The pharmaceutical industry is composed of two main groups: the research-based pharmaceutical industries (innovators) and the generic industries.  The former discovers and develops new medicines while the later replicates, manufactures and distributes the bioequivalent or biosimilar “copies” of the innovative product. ^[1]

These research-based pharma industries, undoubtedly invest billions of dollars and many years of research to finally produce a drug.[2] Moreover, these drugs are further tested through the preclinical and three phases of clinical trials.^[3] These trials normally take 10-15 years before the final result is approved by the respective drug regulatory authority.^[4] The trials are conducted by the pharma industries after the particular drug has been granted a patent license. Hence, such trials eat up into the 20 years of patent term protection given to the pharmaceuticals. So usually, the pharma industries are left with just 5-10 years of patent protection, and more importantly to cover up the costs and make profits out of it.  Such a procedure is unique and applies just too pharmaceutical and other related innovations.[5]

Due to the strict and exhaustive procedure, the pharma industries are a granted patent extension and other forms of protection. Data exclusivity is a form of product exclusivity right for medicinal products and a market exclusivity is a related form of additional protection.^[6] The rising economic significance of data exclusivity is a combination of three factors:^[7]

(i) The lengthy and costly process of clinical trials;

(ii) The ongoing innovative productivity challenges faced by the pharmaceutical industry and

(iii) The legal disputes between research-based and generics-based pharmaceutical companies.

This essay will deal with the implementation of data and market exclusivity in the European Union and the United States of America and its effect on the generic pharma industries. 

DATA AND MARKET EXCLUSIVITY:

“Investments in discovering and developing a single new biologic (including the cost of failures and cost of capital) are now estimated at over a billion dollars with an increasingly focused Food and Drug Administration (FDA) requiring more, not less, investment prior to approval. Given these high upfront costs, data exclusivity is designed to provide a sufficient period of in-market exclusivity to encourage innovation when patent protection is limited or uncertain in value”^[8]. The United States and the European Union systems go a step beyond the minimum obligations as set out under the TRIPS.^[9]

Data Exclusivity is a period of time during which a company cannot cross- refer to the data in support of another marketing authorization.^[10] Data exclusivity is designed to preserve innovation, incentives and recognizes the long, costly and risky process necessary for the innovator company to gain regulatory appeal.^[11] The protection of this test data is a legally required and economically necessary component of the intellectual property that provide incentives for the development of innovative pharmaceutical products.^[12] Further, this data is important for the innovator company so as to get a market authorization from appropriate drug authority. Some experts consider data exclusivity as an independent intellectual property right and not part of patent protection. ^[13] Hence, data protection is available even if the drug is not protected by a patent. 

The Trade Related Intellectual Property Rights (TRIPS) agreement also recognises the need to protect such an undisclosed data under Article 39.3. TRIPS Article 39.3 states that “Members, when requiring, as a condition of approving the marketing of pharmaceutical or of agricultural chemical products which utilize new chemical entities, the submission of undisclosed test or other data, the origination of which involves a considerable effort, shall protect such data against unfair commercial use. In addition, Members shall protect such data against disclosure, except where necessary to protect the public, or unless steps are taken to ensure that the data are protected against unfair commercial use” ^[14]

The phrase “a considerable effort” in the TRIPS article 39.3 (in the case of pharma industries) means the pre-clinical testing and the three phases of the clinical trials, which have to be conducted before the market approval is granted. Article 39(3) essentially imposes three obligations on governments^[15]:

1.     To protect data on new chemical entities, the collection of which involved considerable effort, against unfair commercial use.

2.     To protect such data against disclosure, except where necessary to protect the public.

3.     To protect such data against disclosure, unless steps are taken to ensure that the data is protected against unfair commercial use.

EUROPE:

Data exclusivity was first introduced in the European Union in 1987 with the 87/21/EEC Directive, which amended the 65/65/EEC Directive.^[16] In July 2001 the E.U. revised key aspects of the pharmaceutical legislation; data exclusivity being one of the key topics.^[17] Subsequently, the changes were brought into the 2004/27/EC Directive that amended the 1987 Directive.^[18] It is not retroactive directive; it does not affect exclusivity periods for products for which applications were submitted before the effective date, ie, late 2005. Hence, if an application is made before November 2005, then the data exclusivity will depend on the earlier laws of the member state, where data exclusivity varied from 6 -10 years.^[19]

The EU Pharmaceutical Legislation, Directive 2004/27/EC adopted in 2004 created a harmonised eight year data exclusivity provision with an additional two years market exclusivity provision.^[20] This effective ten year market exclusivity can be extended by an additional one year for new therapeutic indications.^[21] This is also referred to as the “8+2+1 formula”. This formula applies to all new chemical entities (NCEs) from 1^st November 2005 onwards.^[22] This formula allows the generic company to file a patent application after the first 8 years of the data exclusivity but would be restrained to market the drug due to the extended market authorization with the innovator company. Therefore, if a generic company wants to apply for a generic product within the stipulated 8 years of the data exclusivity time period, then it will have to perform its own clinical trials and other safety and toxicology work.^[23]

The E.U. data exclusivity does not grant additional periods of protection for subsequent improvements (like the concept of “ever greening” in the U.S.A) brought to a drug, for example new therapeutic indications, dosage forms, doses and dosage schedule.^[24]Any new strengths, pharmaceutical forms, routes of administration, and presentations, as well as any extensions or variations, are to be considered as belonging to the same “global authorization” for purposes of the abridged application rules ^[25]and therefore there is no data protection for these changes.^[26]

Comprehensive Economic and Trade Agreement between Canada and the European Union (CETA):

Article 10 of the intellectual property chapter in CETA provides protection of undisclosed data in relation to pharmaceutical products.^[27]  Clause 2(b) of the said article states that no person other than the person that submitted the undisclosed information may, without the latter's permission, rely on such data in support of an application for  marketing authorisation during a period of not less than six years from the date on which the Party granted approval to the person that produced the data for approval to market its product, and no Party shall grant to any person who relies on such data during a period of not less than eight years from the date on which the Party granted authorisation to the person that produced the data for authorisation to market its product, unless the person or entity who produced this data provides its permission.^[28]

In CETA, there are two levels of protection, firstly, the data authorization; which is valid for 8 years after it is submitted to the respective drug authority. Secondly, the market authorization; which is valid for 6 years from the date the innovator pharma company was granted the permission to market the drug.

EXAMPLE:

A pharma company ‘X’ is granted a patent in 2010. After its preclinical and clinical trials, it submits the data in 2020, ie 10 years after the grant of the patent. After the data is submitted, this undisclosed information gets data protection through 8 years of data exclusivity in accordance with the clause (b) of Article 10 in CETA, as mentioned above. Hence, the generic pharma companies cannot rely on the data till 2028. The other incentive provided to the company ‘X’ is the marketing exclusivity for 6 years. If the said company gets authorization to market the drug in the year 2024, it will last till 2030.

While reading the above example, it must be kept in mind that the patent term protection will last till 2030 (as the patent term is 20 years). Hence, as the data and market exclusivity are treated separately from patents, such exclusive rights may terminate or exist after the patent term is over, depending on the factual circumstances. In this case, all the protections terminate in 2030.

The establishment of a proper method to determine FRAND royalty rates is a highly debated issue for a variety of reasons. Standard Essential Patents (SEPs) have a huge impact on the market of technologies and, despite very useful for interoperability, fixation of pro-competitive and pro-consumer prices (Broadcom v. Qualcomm) they do have side effects. The most relevant are:

1. Lock-in effect for potential licensees, generated by the gap between the investment for SEP and the potential failure of its effective implementation in a company.

2. Patent ambush, i.e. the partial disclosure of useful SEP information to the SSO, so that competitors will be hindered in adopting the SEP technology and SSO will be confused as to the choice of right technology to license under FRAND terms.

FRAND licenses commit the holder of the SEP to waive the right to refuse licensing to third parties while having the burden of essentiality for future products to be developed. Moreover FRAND rates must be reasonable. Hence, to what extent is a FRAND rate reasonable as to the value of the royalties to be paid by the licensee?

In order to determine the proper FRAND rate U.S. availed of both theoretical and practical approaches elaborated by courts. Among the theoretical methods, the most relevant are:

1. The twenty-five per cent rule of thumb: it consists of spreading an equal royalty rate of twenty-five per cent on every SEP license and licensee.

2. The ex-ante auctioning model: a model public tender for potential SEP holders. All the patent holders have to disclose their potential rates per unit in order to produce the final product at the lower cost.

The third and most reliable method for determining royalties is by applying the Georgia Pacific Factors (GPFs). And this is a method created and used by courts. It consists of fifteen standard rules that were deemed to operate in the determination of the lower bound of the damages awarded for patent infringement. Because damages and FRAND rates are both calculated through royalties, it is accepted to consider GPFs as a reliable source.

UK Courts adopt a straightforward method, also based on the comparison between damages awarded for past license infringements in the calculation for on-going FRAND rates. In the court ruling Vring v. ZTE, two methods of setting royalties were elaborated but not enacted.

Regardless of the quality of the invention, the alternatives on the market and, in general without taking into account the characteristics of the industry, the 25% rule of thumb is inadequate to reasonably represent FRAND rates. Despite the inaccuracy of the rule, it was widely used in the U.S., as demonstrated in Standard Manufacturing Co. Inc. v. U.S. and the Uniloc case. Whether it might be considered as a viable way of simplifying royalties, it is necessary to look at the present situation, where a 2.25 % royalty in the case Motorola v. Microsoft, was considered too high. The necessity of lower royalty rates is significant as to the essentiality of a multiplicity of patents that need to be guarded against disproportioned and anti-competitive licensing practices (as demonstrated in the UK case, Vringo).

The ex-ante auctioning model is deemed to lead to anticompetitive concerted practices. It also leads to vague licensing terms and to situations that do not reflect real world negotiations. It may also affect the good faith of Standard Setting Organizations (SSOs). SSOs might be encouraged to push for the lowest possible fee per unit to the detriment of the SEP holder's investments. Ex-ante auctioning method was used "in re rambus" using the arm's length principle which describes a virtual situation in which the price is determined by potential negotiations that would have occurred before the standardization and, again, it did not reflect real world negotiations.

The case Microsoft Corp. v. Motorola Inc. demonstrates the significant link between allocation of damages and determination of FRAND rates. In particular the rate, as the damage, must be reasonable and based on the royalties that the licensee or the infringer would have paid. In order to implement those principles into law the Court have used fifteen criteria to determine damages in the previous case Georgia Pacific v. U.S. plywood corp. The most relevant factors highlighted by Court are 1, 2, 6, 8, 10, 12 and 15. The interesting feature about the application of the GPFs is that they have been interpreted as to fit the concept of FRAND rate. They can be grouped as follows:

1. The value and profitability of the patent, taking into account the royalty due for the standard. In particular how the standard will increase the value of the licensee's products and their commercial success in comparison with the foreseeability of hold-ups, royalty stacking, and objective reasonable compensation of the SEP's holder (6, 8, 10, 15).

2. Royalty stacking, i.e. more patents pending on a single product that would increase prices for final consumers of telecommunication technologies (15).

3. Licensing agreements of patent pools, third parties and other marketing indicators. In particular, the comparison between normal patent fees and the royalties given under FRAND rates, the waiver to not refuse licensing, together with licensing under Reasonable terms (1, 2, 12).

As the damage allocation for infringement is insufficient to assess a viable determination of FRAND rates, the court in Motorola focused upon patent pools fee calculation, taking into account side effects of this model on the value of the patent.

The elaboration of the final model of calculation of FRAND royalties takes into account the relationship between the value acquired by joining a patent pool and the value of abstention from the latter. Thereby it identifies a coefficient, which can be a viable guide for the determination of the proper FRAND rate. As a consequence, Georgia Pacific factors represent the infrastructure on which the whole method is built and must be aided through adjustments in the final phase of the calculation if the coefficient is equal one.

The UK model can be widely shaped around Georgia Pacific Factors. The case Nokia OYj v. IPCom GmbH demonstrates the strict relationship between the award of damages following a patent infringement and the calculation of FRAND rates. With due consideration to the differences between these two models, they are both based on royalty adjustments on the value of the damage or SEP. Hence, also the UK system is compatible with Georgia Pacific Factors.

In Vringo v. ZTE the calculation of the FRAND rate was widely based on the court ruling. Two methods were assessed:

1. If the claimant wins the trial, the damage or royalty will be calculated. As a consequence, if the patent is held to be valid and infringed, then the FRAND rate decided within the preliminary issue will take effect.

2.     The court could determine the rate (and terms) which would be arrived at as the outcome of a notional negotiation between a willing licensor and a licensee willing to negotiate without fighting a trial on the merits about the underlying rights.

In conclusion, the fifteen GPFs are objective. As a consequence they can be shaped and adapted on a case-by-case basis. This method may limit the lack of precision of the theoretical methods like the twenty five per cent rule of thumb or the ex-ante auctioning model. In particular GPFs can fix the lacunas in those methods of calculation that consider the value of the patent independently from the FRAND rate involved.

The opportunity cost of FRAND rates is calculated through mathematical terms that do not take into account the evolution of markets as well as alternative technologies, investments in new-born standards and prominent changes. Nevertheless market is getting more uniform than ten years ago. In fact the possibility of concerted practices that lead to anti-competitive conducts is more likely to occur. In light of the above it might not be a case that patent-pool criteria were used in order to calculate FRAND rates as patent-pools are multilateral practices and SEP's licensing is bi or unilateral. This is a sign the market is heavily changing from the twenty five per cent rule of thumb to the coefficient equal to one that explains a total equilibrium of interests.

    Law No. 190/2014, included into the investment compact 2015, introduces the so called patent box, a system for the partial tax reduction of the revenues produced through IP rights ("intangibles"). A stagnant economical situation of R&D in IP rights, together with the view, from the Italian State, of the successful results Patent Box has brought to the economies of the many other EU States, has led to the adoption of this system. In fact, the main merit attributable to patent box, is to encourage foreign direct investments, as well as the local investment.

    Patent Box is applicable on an optional basis. That means the IP holder can still rely on the ordinary taxation system if he wishes to do so. Nevertheless, in order to apply the Patent Box regime two main conditions must be met. Firstly, the company wishing to apply for this tax system, has to produce its profits within the territory of the state which applies Patent Box system. On the other hand, Patent Box works exclusively within the scope of revenues produced through R&D. And considering the latter as the main trigger of intengibles investment, it goes without saying that PB will probably turn into even more valuable intengible assets for innovative companies and start-ups.

    Talking about the companies that can benefit from this system, there are no particular thresholds nor limitations to physical or juridical persons. Every recognized company is able to avail itself of PB but associations. On the other side, companies that find themselves in compulsory winding up, bankrupcy or extraordinary receivership are relegated to the ordinary national tax system. Also foreign companies may apply, provided that they will produce income through intangibles within the national territory.

    As regards the definition of R&D, Law No. 190/2014 includes a wide range of definitions, streching from essential and applied research (and development of new products), until market research and development of copyrighted Softwares.

    PB covers a wide range of uses of intangible rights, provided that such uses are included within the definition of direct and indirect use. So, to be more specific, the applicable principle to distinguish between these two factors is whether the intangible is directly used by its holder or, vice versa, if the latter is exploited by a third party. This being said, we can easily state that:

1. Direct use: the exploitation within the sphere of autonomy reserved to the IP holder, which is meant to be any commercial activity in which he is directly involved, as the development of a new chemical compound to be sold as a drug, or a trademark willing to identify the products of the company. the taxable revenue will be made of the actual earning, direclty produced through the exploited intengible.
2. Indirect use: the transfer of the right to use the IP right (e.g. through a license agreement). In this case, the revenues affected by the reduction will be the royalties acquired by the IP holder.

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