HAZEL MOIR. Evergreening of patents and the cost of pharmaceuticals.

A low standard for granting patents can mean lengthy delays generic medicine availability. In one case this is shown to have cost taxpayers almost $A3 billion extra in Pharmaceutical Benefits Scheme outlays. A solution is to grant patents only for inventions that embody a significant increase in what is known.

The cost of undeserved patents

New research published recently in the Australian Economic Review shows that the cost of evergreening patents can run into billions, for just one medicine.

When a pharmaceutical company receives a patent for a new compound leading to a genuinely new medicine, everyone wins. The company is able to get very high prices for around 10-14 years as a result of the patent. And society gets a useful new medicine.

An example is the proton pump inhibitor, omeprazole. This chemical blocks the production of stomach acid and is used to treat reflux and peptic ulcers. It is marketed as Losec. This medicine was approved for the Australian market in December 1988. Losec was protected by a patent on the chemical omeprazole.

The original patent provided the owner, now Astra-Zeneca, with a range of privileges. The essence of the patent privilege is the sole right to exploit the invention. This right is spelled out in the Trade Related Intellectual Property Rights (TRIPS) Agreement, Article 28. A patent owner can prevent anyone else from making, using, offering for sale, or selling a product based on the patented invention in the country where the patent has been granted.

Pharmaceutical companies use a range of strategies to try to extend the period during which they are able to prevent any competitor entering the market. One of these strategies is evergreening, where a company applies for a large number of low quality patents surrounding the original patent for a genuinely new compound.

It is generally assumed that only a genuine invention is granted a patent. This is far from true. In the patent world “invention” is defined as “not obvious” – rather like defining beautiful as not ugly.

As a consequence patents are granted for thousands of trivial “inventions”.

In the case of Losec (omeprazole) Astra-Zeneca has been granted 61 patents related to omeprazole, as well as the initial patent. Questions need asking.

What are the benefits of the extra 61 patents? Can there really be 61 inventions about just one chemical compound? Do they all reach the patenting standard of “a significant advance over what was known” which was advised to parliament in 2011?

In the pharmaceutical industry such secondary patents have become a standard part of “lifecycle management”. Lifecycle management patents are also known as evergreening patents, because they maintain very high profits.

The objective of lifecycle management patents is to delay the entry of competitors supplying generic medicines. This gives the patent owner a longer period of high prices. Longer than that agreed by the grant of the patent for the initial invention.

The patent term was extended from 16 to 20 years as part of the Trade Related Intellectual Property Rights (TRIPS) Agreement. TRIPS is one of the World Trade Organization (WTO) core treaties. When a country becomes a WTO member it must ratify the TRIPS Agreement. Unless it ratifies TRIPS it cannot join the world’s free trade nations.

It was pharmaceutical companies who pushed for the patent term extension mandated in the TRIPS Agreement. Since then pharmaceutical companies have pushed for yet longer terms, and in Australia they can receive a patent term of up to 25 years.

Companies argued that it takes a lot of time to convert a new patented compound into a useable medicine. This is true, and in practice the patent term of up to 25 years actually gives a monopoly period of about 10-14 years. During this time patent owners continue to charge very high prices, particularly for block-buster medicines such as Losec.

Some of the additional evergreening patents are for particular formulations of the compound – the very process of commercialisation that was the reason for extending the patent term by 4 years and then another 5. So although companies have been granted up to 9 years extra monopoly time, they seek even more time by acquiring secondary formulation patents.

One of Astra-Zeneca’s 61 evergreening omeprazole patents is just such a patent. It is a particular formulation of omeprazole – a formulation essential for the compound to be useable as a medicine. It specifies a separating layer between omeprazole and its enteric coating. This formulation allows the medicine to pass through the stomach before dissolving.

Without this coating Losec would never have become a blockbuster medicine.

Australian generic companies tried to enter the omeprazole market in 1999. Astra-Zeneca sued for infringement of the enteric coating formulation patent, and the generics company Alphapharm counter-sued claiming that the patent was invalid.

The Federal Court and the Full Federal Court both held that the formulation patent was invalid — it was quite obvious to use a separating layer as the chemistry would not allow the enteric coating to be used directly.

Astra-Zeneca appealed to the High Court. The High Court overturned the lower court decisions, finding that the enteric coated formulation was sufficiently inventive for a patent. In the United Kingdom, where there are very similar patent laws, the formulation patent was struck down by the courts as obvious.

The High Court’s 5-2 decision delayed generic entry by 8 years, costing Australian taxpayers $A1.1 billion over that 8 year period. During this time Australian taxpayers spent $A3.1 billion on Losec. Had generic companies been allowed to compete from 1999, the cost would have been at least $A1.1 billion less.

During the time generic companies were locked out of the omeprazole market Astra-Zeneca obtained a patent for a compound closely related to omeprazole – the isomer esomeprazole. The new medicine entered the Australian market in 2002, as Nexium.

Nexium, of course, has the same chemical effect as Losec (blocking the production of stomach acid) and is used to treat the same conditions (reflux and peptic ulcers). Because of their close chemical relationship, Nexium can be expected to have a similar efficacy as that of Losec.

But Astra-Zeneca has never run clinical trials comparing the performance of the two medicines.

Despite the lack of evidence, Astra-Zeneca has been able to persuade doctors to change their prescribing habits.

The prescribing shift began early, with 23% of scripts changing from Losec to Nexium by 2004. By 2014, 77% of prescriptions were for the new more expensive medicine Nexium.

And still there is no evidence that Nexium performs any better than Losec.

Over the period from 2002 to 2014 the cost of prescribing the higher priced Nexium has been significant. A minimum estimate of the extra cost to Australian taxpayers is $A1.8 billion.

What Astra-Zeneca did in obtaining the 61 evergreening patents is entirely lawful. Indeed all major pharmaceutical companies use this strategy, and they use it in other countries as well as in Australia.

In the USA the extent of evergreening is limited to some extent by a reward for the first competitor to successfully challenge a low quality patent. The reward is a period of 6 months before any further companies can enter the market. Given the size of the US market this reward more than offsets the costs of challenging a questionable patent.

But the Australian market is much smaller and a generic company challenging a questionable patent bears all the costs and risks. If the challenge is successful, and the patent is declared invalid, every other generic company shares in the reward of market entry.

In Australia this one story is the tip of the iceberg about the cost of low quality patents. Similar stories are almost certainly to be found for other medicines on the Pharmaceutical Benefits Scheme. And it is the medicines with the biggest outlays – and hence largest profits – which are most affected by evergreening.

This story of omeprazole is told in detail in December’s Australian Economic Review. It shows how Australia’s very low patent standards come at a very significant cost. Just for es/omeprazole the cost to Australian taxpayers has been at least $A2.9 billion over 12 years.

Australia is just 2% of the global pharmaceutical market. Patent standards are low in other countries, and become lower as each new trade treaty is signed. At its peak in 2000 global annual sales of Losec were US$6.2 billion. Global annual sales of Nexium peaked in 2006 at US$5.2 billion.

The continuation of these large revenue streams has been possible because patent standards have not been properly scrutinised.

If Australia adopted the standard advised to the Australian parliament in 2011, we would save billions in unnecessary payments to overseas companies.

If patents were only granted for a significant advance over what is known, patent policy would deliver a win-win outcome.

But we grant patents for “inventions” that are barely inventive. This is to grant monopolies in exchange for no benefit. Most of the wasted money flows overseas as 92% of Australian patents are owned by foreign entities.

Over the past year the Productivity Commission has been inquiring into Australia’s intellectual property arrangements and the final report is with the government. In its draft report the Commission found there was a compelling case to raise the inventiveness requirement before a patent is granted.

Despite the compelling evidence the Commission only recommended that inventiveness be raised to the low levels evident in the USA, Japan and Europe. Not to the level advised to parliament in 2011 – a significant advance in what is known.

It is surprising that the Commission has been so timid in its recommendations. The Commission never hesitated to recommend unilateral dismantling of tariff barriers.

One of the clear findings in economics is that if an industry needs to be supported, it is much cheaper to pay a subsidy than to erect a tariff wall. Unilateral dismantling would make Australia better off.

Patents work very like tariffs, especially patents for chemical compounds. The financial benefit to the pharmaceutical company is a fraction of the additional cost to consumers through higher prices. Three different studies have each found that what consumers pay is between 6 and 9 time higher than what pharmaceutical companies gain.

It would be far more efficient to subsidise pharmaceutical companies than to grant them patents.

But TRIPS requires we grant patents. We should do this only for genuine inventions.

There is a very strong case to raise the inventiveness requirement for a patent to a significant advance over what is known. One consequence would be very substantial savings to the Pharmaceutical Benefits Scheme.

There would also be an improved environment for Australia’s generic pharmaceuticals industry.

The government should take action on this matter now, before the room for policy reform is further narrowed through the regulations proposed in “trade” treaties.

Dr Hazel Moir is Adjunct Associate Professor, Centre for European Studies, Research School of Social Sciences, ANU.

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