By Tim Gilbert and Nathaniel Lipkus
October 26, 2012
In our August 2012 article titled “Controlling drug costs … one lawsuit at a time”, we explained how generic drug companies face a perfect storm of competitive pressures in Canada. Current market conditions undermine their incentives to challenge weak patents and bring low-cost drugs to market as soon as possible. We emphasized the role of generic companies in ensuring that patent protection does not last longer than appropriate.
Our main concern was that generic revenues have dipped so low while patent challenge costs have remained stubbornly high, making the return on investment from patent challenges not worth the risk in most cases. We suggested a stronger incentive tailored to rewarding the social value that generic companies provide to patients and taxpayers through lower drug costs.
Jason Markwell and Patrick Kierans in an article on October 16, challenging the premises in our position and suggesting that our proposed solution will increase litigation. They took the position that patents are important, Canada’s pharmaceutical policy is good for Canada, the patent system is working well and patents are not a key driver of drug costs.
The timing of their response is interesting, particularly in relation to their latter point that patents do not drive drug costs. Just a day earlier, Industry Canada and Health Canada revealed that extending patents would increase drug costs up to $2 billion per year.
While there is merit to their view that, generally speaking, patents promote innovation, it is a fact that patent protection imposes costs on Canadians. The purpose of patents is to provide an exclusivity incentive to innovators, which has the byproduct of keeping prices high. It should come as no surprise that conferring patent protection would have such a dramatic effect on prices.
Patents have been a critical tool to promote innovation for hundreds of years. However, the drug industry presents a unique challenge. Our Canadian pharmaceutical policy for a generation has been to balance the competing goals of incentivizing new drug development and maximizing access to available drugs. It is a constant struggle to achieve this balance, and the marketplace continues to change around the balance we strike. Without generics on the horizon, brands have less pressure to introduce new drugs. Without new drugs, generics have nothing to bring to market.
Generic companies are expected to invest time, energy and resources in costly patent litigation to overcome weak patents. Yet they know that other companies can free-ride on their efforts and enter the market on the same day without incurring sunk litigation costs. This system, by design, encourages competition, but only as long as there is an incentive for generic patent challengers to start the ball rolling. Particularly, in small and medium-size markets, the returns increasingly do not justify the investment. Messrs. Markwell and Kierans did not have anything to say about these concerns.
Our current system does not make sense. Patent holders in Canada have the opportunity to sue generic companies twice on the same patents – first, to prevent the drug from being approved, and then again after the drug is approved. Canada is the only country in the world with this kind of duplicative litigation system. Each court case is likely to cost each side well over $1 million. Increasingly, the cost of litigation exceeds the profits the generic company stands to make from selling the drug.
Recent generic price reductions across Canada, though undoubtedly beneficial for consumers, make it increasingly prohibitive for generics to contend with this double-litigation system. Companies are foregoing or delaying the development of certain products that used to be ripe for patent challenges. Consumers are then forced to pay high prices on these drugs for a lot longer. Messrs. Markwell and Kierans are incorrect in suggesting that generic companies do not need additional incentives to succeed.
The challenges to generic drug industry health are real and are getting more formidable, even since we published our article. The Ontario government recently negotiated additional savings on generic drugs, beyond those achieved when prices were cut in half in 2010. The provinces have jointly announced that they will tender for supply of three to five large blockbuster drugs, calling into question the entire generic patent challenge business model. Why spend money challenging a patent on a product that you may never be able to sell?
It is legitimate for us to question whether generic company incentives have been destroyed, and whether some counterbalance is needed to ensure the continued vitality of the industry.
Where we and Messrs. Markwell and Kierans appear to find common ground is in acknowledging the link between Canada’s drug patent policy and provincial drug prices. Effective drug policy in Canada requires an integration of pricing and patent policy to provide the right incentives for both brand and generic drug companies to do what each of them does best – maximize innovation and access, respectively.
What Messrs. Markwell and Kierans do not seem to appreciate, though, and what policymakers and regulators need to be careful about, is the very real prospect of eliminating generic incentives completely.
Timely access to generic medicines would then cease to play its critical and irreplaceable part in Canada’s pharmaceutical policy balance.
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