsidised under the Pharmaceutical Benefits Scheme (PBS).  As I explained recently, as soon as a generic alternative is released to the market, the maximum price that the government will pay for the drug under the PBS is immediately and irreversibly reduced by 16%.

Unsurprisingly, therefore, the draft report offers recommendations which would reduce the period of pharmaceutical patent extensions, thus saving taxpayers’ money on purchasing patented drugs.

Current Position

Presently, the maximum term extension is five years.  It is, however, only possible to obtain the full benefit of the provision if the actual delay between the grant of a patent and obtaining regulatory approval to market the drug in Australia is five years or more. 

It is worth bearing in mind that the standard expiry date of a patent is 20 years after filing, and that accounting for the time required for processing by the patent office the period for which it is enforceable (i.e. after grant) is more commonly around 14-17 years.  The maximum five-year extension was determined on the basis of providing an effective patent term of around 15 years following regulatory approval of a pharmaceutical product.

‘Savings’ From Reducing Maximum Extension

Using a fairly simplistic analysis, the draft report calculates the following total estimated savings by reducing the maximum term of extension:

Maximum Extension

Of course, these savings to the government translate directly into money not earned by the patent-holding pharmaceutical companies.  In fact, however, the loss to the originating suppliers is much greater than the savings made by the government.  These savings are based on the price reductions which occur when a drug goes off patent, and generic competitors enter the market.  From the patentee’s perspective, however, not only do prices drop, but a large share of the market is immediately taken away by generics.

Compensating the Drug Companies

Patents provide pharmaceutical companies with an incentive to invest in innovation, in the form of a period of monopoly, during which the costs of research and development can be recouped.  It is sometimes argued that if the rewards are not sufficient in Australia, i.e. if no extensions of term are available, then pharma companies will invest less in Australia, to the detriment of local researchers.  However, as the draft report rightly notes, this argument is probably of limited validity.  The factors influencing R&D investment decisions are complex, and the potential for an extension of patent term in a relatively small market at some future date, in the low-probability event that a project actually results in a successful new product, is probably not a major consideration.

Clearly, if the Government wanted to generate more R&D in Australia, the most direct way to make this happen is simply to provide more funding.  Therefore, the draft report suggests that a portion of the savings from reducing the maximum term extension should be used to fund direct subsidies to Australian-based R&D.

Representative calculations in the draft report demonstrate that this approach makes economic sense.  The advantage of the current system is that ‘compensation’ is provided only in respect of those products which are ultimately successful, leaving private enterprise to bear the risks associated with R&D.  The down side is that the originating drug companies get to charge a premium for their successes, regardless of whether any of the R&D was actually conducted in Australia – which, of course, most of it was not.

Problems with the Proposed Reduction and Subsidy?

The problem I see with a subsidy scheme is that someone is going to have to decide how to distribute the subsidies.  The draft report does not address this issue at all.  It simply demonstrates that, on paper, subsidies are more cost-effective than term extensions.  Of course, this assumes that both mechanisms will produce the same outcomes.  But experience teaches that they will not.  For one thing, governments are very bad at investing in inherently risky ventures, having a tendency to try to justify the expenditure of tax dollars by trying to ‘pick winners’, when they lack the expertise to do so.  In fact, this expertise lies largely with the pharmaceutical companies, which will deploy it to best effect when they are exposed to all of the risk.  Providing a trough of money in the form of subsidies is likely to do anything but ensure that the funds are spent in the most effective way!

Reducing patent terms is neither the most straightforward, nor the most significant, way in which the Australian Government could reduce its expenditure on pharmaceuticals.  While reducing the maximum extension to one year might save $191 million (offset by some additional cost of subsidies), a recent report – which I wrote about in a previous article – identified $1.3 billion in savings on unpatented generic drugs, available by reforming the operation of the PBS.  The Pharmaceutical Patents Review draft mentions this report, primarily to note that if its recommendations are also implemented, then the savings from reducing the maximum term extensions will be even greater.  That is, it will deny even more income to the originating drug companies!

The Nature of Cost ‘Savings’

In my opinion, to refer to reductions in costs by shortening patent terms as ‘savings’ is disingenuous.  If we do not want to pay premium prices to pharmaceutical companies that invest in high-risk R&D to develop new drugs, then we can simply refuse to grant patents covering such products.  Or we could follow the lead of the Indian authorities and grant compulsory licenses at low royalty rates to local generic manufacturers.

The fact is that the Australian Government has chosen to join a number of other developed nations in supporting drug discovery and development by providing extensions of patent term, with the objective of ensuring a commercially effective term of 15 years.  The cost of doing this is the same whether those 15 years fall entirely within the normal, unextended, 20 year patent term, or if they include a maximum five-year extension period.

In practice, many products do not receive 15 years of protection, because of the existing five year cap on extensions.  The chart below is a copy of Figure 5.8 of the draft report, which shows the effective term enjoyed by all patents that have been extended under the current provisions.
There are a number of ways to describe this data, depending upon your perspective (thus demonstrating the application of the adage about ‘lies, damn lies and statistics’). 

The draft report chooses to state that ‘more than half of all patents extended under the current provisions have received the maximum effective patent life after marketing approval of 15 years’ and that ‘the median effective patent life provided by the extension of term has remained at or close to 15 years each year since its introduction’.  However, the median does not seem to be an appropriate statistic in this case.  Once more than half of the relevant patents have received a 15 year effective term, the median value is 15, even though nearly the same number have failed to achieve the ‘target’. 

Another way to express the situation would be to say that 47% – or nearly half – of all extended patents failed to achieve a 15 year effective term, and that 16% of them did not even make it to 11 years.

However the statistics are described, the facts remain that originating drug companies generally receive no more than a 15-year benefit from an Australian patent, and any changes to the system which reduce this benefit – and thus the associated revenue – will result in those companies looking to make up these losses elsewhere.  Does the review panel really believe, for example, that reducing the term of patent protection will not result in any increases in the price of patented drugs during the shorter term of protection?

Option II: Limits Based on International Comparison

The alternative option proposed in the draft report is to limit extensions of term through one of two mechanisms:
  1. limiting the term of an Australian patent by requiring that, regardless of the duration of any extension granted, it expire ‘upon the expiry of the equivalent patent extension in one of a list of other jurisdictions including the United States and European Union’; or
  2. changing the method of calculating the term extension in order to encourage earlier applications for regulatory approval.
The first of these mechanisms, it seems to me, is essentially arbitrary.  It asks nothing more than ‘why should Australia continue to pay for patented drugs when some other selected jurisdiction does not?’  This can, of course, serve only to shorten the effective term of the Australian patents, on average, for reasons which may have as much to do with the processes followed in other countries as with anything remotely pertinent to sound policy in Australia. 

It also fails to address the question of what is meant by an ‘equivalent patent extension’?  Does this mean a patent with the same claims?  Or a patent which might have different claims, but which nominally covers the same, or a similar product?  And what happens if there is no ‘equivalent’ patent, or term extension, in one of the specified jurisdictions, for example as a result of substantive differences in law, practice or policy?  Is Australia to become effectively subservient to the decisions of foreign authorities?

As for the second mechanism, I would ask simply: why would we consider it beneficial to encourage pharmaceutical companies to rush new drugs onto the Australian market?  This proposal raises policy questions of public health that go far beyond the terms of the Pharmaceutical Patents Review.


The current policy is to provide a term extension on pharmaceutical patents which allows originating drug companies to reap the benefits of patent protection for a period of up to 15 years. 

While there are variations on a case-to-case basis, data presented in the draft report of the Pharmaceutical Patents Review shows that, overall, the term extensions granted in Australia are commensurate with those granted in Europe and Japan, which also aim to provide a 15 year effective term.  The policy in the United States is to provide for up to 14 years effective term, and thus corresponding US patents tend to expire earlier, according to the data in the draft report.  However, it is not meaningful to compare only the effective terms between countries, unless the cost of patented drugs during the period of patent protection is also taken into account.

There is a purely economic case for reducing the maximum term extension, for the trivial reason that any reduction in patent term reduces costs, subject to the assumption that this has no other impact on the prices paid by Australians for drugs, including both patented and generic products.  This, it seems to me, is a significant assumption, which is highly unlikely to be valid in practice.

The suggestion that term extensions could be replaced with a direct subsidy is, frankly, astonishing.  Whatever its flaws may be, the patent system at least facilitates market-based decision-making by pharmaceutical companies as to how, and where, they invest in R&D, clinical trials and manufacturing.  However, I was under the impression that most economists are nowadays in agreement that direct government subsidies to otherwise non-viable industries are counterproductive in the longer term.

It seems clear that meddling with the duration of the pharmaceutical patent term extension is not the most effective way for Australia to control the rising cost of drugs to the community.  Greater savings – and certainty of outcomes – can be made through changes to the way in which the PBS operates and negotiates prices for both patented and generic drugs.  If there is any sound policy reason – other than saving a few dollars – for an adjustment to the current 15-year setting, it does not appear to be revealed in the Pharmaceutical Patents Review draft report.

Overall, the draft report does little to dispel the concern that I expressed in an earlier article that ‘it is difficult to avoid arriving at the conclusion that somebody, somewhere, is pushing an agenda with the objective of improving the conditions in Australia for entry of generic drugs to the market.’

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