As if the biotechnology space isn’t convoluted enough, there is a very important aspect of t that we, as biotech investors, must take into consideration before putting our hard earned capital at risk. It is an element that, while relatively simple in concept, is often misunderstood, even by seasoned participants in the space. We’re talking about the legal side of the industry – patents, market exclusivity, branded drugs and generics. Where do they all fit in with each other, what do the terms mean, and why are they in place? Let’s take a look.

Patents

A common misconception is that the FDA grants a patent to a drug development company on approval of that drug. This is not the case. Instead, the company in question must apply for a patent with the patent authority in its respective country (the United States Patent and Trademark Office in the US, for example), requesting patent protection for a particular element of its development program. More often than not, in biotech, this element is the science and technology behind its candidate’s mechanism of action. If granted, a patent will generally last for 20 years from grant date, although this can vary. The key thing to remember here is that a company will generally pick up a patent on its drug very early on in the development process. As a result, and as is so often wrongly believed in the space, a drug is not under patent protection for 20 years from approval. If the company picks up a patent during preclinical, and it takes 16 years to take the drug through to approval, it will only have 4 years left of patent protection. Which brings us nicely on to…

Market Exclusivity

Unlike patents, the FDA grants market exclusivity on approval of a drug. The timeframes associated with exclusivity differ (we’ll get to this in a second) but the concept is the same regardless of timeframes – the FDA will not approve a treatment that is biosimilar to the treatment in question during the period of exclusivity. There are a few different types of exclusivity – Orphan drugs get 7 years, new chemicals get 5 years and pediatric exclusivity (where a company carries out further studies in children for an already approved drug) gets an extra 6 months tagged on to the end of its initial exclusivity period. There are a few other predefined exclusivity criteria, which you can read about on the FDA’s discussion on the topic here. Outside of these predefined examples, the FDA can grant exclusivity at its discretion to any approved therapy.

Generic Drugs

As soon as market exclusivity expires, a company can submit an abbreviated new drug application (ANDA) to the FDA. This is basically an NDA that demonstrates it can create, produce and supply a drug that is identical to an already approved drug. It must demonstrate noninferior efficacy, a similar safety profile and be chemically identical. A company can challenge the patent of a particular drug it is looking to develop a generic treatment for, but not the exclusivity. To challenge, a company goes to a court to try and get the patent overturned. If successful, and assuming the exclusivity period for the treatment in question has expired and the FDA approves the ANDA, the company can commercialize its generic treatment. Because of the reduced cost of developing an identical version of an already developed drug, generics are far cheaper to the patient than branded drugs. There are a number of companies, Teva Pharmaceutical Industries Limited (NYSE:TEVA) for example, that operate solely in the generic drug space, primarily to avoid the cost and time it takes to develop drugs from scratch.

Why does the FDA grant exclusivity?

One word, incentive. As we have said, it costs an awful lot to develop a drug. If Pfizer Inc. (NYSE:PFE) knew that as soon as the FDA approved its latest cancer drug that it spent $100 million and 12 years creating would start getting patent challenges and generic versions created as soon as approved, it would likely not spend the money to do so in the first place. This would mean we didn’t get the latest cancer drug, however, so the FDA needs to offer exclusivity to incentivize Pfizer to spend the money on development.