A Case of Patent Absurdities

Earlier this month, international negotiators descended on Honolulu to finalise details of perhaps the most important free trade deal of the century. The Trans-Pacific Partnership would join Australia with roughly a dozen other key Asia-Pacific economies, including Japan and Malaysia, to form a far-reaching commercial framework that could stimulate billions in economic activity.

One of the TPP’s most important provisions governs the intellectual property rights afforded pharmaceuticals. And there’s now an emerging consensus among negotiators supporting the establishment of robust protections for a promising new class of medicines, biologics, which hold huge promise for combating disease and driving growth among all member countries. This consensus is grounded in a clear-eyed understanding of the economic dynamics of biologic development. However, it has come under heavy fire from critics. They claim that strong biologic protections will dramatically drive up healthcare costs and prevent low-income patients from accessing need drugs.

That’s false on both counts — and dangerously so. If the TPP does not include robust biologic protections, innovation in this sector could slow to halt, depriving patients and doctors of miraculous new therapies.

Biologics are derived from living organisms. Legally, they’re subject to the standard intellectual property protections afforded conventional chemical drugs, which prevent competitors from producing a generic version of a popular biologic before its patent has expired.

However, biologics are so complex it’s proven possible for generic manufacturers to create knock-off versions that are sufficiently different from the original to skirt patent laws but also sufficiently similar to have roughly the same therapeutic effects and serve as a competitive substitute. So regulators have devised an additional regulatory layer called “data exclusivity,” which bars competitors from accessing the research information behind a new biologic, effectively prohibiting them from producing even rough copies.

Setting the right length of data exclusivity is crucial. The research and development process behind a new biologic is extraordinarily expensive, costing on average over $3 billion (AUD). And the average biologic manufacturing facility can cost well over a half a billion dollars (AUD) and take up to five years to build.

If exclusivity is too short, generic firms can undecut an innovator’s sales before the biologic has broken even. Creating new drugs would become a money-losing enterprise.  Drug firms and their investment partners would scale back the resources devoted to development. And, most importantly, patients would benefit from fewer breakthrough new treatments.

Economists at Duke University in the U.S. have investigated the market performance of existing biologic therapies and determined that the average new product requires about 12 years of sales to recoup initial research costs. And that’s exactly the length trade negotiators are looking to set exclusivity at in the Trans-Pacific Partnership. Critics claim that’s too long. They think it will unduly prevent cheap generics from hitting the market and drive up medical expenses among partner nations.

But that concern, no matter how well-meaning, simply isn’t backed up by the evidence. Data from the Organisation for Economic Co-operation and Development shows that when Canadian authorities expanded biologic data protections from zero to eight years, pharmaceutical expenses as a percentage of overall national healthcare spending actually went down in subsequent years. Mexico has also bulked up its data protections and experienced a similar spending drop. And the country’s central government has also seen its total annual drug expenses decrease.

There’s a heavy dose of naiveté powering the critics of the TPP’s exclusivity provision. Drug innovation is not free. Someone has to pick up the bill. Robust intellectual property protections ensconce the economic rewards for taking that risk.

Think about applying this logic Apple, which just shattered the world record for the best quarter in corporate history. Patents and trademarks prevent competitors from copying the technology behind its flagship iPhone and producing knockoffs. That marvelous invention took years of hard work and billions of dollars to create. Most would agree that Apple should reap the rewards — and it has.

The Trans-Pacific Partnership needs to include a full 12 years of data protection for biologics. Critics of such a provision fundamentally misunderstands how drug development works. We can’t let their ignorance undermine smart policy.

Tim Andrews is the Executive Director of the Australian Taxpayers’ Alliance