Reverse settlements, Part 2: drug company profits

In my second post, I want  continue my discussion of reverse settlements.  Recall that the basic argument against reverse settlements is that they extend the duration of a pioneer drug company’s patent beyond what it might expected to be if there were no settlement.  (Elhauge and Krueger (Texas Law Review, 2012) have a nice description of the settlement process that yields this result.  For now I will take it as given.)  In my first post I questioned whether drug patents reduce total welfare.  In this post I question whether extending drug patents raise producer welfare at the expense of consumer welfare.  I will argue that the profits pioneer drug companies make under patents overstate producer surplus.  Producer surplus depends on not competition in the drug market but rather on how competitive the market for research and development for the drug was.  But we have little evidence on how competitive that market is.  It is possible that that market is perfectly competitive, in which case, in expectation, drug companies are making no supra-competitive profits.  No such profits would mean no excessive producer surplus, and no antitrust concern, even with its consumer surplus focus.

At the risk of being repetitive (and thereby pedantic), let me restate the conventional tradeoff when setting patent duration, but from the perspective of producer versus consumer surplus as conventional antitrust analysis sees it.  An innovator – in drugs or another product – gets a patent if they come up with a valuable innovation.  This patent allows the innovator to charge a high (monopoly) price and thereby earn supra-competitive profits.  These profits are treated as producer surplus (though I will question that).  The high producer surplus comes at the cost of low consumer surplus.  This is partly because surplus is a zero sum game: total surplus is either consumer surplus or producer surplus.  This partly because the high prices that generate high producer surplus reduce total surplus by pricing consumers out of the market (ignoring my first post on reverse settlements).  When a patent ends, competition starts and the market price of the previously patented drug falls.  This increases consumer surplus, at the expense of producer surplus.  If total sales also rise, total surplus also rises, which also favors consumers.  Thus the duration of a patent determines how long producers enjoy high producer surplus and when high consumer begins.

Given this background, it is possible to see why antitrust law cares about the duration of patents.  Antitrust law and antitrust authorities – for distributional reasons it appears to me – favor consumer surplus over producer surplus; I will take this preference as given.  The more quickly a patent ends, the sooner consumers start earning higher surplus.  For this reason, antitrust law is opposed to reverse settlements if they increase the expected duration of patents.

The problem with this logic is that the producer surplus created by patents is not fully producer surplus.  The purpose of this producer surplus is to encourage innovation.  In the absence of innovation, consumers would be worse off because they would not have the innovation required to generate high consumer surplus once patents expire.  Thus, antitrust law should not judge producer surplus in the patent setting the same as it is in the non-patent setting.  It should not be judged against a baseline of zero-producer surplus.  Instead, it should be judged against a baseline of innovation with shorter patents.  If patent duration is shortened, consumers will obtain less innovation and less consumer surplus.  That reduced consumer surplus should be subtracted from producer surplus observed due to patents and credited as consumer surplus.  (If this were not the case, antitrust law would want to eliminate all patents!).

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A different perspective on reverse settlements

Before I begin my initial post, I want to thank Holly for inviting me to post on this blog.

I want to take up reverse settlements in litigation over pharmaceutical patents.  Circuits are divided on how to treat these settlements under antitrust law (Elhauge & Krueger, Texas L. Rev., 91:283, 285, 2012).  The Supreme Court has decided to take this the topic up this term; it will hear oral arguments in Federal Trade Commission v. Watson Pharmaceuticals on March 25, 2013.  However, this is a topic about which I believe the legal literature has lagged substantially behind the health economics literature.  As a result, I think the conventional (legal) views of such settlements get the economics of pharmaceutical patents and innovation wrong.  (That does not mean they are getting the law wrong. Although the law in this area is highly unsettled, the goal of the law may not coincide with economic prudence.  I am commenting primarily about economic prudence.)

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A Myriad of Options in the Spirit of the Law

by Adriana Lee Benedict

In a couple days, petitioners in AMP v. USPTO will be filing their brief on the merits following the Supreme Court’s grant of certiorari in late November.  For many, the Supreme Court’s ruling in this case will provide a long-awaited answer to the question of whether or not isolated DNA is patentable subject matter under §101.  In August, the Federal Circuit ruled on the case for a second time following a remand from the Supreme Court, in which the Federal Circuit was asked to reconsider its ruling in light of the Supreme Court’s recent ruling in Mayo v. PrometheusThe majority, written by Judge Lourie, found that Mayo did “not control the question of patent-eligibility of such claims. They are claims to compositions of matter” and that while “Plaintiffs and certain amici state, that the composition claims are mere reflections of a law of nature.  Respectfully, they are not, any more than any product of man reflects and is consistent with a law of nature.”  Judge Bryson’s dissent, on the other hand, explained that, “In cases such as this one, in which the applicant claims a composition of matter that is nearly identical to a product of nature, it is appropriate to ask whether the applicant has done ‘enough’ to distinguish his alleged invention from the similar product of nature,” concluding that Myriad had not made a “substantial ‘inventive’ contribution” or claimed anything more than a combination of “well-understood, routine, conventional” elements.”

It seems likely that the Supreme Court will agree with Judge Lourie that the gene patents in question in Myriad, whether or not they are products of nature, are not laws of nature, as some of the patents in question in Mayo were.  Yet I would be surprised if they took this to mean that Mayo therefore does not control the question of patent-eligibility in Myriad.  In Mayo, Justice Breyer’s majority opinion was incredibly clear that the metabolic correlation at issue was not patentable under §101 because it tied up a law of nature and therefore preempted its use for further research.  Isn’t that exactly what Myriad is about?  Certainly all parties would agree that Myriad’s patents, whether natural products (physical phenomena) or not, serve to preempt breast cancer research on the BRCA1 and BRCA2 genes.

When the Supreme Court articulated the §101 exception for laws of nature, physical phenomena and abstract ideas in Gottschalk v. Benson, it explained that these kinds of claims were not patentable because they consist of the “basic tools of scientific and technological work.”  It is difficult to dispute that Myriad’s isolated genes are basic scientific tools. But according to Myriad, under this rule, their patents would only be invalid if they claimed real human DNA, and that it is not dispositive that their isolated DNA is nearly identical to real human DNA, because it is not naturally occurring.

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Are Human Genes Patentable?

Efthimios Parasidis

The Supreme Court will consider the patentability of human genes when it reviews the Myriad case this term. As Bill of Health readers are likely to know, the Myriad case centers on Myriad’s patents on gene sequences for BRCA mutations that are associated with the propensity to develop breast or ovarian cancer.  Myriad does not claim ownership over the mutations as they exist in nature, but rather on isolated BRCA sequences that the company has “created”. The Myriad case will give the high Court another chance to clarify the scope of subject matter that is eligible for patent protection. The Court’s track record in this area is less than stellar.

As I have argued (here), the legal uncertainty at to the scope of patentability for claims that implicate products of nature is largely the result of the lack of a uniform framework for determining what areas are excluded from patent-eligible subject matter. More specifically, while patent law prohibits patent protection for inventions that equate to a law of nature, natural phenomenon, mental process, mathematical equation, or abstract idea (collectively referred to as the product of nature doctrine), no court has defined these terms adequately. Uncertainty is bad for business and bad for patients — the Court should seize upon this opportunity and offer clear guidance as to the contours of the product of nature doctrine.

With respect to gene sequences, the mere fact that a sequence is isolated is inconsequential.  Rather, courts should analyze the precise subject matter of the isolated gene sequence to determine if it differs substantially from its natural counterpart. I’ve created a three-part test to help make this determination:

  1. Does the isolated sequence exhibit characteristics or contain properties that are substantially different from the non-isolated sequence?
  2. Is the proximate cause of any difference between the isolated and non-isolated sequences the result of natural phenomenon that govern the properties of the sequence when isolated?
  3. Would a patent on the isolated sequence grant a property interest that extends to anything other than the isolated sequence?

If the answer to these questions is anything other than (1) yes, (2) no, (3) no, the claim must be invalidated pursuant to Section 101 of the patent act because the claim does not constitute patent-eligible subject matter. My article explains why…

Does Whole Genome Sequencing Circumvent Gene Patents?

By Nicholson Price [originally posted at Bio-IT World on Dec. 10, 2012]

What happens when, during the course of whole-genome sequencing (WGS) a patient or research subject, an investigator sequences and analyzes a disease gene that has been patented? The U.S. Supreme Court will shed some light on this question next year when it issues its ruling in the long-running Myriad Genetics saga.

Last month, the Supreme Court voted to hear the case of Association for Molecular Pathology v. Myriad Genetics to consider the question whether human genes are patentable. The plaintiffs—doctors, patients, researchers, and the American Civil Liberties Union—have challenged Myriad’s patents on the breast cancer genesBRCA1 and BRCA2, which cover, among other things, isolated DNA molecules with the sequences of those genes. A federal district court in New York ruled that the patent claims on isolated DNA molecules were invalid, but that ruling was reversed on appeal by the Federal Circuit in D.C. The Supreme Court decided to review the Federal Circuit’s decision and will likely rule on whether isolated human gene sequences are patentable next summer.

This case has profound implications for biotechnology, and diagnostics, as well as the emerging field of personalized medicine. Among the fascinating issues that will likely be addressed is whether WGS—an essential foundation for truly personalized medicine—violates human gene patents.

As WGS involves determining the sequence of an individual’s entire genome, there is concern in many quarters that WGS could violate essentially every patent covering an isolated human DNA sequence—of which there are thousands. Indeed, this concern has been raised by scholars, policy analysts and lawyers, including before the Federal Circuit and in the arguments over whether the Supreme Court should hear the case.

However, a closer look at the technology suggests that rather than violating thousands of gene patents, WGS methods violate few, if any, existing gene patents. Whatever the Supreme Court decides next summer, the widespread adoption of clinical WGS is not particularly threatened by gene patents.

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Elhauge on Solving the Patent Settlement Puzzle

Founding Director of the Petrie-Flom Center, Professor Einer Elhauge, has just published an article with co-author Alex Krueger on an issue that the Supreme Court just granted certiorari on in FTC v. Watson: the proper antitrust analysis of reverse payment patent settlements.  In such settlements, the alleged infringer receives a payment and agrees to stay out of the market for a number of years.  Such settlements have been particularly prevalent in the pharmaceutical industry that has such a large effect on health care costs. The appellate courts have all recognized that such settlements have anticompetitive potential to exclude entry for far longer than merited by the probability of patent victory.  However, the courts have split on whether to find these settlements presumptively anticompetitive or lawful if within the formal scope of a non-sham patent.  The latter courts have focused on the possibility that a settlement might not exclude entry for longer than merited by the probability of patent victory and the administrative difficulty of conducting case-by-case inquiries into that probability.  Professor Elhauge’s article seeks to solve this puzzle by showing that case-by-case inquiries are unnecessary when the reverse payment amount exceeds the patent holder’s future anticipated litigation costs, because one can infer that such settlements will exclude entry for longer than merited by that probability of patent victory, whatever that probability may be.

2012 Global Congress on Intellectual Property and the Public Interest

By Adriana Benedict

The 2012 Global Congress on Intellectual Property and the Public Interest has just come to a close in Rio de Janeiro, Brazil.  The conference brought together global leaders in intellectual property-related fields like access to medicines, access to knowledge, internet freedom, innovation and development, and open educational resources.  I was invited to participate in the various sessions concerning access to medicines, which focused on two sides of this global health challenge.

The first part of the access discussions focused on best practices and threats in the use of TRIPS flexibilities in developing countries.  Participants emphasized the need to look beyond the usual focus on compulsory licenses to set new priorities for understanding and leveraging less-developed flexibilities such as patentability criteria, patent opposition mechanisms and parallel importation.  An important overarching theme in these discussions was reframing flexibilities as rights, as they carry the same legal status as the intellectual property rights which make them necessary.

The other side of the discussions focused on innovation and research and development (R&D) for the developing world, primarily through recent advances by the WHO CEWG report in promoting a binding convention in this realm.  At the forefront of these proposals is the notion that incentives for innovation should be de-linked from product prices in order to address the needs of the developing world.  Participants emphasized that, moving forward, advocates should be careful to ensure that public and institutional debates on alternative R&D models do not narrow their focus from neglected populations to neglected diseases.

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Open Access to Health Research: Highlights from the NIH Public Access Policy panel

By Adriana Benedict

As of 2008, the NIH Public Access Policy requires “that all investigators funded by the NIH submit or have submitted for them to the National Library of Medicine’s PubMed Central an electronic version of their final, peer-reviewed manuscripts upon acceptance for publication, to be made publicly available no later than 12 months after the official date of publication.”  Four years later, approximately 80% of NIH-funded research articles make their way into PubMed Central.  Institutional Open Access resolutions such as Harvard’s Open Access Policy have helped accommodate the NIH Public Access Policy requirements, but Harvard Medical School and Harvard School of Public Health have yet to adopt it.

In May, the Harvard Library Faculty Advisory Council issued a public letter calling on faculty to promote open access scholarly publishing, noting that “Many large journal publishers have made the scholarly communication environment fiscally unsustainable and academically restrictive”.  In a Petrie-Flom Center-sponsored Open Access Week panel (moderated by Open Access Liaisons Scott Lapinski and June Casey), Peter Suber, Amy Brand, Winston Hide and Patrick Taylor discussed the challenges and opportunities for progress towards achieving open access to health research.  Highlights from the panel are presented below, and the video should be available on the Petrie-Flom website shortly.

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