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The European Commission’s muddle on pharmaceutical innovation incentives

The European Commission’s muddle on pharmaceutical innovation incentives

By undermining a key intellectual property right, the Commission risk worsening the EU’s innovation performance, writes Philip Stevens

As the European Commission prepares to publish its long-awaited review of pharmaceutical innovation incentives, two major factors must steer its future policy direction.

First, innovation is of paramount importance to Europe’s future economic growth. Yet EU member states underspend on Research and Development (R&D) and are outperformed by peer nations such as the United States, Japan, South Korea and Australia, according to the 2017 European Innovation Scorecard. The incentives review must focus on boosting EU innovation.

Second, European societies are ageing and we urgently need new technological solutions to mitigate the economic and fiscal effects. There is a growing need for new medicines against diseases that are prevalent among older people, such as neurological conditions and cancer.

European companies are making some progress, but research into these diseases is complex and extremely slow moving, making it a risky investment.

Against this backdrop, the Commission must avoid upsetting the delicate innovation ecosystem that underpins continued private sector investment into these diseases. If it cannot, this investment will go to more welcoming jurisdictions. Future economic growth will suffer and the flow of innovative medicines that will help to keep ageing people healthy – and out of expensive hospitals – will be stemmed.

Alongside taxation and regulatory policy, and support for academic science, strong protection for intellectual property rights is a fundamental component of this innovation ecosystem.

Regions that produce the highest numbers of innovative medicines – the US, Japan, Switzerland and the European Union – have rules for the protection of intellectual property rights well above minimum World Trade Organization standards.

These heightened standards include rules for the protection of clinical trial data that drug companies must disclose to regulators to gain marketing approval. They also include extensions of the normal twenty-year patent term to compensate for delays caused by drug regulators while they conduct mandatory pre-market assessments of a new drug’s safety.

Supplementary protection certificates export waiver

This latter “patent term restoration” is in the crosshairs of the Commission, which it views as overly generous to innovator companies. Known as “Supplementary Protection Certificates” (SPC) in the EU, this important intellectual property right allows five years of patent protection of up to five years to be restored. Similar systems exist in the US, Japan, South Korea and others.

The Commission is drawn to the argument that the European generics industry will increase investment and jobs if it is allowed to export outside the EU patented medicines covered by a Supplementary Protection Certificate, as long as no such legislation is in place in those markets.

This Supplementary Protection Certificates export waiver could well threaten the twin objectives of boosting R&D and creating solutions for ageing populations.

Increasing evidence questions the economic benefits of the waiver cited by the Commission. New data suggests that the Commission has not only over-estimated the generic industry export and job creation benefits, but also under-estimated the potential damage to the innovative industry (which also exports).

Specifically, it could cost up to €364m in European R&D investment, and 7,700 direct and 32,000 indirect jobs in that sector according to one recent study. That would be a major blow for the EU’s “Innovation Union” initiative which aims to re-establish Europe as one of the most innovation-friendly regions in the world.

The export waiver also works against the pressing need to develop new medicines to treat diseases associated with ageing.

The drug development process for many of these diseases is extremely protracted, particularly for slow degenerative diseases such as Alzheimer’s and multiple sclerosis, or early stage cancer. These long R&D timelines can consume up to 15 years of the standard 20-year patent term, according to research by Erika Lietzan of the University of Missouri.

Supplementary Protection Certificates provide some compensation, but they are capped at five years. This means that medicines for these diseases have a far shorter period to recoup significant investments than other categories of medicines: what Lietzan calls the “drug innovation paradox”.

This insufficient incentive framework provided by the combination of fixed patent-terms and Supplementary Protection Certificates could well be responsible for the relative under-investment by the private sector on R&D activity with long time horizons. And perhaps why several companies ended their R&D programs into neurological diseases in the late 2000s, citing high failure rates and long development timelines.

The export waiver would inject even greater levels of risk into long-term R&D projects. It would undermine the ability of European industry to provide the medicines necessary for an ageing society and hit European R&D investment. It would also put European IP standards below those of competing nations, an unwise move given the economic need to boost innovation. This approach should be rejected.

Preserve and strenthen Supplementary Protection Certificates

Given these pressing challenges, the Commission should at least be preserving the Supplementary Protection Certificate system. Beyond that, the Commission might want to consider reforming and strengthening Supplementary Protection Certificates to promote pharmaceutical innovation. Diluting them, as proposed, would achieve little and cost a great deal.

Philip Stevens is director of Geneva Network, a UK-based research organisation focusing on trade and innovation issues.

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