Investing in the developing world is a two-edged sword: it can succeed spectacularly because of the room for growth, or it can backfire because of corruption. A few years ago, the documentary “Big Men
” chronicled this in the oil industry in Ghana and Nigeria, where foreign investors have been burnt by new regimes that freely disregard their predecessors’ agreements.
It’s the real-world equivalent of when Darth Vader tells Lando Calrissian, “I am altering the deal. Pray I don’t alter it any further.” When big men do this kind of thing too much, investors stop trying — leaving countries and industries stagnant.
In the United States, our rule of law precludes that kind of capriciousness — mostly.
Sometimes our rule of law can be abused, such as when overly litigious companies abuse patent infringement claims for profit, by attempting to piggyback off the innovation of others. This chills innovation and scares money away from R&D, just like regime changes in the developing world can scare away foreign investment. The protection of intellectual property should strike a balance between incentivizing innovation without unfairly excluding potential competitors. Unfortunately, in the pharmaceutical space, recent efforts by Congress have punished innovator drug companies by allowing generic competitors to run roughshod over the industry with never-ending litigation devoid of any merit.
In 2012, Congress recognized a very real problem on the other side of the coin: It was too easy for bad actors to acquire patents for technologies they never intended to produce, only litigate. These “patent trolls” simply held patents for the purpose of suing and settling with anyone they deemed to be infringing on their IP. This problem was primarily taking place in the tech sector.
To combat this, Congress passed the America Invents Act, which created a new streamlined process for invalidating bad patents called Inter Partes Review (IPR), and was hailed by tech companies. But despite the good the new law would do for Silicon Valley, Congress had unwittingly created a monster to be exploited by unscrupulous patent challengers in other industries, most notably pharmaceuticals.
To ensure drug affordability can trickle down, the U.S. has traditionally encouraged generic drug-makers to enter the marketplace with copycat medicines at lower prices once a branded company’s patents expire. This has been governed under the enormously successful Hatch-Waxman Act, which preserved the incentive to innovate new medicines under sensible IP protection while increasing generic competition.
Generics may challenge drug patents, but such challenges require a strong case from the plaintiff. With faith that strong patents would be upheld, innovator companies can invest in R&D with peace of mind.
But that’s been under threat since the America Invents Act, because now there are two channels for challenging drug patents: through the courts via Hatch-Waxman or IPR. And generic challengers aren’t forced to choose just one. They can challenge under Hatch-Waxman, fail, and then repeat the process under IPR.
And the IPR process inherently favors the patent challenger. It’s much cheaper and easier to file an IPR challenge, which takes place in front of a patent review panel, and evidentiary standards are lower than Hatch-Waxman proceedings, which take place in front of a federal district court judge. IPR has even created a so-called “reverse patent troll,” predatory hedge funders who file illegitimate biopharmaceutical challenges, either via drug company settlements or to profit from short positions in companies they target.
This kind of abusive behavior does not make health care more effective or affordable for anyone. Indeed, it makes it more expensive and stymies the next generation of new medicine.
Under this double jeopardy system, a drug company can spend billions of dollars developing a new life-saving drug, then has to face the added cost of multiple rounds of patent challenges by generics looking to copy its research for a song.
Smart, innovative scientists don’t have to make money developing the medicine of the future. If there’s no profit, they can focus their energy on coming up with new sodas instead.
To streamline this system, Sen. Thom Tillis (R-NC) and Rep. Bill Flores (R-Tex.) this week have introduced a bill that would eliminate the chance for frivolous repeat challenges, so companies making multibillion-dollar R&D investments can have more faith in the rule of law in the years to come. If enacted, this bill would mandate legal challenges to pharmaceutical patents pick either the courts or IPR.
They couldn’t use one then fall back on the other.
It’s tempting — albeit intellectually dishonest — to criticize the for-profit aspects of our health care system. It’s not perfect, but it’s still the best we’ve got, and under Hatch-Waxman, the results have been amazing. Because it streamlined the legal pathway to approve generics, their share of the U.S. drug market has climbed from 19 percent upon passage in 1984 to 89 percent in 2015. The added competition to the pharmaceutical market has saved an estimated $1.7 trillion over the last decade. But Hatch-Waxman also succeeded at protecting innovation: since 2000, over $500 billion has been spent on R&D.
For-profit drug research is to credit for the last 100 years of medical progress. With America creating about half of the world’s new drugs every year, strong legal protections will ensure that we remain at the forefront of the next 100 years. Tillis’s and Flores’s bill is a no-brainer. IPR is a deal we have to alter.
Disclosure: Mr. Whitley has worked with advocacy groups that fight for the rights of America's investors, such as the Market Institute and Capitol Policy Analytics.
Jared Whitley is a long-time politico who has worked in the U.S. Congress, White House, and defense industry. He is an award-winning writer, having won best blogger in the state from the Utah Society of Professional Journalists (2018) and best columnist from Best of the West (2016). He earned his MBA from Hult International Business School in Dubai. To read more of his reports — Click Here Now.
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