Relationships between the academic community and the pharmaceutical industry: the legislative background and its effect on spending on medical research and development

John H. Matthews, MA, MB, BChir

Clin Invest Med 1996; 19 (6): 470-8.

[résumé]

Dr. Matthews is in the Department of Medicine, Queen's University, Kingston, Ont.

Paper reprints may be obtained from: Dr. John Matthews, Division of Hematology/Oncology, Department of Medicine, Queen's University, 2015 Etherington Hall, Stuart St., Kingston ON K7L 3N6; tel 613 544 4536; fax 613 545 6855; matthewj@post.queensu.ca

Copyright 1996, Canadian Medical Association

Contents

Abstract

Patent legislation governing drugs has evolved through a series of amendments to the Patent Act. From 1923 until 1993, Canada operated a system of "compulsory licensing," allowing generic copies of patented medicines to be manufactured within Canada and, by 1969, to be imported. In 1987, the act was amended (Bill C-22) to provide patented medicines with a fixed period of market protection before a compulsory license could be issued and to create a price review board to monitor and control prices charged. In return for patent protection, brand-name drug companies promised to invest a growing percentage of sales revenue in research and development in Canada. A 1993 amendment to the Patent Act (Bill C-91) brought a fundamental change to the legislation by abolishing the system of compulsory licensing and applying general patent regulations to medicines, thereby bringing Canadian law into line with that of its trading partners. It is now illegal to sell a copy of a drug until the patent expires (20 years after the patent is filed). This means that marketed drugs are protected for 8 to 13 years, since drug development takes a large proportion of the life of the patent. Since this amendment was passed, the brand-name drug companies have made major contributions to research and development in Canada, increasing from 6.5% of sales revenue in 1987 to 11.6% in 1994. Major irritants in the legislation remain. Generic drug companies have complained about "linkage regulations" that allow brand-name drug companies to legally challenge generic drug production on the basis of alleged infringements of linked patents, delaying the marketing of the generic drug. The act also prohibits Canadian manufacturers from exporting a generic drug to a country where it is not protected if it still protected in Canada. Brand-name manufacturers want some means of patent term restoration if regulatory authorities prolong the time taken before marketing a drug. This legislation is being reviewed by parliament beginning in 1997.

Résumé

 Le cadre législatif régissant les brevets de médicaments a évolué par une série de modifications apportées à la Loi sur les brevets. Au Canada, de 1923 à 1993, un système de «licence obligatoire» était en vigueur, qui permettait la fabrication au Canada de copies génériques de médicaments brevetés et, à partir de 1969, leur importation. En 1987, cette loi fut modifiée (projet de loi C-22) afin, d'une part, d'assurer aux médicaments brevetés une période fixe de protection sur le marché avant qu'une licence obligatoire puisse être accordée, et d'autre part, de créer un conseil de révision des prix afin de surveiller et de contrôler le prix des médicaments. En échange de cette protection, les fabricants de médicaments d'origine s'engageaient à investir un pourcentage croissant de leurs revenus de vente dans la recherche et le développement au Canada. En 1993, une modification de la Loi sur les brevets (projet de loi C-91) rapprochait la loi canadienne de celle de ses partenaires commerciaux. Il est désormais illégal de vendre une copie d'un médicament pendant la durée de validité du brevet (20 ans après le dépôt du brevet). Cela signifie que les médicaments entrant sur le marché sont protégés pour une période de 8 à 13 ans, puisque la mise au point d'un nouveau médicament accapare une grande partie de la durée du brevet. Depuis l'entrée en vigueur de cette disposition, les fabricants de médicaments d'origine ont apporté d'importantes contributions à la recherche et au développement au Canada, dans une proportion qui est passée de 6,5 % de leurs revenus de vente en 1987, à 11,6 % en 1994. Par ailleurs, des irritants majeurs demeurent dans la loi. Les fabricants de médicaments génériques se sont plaints de certains règlements sur les produits reliés ou apparentés, qui permettent aux fabricants de médicaments d'origine de s'opposer devant les tribunaux à la production de médicaments génériques en allégant l'usurpation présumée de brevets reliés ou apparentés, ce qui retarde la mise en marché du médicament générique. De plus, la loi stipule que si un médicament générique demeure protégé au Canada, il est alors interdit aux fabricants canadiens de l'exporter dans un pays où il n'est pas protégé. Pour leur part, les fabricants de médicament d'origine souhaitent obtenir un mécanisme permettant de reconduire la durée du brevet si le législateur prolonge le délai qui s'écoule avant la commercialisation. Cette loi sera étudiée par le Parlement en 1997.

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Introduction

 If my own institution is a barometer of national trends, the phrase "redefining our relationship with industry" will sound familiar to readers. Academic bodies wish to change the way they conduct business with the pharmaceutical companies. A cynical observer could see the proposed relationships as "marriages of convenience" driven by the need to replace traditional funding sources by new money from industry. Although there may be some truth in this, if we wish to forge durable and mutually beneficial relationships with the private sector, we would be advised to understand our prospective partners.

This article describes the background to the current legislative environment in which pharmaceutical companies operate and the effect of that environment on their spending on research and development. It is intended to inform the discussions that may take place as new partnerships begin. It is also of particular contemporary relevance, because the provisions of the legislation will be reviewed by a parliamentary committee beginning in 1997 and because private funding of medical research is a central feature of the federal government's new science and technology policy.

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Background on patent protection for pharmaceutical products

1923 Patent Act Amendment[1,2]

Before 1923, a 17-year patent term was applied to all inventions, including medicines. The 1923 amendments provided for compulsory licensing in respect of food and drug patents. They gave the Commissioner of Patents the power to issue a compulsory licence enabling a third party to manufacture a patented drug within Canada, despite the continuing existence of the patent. Importing of the drug, however, was not licensed. Between 1935 and 1969, only 22 licences were granted. Patents were applied to the manufacturing process, not to the product.

1969 Patent Act Amendment

This amendment created additional powers for the Commissioner of Patents to issue compulsory licences to import patented medicines that had been manufactured abroad. A standard 4% royalty was paid to the patentee. The commissioner was obliged to grant an interim compulsory licence within 6 months of application and a final decision within 18 months. In practice, the commissioner granted nearly all requests, despite vigorous objections from the patentees.

It therefore became profitable to import and sell copies of patented medicines manufactured cheaply elsewhere, and successful generic drug companies were founded within Canada.[1] Provincial reimbursement programs, which mandated generic substitution, also fostered the generic industry.

The manufacturers of patented medicines were concerned for their profitability and sought changes in the legislation. In response, the federal government established the Commission of Inquiry on the Pharmaceutical Industry (the Eastman Commission).

1984 Eastman Commission[3,4]

This commission endorsed Canada's unique system of compulsory licences because of the increased competition it engendered. It felt, though, that the manufacturers of patented medicines needed some degree of protection, and recommended 4 years of exclusive marketing from the receipt of a "Notice of Compliance" (the official notice that a drug has been approved for marketing). It also recommended a subsequent royalty fund, into which would be paid the royalties generated by the sales of generic copies of the drug after the issue of a compulsory licence. These royalties were to be shared by the patented medicine companies in proportion to their research spending.

1987 Patent Act Amendments (Bill C-22)

In return for the extended patent protection in this act, the Pharmaceutical Manufacturers Association of Canada (PMAC) made a public agreement to increase the spending on research and development by its member companies.[5,6]

This system of compulsory licences after a specified period of market protection was different from the rules applicable within Canada's trading partners. During the negotiations leading to the Canada­US Free Trade Agreement, Canada agreed to fall into line and apply general patent law to medications.[1] Patent protection was also addressed in the General Agreement on Tariffs and Trade (GATT) and the North American Free Trade Agreement (NAFTA).

1993 Patent Act Amendment Act (Bill C-91)[7]

The review committee is scheduled to begin its work in February 1997. The process is to be coordinated by Industry Canada.

Current position

Drug patents now extend 20 years from the filing of a patent application. Typically, a drug takes about 10 years of development before it receives a Notice of Compliance, so market protection amounts to about 10 years, on average, or a range of 8 to 13 years.[1] If the Notice of Compliance is inappropriately delayed by the actions of the regulatory authorities, Canada has no legislation that enables extension of the patent term (so-called "patent-term restoration"), other than through an act of parliament.

The rules that apply in Canada are now quite similar to those in other countries. In the United States, the term of market protection for a pharmaceutical product was, until recently, 17 years from the granting of the patent. (It has just been changed to 20 years from the filing of the patient; this has effectively extended the patent life of certain brand-name drugs, of which the best known is Zantac [ranitidine]).[8] The Restoration Act provides for redress by patent extension if the Federal Drug Agency causes inappropriate delay in approval of the drug.[1,2] The rules in the European Community vary from country to country but patent protection generally amounts to about 20 years from the filing of the patent application. Provisions for conditional patent extension exist.

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Spending on research and development by the manufacturers of patented medicines[5,6,9]

The hope was that, by affording fair market protection, the Patent Act amendments of 1987 would encourage the multinational pharmaceutical companies to undertake research and development in Canada. The act did not require the manufacturers to do this, but, when it was passed, the PMAC made a public pledge to increase drug companies' research and development spending to 8% of sales by 1991, and to 10% of sales by 1995, from a figure of 6.5% of sales in 1987, when the commitment was made.[5]

Although it seems intuitively obvious that a company would locate its research effort where its product receives the best market protection, in fact this is not necessarily so. From the standpoint of a multinational corporation, the individual patent laws of each country operate as they were written, regardless of the location of the researchers who developed the product. Thus, it can be argued that patent legislation is irrelevant in determining the location of a corporation's research. It will simply develop products wherever there is the greatest chance of success. So, were the PMAC's promises fulfilled?

Total expenditures

Figures from the 1995 edition of the Patented Medicine Prices Review Board Annual Report indicate that the PMAC companies have surpassed their promises, spending 11.6% of their 1994 sales revenue on research and development (Fig. 1 and Fig. 2).[6] The 1995 figures are not yet available. (Since this article was written, the 8th Annual Report of the Patented Medicines Prices Review Board, covering 1995, has been presented to parliament.)

To put these figures in a Canadian perspective, the total research and development expenditure by the patented medicine companies in 1994 in Canada was $561 million, of which roughly one quarter ($140 million) was invested in "extramural" research outside of the drug companies themselves.[6] This amount may be compared with the annual operating budget of the Medical Research Council of Canada (MRC) of about $250 million for 1995­96, which will shrink by 10% from 1996­97 to 1997­98, and by another 3% or so in 1998­99. The recently announced Health Services Research Fund of the MRC will commit $13 million per year over 5 years to outcomes research.[10,11] The Canadian Medical Discoveries Fund of the MRC has invested approximately $150 million this year in Canadian medical research.

These figures indicate that the manufacturers of patented medicines are major contributors to medical research in this country. It should be pointed out, however, that the generic drug companies also commit large sums to medical research. They argue forcefully that their investigations into novel manufacturing processes constitute legitimate research activity, and they also contribute funds to "extramural" research. For example, the joint venture between Apotex and the MRC is worth $4 million over 5 years.[9]

Disposition of funds

In 1987, before the Patent Act amendments, several concerns were expressed. Observers were concerned that not enough of the increased research and development expenditure by the patented medicine companies would be invested "extramurally," that is, in the academic sector, rather than on "in-house" research, that too much spending would be devoted to buildings rather than to projects or personnel, and that too little spending would be put into basic rather than applied research.[1]

How, then, has the money been spent? Fig 3, Fig. 4 and Fig. 5 show what type of research was funded, who did it, and where it was done. Roughly 25% of the funds flow to universities and hospitals.[6] About 60% is spent "in-house," and the remainder is divided among other companies and "others" (individuals, private clinics and government organizations). The amounts directed toward capital expenditures do not seem inappropriately large: the difference between "current" and "total" expenditures detailed in the report of the Patented Medicine Prices Review Board is the amount spent on allowable capital equipment and depreciation. The board has reporting rules that allow buildings, for example, to be charged as a research expenditure at the rate of 4% per year over 25 years. For 1994, allowable capital expenditures amounted to $25 million of the $561 million total sales.

Since there appears to have been no explicit or implicit understanding as to how the money should be spent in the first place, one should not criticize the PMAC member companies in retrospect because of some perceived notion that the disposition of the funds should have been different, and that too little has accrued to certain areas, such as the academic institutions or basic research support. Moreover, the primary purpose of the legislation was to allow an innovative drug industry to develop, and funding research endeavours was an important but secondary consideration. Nevertheless, academic communities have a deep interest in having the best agreement possible, and it is useful to consider whether new terms should be instituted.

Is there a need for a different agreement?

It can be argued that there should be a structured agreement on the amount and disposition of research and development funds. The expenditures catalogued as research and development by the Patented Medicine Prices Review Board are defined as those that "would have been eligible for an Investment Tax Credit for scientific research and experimental development under the Income Tax Act." It is interesting that the proportion of research and development funding spent on basic research fell slightly between 1993 (25.3%) and 1994 (21.9%), and that the proportion of spending going to universities and hospitals fell from 25.0% to 23.9% in the same period.[6] Although these are small changes, it would be in the interests of the research community to have a commitment to extramural research funding built into the legislation. Perhaps the research and development spending target of 10% should be reevaluated. In countries with highly innovative drug industries, such as the European nations and the United States, considerably more is invested.12 In the United States, for example, research and development spending is roughly 17% of sales revenue.

The MRC/PMAC Health Program[10,11,13]

In October 1993, the MRC and the PMAC entered into a collaborative agreement to enhance health research in Canada through a joint Health Program. The PMAC members were committed to invest approximately $200 million over 5 years and the MRC $50 million over the same period.[13]

As of August 1995, the amount of money actually spent on research under the provisions of the MRC/PMAC agreement was behind schedule. By then, only $28.03 million had been contributed by PMAC (whereas a contribution of $80 million was expected) and $8.55 million by MRC (whereas $20 million was expected).[14] These figures engendered some criticism of the PMAC companies, which were suspected of not living up to their commitments under the program.

A number of points about this complex issue are worth making.

Fortunately, there has been a recent increase in the amounts allocated by the PMAC companies. According to a news release dated May 15, 1996, $56 million has now been committed by industry, and the figure is expected to reach $75 million by the end of June 1996 and $100 million by the end of December 1996.

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Areas of controversy in the current legislation[9,15­18]

It is clear from the publicity documents issued by the generic drug companies and the PMAC member companies that they disagree forcefully over the merits of the current legislation. In general, the generic drug companies believe the law is bad and should be changed back to what it was before 1993. The PMAC member companies prefer the current system and would like to see it strengthened. At first glance, the differences between the situation under the amendments made in 1987 (Bill C-22) and that under the 1993 amendments do not appear to be large. Under the 1987 act, patented drugs enjoyed 7 years of market exclusivity from the date of the Notice of Compliance, and 10 years of protection against imports, whereas under the 1993 act (Bill C-91), there is a variable period of market exclusivity measured from the Notice of Compliance, depending on the amount of the patent term remaining, but usually about 8 to 13 years. What is the substance behind the disagreements?

The linkage regulations

Although it may be surprising to an outsider, a single pharmaceutical product may have several patents attached to it, relating to different aspects, such as its chemical composition, process of manufacture and the dosage and form in which it is administered; these patents may expire at different times.

Thus, after the patent on the chemical compound contained in a pharmaceutical product has expired, other patents on that product may still exist. The manufacturer of a generic copy may be challenged in respect to a linked patent after the product patent has lapsed. Under section 55.2(4) of the 1993 act, the Cabinet created regulations (the "linkage regulations") which set out procedures to deal with claims contesting the validity of patents. They allow legal challenges alleging patent infringements to delay the Notice of Compliance given to the generic drug companies for up to 30 months.

The PMAC member companies take the view that these regulations are right, proper and essential, as the Canadian court system did not previously have the power to prevent patent infringement effectively.[5] Indeed, in one instance relating to Prozac, the Federal Court of Canada agreed with the patentee, Eli Lilly, and issued an order of prohibition delaying the grant of regulatory approval to Novopharm until the expiry of Lilly's Canadian patent, on the grounds that the process of manufacture to be used by Novopharm's supplier (the Finnish company Fermion) would clearly infringe Lilly's patent.[5]

The generic drug industry says that the legislation gives an unfair advantage to the patent-holders.[19] They claim that, because most of the more than 50 challenges now before the courts were the subject of new drug submissions filed before the regulations, they are being affected retroactively. They also feel that some of the claims are based on frivolous challenges, because the patents listed relate to aspects of the process of manufacture or the composition of a pharmaceutical product, which should not qualify under the regulations. Since the challenges are not subjected to a screening process, and the legal machinery is slow, they say that the regulations give the patentees de facto injunctions preventing rightful manufacture of a generic pharmaceutical product.

Whoever is right, it seems likely that the average extension of market exclusivity caused by the 1993 act will be greater than the 3 years originally estimated by the Ministry of Industry, Science and Technology Canada. One subsequent study estimated the average extension to be 6.8 years, with 25% of products receiving more than 10 years of additional market protection.[7]

Patent export exception

The legislative provisions of the 1993 act prevent Canadian manufacturers from exporting a pharmaceutical product for sale to a country in which the patent has either expired or never existed, if a patent on the same compound still exists in Canada. The Canadian Drug Manufacturers Association (the body that represents the generic drug companies) claims, in some key instances, that Canadian patent expiry lags behind those of other countries.[15] Canadian manufacturers of generic medications and fine chemicals are therefore at a potential disadvantage in foreign markets, and they would like this rule to be changed.

Patent term restoration

The process of drug development and preparation for marketing is long, unpredictable and very costly (costing an estimated US$100 to $350 million[20]). On average, it takes about 10 years from the filing of a patent to marketing of the product. If this period is prolonged, which it may be through no fault of the patentee, there is currently no redress in Canada, other than through an act of parliament. The brand-name manufacturers would like the drug regulatory approval process to be streamlined and would like some means of patent term restoration in case of a delay caused by negligence on the part of the regulatory authorities. This type of restoration is available, for example, in the United States, under the provisions of the Restoration Act, and elsewhere.[1,2]

Retroactivity of the 1993 act

Although the retroactive nature of the most recent Patent Act amendments is not strictly an area of disagreement, it is a particular irritant to the generic drug companies. The act was passed in February 1993 but was made retroactive to Dec. 20, 1991. Compulsory licences issued to generic drug companies between Dec. 20, 1991, and the passage of the act were repealed, so that a generic drug company that had been manufacturing and selling a medication licensed to it during that period was compelled to desist.

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Conclusion

It is a central plank in the present federal government's policy on science and technology that future medical research will be financed to a greater extent by the private sector. Therefore, the present trend toward greater industrial sponsorship of academic medical research will need to continue. On the whole, the omens to date seem favourable. The brand-name manufacturers have exceeded their dollar targets for research and development spending, and all sides will likely wish to ensure that academic communities in hospitals and universities continue to receive a fair share of the money, and that genuine research needs are met. To this extent, both the brand-name manufacturers and generic drug companies that finance medical research deserve support for their progress to date and encouragement to continue.

It is important that the legislative environment be fair to all concerned. Intellectual property must be adequately protected, but it is also clear that Canada needs a strong generic drug industry to provide cost-effective versions of nonpatented medicines and to supply fine chemicals to world markets. At present, the workings of the legislation lack clarity and predictability, and, I believe, deal significant unfairness both to the brand-name manufacturers and to the generic drug companies. The former can have their period of market exclusivity severely eroded by delays in the approval process and are without means of redress. The latter can no longer predict with certainty when they will be granted a Notice of Compliance because of the linkage regulations.

One hopes that the upcoming review will address some of these policy issues and foster a situation in which the academic community, the brand-name manufacturers and the generic drug industry can prosper together.

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References

  1. Smith M. Patent protection for pharmaceutical products. Ottawa: Library of Parliament Research Branch, 1993.
  2. Hore H. A survey of patent terms around the world. Toronto: Hazzard & Hore, Barristers & Solicitors, 1994.
  3. Eastman HC. The MRC of Canada and the pharmaceutical patent legislation. Ottawa: Medical Research Council of Canada, 1987.
  4. Eastman HC. The report of the Commission of Inquiry on the Pharmaceutical Industry. Ottawa: Commission of Inquiry on the Pharmaceutical Industry, 1985.
  5. Pharmaceutical Manufacturers Association of Canada. Promises made...promises surpassed: a special report from the Pharmaceutical Manufacturers Association of Canada. Ottawa: The Association, 1995.
  6. Patented Medicine Prices Review Board. Patented Medicine Prices Review Board seventh annual report for the year ended December 31, 1994. Ottawa: The Board, 1995.
  7. Schondelmeyer S. The cost of Bill C-91: an economic analysis of the elimination of compulsory licensing of pharmaceuticals in Canada. Minneapolis: PRIME Institute, University of Minnesota, 1993.
  8. Americans feel the pain of extended WTO rules on patents. Drug News Views 1995;Summer:3.
  9. Apotex in the top 25 in R&D spending. Apotext 1995;1(1):2.
  10. Industry Canada Website (http://www.ic.gc.ca/), May 1996.
  11. MRC Website (http://hpb1.hwc.ca:8100/), May 1996.
  12. Ballance R, Pogany J, Forstner H. The world's pharmaceutical industries. Brookfield (VT): United Nations Industrial Development Organization, 1992.
  13. PMAC Website http://www.pmac-acim.org), May 1996.
  14. McLennan BD. Report by the Research and Graduate Studies Committee item -- MRC/PMAC Health Program [memorandum]. Ottawa: Association of Canadian Medical Colleges, Oct 26, 1995.
  15. Patent laws limit Canadian companies' growth in export markets. Drug News Views 1995;Summer:1.
  16. Coutts J. Drug giant seeks to delay sale of generic Prozac. Globe and Mail [Toronto] 1996 Mar 16; Sect A:9.
  17. Waldholz M. Breathing life into new asthma medicines no easy task. Wall Street Journal 1996 Apr 5; B:1.
  18. McKenna B. Generics press Ottawa for relief. Globe and Mail [Toronto] 1996 May 20;Sect B:1.
  19. C-91 regulations breach administrative and constitutional law. Apotext 1995;1(1):10.
  20. Marriot J, Anderson M, Bolton C, et al. International pharmaceutical industry study: a report to Industry Canada by the Queen's University Health Policy Team. Ottawa: Industry Canada, 1994.

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