January 7, 2009

Approval process of generic drugs: revisited

Barack Obama has announced that he encourages the use of generic drugs, including generic biologic drugs. According to the IP Finance blog, Obama’s advisors have gone on record as wishing to speed up the FDA’s approval process of generic drugs in addition to introducing a new legislative pathway for generic biologics, which I briefly touched upon in a previous blog post.

It is obvious that Obama’s announcement is related to his increased insurance coverage plans where main focus is on the well-being of society and the individuals living there by decreasing the prices they have to pay for drugs. Much to the delight of generic drug manufacturers. I think that innovative actors need to be incentivized for innovation to continue, and I think that too generous terms for generic drugs could discourage innovative actors from taking the risk of investing in discovery rather than solely develop what already exists. The latter would obviously be a dramatic loss in value for innovative actors as well as generic drug manufacturers and society as a whole. However, automatic full exclusivity would on the other hand lead to inefficient market structures (monopolies) so it will be interesting to follow the discussions about the exclusivity terms for the new US legislation.

The IP Finance blog mentions that speeding up the approval of generic drugs and biologics is likely to lead to substantial reduction in the value of patents. I agree with this in relation to the value related to effective patent terms, but I also think that an effective system for approving generic drugs/biologics is likely to lead to higher values of the same patents for the period when exclusivity is still enjoyed. An interesting scenario, in my opinion, would be that an effective second hand market would emerge where patents having competition from parallel generic production could be either sold off or license fees securitized in exchange for lump sums which could then be used to discover innovative new drugs/biologics. If the patents would be offered to generic drug manufacturers at the same time as they would have the right to manufacture generic drugs to a reasonable price, then a whole new model could be created where these actors would not have to invent around but rather produce the “real” drugs/biologics. This would probably mean that new drugs would be even more expensive during the first years of exclusivity for innovative drug manufacturers to get their ROIs in addition to a number of other game changing factors, but I still think it is an interesting thought as intuitively this could ultimately lead to an even stronger market-pull for new innovative drugs.

I don’t envy the complex work that Barack Obama has in front of him, and I really hope that he aims for long-term stability and sustainability for the whole industry when creating new structural order rather than only “putting out fires” and provide concessions to please individual voters in the short-term. Said voters need to work somewhere, so I suggest start incentivizing companies to get the economy back on its feet.

Tobias Thornblad


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