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There are three distinct phases to the life cycle of a new medicine:

(1) R&D phase up to market launch;

(2) the period between launch and loss of exclusivity (e.g. patent expiry);

and (3) the period following the loss of exclusivity, when generic companies can enter the market.

During the first phase, companies identify potential new medicines and take them through intensive
pre-clinical and clinical trials. The originator companies surveyed rely to a large degree (i.e. for more
than one third of all new medicines in the marketing approval phase) on innovations acquired from
third parties. During the second phase, originator companies market the medicines they have
developed, with a view to recouping upfront investments and making a profit. Effective patent
protection is vital to sustain this business model, which also ensures there are incentives for further
innovation. Following loss of exclusivity, generic medicines can enter the market.

2.1. Patents In Europe, patent protection can last up to 20 years from the date of a patent
application. For the pharmaceutical sector, where the time between filing a patent application and
market launch can be significantly longer than in other sectors, supplementary protection
certificates (SPCs) can be issued. These extend the effective protection of products already on the
market by a maximum of five years. Despite significant efforts, neither a Community patent nor a
Community jurisdiction for patent matters exist. The European Patent Office handles centralised
patent applications (and opposition and appeal procedures relating to granted patents). However,
once granted, the European patent turns into a bundle of national patent rights, which, in court,
must be challenged at national level. This can lead to diverging national decisions and is costly and
time-consuming for all stakeholders concerned.

2.2. Marketing Authorisations

In order to maintain public health standards, marketing authorisation procedures verify that
medicines are safe, effective and of good quality. Detailed results of (pre-) clinical tests and trials
must be submitted for a new medicine. Generic medicines also require marketing authorisations, but
applications need not resubmit detailed trial results, if it is shown that the generic product is
equivalent to a medicine previously authorised.

1.1.1.2.4. Industry Trends

Pg (62) Many originator companies reported that they are currently undergoing a phase of
transition. According to the respondent companies, the following trends are particularly noteworthy:
(a) difficulties in refilling the pipeline with new products (in particular NCEs);

(b) increasing requirements in terms of safety and efficacy for new medicines, resulting in higher
R&D costs;

(c) increasing control over prices and reimbursement levels, as well as on the prescribing practices of
doctors by national health authorities;
(d) a significant number of patent expiries for important blockbuster medicines;

(e) new advances in genomics, proteomics and personalised medicines.

1.1.1.3.4. Business Strategies for the Future (82) Generic companies also see the future in the
biosimilars segment. More than half of the respondents are, or will in the near future be, involved in
the biosimilars market. Furthermore, generic companies considered that biosimilar products will
achieve fundamental cost savings for national health care systems, as existing biopharmaceutical
products are generally highly priced medicines. Some respondents stressed the need to develop an
adequate regulatory framework; the possibility to use the INN name of the originator (reference)
products was mentioned in particular. Smaller-sized generic companies also raised the question of
whether they will be able to tackle the financial burden associated with the R&D concerning
biosimilar products. (83) The sector inquiry also revealed that certain generic companies aim to
increase their economies of scale by acquiring other (often local) generic operators. A key motivation
for these mergers is to extend the geographic reach of a company. The acquisition of Merck Generics
by Mylan, or of Barr by Teva are typical examples.

1.2. Product Life Cycle (106)

In general terms, the life cycle of an originator product can be divided into three distinct phases:

the pre-launch period, where R&D as well as regulatory (governmental) approval take place;

the marketing and sales period, during which the product benefits from exclusivity;

and a later period when the LoE occurs and generic competition is possible. (107)

In every phase, patent protection plays a crucial role in the business strategies of originator
companies. Patent applications are filed from the very beginning of the discovery process for a new
medicine and can continue to be filed throughout its entire life cycle. As shown in the previous
section, the period between launch and LoE is the period during which originator companies must
aim to recover the investments made in R&D (including those made for failed projects) and indeed
show an overall return. (108)

In order to maximise the revenue streams from a given product (and in particular blockbuster
medicines), originator companies put into place a variety of life cycle management strategies. These
include not only patent and litigation strategies, but also other measures such as enhancing product
loyalty or the introduction of product differentiation or OTC switches. (109)

1. Pre-Launch Period (110)

Typically, R&D activities in the pharmaceutical industry produce a continuum of innovation which
can be divided into two distinct categories. First, fundamental innovation, which leads to the
discovery of new medicines containing novel pharmaceutically-active substances (NCEs). This type of
innovation requires significant investment in research with no guarantee of commercial success.
Secondly, incremental innovation results from the development of existing medicinal products.
Incremental innovation may involve the development of a new formulation or mode of delivery, or
the combination of previously disclosed active substances, or the use of a new salt or derivative of
the original product. In this section, the focus is on fundamental innovation and the phases involved.

1.2.1.1. The Different R&D Phases (111) The pre-launch period in the life cycle of a medicine
comprises the initial discovery of a new molecule and its development as a new medicine up to
marketing authorisation and any subsequent pricing and reimbursement decisions. Following their
market launch, products continue to be monitored through the process of pharmacovigilance i.e.
monitoring of possible adverse reactions and/or new side effects (also referred to as Phase IV
studies). The figure below sets out these different steps along with average time frames and the
corresponding patenting activity

1.2.1.1.1. Basic Research (112) The research process for a new medicine typically begins with
scientists aiming to identify molecular targets (frequently enzymes or receptors) which are
associated with the disease in question. This process is called target identification.

(113) Following target identification, scientists carry out tests to verify how the targets regulate the
biological processes in the body and whether they are suitable as a target for a therapeutic agent.
They also compare the performance of all potential targets for therapeutic action. This step is
sometimes referred to as target validation.

(114) The next step is lead identification, whereby new molecules are actively sought which interact
with the target(s) identified. This may involve mass screening of chemical libraries. This results in the
identification of one or more molecules which show promise as potential treatments for the disease.
Leads may also be derived from known treatments of disease, such as competitors' products or
natural remedies. They may also result from a surprise discovery made in other pharmaceutical
research programmes. (115) Lead optimisation then aims to find molecules which have the greatest
potential to be developed into a safe and effective medicine. The best compounds are studied for
their therapeutic effects in both in vitro and animal studies. The resulting candidate medicines then
progress to the development phase.

(116) At some point during the lead identification/optimisation process, a company will begin to
consider filing a patent application. Initially, these applications will be concerned with the active
molecules themselves. The applications, and the resulting patents, are often referred to as "primary
patents" because they relate to the first patents for the active molecules. Later during the
development phase further patent applications will be made for other aspects of these active
molecules, such as different PHARMA SECTOR INQUIRY – MARKET CHARACTERISTICS AND
STRUCTURE OF THE PHARMACEUTICAL SECTOR 52 dosage forms (e.g. tablets, capsules or solutions
for injection) or for particular pharmaceutical formulations (mixtures of active agents and other
substances which promote the activity of the medicine by, for example, enhancing absorption in the
body). Such patents, or their applications, are often referred to as "secondary patents".

(117) To maintain its freedom to operate, it is essential for an originator company to ensure that its
research options remain as open as possible, in particular with regard to further development of its
own inventions. Filing for broad primary patents and using several secondary patents around an
invention is therefore considered instrumental to achieving this goal.

1.2.1.1.2. Development (118) The development phase assesses the safety (e.g. toxicity) and efficacy
of the lead compounds mainly through laboratory (animal) testing. For the most promising
candidates, human testing is undertaken at a later stage. Trials can generally be divided into two
main stages: the pre-clinical stage (which involves laboratory and animal testing primarily aimed at
ascertaining toxicity) and clinical trials where three distinct phases exist:

1. Phase I, which consists of studies on small groups of healthy human beings to determine safety
and side-effects.

2. Phase II, which consists of studies on patients with the disease, who are often chronically or even
terminally ill, to test the efficacy of the new medicine for the given indication. Parallel tests with
placebo preparations, i.e. medicines devoid of the active compound, are often also carried out at
this stage, to provide for a "control group". Also the development of novel pharmaceutical
formulations and dosage forms may be necessary, which will result in the filing of further
(secondary) patent applications.

3. Phase III, which involves long-term trials comprising large patient groups (very often thousands of
patients with the illness to be treated). New therapeutic applications for the candidate medicine can
sometimes be found at this stage, which result in further (secondary) patent applications. (119) EU
legislation provides harmonised measures aimed at guaranteeing good laboratory practice and the
safety of animals and humans during pre-clinical and clinical testing.

The time between filing an application for the first compound patent to the launch of the product
varies significantly, depending on the obstacles encountered. It can take between two to ten years
for a potential medicine to go through the three clinical trial phases, with an average of five years.
On the basis of a sample of the 20 best-selling molecules the time period between first patent
application and launch on the market seems to vary between six and ten years.

1.2.1.1.3. Marketing Authorisation (122) Medicines may only be placed on the EU market when
they are safe, effective and of good quality. This is verified in the marketing authorisation process.
Marketing authorisations are governed by EC law and can be granted either centrally (after
application to the European Medicines Agency, EMEA) or nationally. EU legislation also sets a time
limit for taking marketing authorisation decisions. The centralised procedure lasts approximately
two years.

1.2.1.1.4. Pricing and Reimbursement (123) In many EU Member States a product can only be
marketed after a decision on the price and reimbursement has been taken. The pricing decision
determines the “commercial” terms of access to the market in a particular country. The aim of these
policies is to ensure on the one hand that patients have access to the necessary medicines and, on
the other hand, that health budgets remain under control in order to ensure sustainability of the
health system. Obviously these policies are also decisive in giving incentives for further innovation.

(124) Even in Member States in which prices are not officially fixed, indirect price controls exist
through reimbursement decisions. If no reimbursement is offered for an expensive product facing
competition, or it is subject to a very significant co-payment, a significant share of patients will
refrain from using the new medicines. When deciding on reimbursement, health insurers also rely
on so-called "health technology assessments" aimed at assessing the added value of a new medicine
over and above existing treatments.

(125) Pricing and reimbursement decisions must be taken within the time frame set by the
Transparency Directive (Directive 89/105/EEC52). However, many Member States appear to take
considerably longer than the 90 days stipulated in this Directive for each of these decisions. Once the
pricing and reimbursement decisions have been taken, the product can be launched onto the
market.

1.2.1.1.5. Pharmacovigilance (126) Throughout the lifetime of products, pharmaceutical companies

are subject to harmonised requirements to carry out pharmacovigilance studies in order to monitor
adverse reactions to a medicine and/or new side effects (also referred to as Phase IV studies). As
already mentioned above, further R&D (incremental innovation) aimed at improving the medicine or
finding new uses is frequently conducted by originator companies during this phase. New patent
applications can be therefore submitted at this stage.

1.2.1.2. Costs (127) The costs of bringing a new medicine to market are subject to wide debate and a
variety of estimations. The originator industry claims that the cost of a new medicine from basic
research to launch amounts to between US$ 800 million and US$ 1 billion,54 (this figure includes the
costs of failed projects). Some respondents have suggested, however, that the costs are closer to
US$ 450 million.55 For biopharmaceuticals, the costs of R&D are generally reported to be higher
than those of traditional pharmaceuticals.

(128) According to the submissions received by the respondent companies, pre-clinical and clinical
trials are generally financed by the companies' own resources and the amount of financial support
received from governments or other sources is not significant. (129) However, it is worth noting that
within the Seventh Framework Programme of the European Community for research, technological
development and demonstration activities (2007-2013), it was recently decided that support would
be provided to European R&D activity through the Innovative Medicines Initiative Joint Undertaking
(IMI JU). In this public-private partnership, the European Commission and EFPIA have joined forces
to overcome bottlenecks in the development of innovative medicines. The Commission is
contributing € 1 billion to the project, half of the IMI JU budget. The other half will be provided by
the pharmaceutical industry through EFPIA.56 (130) On the basis of sector inquiry data, the
development phase, in particular Phase III clinical trials, is the most expensive. In comparison, the
costs associated with basic research are low. This is a positive aspect for the companies as the risk of
failure decreases with every step in the R&D process. The table below provides an average break-
down of total costs invested by the originator companies in the different stages, as reported by the
companies.

1.2.1.3. Selection Process (133) Originator companies are commercial operators. They therefore
determine the areas in which they carry out R&D activities from a commercial perspective, taking
into account the costs and expected returns. In order to assist with this decision, all originator
companies reported that they produce documents which they sometime refer to as target product
profiles (TPPs). TPPs contain the indicators on which decisions concerning future product pipelines
are based. The importance assigned to each indicator varies from company to company but the
indicators listed below were reported to be of decisive influence for (almost) all companies:

• Therapeutic indication/area (ideally an unmet medical need);

• Market size and growth potential (patient numbers, medical needs, pharmacoeconomic benefits);
• Risk assessment and profitability (economic return);

• Portfolio synergy (company experience, R&D and manufacturing facilities already available);

• Competitive environment (differentiation);

• Future regulatory environment (pricing-reimbursement); and

• IP protection (patents owned by both the company and their competitors).

1.2.1.4. Success Rates (138) The attrition rate (percentage of failed projects) is very high at the basic
research stage, but this rate decreases throughout the development process. Costs, however, follow
the opposite trend, the last phase in clinical trials (Phase III) being the most expensive one. (139)

(140) The companies reported that the main reasons for discontinuing the development of a
compound already under clinical trials are generally speaking of a scientific nature (often a lack of
safety or efficacy). Once the project reaches the last phases of development, commercial reasons
appear to play a less significant role in that decision. This is to be expected as commercial
expectations are carefully considered by the companies at the outset.

2. Product Life Cycle during Patent Protection

(141) is the time period between launch and LoE during which an originator company must generate
sufficient revenues from a product to cover the R&D expenses and earn a profit. After patent expiry,
generic companies will be able to enter the market, leading to falling prices and decreasing volumes
for the originator company. (142) A significant number of blockbuster medicines will lose patent
protection during the next few years. This fact, along with increasingly restrictive health care
budgets throughout the EU, form the background against which originator companies aim to
maximise their return on investment and reaping the benefits of prior R&D investments.

(143) In anticipation of the declining turnover following patent expiry, originator companies confirm
employing strategies with broadly two aims:

(1) extending the time of their market exclusivity without generic competition; and

(2) maintaining or expanding the market that the product has during its exclusivity period.

Originator companies also develop life cycle management strategies to face competition from other
originator companies. These strategies include conventional business practices which are not specific
to the pharmaceutical sector, such as cost savings for example through optimising the
manufacturing process or product improvements.

Most of the companies consulted report having life cycle management departments. Life cycle
strategies can be considered as a tool-box for originator companies to use in order to maximise the
return from their products. (144).

The main strategies that became apparent from the respondents are:

• Measures enhancing product loyalty (including criticising competitor's products);

• Putting into question the efficacy or quality of generic products; (Chapter C.2.5.);

• Defensive patenting against other originators; (Chapter C.3.1.);

• Interventions at the level of marketing authorities and pricing and reimbursement bodies;

• Interventions at the level of other stakeholders (e.g. wholesalers and pharmacies);

• Pricing strategies;
As patent expiry approaches, originator companies must consider their future pricing strategies,
which will depend on product-specific price sensitivity (relating to Member State-specific demand-
side characteristics). One strategy is simply to maintain the price following loss of exclusivity. The
rationale behind such a strategy is the expectation that a significant share of market demand is
inelastic. Possible reasons for the lack of price sensitivity are manifold but could include the
deployment of measures aimed at achieving product loyalty. (52) The more common strategy is to
initiate price competition with incoming generic companies. Price decreases can be implemented
through cutting the list price or through selective price reductions or rebates for wholesalers,
pharmacies or insurers. A large originator company might also attempt to use its economies of scale
in order to drive small generic companies out of business. This strategy of price reductions in
anticipation of generic entry was described by one company as being a means of creating an
“unattractive generic market”.

• Launch of a licensed or a company's own generic –

Originator companies might decide to launch a “generic version” of their own products as patent
expiry approaches. Similarly they may decide to license the product to a third party. Most
respondent originator companies stressed that the option of launching their own or an in-licensed
generic product is only considered once generic competitors have entered the market or at least
when generic competition has received approval. Several companies also stressed that "the
presence of a high number of independent generics on the market may have a major role in deciding
whether to launch a generic product". Despite the existence of conditions encouraging originator
companies to launch a generic version of their original product, respondent companies emphasised
the fact that they review the option of launching or licensing generic versions of their products on a
product-by-product and market-by-market basis.

• Switch to OTC –

Towards the end of the life cycle of an originator product, switching the medicine to an over-the-
counter (OTC) pharmaceutical product which does not require a prescription by doctors may be
considered.458 Switching to OTC is sometimes considered by companies, but it is apparently not
frequently used. (56) One reason that this strategy is seldom used could be that a pre-condition for
such a switch to OTC products is that it must be authorised by a marketing authorisation agency
upon request of the originator company. For a switch to OTC of prescription medicines to be
authorised, there has to be proof that the therapeutic area it addresses allows self-diagnosis and
monitoring by the patient. Therefore, the dosing regime and instructions should be understandable
for patients and no exposure to significant risks should result from the product. (57) If these
requirements are met, the attractiveness of a switch to OTC products lies primarily in the marketing
opportunities that ensue. This further requires an increased marketing budget and an effective
consumer healthcare division. Otherwise, the OTC medicine must be licensed to another company.
(58) Contrary to prescription medicines, direct advertising of OTC medicines to the consumer is
allowed. In general, OTC medicines do not compete with generic products, which makes the timing
of the switch less crucial than for other life cycle management strategies. Nevertheless, a switch to
OTC products late in the life cycle and before patent expiry is generally preferable because at this
point it becomes an option to strengthen the product image and brand loyalty of the patient.
Moreover, the switch to OTC products can extend the data protection period
3. Product Life Cycle after Patent Expiration

1.3.2. Effects of Generic Entry (177) Generic entry into a pharmaceuticals market can have a
profound effect as it changes the market from one in which only one firm could sell the product(s)
concerned (possibly via licensees) into one where more sources of supply become available for the
product. The most direct effect is likely to be on the average price level of the product(s) concerned
and the sales volumes of the originator. But other products can also be affected, both products
under the INN that remain patent-protected and products based on other INNs but competing with
the product(s) that lost exclusivity.

Sursa citarii: COMPETITION, D. G. Pharmaceutical sector inquiry-preliminary report. 2008.

http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf