Preserving and leveraging value from the IP/FDA interface

Preserving and leveraging value from the IP/FDA interface

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Unlike any other industry segment, life sciences companies (pharmaceuticals, biotechnology, and medical devices) face regulatory hurdles that delay market entry and thereby erode the intellectual property value of key technologies and product franchises. Importantly, however, companies that understand the nuances of how IP rights interface with the FDA regulatory system can turn these same regulatory hurdles into advantageous strategic tools vis-à-vis potential competitors. This article draws on real world experiences to offer insights and strategies for life sciences companies not only to preserve as much IP value as possible in the face of costly and delay-inducing FDA regulatory requirements, but also to leverage additional IP-related value from the same regulatory scheme.

FDA regulatory issues directly impact IP value

Pharmaceuticals, biologics, and medical devices are undoubtedly the most strictly regulated consumer products in the United States, typically requiring FDA approval prior to marketing. For most of these products, especially the most innovative ones, the FDA approval process requires a multi-year investment of resources to establish, through expensive, lengthy human clinical trials, the safety and efficacy of the products prior to marketing. In contrast to the lag time between product discovery and FDA approval, most of the basic patent rights to such inventions must be sought promptly after discovery, even though actual commercial marketing is years away. Thus, by the time of FDA approval, the remaining effective patent life for a product may be less than one half of the statutory 20-year patent term. This market lag has a profound effect on product-specific investment decisions as well as the stock valuation of mature and emerging companies alike. Congress, however, has recognised the adverse effect of the FDA approval lag on patent rights, and has thus provided several mechanisms designed to restore and protect those patent rights, and incentivise the investments necessary to develop and bring to market medically significant new products.

The most direct mechanism for restoring lost IP value for medical innovations is the patent term extension provisions codified at 35 USC § 156. Patents covering new products subjected to FDA regulatory review and approval prior to initial marketing are eligible for such patent term extensions. Products potentially eligible for section 156 patent term extensions include human drugs, antibiotics, biologics (including many recombinantly-produced therapeutics and vaccines), animal drugs and veterinary biologics (other than those primarily manufactured using recombinant technology), medical devices, food additives, and colour additives.

There are important limitations to the scope of a section 156 extension. Specifically, no extension may exceed five years, and the total extension granted may not result in an effective remaining patent life of greater than 14 years beyond the date of FDA approval of the relevant product. Moreover, only one patent may be extended per approved product, the patent to be extended must be unexpired, and it must cover the approved product. Extension periods are calculated based upon the time spent in human clinical trials and the time spent for FDA review of the approval application. Essentially, the extension period is based upon a formula that credits one half of the time spent on human clinical trials and gives full credit for the time spent by the FDA for review of the application. Finally, the full scope of a patent’s claims is not necessarily extended under section 156. Rather, the claims are extended only to the extent that they cover the approved product. Thus a broad claim might be extended only in so far as that claim covers the approved product. Other products that would otherwise be covered by the broad claim, but differ from the approved product, may not be subject to the broad claim during the extended term. Recent ongoing litigation has called into question the applicability of such extension limitations in certain contexts, and the outcome of a Federal Circuit appeal, pending at the time of this writing, may alter the rights available under section 156.

Under the Federal Food, Drug, and Cosmetic Act (FDCA), patents that claim an approved drug, or that claim an approved method of using a drug, are eligible, and indeed are required to be submitted by the product sponsor, for inclusion in FDA’s publication Approved Drug Products and Therapeutic Equivalence Evaluations (the Orange Book). The effect of an Orange Book listing is to require advance notice to the patent holder and New Drug Application (NDA) sponsor whenever a generic applicant seeks approval to begin marketing a competing version of a drug prior to the expiration of any Orange Book listed patent. Upon such notice, the patent holder may bring an action for patent infringement within 45 days of the notice, and thereby impose an automatic 30-month stay of approval of the generic product (which stay is terminated upon a judicial determination that the patent is invalid, unenforceable, or would not be infringed by the commercial marketing of the proposed generic product).

Given that many basic patents on pharmaceuticals (ie drug compound patents) retain limited effective life upon FDA approval, (even after a patent term extension), the use of Orange Book listings has played an increasingly important role in lifecycle management strategies for pharmaceutical companies. Specifically, patents on drug product formulations and methods of use, as well as patents on particular dosing regimens and pharmacokinetic data (eg food/bioavailability effects on drug products), have been listed in the Orange Book. Coupled with regulatory exclusivity strategies (discussed below), such patent listings can provide very strong protection from competition even beyond the full expected term of a basic compound patent. However, such strategies have been under close scrutiny by both FDA and the Federal Trade Commission (on antitrust grounds) and FDA recently promulgated new regulations governing the listing of patents in the Orange Book and the availability of successive 30-month stays for a single drug product. These new regulations are designed to prevent multiple, successive approval stays for generic drugs, thus reducing the FDA procedural advantages of Orange Book patent listing. However, the rights of patent owners to sue infringing generic companies for monetary damages and injunctive relief after commercial sale of the generic product remain fully operative even under the new FDA rules.

Regulatory protections may function as intellectual property

In addition to traditional patent protections, and the limited patent term extension rights described above, pharmaceutical innovation is encouraged and rewarded in the US through several regulatory exclusivity mechanisms administered by the FDA under the Hatch-Waxman Amendments to the FDCA. Although some refer to it as data protection, that term is somewhat of a misnomer in that US law allows competitors (and FDA) to rely on other applicants’ data in various ways before such data is subject to actual public disclosure. Moreover, the various types of regulatory exclusivities operate in subtly, but importantly, different ways.

When a new chemical entity (NCE) is first approved as a drug under a New Drug Application (NDA), the sponsor is entitled to a five year exclusivity period that bars the submission of any generic drug application for a product that contains that NCE. There are two types of generic drug applications: Abbreviated New Drug Applications (ANDA); and the so-called 505(b)(2) NDA. With both types of applications, approval of the competing product relies upon FDA’s prior approval of a drug containing the NCE as being safe and effective. An exception allows filing of a generic application as early as four years after NCE approval if the competitor challenges the validity or applicability of a patent on the NCE. However, under the complex rules governing generic drug patent challenges, and in light of the two or more year FDA review time for ANDAs, final generic approval is usually not possible for at least seven years post-NCE approval, or longer.

Another regulatory exclusivity applies when a sponsor obtains FDA approval of certain changes to an already approved drug, eg, a new indication, a new dosing regimen, a new patient population, a switch to over-the-counter marketing status, or other labelling changes. If new clinical studies, conducted or sponsored by the applicant, are deemed by FDA to be essential to the approval of the change, the sponsor is awarded a three-year exclusivity period for the approved change. But, unlike the five year NCE exclusivity, the three year exclusivity only bars FDA approval of an ANDA or 505(b)(2) NDA for the same change, and once the three year exclusivity period expires, pending generic applications for the change may be approved immediately. Moreover, in many instances, a generic version can still be approved using the old labelling – ie, by carving out the exclusive labelling language – before the three year exclusivity expires. Given the liberal generic substitution rules in most states, this exclusivity is often considered to be of limited value. Thus, sophisticated companies and their FDA counsel have pursued regulatory strategies that can enhance the power of the three year exclusivity to prevent or delay FDA approval of generic versions that use the old, unprotected labelling. These strategies have been vigorously opposed by generic manufacturers and patients groups, and have a mixed record of success.

In addition, the data supporting NDA approvals is protected from actual public disclosure by a panoply of laws, including the FDCA, the Freedom of Information Act (FOIA), and the Trade Secrets Act. For example, the FDCA prohibits disclosure of drug safety and efficacy data (as opposed to indirect reliance by generic applicants) until such time as an ANDA is, or could have been approved (if one had been filed). However, even after such ANDA approval occurs, new drug sponsors can still prevent public disclosure under extraordinary circumstances. Knowledge of when and how extraordinary circumstances will be found to exist can be a crucial business tool for companies competing in both the US and foreign markets.

In addition to the three-year and five-year exclusivities described above, US law provides for a seven-year orphan exclusivity. For orphan drugs or biologics – those intended to treat rare diseases or conditions (less than 200,000 US patients) – a sponsor may receive seven years of exclusivity for use of the drug in treating the orphan condition. Thus, if two companies are pursuing the same drug for the same orphan indication, whichever wins approval first will obtain exclusivity over its competitor. However, this exclusivity does not block approval of the same drug for a different indication, nor does it block approval of another version of the same drug if the new version offers clinical advantages over the prior product (eg greater safety, tolerability, or convenience of administration).

Yet another exclusivity option for innovator drug products is the six month pediatric exclusivity awarded when companies conduct FDA-requested studies of a drug in pediatric populations. This exclusivity actually operates as a general exclusivity extension – it adds a six month approval delay for competing generic products, added to the end of any unexpired patent or regulatory exclusivity. Moreover, if the requested pediatric studies result in product labelling changes, those changes may also be eligible for a three-year exclusivity (described above), subject to limited exceptions for generic products seeking to carve out such exclusive pediatric labelling.

There also exists a limited (and currently debated) statutory experimental use exception for uses of patented drugs, devices, and biologics where the use is solely for purposes reasonably related to the development and submission of information to FDA under the FDCA. For example, a generic manufacturer can use a drug covered by a patent to conduct product development work, including human clinical trials, as long as that development work is related to the development and submission of information to the FDA to obtain an approval for that drug. Under these circumstances, the use of the patented product is not an act of infringement.

Accounting for FDA regulatory issues in IP valuation

IP valuation is critical for any life science company seeking financing, a licensing agreement, or a change of control transaction. In turn, the IP valuation, and indeed the valuation of the company as a whole, requires a clear-eyed assessment of the impact of the FDA regulatory scheme on the company’s technology and operations. For example, in addition to the IP-specific issues discussed above, product and company valuations are influenced, sometimes dramatically, by the company’s history of compliance with FDA’s current Good Manufacturing Practices (cGMP) requirements (many of which are not specifically codified, but must be discerned through awareness and understanding of FDA’s recent and historical enforcement activities). Moreover, for pipeline products, careful evaluation of a company’s FDA regulatory strategies, including how it has conducted itself, and what agreements it has obtained, in its early stage interactions with FDA can mean a difference of years in the expected time for clinical development, FDA review, and ultimate approval. Navigating the optimal regulatory course with FDA requires experienced counsel, but investing early in a well thought-out regulatory strategy can produce tremendous value when it counts most.

The lesson that many companies have already internalised, but which many others will learn the hard way, is that in the life sciences sector, IP and FDA issues are inextricably linked. Any business strategy that fails to account for this linkage, and fails to address these issues in a coordinated manner between patent, regulatory, and corporate counsel, is much more likely to produce avoidable delays, and accelerate the erosion of intellectual property value.

A chapter published in the 2004 edition of Building IP Value (by Globe White Page, publishers of Intellectual Asset Management Magazine).

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