July 17, 2015

Looking Inside the Biotech Black Box (Part 13)


Market Exclusivity – Patents

Market exclusivity is a critical component of valuation. Patenting strategies, regulatory data exclusivity and product life-cycle management will give about 10 to 15 years of market exclusivity to most novel drugs.

The patent system originated during the industrial revolution – the first U.S. patent law was enacted in 1790. The concept behind granting a period of market exclusivity was that novel inventions would be brought into the public domain, which would stimulate new inventions and commercial development, in return for a period of market exclusivity in which the inventor could recover the costs of the invention and make a reasonable commercial return.

This blog will outline some general information on the subject of patents in biotechnology which might be useful in assessing some products or companies. I am neither a patent agent nor a patent lawyer – please consult one if you have detailed questions concerning your invention. Another useful source of general information is the web site of the U.S. Patent & Trademark Office (http://www.uspto.gov/).

What can be patented?

  •  In the U.S., there are three types of patents – utility, design and plant patents.
  •  For the pharma industry, utility patents usually cover a process (manufacturing or medical use), a composition of matter (active ingredient) or both.
  •  An invention is patentable if it is novel, non-obvious and reduced to practice. [I have looked at hundreds of patents and I have seen many which I think are not novel and are obvious based on the prior art.]

How can patents be used to maximize the period of market exclusivity?

These are only a few of the strategies available to drug development companies.

  •  Patents currently provide exclusivity for a period of twenty years from the date of filing whereas the U.S. used to give 17 years from the date of grant. It was common practice to delay the review and approval for as long as possible, an option which is no longer available.
  •  Patents are not filed on a single active ingredient but on families which could include thousands of compounds. It makes it more difficult for competitors at the earlier stages of development.
  •  Many patents have all their claims rejected on first review. A common move is to drop a few claims, maybe modify a few and then file again.This process gets repeated until the reviewer accepts a number of claims and allows a patent to issue, although the final arbiter on the validity of the claims will be the courts.
  •  Instead of filing a single patent with a large number of claims, it may be possible to file patents in a sequence where it can be argued that the next patent is novel and not obvious based on the prior art. Given the complexity of modern medicine and science, it is unlikely that the reviewer will be an up-to-date expert in that specific field.

As a potential investor in a drug development company, what key patent questions might you ask?

  •  Who owns the patents, either through invention, assignment or a licensing agreement?
  •  Do any other parties have any rights to a revenue stream from the commercialization of a product covered by those patents?
  •  When does the patent exclusivity expire?
  •  Do the patents cover the composition of matter (structure) of the active ingredient being developed? This is the strongest type of patent protection.
  •  Do the patents cover related families of compounds which a competitor might otherwise develop? This strategy is obviously not as strong when you look at the structurally-related compounds which have been approved in some therapeutic areas – such as the numerous statins.
  •  Does the patent cover a key step in the manufacturing of the active ingredient? Only in rare cases is this an effective deterrent to generic drug development.
  •  Does the patent claim a novel medical use of a drug product or related families of compounds?
  •  What applications have been published or patents granted in the last few years which have similar claims, such as the same medical use?
  •  What patents are listed for this drug product in the Orange Book (http://www.accessdata.fda.gov/scripts/cder/ob/default.cfm)? The expiry dates of these patents determine when the U.S. FDA can approve generic versions. There may be other patents owned by the originator with later expiry dates but those patents do not impact FDA approval. In those cases, the originator will probably have to defend the validity of those patents and attempt to get an injunction to prevent the launch of generic versions. As an example, if you search the Orange Book for Sovaldi, one of the Hepatitis C drugs mentioned in previous blogs, you will see 6 patents listed with the earliest and last expiry dates being March 21, 2028 and December 11, 2030.
  •  Does the company have a ‘freedom-to-operate’ opinion? For a specific drug product, this opinion would state that the commercialization of the drug product does not infringe upon any intellectual property owned by other parties.
  •  Which patent lawyers worked on these filings?

The case law surrounding pharmaceutical patents is almost as complicated as modern medical science. Even with the answers to the questions listed above, there is no guarantee that the granting of a patent would be upheld in court. There are two common types of court battles over patents. The first is between two pharma companies where a broad initial patent might prevent one company from marketing its competitive product. The second is where a patent(s) on a novel product is being challenged by one or more generic companies.

If a patent is filed during research or preclinical development, there may be fewer than 10 years of patent exclusivity left when the drug product is approved. The U.S. PTO can grant up to 5 years of patent term restoration to compensate for a regulatory review period comprised of the clinical testing and regulatory approval process. The FDA verifies the key regulatory dates but it is the PTO which grants the patent term extension. In the EU, similar patent term extension is available through SPCs (supplementary protection certificates).

Market exclusivity can also be obtained from regulatory data exclusivity, which starts when a drug product is approved and will be discussed in the next blog.

[The author and his immediate family members may have long or short positions in the shares of some companies mentioned in or assessed during the preparation of this blog. Past share price performance may not be an indicator of future share price performance. This blog does not consider the investment objectives, financial situation or particular needs of any particular person. Investors should obtain professional advice based on their own individual circumstances before making an investment decision.]

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