Realizing two-tiered innovation policy through drug regulation.

• Author: Ridgway, William E.

INTRODUCTION I. OVERVIEW OF DRUG REGULATION II. PATENT LAW'S DECLINING INFLUENCE ON DRUG INNOVATION POLICY. A. The Emergence of an Independent Written Description Requirement 1. Written description and the anatomy of a patent 2. Written description's impact on drug patents B. The Rise of Patented Research Inputs C. Drug Patenting as Copyright III. DRUG REGULATION'S GROWING IMPACT ON INNOVATION POLICY A. Explicit Innovation Policy Provisions B. Implicitly Remedying the Public Goods Problem IV. ADVANTAGES OF TWO-TIERED INNOVATION POLICY A. Aligning with Patent Law's Justifications B. Decreasing Pressure on the PTO To Determine Utility C. Focusing Protection Where It Counts 1. Focus on a drug's use 2. Focus on commercialization CONCLUSION INTRODUCTION

Patent law and drug regulation traditionally function within distinct, and largely adversarial, domains. That is, patent law's aim to encourage invention counteracts the costs and uncertainty associated with drug regulation's efforts to ensure the safety and efficacy of drugs. But this traditional view needs revision. In fact, their domains are merging, and their relationship is more the reverse: drug regulation's costs and its growing number of market-exclusivity provisions protect drug manufacturers against their weakening patent rights.

This counterintuitive twist on tradition derives from the logic of the public goods problem. Because ideas cost more to create than to copy, unregulated markets are thought to be incapable of sufficiently rewarding innovation. Yet creation costs alone do not trigger the public goods problem; rather, its extent is determined by the ratio of the cost of creating to the cost of copying. Thus, goods that are expensive to make but equally costly to copy, such as handmade furniture, evade these problems entirely. In fact, with a ratio close to one, copying becomes a socially desirable mechanism for generating competition. (1) Accordingly, patents, and intellectual property in general, strive to adjust the public goods ratio so that it approaches one and thereby ensure fair competition between creators and copiers.

But the emergence of an independent written description requirement seemingly undermines patent law's ability to remedy the public goods problem, especially for drug manufacturers. This new requirement tends to narrow patent scope within biotechnology, (2) and recent cases suggest its application may extend to other fields as well. (3) Moreover, the rise of patenting on research inputs--as instigated by reduced patentability standards and the outburst of academic patenting through the Bayh-Dole Act (4)--means that the patent system increasingly extracts, rather than generates, revenue for drug manufacturers. (5) As a result, drug manufacturers rely less exclusively on the patent system for protection.

As patent law's relevance to drug manufacturers continues to wane, drug regulation discretely shifts into the void. Drug regulation first explicitly crossed over to the patent domain with the Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman Act). (6) To facilitate the introduction of generic drugs, the Hatch-Waxman Act permits a manufacturer of a generic alternative to a pioneer drug to seek FDA approval by submitting a significantly less stringent abbreviated new drug application; to counteract this advantage to generics, the Act awards pioneers with a patent term extension. (7) The Hatch-Waxman Act is generally considered a policy success, which likely contributes to lawmakers' unflinching support for the several subsequent Food and Drug Administration (FDA) provisions that confer market exclusivity through the regulatory process alone by limiting the approval of competing drugs.

And even though the Hatch-Waxman Act and its progeny suffer no shortage of scholarly treatment, virtually none of the literature deals with the implications of drug regulation's marked step into the patent domain. (8) What is more, these explicit innovation policy provisions only begin the analysis--drug regulation also implicitly executes patent policy with subtle, though profound, influence.

Most notably, and contrary to drug manufacturers' standard rhetoric, FDA-imposed approval costs actually protect manufacturers because they equally impact all industry participants, including copiers. By imposing fixed costs upon all manufacturers, the FDA adjusts the critical public goods ratio toward one, thus decreasing both the benefits of drug copying and the need for drug patents. In this sense, the FDA turns drugs into handmade furniture, costly to create and to copy. Of course, the Hatch-Waxman Act seemingly moderates this unintended consequence by permitting generic manufacturers to pay less in fixed costs than pioneers. But as I later explain, the Hatch-Waxman Act's rule-based approach functionally restores drug regulation's implicit impact on the public goods problem.

When examined together, these concurrent developments reveal an important shift: patent law and drug regulation share responsibility for innovation policy within the drug industry--a system I call "two-tiered innovation policy." Under this system, drug candidates receive baseline protection early on at the patenting stage and heightened protection through drug approval.

At first glance, a two-tiered system may seem organizationally inefficient. After all, assuming an optimized patent system, independent assistance from drug regulation will either be redundant or harmfully overprotective. Even if the system is nonoptimal, deploying an independent regulatory agency seems a roundabout approach to correction.

But I argue that this two-tiered system is an unintended consequence worth embracing, as it yields three crucial advantages. First, regulating intellectual protection in two stages aligns better with patent law's aim to remedy the public goods problem. Conferring protection at the patenting stage alone forces the system inefficiently to overprotect the drug candidate as if it were a product, even though the vast majority of patented candidates never reach the market. Dividing protection into two stages, by contrast, accommodates the reality that preapproval drug candidates suffer the public goods problem much less than postapproval products. Moreover, this heightened precision comes with virtually no additional costs: the FDA already tests a drug's utility (i.e., safety and efficacy) for independent policy reasons, so the system for subsequent examination already exists.

Second, and related, the FDA's approval process and its resulting quasi-intellectual property protection ease the pressure on the Patent and Trademark Office (PTO) unilaterally to differentiate utility when it determines patentability at such an early stage. With knowledge that the truly useful drug candidates will receive subsequent protection through drug approval, the PTO can confidently apply lower and more administrable utility standards to drug patent applications while narrowing scope accordingly.

Third, by shifting responsibilities from patents to drug regulation, this system focuses protection on commercialization. In patent law, commercializing is not particularly consequential--it is neither necessary to receive patent rights nor required to infringe them. That approach is troublesome both because it encourages patentees inefficiently to withhold commercialization and because it enables them to prevent others from pursuing noncommercial research. By contrast, the FDA only initiates protection after drug approval, which encourages patentees to commercialize. And rather than granting broad rights to exclude for any use, the FDA's quasi-protection applies only to drugs intended for distribution in the marketplace, thereby minimizing intellectual property's notorious obstruction at the research stage.

This Note proceeds in four Parts. Part I describes in greater detail the drug-approval process, focusing on the portions that are relevant to this Note. Part II argues that patent law's role in innovation policy continues to decline, especially with respect to drug patents. It first explains how the doctrine of written description effectively narrows the patent scope of key drug patents and then argues that after the rise of research inputs, patents often extract monopoly rents from drug manufacturers. Part III argues that drug regulation is increasingly a source of protection for drug manufactures. After briefly describing explicit policy provisions, the Note explains how the FDA implicitly influences innovation policy with even greater consequence. Finally, Part IV further explains why this shift toward a two-tiered innovation policy is desirable, though in need of deliberate cross-institutional coordination.

1. OVERVIEW OF DRUG REGULATION

   Congress drastically increased the FDA's role in drug regulation in 1962 Then it amended the Food, Drug, and Cosmetics Act (FDCA) to require companies to "prove that new drugs are safe and effective prior to FDA approval." (9) This simple statement transformed the industry. Drug approval now requires controlled clinical studies, which currently take six to eight years (10) cost up to $1.7 billion dollars, (11) Moreover, the standards are exacting: only eight percent of the drugs that begin Phase I clinical trials ever get to market. (12)

   A second FDA-inspired industry transformation resulted from the Hatch-Waxman Act. As discussed in the Introduction, the Act permits a manufacturer of a generic alternative to a pioneer drug to seek FDA approval by submitting a significantly less stringent abbreviated new drug application (ANDA). (13) Rather than proving safety and efficacy, an ANDA only obliges a generic manufacturer to show that its drug is bioequivalent to the pioneer, uses the same active ingredients, and contains generally safe inactive ingredients. (14) A bioequivalent drug, according to the FDA, delivers roughly the same amount of...