Unpredictability in patent law and its effect on pharmaceutical innovation.

• Author: Holman, Christopher M.
• Position: Evolving the Court of Appeals for the Federal Circuit and Its Patent Law Jurisprudence

1. INTRODUCTION

   In recent years, the major innovator pharmaceutical companies have experienced two pronounced and significant trends: a decreasing output of innovative new drugs and cutbacks in research and development (R&D) investment. The two phenomena probably are not unrelated and raise significant concerns for a society intent upon providing affordable health care for an aging population.

   While the root causes of these trends are complex and diverse, we should not overlook the critical role patents play in creating the necessary incentives for the substantial investment required to develop pharmaceutically-interesting chemical compounds into actual drugs and to take them through the clinical trials necessary for Food and Drug Administration (FDA) approval. In a recent presentation, Robert Armitage, Senior Vice President and General counsel for Eli Lilly and co. (Lilly), identified the high level of unpredictability in today's patent law as a significant impediment to the development of new medicines. (1) This Article discusses various forms of unpredictability in patent law and how they impact innovators, particularly in the pharmaceutical sector, and provides some ideas for addressing the problem.

   Part II of this Article summarizes the current R&D crisis confronting the pharmaceutical industry and the accompanying drop-off in innovative output from this important technological sector. Part III explains Mr. Armitage's "view from industry," which attributes a significant causative effect to unpredictability in the patent system. Part IV provides two Lilly case studies involving generic challenges to two of the company's important drugs, Gemzar and Strattera, in which the company has suffered as a result of this unpredictability. Part V identifies three distinct forms of unpredictability in patent law: unpredictability caused by the proliferation of loosely defined standards rather than bright line rules; unpredictability associated with long-delayed clarification of critical and identifiable ambiguities in patent law; and perhaps worst of all, unpredictability that occurs when courts adopt a new interpretation of legal doctrine and apply it retroactively, to the detriment of the investment-backed expectations of patent owners. Part VI discusses how congress and the United States Patent and Trademark Office (PTO) can ameliorate problems of unpredictability by taking a more active role in instituting changes in patent law.

2. THE CRISIS IN PHARMACEUTICAL R&D

   Pharmaceutical R&D is in crisis. The signs are all around us. For example, in early February 2011, the world's largest drugmaker, Pfizer, announced plans to slash R&D and close a major research facility in Sandwich, England, birthplace of important pharmaceutical innovations such as Viagra. (2) Layoffs and facility closures have become endemic in Big Pharma, resulting in the loss of an estimated 9000 R&D jobs in the first half of 2010 alone. (3) These closures and job losses affected a broad swath of the innovative pharmaceutical sector, including: AstraZeneca, 3500 R&D jobs eliminated; Roche, 800 R&D jobs cut or transferred; Sanofi-aventis, Pennsylvania R&D facility closed, ending 400 jobs; and Takeda, 1400 U.S. jobs cut. (4)

   The cutback in R&D coincides with an increasing reluctance among investors to support pharmaceutical R&D, based upon the emerging consensus that the expected payout in the current environment does not justify the risk and expense. A report by Reuters published on February 10, 2011, begins with the assertion that "[d]rug companies are drinking in the last-chance saloon and have just two to three years to prove to investors they can generate a decent return on the billions of dollars thrown annually at research and development." (5) A Bureau of National Affairs report, published one week earlier, arrived at a similar conclusion, noting that, "Wall Street analysts like Morgan Stanley have run the numbers and found powerful financial rationales for shutting down internal drug discovery and early development, and they are making this abundantly clear to pharmas." (6) In the words of David Redfern, GlaxoSmithKline's head of strategy: "I am absolutely convinced that this will be the last generation of R&D spending unless a decent return is generated." (7)

   Unfortunately but inevitably, decreased investment in R&D translates into decreased output of innovative products from the drug pipeline. in fact, the number of approvals of innovative drug products already has decreased. For example, in 2008 only twenty-one New Molecular Entities (NMEs) were approved, a twenty year low. (8) 2009 was only slightly better--the twenty-six NMEs launched globally that year represented only slightly more than half the peak level in 1997. (9) The decreasing productivity of pharmaceutical R&D only feeds into investor fears, creating a vicious cycle of decreased investment, more cutbacks, and ultimately less life-saving innovation, a particular concern as society struggles to contain healthcare expenditures while caring for an advancing army of aging baby boomers.

   Not surprisingly, policymakers are concerned about the sharp drop-off in productivity plaguing pharmaceutical R&D. On January 22, 2011, the New York Times reported that "[t]he Obama administration has become so concerned about the slowing pace of new drugs coming out of the pharmaceutical industry that officials have decided to start a billion-dollar government drug development center to help create medicines." (10) The article notes that pharmaceutical companies are paring back on research and concludes that "[p]romising discoveries in illnesses like depression and Parkinson's that once would have led to clinical trials are instead going unexplored because companies have neither the will nor the resources to undertake the effort." (11) National Institutes of Health (NIH) Director Francis Collins was quoted as saying that pharmaceutical research productivity has been declining for fifteen years, "and it certainly doesn't show any signs of turning upward." (12)

   Regrettably, this foray into drug R&D by the federal government will be expensive, and the New York Times article notes that researchers and NIH staff members are questioning the wisdom of the plan. (13) For example, Mark Lively, a professor of biochemistry at Wake Forest University, is quoted as observing (correctly in my view) that, "NIH is not likely to be very good at drug discovery, so why are they doing this?" (14) The NIH traditionally has played an important role in funding the early-stage research that is the starting point in drug development, but the public sector has demonstrated little success in taking these early-stage candidates through clinical trials and onto the market as FDA approved drugs.

   The answer to Dr. Lively's question appears to be that the move is borne largely out of frustration, if not desperation. The New York Times article points out that for years Director Collins has been predicting that "gene sequencing will lead to a vast array of new treatments, but years of effort and tens of billions of dollars in financing by drug makers in gene-related research has largely been a bust." (15) Director Collins is quoted as saying, "I am a little frustrated to see how many of the discoveries that do look as though they have therapeutic implications are waiting for the pharmaceutical industry to follow through with them." (16) Government officials acknowledge that it is unclear whether government can succeed where private industry has failed, "but they say doing nothing is not an option." (17)

3. A VIEW FROM INDUSTRY: THE PROBLEM OF UNPREDICTABILITY IN PATENT LAW

   Policymakers could gain insight into the problem of decreasing pharmaceutical innovation by consulting with Robert Armitage, longtime Senior Vice President and General Counsel for Lilly. Were they to do so, Mr. Armitage likely would point to an unacceptably high level of uncertainty and unpredictability in the U.S. patent system as a major disincentive for the investment necessary to bring innovative new drug products to market.

   Unfortunately, neither President Obama nor Director Collins was in attendance at a conference held at the University of Illinois on September 22, 2010, commemorating the thirtieth anniversary of Diamond v. Chakrabarty. (18) If they had been, they would have witnessed Mr. Armitage's presentation, entitled: "The Role of Patents in Ensuring Innovation: A View from Industry." (19) The Lilly vice president opened his talk with a PowerPoint slide dominated by this bullet point: "Uncertain, unpredictable patent enforceability will destroy the ability to make the high-risk investments to create new medicines." (20) He explained how, from the perspective of an innovative pharmaceutical company, the current state of the U.S. patent system had rendered it extremely difficult for companies and their investors to predict with an adequate degree of confidence whether they will be able to successfully enforce their patents to maintain a sufficient period of protection from generic competition. (21) He substantiated this point with a couple of recent examples in which key Lilly patents were invalidated unexpectedly in patent challenges launched by generic competitors. (22) While there are clearly a number of factors contributing to the decrease in investment and innovation, we should take seriously concerns voiced by those within the industry since we as a society rely upon this industry to generate continuing advances in medicine and healthcare.

   Taking a promising drug candidate through development, clinical trials, and onto the market is a notoriously expensive and high risk gamble. Only a small fraction of the drug candidates in which pharmaceutical companies invest become commercially successful products. Drug companies spend millions, even hundreds of millions of dollars on a promising drug candidate only to find out that the compound...