FEDERAL ISSUES

Patent Reform Update

Two bills began to gain momentum in Congress in 2007.  HR 1908 was introduced by US Representatives Howard Berman (D-CA) and Lamar Smith (R-TX).  The Senate’s Patent Reform Act of 2007, S. 1145, was introduced by Senators Patrick Leahy (D-VT) and Orrin Hatch (R-UT).

The House and Senate Judiciary Committees both approved for Congressional consideration the two different versions of patent reform on July 17th and July 18th.  Additionally, the full House passed HR 1908 on September 7 by a vote of 220-175 with 37 members not voting.  It is anticipated that the US Senate could take up their version, S. 1145, in early February of 2008.

The life science industry is extremely concerned about the impact of both of these bills on research, investment, development, and commercialization of life science technologies and innovative therapies.  There are numerous provisions contained in both bills that if passed could prove disastrous to life science innovation.  Some of these concerning patent reform changes include, but are not limited to:

1. Apportionment of Damages: The provisions regarding apportionment of damages in these patent reform bills threaten innovators’ ability to obtain reasonable royalties when a patent is infringed upon.  They create a new method for awarding damages based upon a “patent’s specific contribution over the prior art.”  Essentially, this new method fixes the market value of an invention at the time it was made, not when the patent was infringed.  In doing so, it undervalues the bulk of inventive work done in biotechnology.  Currently, a royalty based on the value obtained by the infringer of utilizing the patented invention is used to determine infringement damages.  The change proposed in the Patent Reform Act of 2007 would set the commercial value of an invention according to its technological advance over preexisting technology instead.  This change makes infringement cheaper, incentivizing it.  In biotechnology, the adequacy of future damages for infringement provides the foundation for inventors to raise the public and private investment necessary to spur innovation, fosters the licensing and commercialization and emerging research, and deters infringement.  This foundation is undermined through the changes in law governing the apportionment of damages.
   
   
2. Post Grant Opposition:  Currently there is no post-grant opposition system.  H.R. 1908 creates a single window of post-grant opposition allowing challenges to a patent during a single window of 12 months after grant.  S. 1145 creates a new post-grant opposition whereby a patent can be challenged throughout its term administratively instead of in court.  The increased uncertainty over a patent’s reliability created by this process will drive away investment.
   
   
3.  Inequitable Conduct:  Inequitable conduct is an alleged misrepresentation or failure to disclose information to a patent examiner in the course of applying for a patent.  Accused infringers often claim that otherwise-valid patents should be declared unenforceable for reasons of inequitable conduct.    This defense, while rarely successful, it is a major cost driver of patent litigation, and chills the open communication of patent applicants with patent examiners.  S. 1145 codifies the materiality standard, which is so low that any omission could be considered material. 
   
   
4. First-to-File versus First-to-Invent: The US currently has a first-to-invent system issuing a patent to the party that is first to make the invention.  Both patent reform bills seek to implement a first to file system.  The patent application would be measured against the prior art based on the application filing date (not the invention date).  The inventor would have a 1 year grace period to file following a public disclosure by the inventor, and the only way for an inventor to swear behind a prior art reference is based on an earlier public disclosure by the inventor.

THBI is opposed to both of these pieces of legislation and encourages the Texas Congressional Delegation and United States Senators from Texas to immediately seek changes to the components of these bills which are destructive to the life science industry.

Small Business Innovation Research Grants

One avenue the Small Business Administration (SBA) uses to help small businesses is through the Small Business Innovation Research (SBIR) program.  A percentage of all federal research and development grant monies are reserved and distributed to applicants to provide seed money.    A small business applicant, in order to qualify for an SBIR grant, must be at least 51 percent owned and controlled by one or more individuals who are US citizens or permanent resident aliens and may have no more than 500 employees.  The SBA passed a final administrative ruling in 2004 which changed the eligibility requirements for entities applying for Small Business Innovation Research Grants.  After 20 years, the definition of “individual” was determined to no longer include venture capital firms or investment groups, including funds established by patient groups to support research. 

Thus, do to the strict interpretation, numerous companies with promising successful technologies were no longer eligible to apply for the already rigorous SBIR grants.  Given the high risk and high costs of bringing a new medical technology to market, it is common that the early investors in a company will own more than 51 percent of the company in exchange for the high risk capital the venture capital firms provide. These companies are being penalized for raising investment capital to help in the successful development of their emerging technologies and innovations.  

The US Senate and US House of Representatives will soon take up bills to re-authorize the SBIR program.  THBI supports the inclusion of language to these bills which would restore the eligibility for SBIR grants to venture capital backed start-up biotechnology companies.

NIH Funding

The United States is the foremost leader in developing novel medicines for patients suffering from untreated and under-treated diseases, in part as a result of the extensive scientific partnership between the biotechnology and pharmaceutical industries and the publicly-funded biomedical research enterprise centered at the National Institutes of Health (NIH).  The NIH supports basic research, which leads to discoveries at the molecular and cellular levels of disease, as well as translational and clinical research, which seeks to transform those discoveries into practical applications for new or improved treatment, diagnosis, and prevention.  This research provides a critical foundation of knowledge and technologies that drive private biomedical investment and innovation.  Thousands of new medical technologies have been developed into therapeutics and vaccines through the collaborative efforts of the NIH and industry.
Much medical progress was fueled by the doubling of the NIH’s budget between 1998 and 2003.  Over the past four years, however, the NIH budget has been flat or declining in real-dollar terms.  Because funding has failed to keep pace with biomedical research inflation, the NIH has lost nearly 10% of its purchasing power since FY 2003.

Our nation now has an unprecedented capacity for research into emerging health opportunities and challenges, but in the current budgetary situation, the NIH is unable to meet the growing demand for research project grants.  The current budget allows the NIH to fund just 1 out of every 5 grant applications it receives, compared to 1 in 3 that were funded in 2003.  Moreover, there is no private sector alternative for much of the basic research that the NIH supports.  Adequate funding for the NIH is necessary to sustain the public-private collaboration that is transforming biomedical discoveries into innovative treatments for patients.

Texas is a leader in biomedical research and medical innovation, and there is a tremendous amount of research being done in the state.  Over 3000 life science entities are working to develop the healthcare products which will change the lives of untold people around the world tomorrow.  The industry in Texas employs over 78,000 Texans.  Texas is also at the forefront of research.  In 2005, the Milken Institute ranked one university system in Texas as first in the world in terms of the number and quality of biotechnology patents produced.  Additionally, Texas boasts an Institute for Genomic Medicine with the largest, most comprehensive library of mouse stem cell lines which are available to researchers around the world.  This public-private partnership will facilitate a more rapid discovery process for the cause and potential cure of a multitude of diseases and disorders.  Recently, the Texas Legislature passed legislation to establish the Cancer Research and Prevention Institute of Texas. Voters overwhelmingly approved the measure and the Institute will infuse $300 million a year for ten years into cancer research and prevention.  Historically this type of funding has come from the federal government through the form of NIH grants.  Increasingly, NIH funding is unavailable for many research and development efforts with significant potential only because there is not enough.  States are stepping in to create programs such as the Cancer Institute in an effort to keep the momentum of this critical research continuing as research institutions are no longer able to rely on the possibility of NIH support.  Texas is fortunate as many states do not have the capability to accomplish this sort of funding leverage.  Without the critical support the NIH provides, states will quickly lose more than the opportunity to commercialize much needed emerging technologies; they will begin to lose actual researchers, institutional support, and private industry partnerships.  These important components of the innovation lifecycle will not be lost to other states: other countries will reap the benefits that the United States is unable or unwilling to sustain.

THBI believes that the United States Senate and House of Representatives must increase appropriations to the NIH by 3.5% at a minimum in order to keep pace with the forecasted increase in biomedical inflation.  In the absence of an increase at least equal to biomedical inflation, the NIH will be forced to make deep cuts in life-saving research conducted all over the United States.

A 3.5% increase in the NIH budget would set NIH funding on a track to recover the losses from biomedical inflation and make a valuable investment in research that will accelerate the progress of scientific discovery to improve the health of all Americans. 

Medicare Non-interference

The United States Congress passed landmark legislation in 2003 with the Medicare Prescription Drug Improvement and Modernization Act (MMA).  For the first time, Medicare beneficiaries also received access to a prescription drug benefit called Medicare Part D.  In its first year of operation, the Medicare prescription drug benefit provided comprehensive drug coverage for 38.2 million Medicare beneficiaries, 90% of the Medicare population.  Costs were lower than initially projected and bids for 2007 submitted to the Centers for Medicare and Medicaid Services (CMS) were, on average, 10% lower than in 2006. 

Congress in the recent past has focused on a specific element of the Medicare Part D legislation known as the “non-interference” provision.  This provision prohibits the Secretary of the US Department of Health and Human Services (HHS) from interfering in the negotiation of drug prices between participating health plans, drug companies and pharmacies.  This provision was specifically included to reduce costs for Medicare beneficiaries and the federal government.  It provides plans with the incentive for participating in the program and working to obtain the best drug prices possible for their members.  The lack of government interference fosters greater competition among participating funds resulting in lower costs, greater coverage in each formulary, and greater coverage options.  Some members of Congress are seeking to repeal the non-interference provision.

The Congressional Budget Office has determined that government negotiation could lead to increased costs, and at a minimum would not result in additional cost-savings. The HHS Secretary does not have the capacity to negotiate coverage for every drug and plan.  Should non-interference be removed, the most likely outcome would be a government-imposed national formulary with a one-size-fits-all benefit package.  Beneficiaries would have fewer drugs available to them and fewer or no options when a plan doesn’t meet their needs.  The incentive for plans to participate would be greatly diminished.

Those in support of repealing the non-interference provision argue that the Veterans Health Administration (VA) offers a government-negotiated drug benefit model that could be used for Medicare Part D.  There are several significant problems with this argument:

• The VA is a closed system with a more limited, homogeneous population representing 2.1% of the outpatient prescription drug expenditures in the U.S., unlike Medicare enrollees which represents 40%.  The VA prescription drug benefits are limited to individuals, predominantly men, while the Medicare Part D population is more diverse including more women and individuals over 65 years of age.  If such a large percentage of the prescription drug market was shifted to a national formulary with government-imposed price controls as in the VA model, Medicare enrollees’ access to a variety of medications would be severely limited.
  
  
• The VA formulary is more limited than current Medicare Part D formularies.  The VA formulary has significant gaps of popular drugs in general and specifically with drugs used to treat common Medicare populations such as hypertension, diabetes, depression, and high cholesterol.  In a study by the Lewin Group, 300 of the drugs most commonly prescribed for seniors were studied in both the VA drug program and Medicare Part D for availability.  The study found that one in three are not covered under the VA plan, however 94% are covered under the private competition model of Medicare Part D.  Additionally, less than one in five new FDA approved drugs since 2000 are available to VA enrollees.
  
  
• The VA is a centralized, government-run system, while Medicare is community-based.  In the VA system, hospitals, pharmacies, and physicians are owned and employed by the federal government and enrollees must seek care at these specific facilities.  Medicare enrollees are free to seek care from almost any physician, hospital, and local pharmacy they choose.  A VA-type system for Medicare would significantly decrease beneficiary choice and flexibility.

In the short period of time since its passage, Medicare Part D has achieved enormous success.  While not perfect, the program’s positive impact to date is proof that the system is achieving its goals of greater coverage for more Americans at a reduced cost to the government.  The Congressional Budget Office calculates that the 10-year cost of Medicare Part D will be $265 billion below original estimates.  Seniors are saving money and recent polls show that 80% of seniors say they are satisfied with their new Medicare drug benefits.

Perhaps the biggest argument for opposing the repeal of the non-interference provision is the effect of government-imposed price controls on the research and development of new innovative therapies.  New pharmaceuticals cost between $500 million and $1 billion to develop in today’s research and regulatory environment and from 12-15 years to bring to the market.  If companies’ profits are eroded by government price controls, drug development will slow and treatments for life-saving illnesses will be delayed.  The Manhattan Institute for Policy Research determined that price controls would result in the loss of anywhere from 6 to 12 new therapies per year.

THBI believes that the non-interference provision established in the Medicare Modernization Act of 2003 is a necessity for greater competition among Medicare drug benefit plans, greater access to life-saving and life-altering medications, and for preservation of the research and development of new drug therapies.

Please see the Action Alerts Section of the THBI website for speaking points and sample letters.