Order Code RL33901 Follow-On Biologics: Intellectual Property and Innovation Issues Updated January 17, 2008 Wendy H. Schacht Specialist in Science and Technology Resources, Science, and Industry Division John R. Thomas Visiting Scholar Resources, Science, and Industry Division Follow-On Biologics: Intellectual Property and Innovation Issues Summary Biologics, which are sometimes termed biopharmaceutials or biotechnology drugs, have begun to play an increasingly important role in U.S.
health care. Not only are sales of biologics growing rapidly, some experts estimate that in coming years half of all newly approved drugs will result from biotechnology. A number of patents pertaining to certain biological products will expire in the near future.
Some congressional concern has been voiced over the possibility that these patent expirations may not be accompanied by the introduction of competing, lower-cost biologics in the marketplace. With respect to traditional pharmaceuticals, the Drug Price Competition and Patent Term Restoration Act of 1984, a statute commonly known as the cHatch-Waxman Act, d is widely believed to have encouraged the availability of generic substitutes for brand-name pharmaceuticals upon patent expiration. The Act in part permitted the Food and Drug Administration to expedite its marketing approval proceedings with respect to generic drugs.
Some observers believe that the Hatch-Waxman Act ... more. less.
9s accelerated marketing approval provisions do not comfortably apply to biologics, however. Biologics differ significantly from traditional small-molecule pharmaceuticals in their size, structural complexity, and method of manufacture. Competitors who wish to develop follow- on biologics may face difficult, and even insurmountable difficulties in demonstrating that their product is equivalent to a particular brand-name biologic.<br><br> Other commentators assert that different kinds of biologics vary considerably in their size and structure, and believe that existing Hatch-Waxman mechanisms are appropriately applied to many biologics. The patent system also plays a role in regulating competition in the biologics market. Patent protection is available for biologics in many circumstances, although the scope of protection may be limited by legal principles that restrict the availability of proprietary rights in naturally occurring substances.<br><br> Several bills introduced in the first session of the110 th Congress, including H.R. 1038, S. 623, H.R.<br><br> 1956, S. 1505, and S. 1695 (ordered to be reported, with amendments in the nature of a substitute), would create an expedited marketing approval pathway for follow-on biologics within the Public Health Service Act.<br><br> The bills vary in important details, such as the need for the FDA to have promulgated regulatory guidance with respect to particular product classifications prior to receiving follow-on applications. Certain of these bills also establish specialized patent dispute resolution proceedings with respect to follow-on biologics. A number also create varying periods of exclusive marketing rights for biologic products, both in favor of brand-name firms and follow-on companies.<br><br> Contents Expedited Marketing Approval Issues..................................4 Expedited Marketing Approval for Pharmaceuticals...................4 Application to Biologics........................................7 Proposed Legislation..........................................10 Intellectual Property Issues.........................................11 Patent Protection for Biologics..................................11 The Hatch-Waxman Act, Intellectual Property, and Biologics..........13 Proposed Legislation..........................................15 Innovation Issues.................................................17 Patents and Innovation.........................................17 Role of Patents in Pharmaceutical R&D...........................18 Manufacturing Considerations...................................21 Clinical Trials................................................22 Marketing Concerns...........................................23 Additional Observations.......................................24 This report was funded in part by a grant from the John D. and Catherine T. MacArthur Foundation.<br><br> 1 The term cbiologic d has been described as cpoorly defined, d and its precise parameters are themselves subject to debate. See David M. Dudzinski, cReflections on Historical, Scientific, and Legal Issues Relevant to Designing Approval Pathways for Generic Versions of Recombinant Protein-Based Therapeutics and Monoclonal Antibodies, d 60 Food and Drug Law Journal (2005), 143.<br><br> The Public Health Service defines the term cbiological product d to mean ca virus, therapeutic serum, toxin, antitoxin, vaccine, blood, blood component or derivative, allergenic product, or analogous product, or arsphenamine or derivative of arsphenamine (or any other trivalent organic arsenic compound), applicable to the prevention, treatment, or cure of a disease or condition of human beings. d 42 U.S.C. § 262(i) (2006). Biologics are also sometimes termed cbiotechnology drugs d or cbiopharmaceuticals. d Dudzinski at 143.<br><br> 2 Biotechnology Industry Organization, available at [http://www.bio.org]. 3 Kerry A. Dolan, cBiology Rising, d Forbes.com , May 12, 2006, available at [http://www.forbes.com/2006/05/12/merck-pfizer-amgen-cz_kd_0512biologics_print.html].<br><br> 4 cBiogenerics: A Difficult Birth? d IMS Global Insights , available at [http://www.imshealth .com]. 5 Nicole Gray, cHarbingers of Change, d Pharmaceutical Executive , May 2005, available at [http://www.imshealth.com]; Nicole Gray, cKeeping Pace with the Evolving Pharmaceutical Business Model, d Pharmaceutical Executive , May 2006, available at [http://www .imshealth.com]. Follow-On Biologics: Intellectual Property and Innovation Issues Longstanding congressional interest in the availability and cost of pharmaceuticals has focused attention upon the increasingly significant class of drugs known as cbiologics. d 1 Observers agree that the biologics market is rapidly expanding by any number of measures, including the quantity of approved products, the size of the market, and the importance of these drugs to the health of U.S.<br><br> citizens. The Food and Drug Administration (FDA) issued marketing approval on 36 biotechnology drugs in 2002; it also approved 37 in the following year, 40 in 2004, and 38 in 2005. 2 Many more new biologics reportedly are in the approval process.<br><br> 3 Federico Polliano, head of business development at BioGeneriX, a biotechnology company, projects that 50% of approved pharmaceuticals in 2010 will be the result of biotechnology. 4 Dramatic growth in the number of approved drugs has been accompanied by a similar expansion in sales. IMS Health, a consulting firm, found that in 2005, the size of the U.S.<br><br> biologics market was on the order of $52 billion. According to its analysis, the biologics market grew at a rate of 17%, greater than any other portion of the pharmaceutical market. 5 Some experts further project that the global biologics CRS-2 6 Ramsey Baghdadi, cBiogenerics Are Happening: Slowly, Product-By-Product, d The RPM Report , January 2006, available at [http://www.theRPMreport.com].<br><br> 7 Aaron Smith, cBarr 9s Risky $2.5 Billion Bid for Biogenerics, d CNNMoney.com , September 15, 2006. See also Research and Markets, cThe Biogenerics Market Outlook: An Analysis of Market Dynamics, Growth Drivers and Leading Players, d Business Wire , September 12, 2005, available at [http://www.findarticles.com/p/articles/mi_mOEIN/] is_2005_Sept_12/ ai_n15382946/print. 8 See Dudzinski , supra.<br><br> 9 P.L. 84-417, 98 Stat. 1585 (1984).<br><br> 10 See 21 U.S.C. § 355(b)(2) (2006) (with respect to § 505(b)(2) applications); id. § 355(j)(1) (with respect to ANDAs).<br><br> 11 See John R. Thomas, Pharmaceutical Patent Law (Bureau of National Affairs, 2005). 12 See Melissa R.<br><br> Leuenberger-Fisher, cThe Road to Follow On Biologics: Are We There Yet?, d 23 Biotechnology Law Report (August 2004), 389. market will expand to $67 billion by 2010. 6 Awareness of the increasing importance of biopharmaceuticals has been accompanied by an appreciation that patents covering many of these products will soon expire.<br><br> Andrew Forman of WR Hambrecht concludes, for example, that $20 billion in biotech drugs worldwide will be off patent by 2010. 7 Some commentators have expressed concerns that patent expirations may not be accompanied by the introduction of competing, lower-cost biologics in the marketplace. 8 In the traditional pharmaceutical market, generic substitutes commonly become available to consumers as patents on brand-name drugs expire due to the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984, a statute commonly known as the cHatch-Waxman Act. d 9 This legislation introduced several significant changes to both the patent law and the food and drug law.<br><br> Among them were expedited marketing approval pathways that eliminated, in whole or in part, the need for firms to conduct expensive and time-consuming clinical trials when they bring generic equivalents of brand-name drugs to market. 10 The Hatch-Waxman amendments were designed to facilitate the rapid introduction of lower-cost generic drugs, while at same time promoting innovation in the pharmaceutical industry. 11 Technical factors may limit the effectiveness of the Hatch-Waxman amendments to biologics, however.<br><br> Biologics differ significantly from traditional pharmaceuticals in their complexity and method of manufacture. Typical pharmaceutical products consist of small molecules, on the order of dozens of atoms, that may be readily characterized and reproduced through well-understood chemical processes. In contrast, biologics are often made up of millions of atoms, feature a more complex structure than traditional pharmaceuticals, and are manufactured from living cells through biological processes.<br><br> 12 As a result, the technical challenges that a competitor faces in developing a product that may be viewed as equivalent to a particular brand-name biologic product may be considerable, and in some cases CRS-3 13 See Dawn Willow, cThe Regulation of Biologic Medicine: Innovators 9 Rights and Access to Healthcare, d 6 Chicago-Kent Journal of Intellectual Property (2006), 32. 14 Id. 15 See Dudzinski, supra (noting such concerns).<br><br> 16 See Narinder S. Banait, Follow-on Biological Products 4 Legal Issues , 2005, available at [http://www.fenwick.com/docstore/Publications/IP/follow-on.pdf]. 17 P.L.<br><br> 78-410, 58 Stat. 682 (1944). 18 See H.R.<br><br> 1038 and S. 623 ( cAccess to Life-Saving Medicine Act d); H.R. 1956 ( cPatient Protection and Innovative Biologic Medicines Act of 2007 d); S.<br><br> 1505 ( cAffordable Biologics for Consumers Act d) and S. 1695 ( cBiologics Price Competition and Innovation Act of 2007 d). 19 See, e.g, J.E.M.<br><br> Ag Supply v. Pioneer Hi-Bred Int 9l, Inc., 534 U.S. 124, 130 (2001) (explaining patent law principle that cproducts of nature d are not eligible for patenting, but that patents may be available for chuman-made inventions d resulting from the use of biotechnology).<br><br> 20 See Thomas, supra note 11. perhaps even insurmountable. 13 For this reason, many experts do not describe competing biologic products as cgenerics, d as is the case for a small-molecule pharmaceuticals; the term cfollow-on biologic d is commonly used instead.<br><br> 14 Some commentators assert that these technical challenges may also mean that the expedited approval pathways available under the Hatch-Waxman Act do not comfortably apply to biologics. Because the complexity of biologics is an order of magnitude greater than that associated with pharmaceuticals, they say, an expedited marketing approval protocol would not ensure patient safety to the degree possible with respect to traditional drugs. 15 Others observe that different kinds of biologics vary considerably in their size and structure, and believe that existing Hatch-Waxman mechanisms provide appropriate regulatory oversight for less complex biologics.<br><br> These observers further explain that as scientific knowledge progresses, understanding of biologics will increase, thereby allowing expanded use of current procedures. 16 Legislation was introduced in the first session of the 110 th Congress that would amend the Public Health Service Act (PHS Act) 17 to provide an expedited marketing approval pathway for follow-on biologics. 18 FDA marketing approval is not the only gatekeeper to competition in the biologics market.<br><br> The patent system also has a role to play. Although patent protection may be available for biologics in many circumstances, these patents may be limited by legal principles that restrict the availability of proprietary rights in naturally occurring substances. 19 Further, although key patents on many biologics are set to expire, other products may potentially remain protected by patents for many years to come.<br><br> In recognition that the public possesses an interest in prompt challenges to drug patents that are believed to have been improvidently granted, the Hatch-Waxman Act introduced incentives for firms to bring such challenges along with special procedures for resolving them in the courts. 20 The legislation introduced in the 110 th Congress would account for the patent implications of follow-on biologics somewhat differently. CRS-4 21 P.L.<br><br> 84-417, 98 Stat. 1585 (1984). 22 See Thomas, supra .<br><br> 23 See Apotex Inc. v. FDA, 393 F.3d 210, 212 (D.C.<br><br> Cir. 2004). This report reviews doctrinal and policy issues pertaining to follow-on biologics.<br><br> The report first introduces the application of federal food and drug legislation to follow-on biologics. It next turns to the patent implications of marketing follow-on biologics. Following this review of substantive law, the remainder of the report introduces innovation policy issues pertaining to follow-on biologics.<br><br> Expedited Marketing Approval Issues Efforts to speed approval of follow-on biologics have been based upon the Hatch-Waxman Act. 21 Enacted in 1984, that statute amended the Federal Food, Drug, and Cosmetic Act (FDC Act) in part by introducing two regulatory pathways allowing for the expedited marketing approval of generic pharmaceuticals. Many policy and industry experts agree that the Hatch-Waxman Act has significantly effected the availability of generic substitutes for brand name drugs.<br><br> Generics are often rapidly available after patent expiration, commonly at lower prices than the brand-name original. Concurrently, given the increasing investment in research and development (R&D) and the gains in research intensity of the pharmaceutical industry, it appears that the 1984 Act has not deterred the search for, and the development of, new drugs. 22 At issue is whether the existing Hatch-Waxman Act protocols, or a similar construct created through new legislation, could be effectively implemented for follow-on biologics.<br><br> The difficulty characterizing biologics, along with the importance of manufacturing techniques to the final product, have created debate around the applicability of expedited marketing approval mechanisms for these products. This report next describes issues pertaining to the accelerated marketing approval of follow-on biologics. Expedited Marketing Approval for Pharmaceuticals The FDC Act has, since 1962, prohibited the marketing of a cnew drug d unless that drug meets certain safety and efficacy standards.<br><br> Sponsors of new drugs must submit, among other documents, a New Drug Application (NDA) demonstrating that these standards have been met in order to obtain marketing approval. A typical NDA is a complex, lengthy document that presents clinical data; chemistry, manufacturing and controls; nonclinical pharmacology and toxicology; safety update reports; and other salient information. 23 Brand-name drug companies commonly devote considerable resources, over many years, to complete the studies necessary to submit a NDA.<br><br> Prior to the introduction of the Hatch-Waxman Act, the federal food and drug law contained no separate provisions addressing generic versions of drugs that had CRS-5 24 See Alfred B. Engelberg, cSpecial Patent Provisions for Pharmaceuticals: Have They Outlived Their Usefulness? d 39 IDEA: J. L.<br><br> & T ECH . 389, 396 (1999). 25 See James J.<br><br> Wheaton, cGeneric Competition and Pharmaceutical Innovation: The Drug Price Competition and Patent Term Restoration Act of 1984, d 34 C ATH . U NIV . L.<br><br> R EV . 433, 439 (1986). 26 See, e.g., Justina A.<br><br> Molzon, cThe Generic Drug Approval Process, d 5 J. P HARM . & L.<br><br> 275, 276 (1996) ( cThe Act streamlined the approval process by eliminating the need for [generic drug] sponsors to repeat duplicative, unnecessary, expensive and ethically questionable clinical and animal research to demonstrate the safety and efficacy of the drug product. d). 27 See Jonathon M. Lave, cResponding to Patent Litigation Settlements: Does the FTC Have It Right Yet? d 64 U.<br><br> P ITT . L. R EV .<br><br> 201, 202 (2002) ( cHatch-Waxman has also increased the generic drug share of prescription drug volume by almost 130% since its enactment in 1984. Indeed, nearly 100% of the top selling drugs with expired patents have generic versions available today versus only 35% in 1983. d). 28 21 U.S.C.<br><br> § 355(j)(1) (2006). 29 See, e.g., Sarah E. Eurek, cHatch-Waxman Reform and Accelerated Entry of Generic Drugs: Is Faster Necessarily Better? d 2003 D UKE L.<br><br> & T ECH . R EV . 18 (August 13, 2003).<br><br> 30 21 U.S.C. § 355(b)(2) (2004). The name of this application refers to its section number within the Hatch-Waxman Act itself.<br><br> This provision has been codified at 21 U.S.C. (continued...) previously been approved. 24 The result was that a would-be generic drug manufacturer most often had to file its own NDA in order to market its drug.<br><br> 25 Some generic manufacturers were forced to prove independently that the drugs were safe and effective, even though their products were chemically identical to those of previously approved drugs. Some commentators believed that the approval of a generic drug was a needlessly costly, duplicative, and time-consuming process prior to the Hatch-Waxman Act. 26 These observers noted that although patents on important drugs had expired, manufacturers were not moving to introduce generic equivalents for these products due to the level of resource expenditure required to obtain FDA marketing approval.<br><br> 27 In response to this concern, the Hatch-Waxman Act created two new types of applications for marketing approval of a pharmaceutical. One is termed an cAbbreviated New Drug Application d (ANDA). 28 An ANDA may be filed, generally speaking, if the active ingredient, route of administration, the dosage form, and the strength of the new drug are the same as those of the approved drug.<br><br> An ANDA allows a generic drug manufacturer to rely upon the safety and efficacy data of the original manufacturer. The availability of an ANDA typically permits a generic manufacturer to avoid the costs and delays associated with filing a full-fledged NDA. ANDAs also allow a generic manufacturer, in many cases, to place its FDA-approved bioequivalent drug on the market as soon as any relevant patents expire.<br><br> 29 The Hatch-Waxman Act also authorized a so-called c§ 505(b)(2) application. d A § 505(b)(2) application is one for which one or more of the investigations relied upon by the generic applicant for approval cwere not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted.... d 30 A CRS-6 30 (...continued) § 355(b)(2), where it may be more conveniently located. 31 U.S. Department of Health and Human Services, Food and Drug Administration, Center for Drug Evaluation and Research (CDER), Guidance for Industry: Applications Covered by Section 505(b)(2) at 2-3 (October 1999) [hereinafter c Section 505(b)(2) Guidance d].<br><br> 32 Id. 33 Id. 34 See Pfizer, Inc.<br><br> v. Dr. Reddy 9s, 359 F.3d 1361, 69 USPQ2d 2016 (Fed.<br><br> Cir. 2004). 35 37 C.F.R.<br><br> § 314.93(b) (2004). 36 Section 505(b)(2) Guidance at 5. § 505(b)(2) application differs from an ANDA in that it includes full reports of investigations concerning the safety and effectiveness of the proposed product.<br><br> However, a § 505(b)(2) application is distinct from an NDA in that the § 505(b)(2) application relies upon data that the applicant did not develop. 31 According to the FDA, a § 505(b)(2) applicant can rely upon two sources of studies cnot conducted by or for the applicant and for which the applicant has not obtained a right of reference. d 32 The first source consists of safety and efficacy analysis based upon data that the applicant did not originate itself and does not enjoy an express permission to access. This category of information typically consists of published scientific literature.<br><br> As a result, § 505(b)(2) applications are sometimes referred to as cpaper NDAs. d With respect to the second source of appropriate information, the FDA has declared that a § 505(b)(2) applicant may rely upon that agency 9s own finding of safety and effectiveness for an approved drug. 33 The FDA 9s conclusion allows applicants that wish to market a modification of an approved drug to file a § 505(b)(2) application rather than a full NDA. For example, suppose that an approved drug employed an active ingredient with a particular salt formulation.<br><br> A generic firm seeks to market a generic version of the approved drug with the same active moiety, but using a different salt formulation. 34 Under these circumstances, the generic firm may be unable to file an ANDA because its proposed active ingredient is not identical to that of the approved product. 35 Due to the FDA 9s view, however, the generic firm could file a § 505(b)(2) application that relied upon the FDA 9s previous approval of the innovator drug, along with studies supporting the change in the salt formulation from the innovator drug.<br><br> 36 As may be appreciated, the availability of a § 505(b)(2) application likely leads to a substantial reduction in the costs of the generic firm in this case in comparison with the resources required to file a full NDA. The FDA interpretation of § 505(b)(2) regarding this second source of information has been criticized. Some observers believe that under a plain reading of the Hatch-Waxman Act, a generic applicant may rely upon an innovator 9s proprietary data only when filing an ANDA application, not a § 505(b)(2) application.<br><br> Under this view, the FDA position inappropriately expands the CRS-7 37 See Bruce N. Kuhlik, cThe Assault on Pharmaceutical Intellectual Property, d 71 U. C HI .<br><br> L. R EV . 93, 103-04 (2004).<br><br> 38 Section 505(b)(2) Guidance at 3. 39 The FDC Act defines the term cdrug d to include carticles intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or other animals.... d 21 U.S.C. § 321(g)(1)(B).<br><br> 40 P.L. 78-410, 58 Stat. 682 (1944).<br><br> 41 U.S. Food and Drug Administration, Center for Drug Evaluation and Research, cFrequently Asked Questions About Therapeutic Biological Products d(available at [http://www.fda.gov/cder/biologics/qa.htm]). 42 Further discussion of this issue may be found at Willow, supra.<br><br> circumstances to which a § 505(b)(2) application applies. 37 Despite this critique, the FDA has taken the position that its capproach is intended to encourage innovation in drug development without requiring duplicative studies to demonstrate what is already known about a drug while protecting the patent and exclusivity rights for the approved drug. d 38 Application to Biologics The Hatch-Waxman Act, including its expedited approval pathways, may potentially apply to biologics. This result follows because the Hatch-Waxman Act in part amended the FDC Act, which in turn applies to cdrugs. d 39 The Hatch- Waxman Act did not amend a distinct statute, the Public Health Service Act (PHS Act), 40 which applies specifically to biological products and contains no provisions allowing expedited marketing approval for follow-on biologics.<br><br> Because the definition of cdrugs d under the FDC Act is broad, however, the FDA states that c[b]iological products subject to the PHS Act also meet the definition of drugs under the Federal Food, Drug, and Cosmetic Act. d 41 Under this interpretation, both expedited marketing approval pathways 4 the ANDA and the § 505(b)(2) application 4 would potentially be available for pharmaceuticals and biologics alike. 42 Many observers believe that the possibility of employing an ANDA for a biologic is currently more theoretical than real, however, due to differences between this class of drugs and conventional pharmaceuticals. Two of the more significant differences are the increased complexity of biologics vis-à-vis pharmaceuticals, as well as the importance of the particular manufacturing process employed to produce a biologic.<br><br> Food and drug lawyers have stated: Biologics differ significantly from traditional drugs in their size, complexity, structure, and method of manufacture. Drug products consist of small molecules, on the order of dozens of atoms synthesized from defined components according to a prescribed production method in an environment of manufacturing processes and controls. Biological products are much larger than drugs, made up of millions of atoms, and are manufactured from living cells through an elaborate CRS-8 43 Gary C.<br><br> Messplay and Colleen Heisey, cFollow-On Biologics: The Evolving Regulatory Landscape, d BioExecutive International , May 2006, 43. 44 Stephen B. Judlowe and Brian P.<br><br> Murphy, Proposed Legislation for Follow-On Biologic Pharmaceuticals in the US , Morgan, Lewis & Backius, LLP, New York available at [http://www.buildingipvalue.com/05_NA/135_138.htm]. 45 Debra Weintraub, cNext Generation of Biopharmaceuticals, d Journal of Managed Care Medicine , vol. 9, no.<br><br> 1, 2006, available at [http://www.namcp.com/Journals /JMCM/Articles/Next%20Generation%20of%20Biopharmaceuticals.pdf]. 46 Henry Grabowski, Iain Cocburn, and Genia Long, cThe Market For Follow-On Biologics: How Will It Evolve?, d Health Affairs, September/October 2006, 1292. 47 Judlowe & Murphy, supra note 44.<br><br> 48 Bruce S. Manheim Jr., Patricia Granahan, and Kenneth J. Dow, c 8Follow-On Biologics 9: Ensuring Continued Innovation In The Biotechnology Industry, d Health Affairs , March/April 2006, 397.<br><br> 49 Id . 50 See Weintraub, supra note 45. process initiated by specifically programming a cell line to produce a certain protein in a highly controlled, sterile manufacturing environment.<br><br> 43 Characteristic properties of biologics include a very high molecular weight and high structural complexity, a heterogeneous molecular make-up, varying levels of hard-to-remove biological impurities (bacteria, viruses and the like) and a high degree of sensitivity to environmental conditions. 44 These traits of biologics make the manufacturing process critical to the final product. It has been argued that c[t]he production process is 90 percent of the intellectual property related to the product. d 45 In contrast to traditional drugs, which are manufactured by chemical synthesis, 46 the production of biologics is more complex: [M]anufacturing biologics requires the nourishment and support of living host cells transfected with genetically engineered DNA to code for the desired biological protein that is expressed by the host cell.<br><br> A master cell bank must be established, and host cells are cultured and fermented in large-scale bioreactors to produce commercial quantities of the desired protein. 47 Not only are the characteristics of a biologic cclearly dependent on the process used to manufacture the product, d such information is ordinarily protected via trade secrets. 48 As a result, some observers have opined that a cmanufacturer would have great difficulty producing a follow-on protein that is identical to the innovator product. d 49 The complexity of biological products and the importance of the particular manufacturing process used to produce them may make the showing that a follow-on product is the csame d as a previously approved biologic difficult, if not impossible.<br><br> 50 Former Acting FDA Commissioner Lester Crawford has explained that cbecause protein drug products are large, complex molecules, derived from biological sources, CRS-9 51 Judlowe & Murphy, supra . 52 See Christopher Webster et al., cBiologics: Can There Be Abbreviated Applications, Generics, or Follow-On Products?, d International BioPharm (July 1, 2003) (available at [http://www.biopharm-mag.com/biopharm/article/articleDetail.jsp?id=73785]). 53 Judlowe & Murphy, supra .<br><br> 54 Generic Pharmaceutical Association, Generic Biopharmaceuticals , available at [http://www.gphaonline.org] 55 Selena Class, cBiogenerics: Waiting for the Green Light, d IMS Global Insights , October 28, 2004 (available at [http://www.imshealth.com]). 56 Id. 57 Narinder S.<br><br> Banait, cFollow-on Biological Products 4 Legal Issues d (2005) (available at [http://www.fenwick.com]). 58 21 U.S.C. § 355(b)(2) (2006).<br><br> generally it has not been possible to assess relative sameness with a high degree of confidence. d 51 Some observers have gone further, opining that true cgeneric d biologics cannot exist because they cannot be judged to be the csame das the brand- name product, a requirement that the Hatch-Waxman Act imposes with respect to an ANDA. 52 Other commentators believe that scientific capabilities currently allow manufacturers to produce follow-on biologics that are safe and effective. 53 For example, the Generic Pharmaceutical Association (GPhA) strongly believes FDA 9s current statutory structure would permit approvals and marketing of an array of generic biopharmaceuticals (also referred to as 8biologics 9) with relatively low to moderate complexity, and to expand [sic] that system in the coming years to permit the approval of more complex products as the science evolves.<br><br> 54 Israel Makov, president and CEO of Teva, argues that biologic products can be adequately characterized and manufacturing processes do not necessarily affect the final drug. 55 Similarly, Patrick Vink, Global Head of Biopharmaceuticals at Sandoz, maintains both that the science is in place to assess follow-on biologics appropriately, and that unnecessary clinical trials should not be mandatory. Instead, he advocates that bioequivalence testing should be required on a case-by-case basis.<br><br> 56 In this regard, some commentators have suggested that potential manufacturers of follow-on biologics employ § 505(b)(2) applications in appropriate cases. The statutory requirements for § 505(b)(2) applications do not require that the follow-on product be the csame d as the approved product. Rather, the applicant must provide clinical data demonstrating the follow-on product to be safe and effective, but may rely upon data generated by the brand-name firm itself, or by third parties.<br><br> 57 The applicant must substantiate the crelevance and applicability d of previous findings to the follow-on product, however, and may need to supply clinical data to describe any relevant distinctions between the brand-name biologic and the follow-on product. 58 CRS-10 59 Biotechnology Industry Organization, Follow-on Biotechnology Products (available at [http://www.bio.org/healthcare/followon/]). 60 H.R.<br><br> 1038 at § 3; S. 623 at § 3. 61 H.R.<br><br> 1038 at § 3; S. 623 at § 3. It should be appreciated that some observers believe that § 505(b)(2) applications are inappropriate for biologics, however.<br><br> For example, the Biotechnology Industry Organization (BIO) has asserted that: Approval of follow-on biotechnology products must be based on the same rigorous standards applied by the FDA for the approval of pioneer biotechnology products.... Currently, the science does not exist to provide an alternative to a full complement of data, including clinical evidence, to demonstrate safety and effectiveness for follow-on biotechnology products.... Therefore, in the current state of scientific knowledge and technique, a clinical trial remains a fundamental principle for evaluating the safety and effectiveness of a follow-on biotechnology product.<br><br> 59 Proposed Legislation Legislation proposed in the 110 th Congress would amend the Public Health Service Act in order to provide an expedited marketing approval pathway for biologics that are ccomparable d to previously approved brand-name products. The Access to Life-Saving Medicine Act, introduced as H.R. 1038 and S.<br><br> 623, would grant the Secretary of Health and Human Services (HHS) certain discretion to determine, on a case-by-case basis, what studies were necessary to establish comparability. A comparable biologic would be required to have comparable principal structural features with the corresponding brand-name product; the same mechanism of action, if known; and the same route of administration, dosage form, and strength, among other factors. 60 Under these bills, an applicant for a comparable biological product would be allowed optionally to elect to establish cinterchangeability d with the brand-name product.<br><br> 61 If the follow-on applicant 9s product was expected to produce the same clinical result as the brand-name product, then the follow-on product could be labeled as such. Two other bills, H.R. 1956, the Patient Protection and Innovative Biologic Medicines Act of 2007, and S.<br><br> 1505, the Affordable Biologics for Consumers Act, instead call for the Secretary of Health and Human Services initially to publish a number of individual guidance documents, each relating to a particular class of biological products. That cproduct-class specific guidance d would stipulate the particular data and information required to file a marketing approval application for products within that category. Interested parties would then be permitted to file applications for similar biological products within that category at a certain date, generally not less than 12 years after approval or licensing of the reference product.<br><br> An additional bill, S. 1695, is titled the Biologics Price Competition and Innovation Act of 2007. Under S.<br><br> 1695, a follow-on biologic may be designated as CRS-11 62 For additional information, see CRS Report RL34045, FDA Regulation of Follow-On Biologics , by Judith A. Johnson. 63 See CRS Report RL30648, An Examination of the Issues Surrounding Biotechnology Patenting and Its Effect on Entrepreneurial Companies .<br><br> 64 See 35 U.S.C. §§ 101, 102, 103 (2006). 65 35 U.S.C.<br><br> § 271(2006). 66 35 U.S.C. §§ 101, 102, 103 (2006).<br><br> 67 See Brenner v. Manson, 383 U.S. 519, 86 S.Ct.<br><br> 1033, 16 L.Ed.2d 69 (1966). 68 35 U.S.C. § 102 (2006).<br><br> either a cbiosimilar d or an cinterchangeable d product. In general, under S. 1695 a follow-on product is biosimilar if (1) analytical, animal, and clinical studies show that it is highly similar to the reference product, notwithstanding minor differences in clinically inactive components, (2) the two products have the same mechanism of action, (3) the condition of use in the proposed product have been previously approved for the reference product, and (4) the route of administration, dosage form, and strength of the two products are the same.<br><br> A follow-on product is interchangeable if (1) it can be expected to product the same clinical result as the reference product in any given patient and (2) the risk, in terms of safety or diminished efficacy or switching between the two products, is not greater than the use of the reference product without such alternation. 62 Intellectual Property Issues Patent Protection for Biologics As with pharmaceuticals, biologics may be subject to patent protection provided certain conditions are met. 63 An award of marketing approval by the FDA and the grant of a patent by the U.S.<br><br> Patent and Trademark Office (USPTO) are distinct events that depend upon different criteria. FDA procedures determine whether the drug is sufficiently safe and effective to be marketed. In contrast, the USPTO grants patents on inventions that fulfill requirements established by the Patent Act of 1952, including utility, novelty, and nonobviousness.<br><br> 64 Because patent proprietors may be able to block competitors during the term of the patent, 65 these intellectual property rights also play a role in the marketplace availability of follow-on biologics. Although a complete review of the patent system exceeds the scope of this report, its basic contours may be concisely stated. The Patent Act allows inventors to obtain patents on processes, machines, manufactures, and compositions of matter that are useful, novel and nonobvious.<br><br> 66 An invention is judged as useful if it is minimally operable towards some practical purpose. 67 To be considered novel within the patent law, an invention must differ from existing references that disclose the state of the art, such as publications and other patents. 68 The nonobviousness CRS-12 69 35 U.S.C.<br><br> § 103(a) (2006). 70 35 U.S.C. § 111 (2006).<br><br> 71 35 U.S.C. § 112 (2006). 72 35 U.S.C.<br><br> § 112 (2006). 73 35 U.S.C. § 151 (2006).<br><br> 74 35 U.S.C. § 154 (2006). 75 35 U.S.C.<br><br> § 156 (2006). 76 35 U.S.C. § 271(a) (2006).<br><br> 77 35 U.S.C. § 281 (2006). 78 35 U.S.C.<br><br> § 282 (2006). requirement is met if the invention is beyond the ordinary abilities of a skilled artisan knowledgeable in the appropriate field. 69 In order to receive a patent, an inventor must file a patent application with the USPTO.<br><br> 70 Patent applications must include a specification that so completely describes the invention that skilled artisans are enabled to practice it without undue experimentation. 71 The patent application must also contain distinct, definite claims that set out the proprietary interest asserted by the inventor. 72 Trained personnel at the USPTO, known as examiners, review all applications to ensure that the invention described and claimed in the application fulfills the pertinent requirements of the patent law.<br><br> If the USPTO believes that the application fulfills the statutory requirements, it will allow the application to issue as a granted patent. 73 Each patent ordinarily enjoys a term of twenty years commencing from the date the patent application was filed. 74 If the patent proprietor was unable to market its product for a period of the patent term due to lack of approval by the FDA, the term may be extended by a portion of the regulatory review period in some circumstances.<br><br> 75 Granted patents give the patentee the right to exclude others from making, using, selling, offering to sell, or importing into the United States the patented invention. 76 Parties who engage in those acts without the permission of the patent proprietor during the term of the patent can be held liable for infringement. The patentee may file a civil suit in federal court in order to enjoin infringers and obtain monetary remedies.<br><br> 77 Although issued patents enjoy a presumption of validity, accused infringers may assert that the patent is invalid or unenforceable on a number of grounds. 78 A few patent law principles have particular impact upon biologics. First, the courts have generally concluded that novel and nonobvious products and processes of biotechnology may be patented, notwithstanding the fact that the invention derives from the field of biochemistry or is itself a cliving invention. d In Diamond v.<br><br> CRS-13 79 473 U.S. 303 (1980). 80 Id.<br><br> at 309-10. 81 See Diamond v. Diehr, 450 U.S.<br><br> 175, 185 (1980) ( cExcluded from such patent protection are laws of nature, natural phenomena, and abstract ideas. d). 82 U.S. Patent No.<br><br> 5,955,422 (claiming in part c[a] pharmaceutical composition comprising a therapeutically effective amount of human erythropoietin and a pharmaceutically acceptable diluent, adjuvant or carrier, wherein said erythropoietin is purified from mammalian cells grown in culture. d). See also Amgen, Inc. v.<br><br> Hoechst Marion Roussel, Inc., 457 F.3d 1293 (Fed. Cir. 2006).<br><br> 83 See Alix Weisfeld, cHow Much Intellectual Property Protection Do the Newest (and Coolest) Biotechnologies Get Internationally?, d 6 Chicago Journal of International Law (2006), 833. 84 See Dennis J. Karjala, cBiotech Patents and Indigenous Peoples, d 7 Minnesota Journal of Law, Science, and Technology (2006), 483.<br><br> Chakrabarty , 79 for example, the Supreme Court held a genetically modified bacterium was patentable. The Court explained that the inventor 9s cclaim is not to a hitherto unknown natural phenomenon, but to a nonnaturally occurring manufacture or composition of matter 4 a product of human ingenuity 8having a distinctive name, character [and] use. 9 d 80 Biotechnology firms may at times confront the longstanding patent law principle that a naturally occurring substance may not be patented as such. 81 For example, a scientist could not obtain a patent on a previously unknown plant that she discovered growing in the wild.<br><br> A patent may be obtained once significant artificial changes are made to that natural substance, however. For example, a biological substance that is discovered in nature and isolated from its source may be subject to patent protection. Amgen 9s Epogen®, a genetically engineered form of erythropoietin that combats anemia by encouraging the production of red blood cells, provides one example of a patented biologic.<br><br> 82 In addition, a patent may be available for a new process used to manufacture a known biologic. 83 Suppose, for example, that a naturally occurring biological agent and its activity are already known to the state of the art. The contribution of the biotechnology firm is to develop a manufacturing process that allows for widespread, commercial use of that agent.<br><br> In this scenario, the biotechnology firm may obtain a patent on the manufacturing process, but not upon the biological agent itself. It should be appreciated that the value of such a process patent will depend upon whether competitors will be able to employ a distinct manufacturing process in order to create a comparable final product. Because of the potential ability of competitors to design around process patents, some observers believe that process patents may be of less significance in the marketplace than patents directed towards the final product itself.<br><br> 84 The Hatch-Waxman Act, Intellectual Property, and Biologics In addition to creating expedited marketing approval pathways for generic drugs, the Hatch-Waxman Act incorporated numerous additional provisions pertaining to CRS-14 85 P.L. 84-417, 98 Stat. 1585 (1984).<br><br> 86 A more detailed discussion of the Hatch-Waxman Act is found at CRS Report RL30756, Patent Law and Its Application to the Pharmaceutical Industry: An Examination of the Drug Price Competition and Patent Term Restoration Act of 1984 ( cThe Hatch-Waxman Act d) , by Wendy H. Schacht and John R. Thomas.<br><br> 87 See Patent Fairness Act of 1999: Hearing on H.R. 1598 Before the House Comm. on the Judiciary, 106th Cong.<br><br> 94 (1999) (statement of Hon. Henry A. Waxman, Member, House Comm.<br><br> on Government Reform) (available at [http://commdocs.house.gov/committees /judiciary/hju62499.000/hju62499_0f.htm]). 88 See Terry Mahn and Margo Furman, The Role of Patent and Non-Patent Exclusivity Under the Hatch-Waxman Act (2005), 19-20 (available at [http://www.fr.com/practice/pdf/ 05-16-05%20_PatentandNon-PatentExclusivity.pdf]). intellectual property.<br><br> 85 Among these provisions are a statutory exemption from claims of patent infringement based on acts reasonably related to seeking FDA approval (commonly know as the csafe harbor d); patent term extension for a portion of the time spent seeking marketing approval; special provisions for challenging the enforceability, validity, or infringement of approved drug patents; marketing exclusivities for brand-name firms; and a reward for challenging patent enforceability, validity, or infringement consisting of 180 days of generic exclusivity to the first generic applicant to file a patent challenge against any approved drug. 86 The applicability of the intellectual property provisions of the Hatch-Waxman Act to biologics presents complex issues. Some of the provisions of the Hatch- Waxman Act plainly apply to biologics, whether they were approved under the FDC Act or the PHS Act.<br><br> In particular, the patent term extension and csafe harbor d provisions found in Title II of the Hatch-Waxman Act were enacted as general amendments to the Patent Act (Title 35 of the U.S. Code). The patent term extension statute, codified at 35 U.S.C.<br><br> § 156, specifically accounts for the possibility of a chuman biological product d approved under the Public Health Service Act. The csafe harbor d provision, found at 35 U.S.C. § 271(e)(1), has been construed to apply to biologics as well.<br><br> 87 Congress framed the remaining intellectual property provisions of the Hatch- Waxman Act, including those establishing marketing exclusivities and specialized dispute resolution proceedings, as specific amendments to the FDC Act. These provisions would therefore apply to biologics only to the extent they were governed by the FDC Act. To the extent that a particular biologic is approved under the auspices of the PHS Act, however, these provisions would be inapplicable.<br><br> 88 Should the FDC Act apply to a particular biologic, one of its more notable intellectual property provisions relates to so-called marketing exclusivities. The term cmarketing exclusivity d refers to a period of time during which the FDA affords an approved drug protection from competing applications for marketing approval. Among the marketing exclusivities is a five-year period available for drugs that qualify as new chemical entities.<br><br> Should the drug 9s sponsor submit new clinical studies in support, that sponsor may obtain a three-year period of marketing exclusivity that applies to the use of the product that was supported by the new clinical study. CRS-15 89 H.R. 1038 and S.<br><br> 623 at § 3(a). 90 Id. 91 Id.<br><br> 92 S. 1505 at § 2(a). 93 Id.<br><br> at § 2(c). 94 A declaratory judgment action is provided by a cfederal or state law permitting parties to bring an action to determine their legal rights and positions regarding a controversy not yet ripe for adjudication . .<br><br> . . d Black 9s Law Dictionary (8 th ed. 2004).<br><br> In the context of patents, an action for declaratory judgment potentially would allow a biosimilar applicant to cclear the air by suing for a judgment that would settle the conflict of interests d with the owner of (continued...) Proposed Legislation Certain legislation introduced in the 110 th Congress would amend the Public Health Service Act in order to provide patent dispute resolution proceedings for biologics. The proposed regimes would act differently than the existing Hatch- Waxman framework. Under the two bills titled the Access to Life-Saving Medicine Act, H.R.<br><br> 1038 and S. 623, follow-on or prospective follow-on applicants are allowed to request identification of all relevant patents from the holder of the reference product. The brand-name firm would then be required to respond to such a request within 60 days, and may demand payment of up to $1,000 in exchange for this service.<br><br> The reference product holder would further be required to update this list for a period of two years. 89 The follow-on applicant would be able to challenge any identified patent by providing the basis for the challenge to the patent proprietor and holder of the reference product. 90 The patent proprietor would be required to bring a patent infringement suit within 45 days of notice of a challenge or lose the right to certain remedies in court.<br><br> Patent holders would be unable to seek declaratory judgment with respect to patents not subject to notice by the follow-on applicant. 91 Under S. 1505, the Affordable Biologics for Consumers Act, a Federal Register notice would announce the filing of an application for a biosimilar.<br><br> The sponsor of the reference product would be permitted to request information about the biosimilar for purposes of determining infringement issues, identifying patents that may be infringed by the biosimilar, and indicating whether its patents are available for licensing. The biosimilar applicant is required to provide a written explanation to the patent owner of why the identified patents are invalid or would not be infringed by the proposed product. 92 S.<br><br> 1505 renders the filing of the biosimilar applicant 9s written explanation to be an act of patent infringement that the sponsor of the reference product may pursue in federal court. 93 That bill further stipulates that a patent designated to be available for licensing by the sponsor of the reference product may not be the subject of a declaratory judgment action prior to the approval of the application for a biosimilar. 94 CRS-16 94 (...continued) the reference product.<br><br> Arrowhead Indus. Water, Inc. v.<br><br> Ecolochem, Inc. , 846 F.2d 731, 735 (Fed. Cir.<br><br> 1988). Otherwise the biosimilar applicant is barred from commencing a declaratory judgment action at a time later than 18 months of the application 9s filing date, or at a time later than 60 days of its explanation of its patent position to the reference product sponsor provided that explanation took place within 18 months of the application 9s filing date. The most recent legislation introduced, S.<br><br> 1695, also included specialized patent dispute resolution procedures. Under S. 1695, the follow-on applicant must provide attorneys for the owner of the reference product with confidential information relevant to a patent infringement determination.<br><br> The parties would then exchange lists of patents each party believes to be relevant to the proposed follow-on product. Should the parties be unable to resolve any differences through negotiation, the matter may proceed to litigation before the federal courts. In addition to patent dispute resolution proceedings, several of the bills provide for marketing exclusivities that would be awarded to brand-name firms.<br><br> These marketing exclusivities would prevent the FDA from approving a follow-on version of the brand-name firm 9s product until a certain period of time had elapsed. Under S. 1695, a brand-name product would receive 12 years of exclusive marketing rights, at which time the FDA would be permitted to approve a follow-on biologic.<br><br> H.R. 1956 also calls for 12 years of marketing exclusivity, although this period may be extended to 15 years if the reference product obtains further marketing approval for a new indication and cprovides a significant clinical benefit in comparison with existing therapies. d The proposal of S. 1505 is similar to that of H.R.<br><br> 1956, although S. 1505 calls for a period of 16 (rather than 15) years in the event of approval of new indication with a significant clinical benefit. Several of the bills also propose the creation of a marketing exclusivity that would be awarded to the sponsor of a particular follow-on biologic that was the first to obtain FDA marketing approval.<br><br> Under S. 1695, following the award of marketing approval to the first interchangeable product, the FDA is prevented from approving additional interchangeable products for the shortest of (1) one year after it is marketed, (2) 18 months after a litigation outcome favorable to the first approved interchangeable product applicant, (3) 18 months after marketing approval if the first approved interchangeable product applicant is not sued for patent infringement, or (4) 42 months after marketing approval if the first approved interchangeable product applicant has been sued and the litigation is ongoing. In contrast, H.R.<br><br> 1038 and S. 623 would allow the first interchangeable biological product to enjoy a marketing exclusivity period equal to the shortest of (1) 180 days after it is marketed, (2) one year after a litigation outcome favorable to the first approved interchangeable product applicant, (3) one year after marketing approval if the first approved interchangeable product applicant is not sued for patent infringement, or (4) 36 months after marketing approval if the first approved interchangeable product applicant has been sued and the litigation is ongoing. CRS-17 Innovation Issues Patents have been particularly significant to the pharmaceutical industry.<br><br> Creation of an expedited approval process for generic versions of traditional chemical drugs that have come off patent has been deemed very successful in bringing lower- cost versions of innovator products to the marketplace. However, while many biopharmaceuticals are now poised to lose, or recently have lost, patent protection, additional considerations not associated with typical chemical drugs may be brought into play in determining the success of efforts to bring similar, less expensive biotechnologies to the marketplace. Questions for policymakers remain as to whether or not an expedited approval process for biopharmaceuticals will result in a competitive market for these products similar to that created by the Hatch-Waxman Act for chemical drugs.<br><br> The high costs associated with manufacturing biologics, the scale of additional clinical trials required for FDA marketing approval, and other marketing considerations may affect the availability of lower-cost versions of these products. The section below discusses the role of patents in innovation and the particular situation in the pharmaceutical industry. It then explores some of the unique issues associated with the manufacture and marketing of follow-on biologics to provide a context within which to assess various legislative options.<br><br> Patents and Innovation Patent ownership is perceived to be an incentive to innovation, the basis for the technological advancement that contributes to economic growth. Article I, Section 8, Clause 8 of the U.S. Constitution states: cThe Congress Shall Have Power...<br><br> To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.... d Although not without question, patents are widely thought to encourage innovation by simultaneously protecting the inventor and fostering competition. They provide the inventor with a right to exclude others, temporarily, from use of the invention without compensation. Patents generally give the owner an exclusive right for 20 years (from date of filing) to further develop the idea, commercialize a product or process, and potentially realize a return on the initial investment.<br><br> Concurrently, the process of obtaining a patent places the concept in the public arena. As a disclosure system, the patent can, and often does, stimulate other firms or individuals to invent caround d existing patents to provide for parallel technical developments or meet similar market needs. The grant of a patent does not necessarily provide the owner with an affirmative right to market the patented invention.<br><br> Pharmaceutical products are also subject to marketing approval by the Food and Drug Administration. Federal laws typically require that pharmaceutical manufacturers demonstrate that their products are safe and effective in order to bring these drugs to the marketplace. Issuance of a patent by the U.S.<br><br> Patent and Trademark Office and FDA marketing consent are distinct events that depend upon different criteria. CRS-18 95 Robert P. Merges, cCommercial Success and Patent Standards: Economic Perspectives on Innovation, d California Law Review , July 1988, 876.<br><br> 96 Keneth W. Dam, cThe Economic Underpinnings of Patent Law, d Journal of Legal Studies , January 1994, 266-267. Scope is determined by the breath of the claims made in a patent.<br><br> Claims are the technical descriptions associated with the invention. In order for an idea to receive a patent, the law requires that it be cnew, useful [novel], and nonobvious to a person of ordinary skill in the art to which the invention pertains. d 97 Robert P. Merges and Richard R.<br><br> Nelson, cOn the Complex Economics of Patent Scope, d Columbia Law Review , May 1990, 908. 98 See John R. Thomas, cCollusion and Collective Action in the Patent System: A Proposal for Patent Bounties, d University of Illinois Law Review , 2001, 305.<br><br> 99 Id. 100 On the Complex Economics of Patent Scope , 839. 101 Id.<br><br> , 255 and 257. See also : Edwin Mansfield, cIntellectual Property Rights, Technological Change, and Economic Growth, d in Intellectual Property Rights and Capital Formation in the Next Decade , eds. Charles E.<br><br> Walker and Mark A. Bloomfield (New York: University Press of American, 1988), 12 and 13. The patent system has dual policy goals 4 providing incentives for inventors to invent and encouraging inventors to disclose technical information.<br><br> 95 Disclosure requirements are factors in achieving a balance between current and future innovation through the patent process, as are limitations on scope, novelty mandates, and nonobviousness considerations. 96 Many observers believe that patents give rise to an environment of competitiveness with multiple sources of innovation, which is viewed by some experts as the basis for technological progress. This may be important because, as Professors Robert Merges and Richard Nelson found in their studies, in a situation where only ca few organizations controlled the development of a technology, technical advance appeared sluggish. d 97 Not everyone agrees that the patent system is a particularly effective means to stimulate innovation.<br><br> Critics argue that patents provide a monopoly that induces additional social costs. Some observers believe that the patent system encourages industry concentration and presents a barrier to entry in some markets. 98 Others believe that the patent system too frequently attracts speculators who prefer to acquire and enforce patents rather than engage in socially productive activity.<br><br> 99 Still other commentators suggest that the patent system often converts pioneering inventors into technological suppressors, who use their patents to block subsequent improvements and thereby impede technological progress. 100 Role of Patents in Pharmaceutical R&D The utility of patents to companies varies among industrial sectors. Patents are perceived by pharmaceutical companies as critical to the drug industry.<br><br> That may reflect the nature of R&D performed in this sector, where the resulting patents are more detailed in their claims and therefore easier to defend. 101 In contrast, one study found that in the aircraft and semiconductor industries patents are not the most successful mechanism for capturing the benefits of investments. Instead, lead time CRS-19 102 Richard C.<br><br> Levin, Alvin K. Klevorick, Richard R. Nelson, and Sidney G.<br><br> Winter. cAppropriating the Returns for Industrial Research and Development, d Brookings Papers on Economic Activity , 1987, in The Economics of Technical Change , eds. Edwin Mansfield and Elizabeth Mansfield (Vermont, Edward Elgar Publishing Co., 1993), 253.<br><br> 103 Wesley M. Cohen, Richard R. Nelson, and John P.<br><br> Walsh, Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not) , NBER Working Paper 7552, Cambridge, National Bureau of Economic Research, February 2000, available at [http://www.nber.org/papers/w7552]. 104 Joseph A.<br><br> DiMasi, Ronald W. Hansen, and Henry G. Grabowski.<br><br> cThe Price of Innovation: New Estimates of Drug Development Costs, d 22 Journal of Health Economics, 2003. Capitalized cost includes the ctime cost d associated with an investment and the cost of testing drug products that fail. 105 Christopher P.<br><br> Adams and Van V. Brantner, Estimating the Costs of New Drug Development: Is it Really $802m? , Federal Trade Commission, December 2004, available at [http://media.romanvenable.net/images/drugCost.pdf].<br><br> 106 The Price of Innovation: New Estimates of Drug Development Costs , 180. 107 Carrie Conway, cThe Pros and Cons of Pharmaceutical Patents, d Regional Review , Federal Reserve Bank of Boston, March, 2003, available at [http://www.findarticles.com]. 108 Henry G.<br><br> Grabowski, cPatents, Innovation, and Access to New Pharmaceuticals, d Journal of International Economic Law, 2002, 851. and the strength of the learning curve were determined to be more important. 102 Research undertaken by Professor Wesley Cohen and his colleagues demonstrated that patents were considered the most effective method to protect inventions in the drug industry when biotechnology is included.<br><br> 103 The high cost of drug development and the concomitant uncertainty associated with clinical trials necessary for marketing approval lends significance to patents in the pharmaceutical arena. Studies by Joseph DiMasi of Tufts University and others published in 2003 estimated that the capitalized cost of bringing a new drug (defined as a cnew molecular entity d rather than a new formulation of an existing pharmaceutical product) to the point of marketing approval was $802 million (2000 dollars). 104 Additional research done by Federal Trade Commission analysts found the costs to be even higher; between $839 million and $868 million (2000 dollars).<br><br> 105 At the same time, the total capitalized costs appear to be growing at an annual rate of 7.4% above general price inflation. 106 A large portion of new drug costs (in terms of money and time) is associated with the size and breath of clinical trials necessary to obtain FDA marketing approval. According to a study supported by the Federal Reserve of Boston, only 10% of potential drug candidates reach the human trial phase and only a small portion of these actually reach the market.<br><br> 107 In research presented at a conference sponsored by the Federal Reserve Bank of Dallas, Duke University 9s Henry Grabowski found that only 1% of drug compounds reach the human trial stage and 22% of those entering clinical trials receive FDA approval. 108 Professor Iain Cockburn notes that cas drug discovery became more science-intensive, ... it became CRS-20 109 Iain Cockburn, cThe Changing Structure of the Pharmaceutical Industry, d Health Affairs , January/February 2004, 15.<br><br> 110 Henry G. Grabowski, cPatents and New Product Development in the Pharmaceutical and Biotechnology Industries, d Science and Cents: Exploring the Economics of Biotechnology , Proceedings of a 2002 Conference, Federal Reserve Bank of Dallas, 95-96 available at [http://www.dallasfed.org/research/pubs/science/grabowski.pdf]; and Henry Grabowski, John Vernon, and Joseph A. DiMasi, cReturns on Research and Development for 1990s New Drug Introductions, d 20 Pharmacoeconomics , 2002.<br><br> 111 Henry Grabowski, John Vernon, and Joseph A. DiMasi, cReturns on Research and Development for 1990s New Drug Introductions, d 20 Pharmacoeconomics , 2002, 23. 112 Appropriating the Returns for Industrial Research and Development , 269.<br><br> 113 Edwin Mansfield, Mark Schwartz, and Samuel Wagner. cImitation Costs and Patents: An Empirical Study, d The Economic Journal , December 1981, in The Economics of Technical Change , 270. See also : Appropriating the Returns for Industrial Research and Development .<br><br> 114 Federic M. Scherer, cThe Economics of Human Gene Patents, d 77 Academic Medicine , December 2002, 1352. 115 Patents, Innovation, and Access to New Pharmaceuticals , 852.<br><br> not just more expensive but also more difficult to manage. d 109 Furthermore, returns to new drug introductions vary widely and some experts have found that the median new drug does not bring in sufficient profits to cover the costs of bringing the product to the marketplace. 110 According to research by Professors Grabowski, John Vernon, and DiMasi, only 34% of new drugs (new chemical entities) introduced generated profits that equaled the industry average R&D cost. 111 The degree to which industry perceives patents as effective has been characterized as cpositively correlated with the increase in duplication costs and time associated with patents. d 112 In certain industries, patents significantly raise the costs incurred by nonpatent holders wishing to use the idea or invent around the patent 4 an estimated 40% in the pharmaceutical sector, 30% for major new chemical products, and 25% for typical chemical goods 4 and are thus viewed as significant.<br><br> However, in other industries, patents have much smaller