Rationalising Innovation Incentives Under Drug Approval Regulation from the National Policymaking Perspective

Abstract

The chapter addresses issues related to the increasing role assigned to drug approval regulation in incentivising pharmaceutical innovation. It focuses on the specific provisions under drug marketing approval regulation that intend to restrain the approval of a generic product in order to allow sponsors of innovative drugs to earn higher returns on R&D investments. In doing so, these provisions essentially replicate the incentive model of patents. While previous research has provided a detailed account of drug regulatory incentives, this chapter seeks to define a pertinent approach to their analysis from the national policymaking perspective.

Countries differ in terms of their policy priorities and technological capacities in the pharmaceutical sector. Historically, the development of the global pharmaceutical industry has been characterized by the asymmetric production and distribution of innovative medicines, with a handful of multinational companies concentrated in the high-income countries accounting for the major part of the new drug development. More recently, growth in biopharmaceutical innovative activity has been observed in the middle-income countries. While economic analysis does not provide a conclusive answer as to what extent, and at what costs, intellectual property (IP) protection contributes to this trend, many countries have demonstrated willingness to enhance IP-type protection for pharmaceuticals under sector regulations. The global character of this trend can be attributed to the special obligations under bilateral and multilateral trade agreements.

The concern is that, without solid policy and economic analysis, a sporadic implementation of exclusivity-based incentives might not benefit the functioning of the overall regulatory framework. Patent law and drug marketing approval regulation are two bodies of rules that pursue distinct policy objectives, are directed at different market failures, and enforced by separate authorities. Both play an important role as legal determinants of competition and innovation in the pharmaceutical sector. Similarities between patents and regulatory exclusivities, in terms of policy rationales and incentive mechanisms, have led some scholars to refer to the latter as “industry specific pseudo-patents”, or instruments that award “patent-like protection” under the auspices of a drug authority. Drug regulation can relate to the patent system in different ways, e.g., by strengthening patent protection for the originator drug (e.g., patent linkage), or providing an additional layer of protection (different types of marketing exclusivities awarded independently from the drug patent status). On the one hand, incentives under drug approval regulation have been viewed as an attempt to “fine-tune” sector regulation in order to respond to the industry’s growing needs to support innovative activity. On the other hand, they can entail considerable social costs by interfering with the availability of affordable drugs. By replicating the exclusionary mechanism of patent protection, regulatory exclusivities pose the same dilemma over the balance between static costs and dynamic benefits that has been the focus of policy and scholarly debate regarding patent rights. Namely, to what extent can price competition be restrained to yield results in innovation in the most cost-benefit effective and efficient way? The interaction between the patent system and marketing approval regulation raises the question of the net effect of regulatory interventions on social welfare. At the core of the policy analysis lies the question: How should different regulatory instruments be integrated to achieve policy objectives in innovation in the most socially optimal way?

Keywords: innovation incentives; drug regulation; drug exclusivities