September 1, 2008 (Vol. 28, No. 15)

Unless Situation Is Resolved, Investment in New Candidates May Be Delayed or Withheld

Large pharmaceutical companies are increasingly turning to smaller biotechnology and pharmaceutical companies to supplement their drug development pipelines. When deciding whether to invest in a start-up or smaller firm, the acquiring company faces two major uncertainties: (1) Will a promising early-stage compound gain approval from the FDA? and (2) Will it be possible to obtain strong patent coverage to protect the new drug from generic competition?

Companies often evaluate the strength and breadth of patents and patent applications potentially covering a drug candidate before investing in the candidate. However, the U.S. Patent and Trademark Office (USPTO) is currently overwhelmed by a backlog of hundreds of thousands of patent applications, which delays patent examination and issuance. Thus, the strength of patent protection may be much more difficult to assess when decisions requiring substantial investment in late clinical trials are required.

As a result, investment in drug development will be deferred, or even withheld, leading to delayed drug development or even abandonment of promising drug candidates.

High Cost and Risk in Development

Discovery and commercialization of a New Molecular Entity (NME)—a compound not previously approved by the FDA—is costly and poses substantial risk that it will never reach the market. Cost estimates of bringing an NME to the market vary, but the ever-increasing baseline estimate of $150 million requires significant investment before any Return on Investment (ROI) is realized. A significant portion of costs arise from clinical trials.

Clinical trials typically take two to ten years to complete, and are conducted in phases. In Phase I, the NME is administered to a small number of volunteers and only about 20% of NMEs in this phase eventually obtain FDA approval. Phase II trials consist of a larger number of patients, and, on average, only about 30% of NMEs in this phase eventually obtain FDA approval.

Phase III trials consist of the largest number of patients and are the most expensive. On average, 67% of NMEs in this phase are approved. Finally, even if an NME completes the clinical phases, it may not be approved. Approximately 20% of NMEs that complete Phase III are not approved.

The high cost of development and risk of failure to gain FDA approval potentially reduce valuation of a drug candidate. But, if the new drug is protected by patents, a substantial ROI may be obtained, which makes investment in the drug candidate more attractive.

Recouping Investment

In markets such as Europe and Japan, data exclusivity alone protects the new drug from generic competition for ten years. In the U.S., the innovator must rely on strong patent protection to obtain market exclusivity of an NME beyond five years.

Specifically, the Hatch-Waxman Act (the “Act”) linked the FDA’s regulation of new drugs and the patent system. For an NME, the Act creates a five-year data-exclusivity period during which the FDA cannot approve a generic version of the drug. Because of delays inherent in commercialization, however, the period of optimum sales would be shorter and it may not be possible to recoup the investment in development relying solely on the five-year period.

But, if the new drug is patented, the Act may provide additional protection beyond the right to exclude provided by the patent itself. If the NME is protected by a patent listed in the FDA’s Orange Book, additional market exclusivity may be triggered by the filing of an Abbreviated New Drug Application (ANDA) by a generic drug company.

Filing an ANDA constitutes infringement of Orange Book listed patents covering the drug, and it is often filed with a certification that the listed patents are invalid or not infringed. If the NDA sponsor brings a patent infringement suit against the ANDA filer who filed with that certification, the FDA may not approve the ANDA for an additional 30 months (7.5 years after NDA approval), but this period may be shorted by resolution of the litigation.

Thus, Orange Book patents may extend protection for a new drug up to 7.5 years. But an innovator must successfully enforce its patents against all generic challengers to ensure more than 7.5 years of market exclusivity. Thus, the Act enables exclusivity of more than five years, but only for patented new drugs listed in the Orange Book.

The PTO is faced with a substantial backlog of patent applications (Figure). In 2007, the latest year for which figures are available, over 1.1 million patent applications were pending and over 700,000 had not been acted on by an examiner. With only 5,376 examiners, it is not surprising that it was, on average, over two years (25.3 months) before a patent applicant received a substantive communication (“first Office Action”), and over three years (31.9 months) before a patent was issued.

The delay for the Tech Center responsible for Biotechnology was slightly better for the first Office Action (22.7 months) but worse for the delay in issuance (34.3 months).

Backlog Delays Investment

Due to the backlog, a patent may not issue until well after pre-clinical work is complete. A smaller company developing a new drug must attract investors for the hundreds of millions of dollars for clinical trials. Yet, without an issued patent, investors may hesitate to invest. Accordingly, drug development will be delayed or even abandoned because a small start-up cannot keep the project alive without active investment.

The process of procuring patents (patent prosecution) is central to the ultimate scope and strength of the issued patent, and the delay in the issuance of a first Office Action will also frustrate drug development. It is often possible to roughly assess the likelihood that patent coverage will be obtained based on the first Office Action, which therefore, provides an early indication of whether to invest in a promising new drug. But the average time before an Office Action is mailed for a biotechnology application is nearly two years and almost certain to increase. Accordingly, the delay in this first look at patentability until later in the drug-development cycle may delay investment and drug development.


In 2007 the PTO reported that 467,243 applications were filed, while only 362,227 applications were disposed. Accordingly, the backlog is certain to continue to grow in the future. Therefore unless the PTO can address the backlog, investment in promising new drug candidates may be delayed or even withheld, and some new drugs may never reach the market.

Anthony Tridico ([email protected]) is partner, Jim Kastenmayer is associate, and Ali Kargbo is law clerk in the biotech-
nology/pharmaceutical practice group at Finnegan Henderson.

Previous articleGSK Pays $125M Upfront for Part of Valeant’s Neurology Program
Next articleThe Japanese Acquisition Binge