Pharma Faces More Scrutiny Under Drug Patent Suspension Plan

In this article for Bloomberg Law, partners Tasha Gerasimow and Jeanna Wacker and associate Connor Donaldson discuss a recent proposal that allows federal agencies to suspend drug patents and how it should prompt pharmaceutical companies to better understand which of their products may be targeted. 

The pharmaceutical industry has been under increased scrutiny as governmental agencies explore ways to reduce prescription drug prices and promote competition. The most recent example is the Federal Trade Commission’s move challenging scores of pharmaceutical patents for potential anti-competitive behavior.

Following the FTC challenge, the National Institute of Standards and Technology and Department of Health and Human Services unveiled new draft guidelines. These promote a framework for federal agencies to suspend patents held by pharmaceutical companies, and license competitors to produce and sell the drugs that practice those patents.

If the proposed rule is adopted, the pharmaceutical industry may see increased scrutiny of its patenting strategies, licensing and commercialization efforts, and prices charged for their products.

‘March-In’ Provision

The proposed framework hinges on a little-known mechanism in the Bayh-Dole Act of 1980, referred to as “march-in.” This provision gives the government agency that funded the research the right to intervene, and requires the patent-holder to issue licenses to competitors if one of four statutory factors are met.

An agency may “require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants” if the agency determines action is necessary:

• Because the contractor or assignee hasn’t taken, or isn’t expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use
• To alleviate health or safety needs that aren’t reasonably satisfied by the contractor, assignee, or their licensees
• To meet requirements for public use specified by federal regulations and such requirements are not reasonably satisfied by the contractor, assignee, or licensees
• Because a domestic manufacturing agreement hasn’t been obtained or waived or because a licensee of the exclusive right to use or sell any subject invention in the US is in breach of its agreement

While this mechanism was designed to encourage patent-holders to perfect and commercialize these innovations for the public’s benefit, the march-in provision has never been used.

Under Bayh-Dole, only drugs that are the product of federal research funds are subject to march-in. Between 15% and 25% of new medicines approved over the past decade are covered by a patent that was directly issued to a public entity or contains a government interest statement acknowledging public funding as required under Bayh-Dole.

These patents touch on some of the most clinically and commercially significant drugs and drug classes approved over the past several decades. This is particularly true for breakthrough drug treatments, which often rely on patents that result from academic scholarship from research institutions across the country.

The proposal suggests agencies ask three overarching questions to determine if march-in rights should be exercised:

• Whether Bayh-Dole applies to the inventions at issue
• Whether any of the statutory criteria for exercising march-in applies under the circumstances
• Whether the exercise of march-in rights would support the policy and objectives of Bayh-Dole

Notably, the framework reinterprets 37 C.F.R. Section 401 to explicitly permit an agency to consider whether the price of a product is extreme, unjustified, or exploitative of a health or safety need in assessing whether a march-in is appropriate. This consideration could apply to the initial price of a product or to a price increase.

The proposal also includes eight examples that demonstrate how the framework would be implemented. Three of the eight examples are directed at pharmaceutical products, and one is directed to a medical device.

Outlook

If the proposed framework is adopted, agencies bringing march-in actions—as well as the companies defending against them—will be entering uncharted legal territory. The notice acknowledges “march-in considerations are extremely fact-dependent,” which could lead to increased legal costs for parties with patents implicated under Bayh-Dole.

Companies may benefit from carefully reviewing the proposed framework and submitting comments to NIST to clarify ambiguities and define the procedures in the final rule. For example, ambiguity remains as to the definition of reasonable pricing, potentially leaving its interpretation to the discretion of the federal agency attempting to march in.

Comments are due on Feb. 6, after which NIST will make all comments publicly available before finalizing the guidance. In the meantime, companies should consider taking proactive steps to review their portfolios to understand which patents and products may be affected.

Once identified, companies can review the facts surrounding the development and marketing of these products and prepare to respond to any information and consultation requests from funding agencies. This includes information on commercialization and licensing strategy, market accessibility, and supply-chain resiliency.