Impacts of Evergreening Strategies of Patents on the Pharmaceutical Industry

MGMT5601 GLOBAL BUSINESS AND MULTINATIONAL ENTERPRISE

IMPACTS OF EVERGREENING STRATEGIES OF PATENTS ON

THE PHARMACEUTICAL INDUSTRY

STUDENT NUMBER: 5084259 NAME: CHIA CHEN LIN

STUDENT NUMBER: 5088203 NAME: FRANCESKA TOADER

STUDENT NUMBER: 5081152 NAME: SHARATH RAVISHANKAR

FACULTY

LECTURER: Ms. ESHA MENDIRATTA

TUTOR: Ms. ESHA MENDIRATTA

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TABLE OF CONTENTS

EXECUTIVE SUMMARY page 3

INTRODUCTION page 4

METHODOLOGY page 4

BODY page 5

Evergreening………………………………………………………..page 5

Types of Evergreening Strategies…………………………………..page 5

Future Implications of Evergreening……………………………….page 9

Managerial Implications……………………………………………page 10

CONCLUSION page 11

REFERENCE page 12

APPENDICES page 14

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EXECUTIVE SUMMARY

This paper analyses the effect of the process known as “evergreening” on the global

pharmaceutical industry in recent years by looking at secondary sources and analysing them

through theoretical frameworks.

The introduction gives a brief overview on definitions of patents and evergreening

and what effects it has had over the industry in general.

The main points of discussion around evergreening in the pharmaceutical industries are

the five main strategies used by companies to prolong patents, as follows:

1. Redundant extensions and creation of ‘next generation drugs’ which result in

superfluous variation to a product and then patenting it as a new application

2. Prescription to OTC switch

3. Exclusive partnerships with cream of generic drug players in the market prior to

patent expiry thus significantly enhancing the brand value and interim earning

royalties on the product

4. Defence pricing strategies practice wherein the innovator decrease the price of the

product in line with the generic players for healthy competition

5. Establishment of subsidiary units by respective innovator companies in the generic

domain before the advent of rival generic players

The above presented strategies show what ways companies choose for bending the law in

order to get profit maximization, and knowledge of these strategies gives managers a better

understanding of what to expect from competitors, and how to avoid legal issues.

From research, it has been shown that continuous evergreening will lead to:

inaccessibility to cheaper medicine and improper pricing of medical products, increase in

litigation, ineffective competition and constant increase in investment for innovation. The

most important managerial implication is the fact that the significant change in market

structure requires evergreening to be viewed as a strategy-policy game that provides the best

analytical tools for coping with this sort of process.

To conclude, organizations should implement effective strategies towards sustenance of

evergreening or implement divergent approaches in ensuring innovation as a distinctive

capability.

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INTRODUCTION

Patents can be defined as exclusive rights granted for the invention of a product or

process which provides a new approach to solving a problem. This protection usually lasts for

a period of 20 years, limited duration, to the owner of the invention which can be a person or

an organisation (WIPO, 2015). It is highly valued with the pharmaceutical companies as it

solidifies the protection of their ‘blockbuster drug’. Many pharmaceutical companies file for

patents on the existing patented-product before its initial patent expiration, this strategy of

extending the term of the patent of the products or innovative discoveries in order to maintain

market dominance, is called ‘evergreening’ (Bansal, et al., 2009). It has been filing for

obtaining patents on the existing products with minor improvements or changes. Such a

protection gives them opportunity to have or retain market monopoly. With many aliases

such as “stockpiling”, “layering”, “life-cycle management” or “line extension”, it has been

observed as an abusive practice that hampers generic medications and adversely affects the

public (Thomas, 2009). Extending the given patent to maintain monopoly in production has

been termed as “evergreening” by experts. The notion of extending the patent for a given

products has led to prospects of effective analysis pertaining to the way forward. Thus, this

paper will evaluate the implications of “evergreening” on the pharmaceutical industry.

METHODOLOGY

This paper is based on secondary sources of research i.e. data analysed and reviewed

from other primary sources of data such as other research articles, documents and websites.

The information collected is then critically reviewed to our application of theoretical

frameworks in the aspects of global business and multinational enterprise in relation to the

evergreening process in the pharmaceutical industry in recent years.

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BODY

Although evergreening is the main strategy, which is followed by many pharmaceutical

companies by changing treatment methods, manner of the products packaging, altering the

product on molecular levels, mode of delivery, dosage etc., it consists of many other skilled

strategies to achieve extension on the term of the patent. Given the fact that there are many

legal frameworks that strictly govern the process of patenting these strategies do venture

through them (Bansal, et al., 2009).

1. “Redundant extensions and creation of ‘next generation drugs’ which result in

superfluous variation to a product and then patenting it as a new application”

(Bansal, et al., 2009).

Patenting of drugs can be done for the drug on the whole or for its other

aspects varying from combination of the formula of the drug to manufacturing method

to type of application, and patents for each will have a different expiration date.

Additional patents are filed for the only when the existing patents are inching towards

expiration which does not allow other drug companies to sell their products that use

the same active ingredient. Also to ensure that the new patented product will make the

consumers purchase them, would be to have a convincing amount of common features

of the successful products (Midha, 2015). This can be observed in the case of Indian

Supreme court’s rejection of Novartis’s patent application for a drug called Glivec,

under the patent law section 3(d) which prevents patentability of combinations or

previously patented compounds, for the treatment of leukemia in 2013. Some of the

countries such as South Africa and China are also considering this practice.

Indian government is concerned with providing an easy access to the drugs

and healthcare for their citizens. They are also worried about the threat of

pharmaceutical companies practicing evergreening in developing countries as most of

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their drug companies produce generic drugs (Boscheck, 2015). The pharmaceutical

industry policies is different from emerged and emerging economies (Boscheck,

2015). Some researchers claim that jurisdictions in the US and EU is relatively lenient

i.e. have a lower standard for patent process and easily allows additional patents. The

evidence shows the impact of evergreening on the public health and the cost on low

quality of patents, US government is determined to improve its patent quality (Vawda,

2014).

2. “Prescription to OTC switch” (Bansal, et al., 2009).

OTC or over the counter drugs are those that are deemed safe for use by the

general public without a prescription from a medical practitioner (U.S. Food and Drug

Administration, 2015). The switch from prescription to over the counter is a

reclassification process, known as Rx to OTC, achievable in two ways (a.) OTC drug

review or (b.) by the manufacture of the drug submitting additional information to the

new drug application (NDA). This is done by gather information of the prescription

drug and submitting the additional information through a NDA to the Food and Drug

Administration (FDA) for the consideration of its OTC status. The FDA reviews the

labelling of the OTC drugs to assess the risk versus benefit of the drug, considering

that there is no professional supervision for its usage (Midha, 2015).

3. “Exclusive partnerships with cream of generic drug players in the market prior to

patent expiry thus significantly enhancing the brand value and interim earning

royalties on the product” (Bansal, et al., 2009).

An agreement between the innovator company and generic drug companies,

where the generic drug companies gets paid by the innovator company to delay or not

at all allow certain drugs from entering the market for a specific period of time. These

agreements is an anticompetitive practice also known as “Pay for Delay” agreements

(Midha, 2015). Anticompetitive practices is tackled by the Federal Trade Commission

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(FTC) that stops and prevents these unfair business practices as it reduces competition

which leads to increase in prices due to monopoly of the trade and quality suffers due

to reduced levels of innovation and service (Federal Trade Commission, 2015).

There are two forms of violations; Horizontal Conduct and Single Firm

Conduct:- (Federal Trade Commission, 2015)

i. Horizontal Conduct: An illegal practice of interaction of the

competitors as a group to take market control leading to the price fixes,

market divides and rigged bids (Federal Trade Commission, 2015).

ii. Single Firm Conduct: A company’s attempt to acquire monopoly status

in the market through unlawful or unreasonable or aggressive methods.

By maintaining a dominant position it will discourage new entrants and

Figure 1. Porter’s Five Forces that Shape Industry Competition (Porter, 2008)

excludes existing competition (Federal Trade Commission, 2015). This can be

related to Porter’s five forces that shape the industry competition, which

defines competition and the drivers of profitability. The framework helps to

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identify the forces of competition and the underlying causes that anticipates

new competition and profitability (Porter, 2008).

By establishing monopoly, the new entrants of the industry get

highly discouraged. This will put tremendous pressure on the

investments required to set-up research and development centres and to

start work on a new drug, generic or innovative, from scratch (Porter,

2008).

4. “Defence pricing strategies practice wherein the innovator decrease the price of the

product in line with the generic players for healthy competition” (Bansal, et al.,

2009).

In order to ensure healthy competition amongst competitors of the innovator

company, the generic companies can conduct business with their generic drugs but at

lesser cost than the innovator’s price. However, the innovator company can often gain

a lead advantage by reducing the price of the drug which the other generic companies

are competing with, forcing them to reduce their rates, and introducing an improved

drug that moves them further ahead.

5. “Establishment of subsidiary units by respective innovator companies in the generic

domain before the advent of rival generic players” (Bansal, et al., 2009).

Increasing interests of big pharmaceutical companies in order to dominate the

pharmaceutical market use diversification strategies such as set-up of subsidiaries

which predominantly cater to the generic drug market and to basically undercut the

new rival generic companies. This has been observed in many Big Pharmas who

adopt this strategy to expand their business model horizontally, for example, Novartis

through Sandoz, AstraZeneca through Torrent in India and Glaxo SmithKline through

Dr.Reddy’s in India and Aspen PharmaCare in South Africa (Bansal, et al., 2009).

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Implications in the future if evergreening process continuous

Such approaches of evergreening mainly focused towards the extension of the

privileged position of the patentee. With market exclusivity of the patents held, there is the

concept of monopoly in production and exclusivity in enjoying the given profits. Hence, the

different implications of evergreening that emanate from both the immediate and more long-

term implications such as:-

Inaccessibility to cheaper medicine and improper pricing of medical products:

Monopoly over market exclusivity, in the pursuit of profit maximization, will lead to

individualized pricing. And without competition there will not be price wars that will

influence reductions of drug prices (Midha, 2015).

Increase in litigation: With evergreening, many pharmaceutical companies will get

litigated especially when it comes to trespassing patent rights by other drug companies

(Thomas, 2009).

Ineffective competition: Patents offer organizations within the pharmaceutical

industry with a difficult path towards control of production and profitability. The concept that

no other company can produce the given medicine denotes that the patent holder has no rivals

(Midha, 2015).

Increased investment for innovation: Innovation is integral for sustenance of

effective product development. From the evaluation of the pharmaceutical industry, the

reliance on research and development is crucial for innovation. The implementation of the

evergreening approach leads to extensive investment into innovation (Midha, 2015).

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Managerial implications

According to (Bansal, et al., 2009) an industry which is highly control centric, the

pricing and output decisions is highly influenced by fellow competitors or rivals. Hence,

businesses such as GlaxoSmithKline, maintain their pricing to the industry standard to ensure

profitability. Pharmaceutical companies operate in an oligopolistic market structure where

they determine the prices, although decisions of outputs and pricing require industrial

analysis and effective management. The implementation of evergreening results in a

significant change in the structure of the sector. Most experts emphasize that evergreening

results in the creation of major sector leaders in terms of profit and production dominance.

The significant change in market structure requires evergreening to be viewed as a strategy-

policy game that provides the best analytical tools for coping with this sort of process. A

more emphatic managerial approach that is reliant on corporate governance and employee

centric operational approach (Granstrand & Tietze, 2015).

As seen in the previous section, there are many strategies for evergreening, but there

is also a fair amount of response strategies, all of which are listed in Appendix 1.

The continuous extension of the use of evergreening calls for policy analysis and

research, which in turn requires clear definitions, operationalization and typologies. However,

if evergreening is found to harm innovation in the long-run, there might be major issues in

trying to find effective policy remedies that can add to the countering effects of strategies

against it (e.g. add to the market forces) (Granstrand & Tietze, 2015).

CONCLUSION

The notion of evergreening in the pharmaceutical sector has led to distinctive

outcomes for the organizations. As an aspect that denotes extension of the patents, it has led

to diverse outcomes for both the management and the organizations operating in the sector. It

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is well known that in pharmaceutical industries sometimes bend the legal system to their own

benefit in order to get large profits. The reason for such behavior is that they seek to increase

shareholders return, especially through patents. Because of this fight for financial incentives,

companies will always try and come up with ways to protect their intellectual property rights

through many fields of innovation, such as technology or legal mechanisms. Hence,

“evergreening” and “bootstraping’” patent portfolios — which might alternatively be viewed

simply as an astute use of legal rules — will continue, even if there one could argue that the

use of such procedures can simply be a smart way of using laws to your own benefit.

From the above analysis (and the table in Appendix 1), it is imperative that

organizations within the sector implement effective strategies towards sustenance of

evergreening or implement divergent approaches in ensuring innovation as a distinctive

capability.

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REFERENCES

Bansal, I. S., Sahu, D., Bakshi, G. & Singh, S., 2009. Evergreening - A Controversial Issue in Pharma Milieu. Journal of Intellectual Property Rights, Volume 14, pp. 299-306.

Boscheck, R., 2015. Intellectual Property. [Online] Available at: http://download.springer.com/static/pdf/884/art%253A10.1007%252Fs10272-015-0546-y.pdf?originUrl=http%3A%2F%2Flink.springer.com%2Farticle%2F10.1007%2Fs10272-015-0546-y&token2=exp=1444785742~acl=%2Fstatic%2Fpdf%2F884%2Fart%25253A10.1007%25252Fs10272-015-054[Accessed 2015].

Federal Trade Commission, 2011. Authorized Generic Drugs: Short-Term Effects and Long-Term Impact. [Online] Available at: https://www.ftc.gov/sites/default/files/documents/reports/authorized-generic-drugs-short-term-effects-and-long-term-impact-report-federal-trade-commission/authorized-generic-drugs-short-term-effects-and-long-term-impact-report-federal-trade-commission.pdf[Accessed 2015].

Federal Trade Commission, 2015. Federal Trade Commission - Anticompetitive Practices. [Online] Available at: https://www.ftc.gov/enforcement/anticompetitive-practices[Accessed 2015].

Granstrand, O. & Tietze, F., 2015. IP STRATEGIES AND POLICIES FOR AND AGAINST EVERGREENING. [Online] Available at: http://www.ifm.eng.cam.ac.uk/uploads/Research/CTM/working_paper/2015-01-Granstrand-Tietze.pdf[Accessed 2015].

Midha, D. S., 2015. STRATEGIES FOR DRUG PATENT EVER-GREENING IN THE PHARMACEUTICAL INDUSTRY. International Journal of Pharmaceutical Sciences and Business Management, 3(3), pp. 11-24.

Porter, M. E., 2008. Harvard Business Review - The Five Competitive Forces That Shape Strategy. [Online] Available at: http://elibrary.kiu.ac.ug:8080/jspui/bitstream/1/510/1/Michael%20Porter%20-%20The%20Five%20Competitive%20Forces%20that%20Shape%20Strategy.pdf[Accessed 2015].

Thomas, J. R., 2009. Congressional Research Service. [Online] Available at: http://www.ipmall.info/hosted_resources/crs/R40917_091113.pdf[Accessed 2015].

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U.S. Food and Drug Administration, 2015. FDA - U.S. Food and Drug Administration. [Online] Available at: http://www.fda.gov/Drugs/DevelopmentApprovalProcess/SmallBusinessAssistance/ucm052786.htm[Accessed 2015].

Vawda, Y. A., 2014. After the Novartis Judgement - 'Evergreening' will never be the same. Law, Democracy and Development, Volume 18, pp. 305-316.

WIPO, 2015. World Intellecctual Property Organisation. [Online] Available at: http://www.wipo.int/edocs/pubdocs/en/patents/450/wipo_pub_l450pa.pdf[Accessed 2015].

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APPENDICES

Appendix 1. The strategy-policy matrix for patent based evergreening (Granstrand &

Tietze, 2015).

Evergreening policies

For Against

Patent term restoration

Injunctions

Delaying licenses, concessions,

approvals, litigation etc.

Reduction of statutory duration

Reducing the scope of protection

Reducing patentable subject matter

Increasing the inventive step requirement

Increasing patenting fees for sequential

and/or substitute patents

Market power abuse intervention

Compulsory licensing

Abandoning the patent system

Evergreening strategies

For Against

Search and research for strategic

patents and patent fences

Fragmentation and patenting of

complementary resources and

elements in the business innovation

system, typically by

Follow-on/ continuous sequential

Invalidation

Invent around

Patent or license acquisition

Patent pooling and cross-licensing

Partnering

Use of general bargaining power

Ignore and/or infringe

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patenting of product/process

improvements, features and

applications for the innovation and its

related complements

Aggregation and patenting of

substitute resources and products/

technologies, typically by blocking

patents and patent fencing outside the

own product area

Sequential patent blanketing and

patent flooding

Multi-protection, combining patents

with other IPRs

Grant-back licensing

Deterring litigation and litigation

threats, possibly using NPEs

Delay entry until patent expiration

Abandon entry and related

commercial operations and R&D

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Impacts of Evergreening Strategies of Patents on the Pharmaceutical Industry

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