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To SPC or not to SPC…

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Does the EU Commission really think weakening IP incentives for biopharmaceutical innovation in Europe is going to create more jobs and economic activity?

by Dr David Torstensson, Partner, Pugatch Consilium

As an industry the research-based biopharmaceutical sector is one of Europe’s biggest success stories. Companies like Novartis, Roche, Sanofi Aventis, Novo Nordisk, AstraZeneca and GSK are some of the largest, most innovative and successful research-based biopharmaceutical companies in the world. Not only do these companies have a long track record of producing life-saving medical innovations that have been or are currently being used by millions of patients across the world but they are also an economic engine. The latest figures from European Federation of Pharmaceutical Industries and Associations show that in 2015 the European research-based industry provided nearly 740,000 direct jobs (with over 113,000 in high-skill R&D jobs), over €33.5 billion in R&D investments, and over €238 billion in production in 2015 alone.

Why would anyone want to fundamentally remodel a system that has produced such positive social and economic outcomes?

Yet this is precisely what the European Commission is proposing to do.

In October 2015, under the overarching initiative to reform and deepen the single market with the purpose of spurring economic growth in the EU, the Commission announced its intentions to explore options for recalibrating certain elements of SPC protection. One such option put forth is to provide European manufacturers of generic drugs and biosimilars with an SPC manufacturing and export exemption (SPC exemption). This option is based on an academic study by Vicente and Simões (2014), which argues that an SPC exemption would result in substantial economic gains in the EU, including the creation of nearly 45,000 new direct and indirect jobs and revenue of over €3.3 billion between 2014 and 2022. These claims were rebutted by Sussell et al. (2017), which showed that the made by Vicente and Simões were likely to be substantially lower if they materialized at all. A recent study by Charles River Associates (commissioned by the Commission) estimates that the SPC exemption would result in economic benefits in the form of revenues of up to €9.5 billion, 25,000 new direct jobs and a 4-8% savings on pharmaceutical spending within the EU by 2025.

Yet the economic gains from early market entry of generic and biosimilar products comes at the expense of innovative products, resulting in potential losses to the innovative industry.

The provision of market exclusivity is the key incentive in motivating companies to invest billions of euros and years of time in R&D to produce new and improved medicines and technologies.

How the EU Commission is losing sight of this fundamental fact remains a mystery.

A dose of realism

Up until now the debate on IP incentives has focused on the need to help the European generics industry. Yet what remains unanswered are the questions of:

  1. What will be the cost to Europe’s research-based industry which, per definition, will lose as the generics industry gains?
  2. What is the actual basis for calculating gains to Europe’s generic industry ie is there an actual appetite or market for European generics?
  3. How will the global market for generics be affected if other countries emulate what the European Commission is proposing? It is highly likely that if Europe weakens IP standards other countries (particularly in emerging markets where IP protection is already weak) will follow suit thus increasing competition for European generic manufacturers.

A new study we released earlier this week tries to address these questions.

  1. The cost of reducing IP incentives: Estimating the impact of an SPC exemption on the global and European innovative biopharmaceutical industry

Using evidence from the existing literature, a sample of 30 top-selling drugs, and France and Sweden as the primary source for SPC status within the EU we constructed an econometric model and estimate potential annual losses to the global and the European innovative research-based biopharmaceutical industries.

The study finds that implementation of an EU wide SPC exemption would potentially result in annual losses ranging between USD2.675 billion and up to USD5.35 billion to the global innovative biopharmaceutical industry, with approximately USD1.34 billion to USD2.27 billion (EUR1.14-1.93 billion) of these attributed to the European innovative biopharmaceutical industry.

Translating these losses to current levels of biopharmaceutical sector employment and R&D investment the effect of the introduction of an EU wide SPC exemption could be between 4,500-7,700 direct job losses (with an additional 19,000-32,000 indirect job losses) and a decrease of between EUR215 million to EUR364 million in R&D investment.

  1. Is there really a market for European generic manufacturers?

One running assumption about the potential gains to European generic manufacturers is that there is an actual market and demand for their products. Yet looking at this from a more practical standpoint it is not at all clear what this market is or where the demand for generic medicines produced in Europe would come from.

To begin with the markets that per definition will be targeted by European generic manufacturers under an SPC exemption are markets that do not provide IP protection and exclusivity for products under SPC protection in the EU for which the SPC exemption would apply. But in all likelihood generic follow-on products are already on the market in many of these countries. Indeed, looking at Brazil and India (which do not offer SPC protection or the equivalent exclusivity) generic products are already on the market for some of the world’s top selling products whose patent has just or is nearing its expiration. These products include Abilify, Crestor, Glivec and many others. And as importantly the generic equivalent to these products are locally produced.

Why would India and Brazil or other emerging markets favour European generic manufacturers as opposed to their own domestic ones?

Especially since in many cases they already have a policy framework in place that actively discriminates against foreign competitors. Such localization policies often include price preferences in government tenders; import bans and increased taxation on foreign products; and local affiliation and/or production requirements. As a result, locally-produced generic drugs can take as much as 90% of the local generic market in many emerging markets.

In short it’s hard to see where the demand for European generics would come from.

  1. Assessing the ‘spill-over’ effect of an SPC exemption on global standards of IP and on the European generic and biosimilar industry

One notable underlying assumption of the modelled estimates of economic gains resulting from an SPC exemption is that it would grant the European generic and biosimilar manufacturers an exclusive status for early market entry of their products across the globe. But the economic gains described by the Commission and other studies do not fully take into account the possibility that other countries may seek to emulate this IP carve-out in order to boost economic growth by allowing their domestic generic industry compete for a share in this new global market.

In fact the obvious response to an EU SPC exemption is other countries asking themselves: “If the European Union is weakening IP standards to benefit their domestic industries why shouldn’t we?” And so instead of benefiting the European generics industry it is much more likely that other countries emulate Europe and there is a race towards the bottom in weakening global IP standards.

Back to the drawing board…

The fundamental problem with the idea of introducing an SPC export exemption is that when the proverbial rubber hits the road the practical consequences of this policy could be disastrous. Not only would an SPC exemption weaken the research-based biopharmaceutical industry – one of Europe’s most competitive industries – but the gains for Europe’s generic industry are highly questionable. Some ideas are best left at the drawing board.

To read our full study and modelling results please go to our Research & Analysis Reports page.

The study is also publicly available through the Social Science Research Network (SSRN): http://ssrn.com/abstract=3051545

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About the Author:

David’s focus is policy and economic analysis related to innovation, health care, pharmaceuticals, tax and intellectual property. He has wide experience in quantitative research methods including index-building and data sampling and is the author of a number of both academic and commissioned publications. David’s knowledge spans from North America and Europe to the BRIC economies, and he speaks fluent Swedish.

Prior to his work with Pugatch Consilium, David was with Deloitte LLP where he worked on a broad range of UK and international tax compliance and advisory projects.

David holds a Master of Studies and DPhil (PhD) from Oxford University.

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