Innovation Incentives Part 1: Regulated Therapeutic Product Lifecycle

Understanding the Consequences of Linking Market and Regulatory Incentives for Drug Development: Part 1

This is a three-part series by guest blogger Ron A. Bouchard.

Dr Ron A. Bouchard is an intellectual property lawyer and scholar, specializing in biomedical products. He began his career as a medical scientist, completing a PhD and Postdoctoral Fellowship in the field of ion channel biophysics and Ca2+ imaging. He shifted focus to obtain a law degree specializing in pharmaceutical and biotechnology law and has been involved in the prosecution, acquisition, financing, distribution, and litigation of intellectual property rights. Dr Bouchard has appeared before the Federal Court of Canada and the Supreme Court of Canada. He is a Professor of Law and Medicine, and is the recipient of a Canadian Institutes for Health Research (CIHR) New Investigator Award. He is currently on sabbatical.

Patent valuation has become a hot button issue of late, particularly in the area of pharmaceuticals. In the effort to win the global innovation race, substantial policy and economic efforts are being made by developed and developing nations alike in support of innovation, both in terms of understanding it and making more of it when innovation does occur.

The issue of patent valuation presents to an increasingly educated lay audience as a kind of titanic contest of wills between those who prefer big incentives for innovation and those who focus of the social benefits, or outcomes, of innovation.

Many studies of innovation and patent valuation use economic models to assess the business value associated with patents at a given point in time, as well as ways of maximizing value from those patents. Although there are certainly many skeptics, innovation and patenting have nevertheless become synonymous in economic discussions of national productivity and prosperity in a wide variety of debates, including scholarly, political, civil service, and in the media.

Read the rest of this post . . . .In the world of life sciences products, a distinction can be made between an economic analysis - even one cast in a law and economics light - and a patent law analysis. This is because one is primarily (though not exclusively) in service of utilitarian benefit and the other is primarily (though not exclusively) in service of equity, equality and the terms of the traditional patent bargain. As instructed by the courts when pharmaceutical patents are at issue, the patent bargain is itself to be interpreted through the public health mandate as it is bound by the unique trifecta of patent law, food and drug law and linkage law.

This places patent valuation front and center of any discussion of law reform focused on pharmaceutical innovation, as well as discussions and law reform aimed at reducing drug costs and expenditures. The fact that, unlike in many other industries, follow-on products may offer little benefit compared to existing products raises the bar on this discussion, as does the fact that patents associated with these products can be used as more of a sword than a shield to evergreen older product lines and keep drug prices high.

Because the availability, costs and expenditures of drugs are regulated by such a complex array of legal, policy and political vehicles, their analysis is quite amenable to “complexity”-based frameworks, which by design place significant emphasis on feedback loops between multiple interrelated nodes.

In this case the nodes, or spheres to use the nomenclature of Walzer, are industrial, economic, public health, and political in nature but also play out in numerous intersecting ways in statutory, regulatory, policy, and judicial terms. In our Berkeley study, we presented the model below for the development, consumption and regulation of drug products, referring to it as a regulated Therapeutic Product Lifecycle (rTPL).

Fig. 1. rTPL Innovation Ecology Model for Drug Development.

Innovation is represented as an iterative process over time involving several functional groupings, including national science and technology (S&T) policy, clinical research, university and firm commercialization, innovation by private firms, drug regulation by national governments, and intellectual property and regulatory (IPR) rights covering both drug submissions and marketed products. Large red nodes represent functional groupings, and include sub-functions enumerated in the figure. Red lines are multi-directional between nodes and sub-functions and are independent of time (acknowledging that the process generally moves clockwise).

Through diagrams such as these, one can see that patent rights and incentives permeate all stages of the rTPL. As we have noted elsewhere, even assuming a relatively linear innovation process, because of regulatory incentives that allow the public to gain access to therapeutic products prior to conventional Phase 3 trials, and because linkage laws allow for the development of clusters of interrelated new and follow-on drugs and associated patents, the regulatory lifecycle for drugs has become at once increasingly complex, intertwined, and collapsed. Linkage laws in particular complicate the picture as they are intended to both facilitate industrial development in the form of new drugs and to satisfy the public health mandate by yielding cost savings on generic entry.

One might argue that the convergence of public health and industrial policy of this nature calls for a clear and concise set of policy levers governing the complex innovation ecology for therapeutic products, particularly in jurisdictions where the availability of both brand and generic drugs are regulated by linkage laws.

Yet, as noted in the recent decision of the High Court of Delhi in India, where (like the E.U.) linkage was rejected, the court held that worldwide there is a "raging debate on whether patent linkage should be permitted," concluding there is "no uniformity in the policy of different countries."

In North America, the birthplace of linkage, the Supreme Court of Canada held in its seminal decisions in Biolyse and AstraZeneca that linkage regulations tying generic entry to brand-name patents must be made in a patent-specific manner. The court's pronouncement highlights the importance of the qualitative and quantitative nature of the balance inherent to the patent bargain, especially when read in light of the so-called “special provisions” of linkage laws when parsing pharmaceutical patents.

As pointed out by the Global Consortium on Pharmaceutical Linkage in a recent article, patent law is also antecedent to linkage in the United States, which was the first jurisdiction globally to promulgate linkage laws. This was made clear by the seminal reports of the Committee on the Judiciary (COJ) and the Committee on Energy and Commerce (CEC) prior to the coming into force of Hatch Waxman. Both the COJ and CEC made it clear that the twin policy goals of linkage laws were to encourage the development of “new and innovative” drugs and to facilitate the “timely” entry of generic drugs.

Both of these competing policy goals depend on patents, and so again we arrive at a pivotal role for patent valuation in determining outcomes related to the twin policy goals at issue.

So, what evidence is there to assess whether these two policy goals have been met by patent, food and drug, and linkage laws? What evidence is there to determine the role of “strong” and “weak” patents in producing outcomes, including unintended consequences that may have been completely unanticipated by law-makers at the time pharmaceutical law and policy came to the fore in the early 1980s and 1990s?

This will be the subject of Part 2 and Part 3 of the series.

The Waffle House index

A string of bizarre Waffle House robberies has put the South's most familiar chain of 24-hour diners in the spotlight. Alongside grits, toast, and (yes) waffles, Waffle House does serve up a serious point about disaster law and disaster management.

With total seriousness, FEMA has coined the concept of a Waffle House index for measuring the impact of a disaster on a community:

If a Waffle House store is open and offering a full menu, the index is green. If it is open but serving from a limited menu, it’s yellow. When the location has been forced to close, the index is red. Because Waffle House is well-prepared for disasters … it’s rare for the index to hit red.

Waffle House therefore serves as an informal but readily assessed gauge of social susceptibility and resilience. Waffle House tends to be well-prepared for disaster. By extension, communities that host a Waffle House have at least one prominent actor taking account of catastrophic risk. And the presence of full service as usual at Waffle House signals the resilience with which that community has responded to disaster when it strikes. These are themes that permeate Disaster Law and Policy (2d ed.) and derivative works such as Law Among the Ruins.

Merger to Monopsony: AT&T, T-Mobile, and the Clayton Act

In a pivotal antitrust decision, Judge Ellen Huvelle of the US District Court for the District of Columbia has allowed Sprint and Cellular South to pursue their suits to enjoin AT&T's proposed acquisition of T-Mobile. These suits pose a significant barrier to the merger of AT&T and T-Mobile. The ability of Sprint and Cellular South to pursue their claims represents a modest but important victory against the domination of the American wireless industry by an emerging AT&T/Verizon duopoly.

Sprint and Cellular South's lawsuits complement the United States government's suit to block the AT&T/T-Mobile merger. The Department of Justice's complaint emphasizes the traditional elements of a claim arising under section 7 of the Clayton Act. The government's case against the proposed union of the second and fourth largest wireless carriers in the United States draws heavily from the familiar arsenal of antitrust weapons against anticompetitive mergers. According to the Herfindahl-Hirschman index, the standard measure of industrial concentration, AT&T and T-Mobile would command the single largest share of the United States wireless market and an overwhelming share in many metropolitan markets. AT&T's acquisition of T-Mobile would eliminate potential competition and foreclose future entry by one of the country's peskiest and most creative wireless carriers.

Read the rest of this post . . . .In many merger cases, the contribution of antitrust law begins and ends in the United States Department of Justice. No matter how substantially a proposed merger may lessen competition or tend to create a monopoly, competitors of the combining firms face formidable barriers that often prevent them from suing under section 4 or section 16 of the Clayton Act. The antitrust injury doctrine requires competitors to prove that they have not merely sustained some economic loss, but have suffered injury of the sort that the antitrust laws were intended to prevent. The need to show antitrust injury sometimes forces competitors to allege that the merged firm would engage in predatory pricing, a theory of antitrust liability that can be difficult to prove.

Two recent Supreme Court decisions, Bell Atlantic v. Twombly (2007) and Verizon Communications v. Trinko (2004), raise additional obstacles to antitrust plaintiffs, especially in suits alleging anticompetitive conduct in the telecommunications industry. Twombly requires plaintiffs to plead facts with sufficient particularity so that a court can find it plausible, and not merely imaginable, that defendants violated the antitrust laws. Trinko holds that violations of the Telecommunications Act of 1996, strictly of their own force, do not constitute antitrust violations. Plaintiffs must prove conduct that offends the antitrust laws, independent of their lawfulness under the Telecommunications Act or the implementing regulations of the Federal Communications Commission (FCC).

The magnitude of these barriers to suit heightens the importance of Judge Huvelle's decision to allow Sprint and Cellular South to pursue their suits against AT&T's proposed acquisition of T-Mobile. Any antitrust suit in which competitor-plaintiffs successfully deflect a rule 12(b)(6) motion to dismiss represents a legally noteworthy development. An antitrust plaintiff that clears the Rule 12(b)(6) hurdle has shown antitrust injury and has satisfied both Twombly and Trinko. That plaintiff has pleaded facts that give rise to a plausible theory of antitrust liability beyond the violation of any applicable FCC regulations. That is exactly what happened in Sprint Nextel Corp v. AT&T Inc. and Cellular South, Inc. v. AT&T Inc. To fully appreciate Judge Huvelle's decision in these cases, we must first understand the economic and technological terms by which American wireless carriers compete.

Sprint and Cellular South's involvement in the AT&T/T-Mobile merger is important precisely because this controversy is no ordinary story of industrial concentration. The proposed creation of America's largest wireless carrier has economic significance transcending its $39 billion price tag. The private suits against AT&T's bid for T-Mobile mark a significant step in the development of antitrust law, especially as applied to an industry as technologically intense as wireless communications. In three decades, the American wireless industry has come a very long way from its origins in first-generation (1G) wireless technology and the breakup of the Bell system. 2G wireless technology enabled the first wave of data transmission. Even more significantly, the expansion of the 2G spectrum gave American consumers something they had not enjoyed in either wireline or wireless communications: meaningful choice from a broader spectrum of carriers competing on price and on service. The third generation of wireless technology brought mixed blessings. What consumers gained through faster speeds and enhanced services, they lost to creeping concentration as the country's leading carriers, Verizon and AT&T, increased their shares of the market. Technological incompatibility between the leading 3G protocols has allowed Verizon and AT&T as duopolists to operate their own wireless ecosystems, insulated from fiercer levels of competition that could and should prevail in this industry.

Many American consumers now treat their wireless devices as their primary or even exclusive vehicle for voice communications. It is no longer enough to speak of phones or even of "smartphones" that bridge the conventional gap between voice and data. Americans transmit an astonishing volume of information over wireless networks. The most sophisticated wireless devices and applications designed for those devices give consumers all sorts of intelligent ways to enjoy, create, transform and share content. Wireless devices and networks have liberated consumers from the geographic constraints inherent in legacy wireline technology. Consumers expect — and deserve — the ability to travel with complete confidence that they can call and be called, that they can navigate the World Wide Web and manipulate applications and content, with no perceptible reduction in the level of service they enjoy at home.

Against this backdrop, we can understand the true significance of Sprint and Cellular South's suits against the AT&T/T-Mobile merger. Increased concentration in any industry tends to amplify the power of the largest firms — especially a firm that would be created by a merger that has come under antitrust scrutiny — to gouge consumers by raising prices and lowering the quality of the product or service provided. But a conventional application of antitrust injury doctrine holds that the ordinarily expected increase in price inflicts no anticompetitive harm on competitors, as distinct from consumers. For this reason, the concentration and market share data so central to the government's case would not be enough, standing alone, to enable Sprint and Cellular South to block the AT&T/T-Mobile merger.

Sprint and Cellular South successfully alleged that AT&T's acquisition of T-Mobile would impair competing wireless carriers' access to critical inputs. By far the most important input in the American wireless market, today and for the foreseeable future, is access to the best wireless devices. Postpaid wireless subscribers — customers who subscribe to service for longer terms, as distinguished from pay-as-you-go prepaid customers — are less sensitive to price than they are to the availability of the best, most technologically sophisticated devices. Unlike their counterparts in many other developed countries, American wireless subscribers almost invariably buy their devices from wireless carriers. American carriers regularly subsidize device purchases by their postpaid subscribers, in exchange for a long-term service commitment. Even when consumers buy devices at department stores or electronics boutiques, those vendors usually operate in cooperation with a wireless carrier and bundle the devices with service contracts by that carrier. Empowered by the bundling of devices with service subscriptions, the largest carriers in the US have progressively tightened their grip over the market for wireless devices. Apple's iconic iPhone and iPad epitomize the problem. For years, AT&T held an exclusive on the iPhone; no other carriers' customers could buy this sleekest and smartest of handheld devices. You can buy an iPad at an Apple store, but the market for data service plans to feed that iPad offers exactly two choices: AT&T or Verizon.

In allowing Sprint and Cellular South to pursue their Clayton Act claim against the AT&T/T-Mobile merger, Judge Huvelle astutely recognized the oligopsonistic potential of the merged firm to further constrict an already tight market for cutting-edge wireless devices. AT&T and Verizon, the country's largest wireless carriers, use their buying power to command exclusive access to devices such as the iPhone. At the very least, these large carriers demand (and receive) long periods of exclusivity at the beginning of the economically and technologically significant life of new devices. The addition of T-Mobile to AT&T would exacerbate a serious and legally objectionable constraint on the ability of Cellular South, other small carriers, and even a carrier as large as Sprint (the country's third largest) to offer devices on par with AT&T and Verizon. Permitting this merger would compound these competitors' most pressing problem: being consigned to an unappetizing selection of older phones at higher prices. Judge Huvelle correctly characterized the problem as one of "merger-to-monopsony." Creating the country's largest wireless carrier would cement AT&T's unlawful grip over the devices that are driving and will continue to drive competition among wireless companies.

A second input also played a significant role in these competitor suits. Roaming is the only way that a smaller carrier such as Cellular South, especially one with a geographically circumscribed network, can assure its customers of coast-to-coast coverage. Without commercially reasonable roaming agreements, a smaller carrier cannot serve subscribers who travel outside their home service areas. Judge Huvelle recognized the potential of a combined AT&T and T-Mobile to inflict anticompetitive injury on Corr Wireless, a Cellular South subsidiary that has met stiff resistance in its efforts to forge roaming agreements on commercially reasonable terms with these larger carriers. This conclusion, in many respects, flows more naturally than the merger-to-monopsony theory by which Judge Huvelle recognized Sprint and Cellular South's allegations of injury in the device market. Antitrust cases more routinely involve anticompetitive conduct by defendants as sellers. Roaming agreements involve precisely that: would-be roaming partners sell access to each other's networks.

Judge Huvelle's decision did fall short in certain respects. She appears to have misunderstood the scope of competing carriers' need for roaming. 3G wireless technology is balkanized between Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA) protocols. The incompatibility of GSM and CDMA technologies has forced carriers to choose between 3G protocols and to fashion their 3G roaming arrangements according to that choice. Sprint and Cellular South have operated 3G networks on the CDMA protocol. That choice has presumably led both of these carriers to seek 3G roaming agreements with Verizon, the country's leading CDMA carrier, as opposed to AT&T and T-Mobile, both of which have developed their 3G networks along the competing path of GSM technologies. Incompatibility in 3G networks, however, is of no moment when wireless carriers seek roaming on the Long-Term Evolution (LTE) protocol that represents the fourth generation of wireless technology. The proposed merger of AT&T and T-Mobile will enable this combined firm, to say nothing of Verizon, to obstruct 4G roaming in ways exceeding their existing refusal to cooperate with requests for roaming access to their legacy 3G networks.

On balance, however, Judge Huvelle's decision represents a very significant legal victory for competition in the American wireless industry. Preventing further concentration among wireless carriers preserves a competitive foothold by which Sprint, Cellular South, and other carriers can continue to offer consumers viable options beyond AT&T and Verizon. Nevertheless, domination of wireless communications by these two large carriers continues to pose serious economic threats. Notwithstanding their modest size, smaller carriers such as Cellular South have captured meaningful slices of the 700 megahertz "beachfront" spectrum that provides the best technological platform for deploying fully functional 4G/LTE networks. Properly managed, the transition between third- and fourth-generation wireless technologies promises to liberate American wireless communications, at long last, from the balkanization that has robbed 3G wireless of its full technological potential. The division between GSM and CDMA protocols has enabled AT&T and Verizon to keep cultivating a cozy duopoly in which two and exactly two dominant wireless carriers can lock their respective subscribers inside insulated wireless ecosystems. A wireless duopoly means that carriers outside the AT&T and Verizon ecosystems will have no access to cutting-edge devices, to say nothing of roaming, and will consequently be marginalized to the point of commercial extinction. The impact on all layers of the wireless industry, from radio access network equipment, chips and consumer devices to operating systems, applications and content, would be nothing short of devastating. Competition and consumer choice in wireless communications depend on full interoperability at all layers and evenhanded access to crucial inputs such as devices and roaming. Judge Huvelle's decision, though by no means the final battle in a war that has only begun, represents a significant victory for competition and consumer welfare in the broader market for wireless equipment, services and content.

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Editor's note: This article first appeared on November 22, 2011, on Jurist Forum as Jim Chen, Merger to Monopsony: AT&T, T-Mobile, and the Clayton Act.

The author has provided advice to Cellular South in connection with its lawsuit to enjoin AT&T's proposed acquisition of T-Mobile. After filing suit against AT&T, Cellular South changed its name to C Spire Wireless. For the sake of clarity and consistency, the author has referred to this company throughout this article as Cellular South, the name under which it originally sued.

The Unexamined Life of the American Law School

David Segal recently published an article in the New York Times entitled: "What They Don't Teach Law Students: Lawyering." It's a dreadful piece of journalism, but it raises an issue that law schools really should be thinking about much more seriously.

It would be tempting to entitle this comment, "What They Don't Teach Journalists: Reporting." The Segal article is really a shoddy piece of work. It has a couple of obvious factual errors (incorrectly stating the coverage of criminal procedure courses; referring to a paper by a philosopher in a philosophy journal as an example of a law review article.) It also engages in obvious cherry-picking -- finding articles with ridiculous-sounding titles in obscure law reviews rather than talking about recent issues of major law reviews, which probably would sounds more interesting and relevant to readers. Articles about topics such as originalism or Guantanamo may not be relevant to most practitioners, but newspaper readers might think they were a worthwhile use of time. And the ratio of editorializing to facts in the Siegel article is very high.

The article's view of legal practice also seems rather unintelligent. It assumes corporate law courses should be teaching students how to file paperwork, rather than trying to understand the economics of how transactions work and why corporate law imposes the requirements that it does on boards of directors or how courts review merger tactics. Segal complains that students aren't taught what papers to file for a merger. Why teach that in law school? It took me less than a minute to get the answer by googling "Delaware merger formalities."

As I say, it would be tempting to dismiss the article as an example of the decline of American journalism. But the article is right about one really important thing: law schools are extremely unreflective about what they are doing and about the needs of their students. We make little or no systematic effort to find out about what lawyers need to know to do their jobs or to think about how that may change over the next few decades. In fact, we don't do nearly as well in thinking about these things as the military -- for example, the Army commissioned a really interesting study by RAND about how to train officers for combat when future wars are likely to involve situations and tactics that we can't foresee today (such as the use of IEDs in Iraq).

Law schools could certainly benefit from a little self-evaluation. Our first-year curriculum focuses on common law subjects, even though we live in a statutory world. We teach criminal law courses that largely ignore both the drug crimes that are central to criminal practice and the biggest policy issues relating to criminal justice (racial disparties and sentencing). We make every student take civil procedure even though a minority will become civil litigators, and in any event the course teaches little about the two biggest tasks for civil litigators (managing discovery and negotiating settlements). And by the way, it's hard to get people to teach these courses because most faculty members find them profoundly uninteresting. Thus, we've managed to create a first-year curriculum that combines dubious practical utility, lack of policy salience, and theoretical banality. The main reason we do these things is that we have always done them, and it would be a lot of trouble to change.

I fully understand why no one wants to really think about these issues. It's a major struggle to add or subtract a single hour of credit from a first year course. No one -- certainly not me -- wants to devote endless hours to a quixotic effort in radical curriculum change. Ed Rubin's efforts at Vanderbilt are a salutary lesson in what happens when someone is brave enough to challenge the status quo. But it would be nice if we could at least start a serious discussion of these issues among ourselves.