Bill C-30: who wins and who loses in Canada’s pharmaceutical patent battles?

KEYWORDS:

• Canada
• patent act
• certificate of supplementary protection
• patented medicines (notice of compliance) regulations

1. Introduction

Following lengthy negotiations with the European Union (EU), Canada enacted Bill C-30 to implement the ‘Comprehensive Economic and Trade Agreement’ in 2016 [1]. A particularly important part of that legislation involved the treatment of pharmaceutical exclusivity and the process of litigation between patentees and generic firms. This paper reviews the likely impact of C-30 and its accompanying regulations on the pharmaceutical marketplace in Canada. There are two key changes, with other downstream effects. First, Canada has now implemented a system of ‘Certificates of Supplementary Protection’ (CSPs) that will provide for effective patent extension of up to 2 years for one qualifying patent for each product. Second, the legal process for generic firms to enter the market has been simplified.

2. Certificates of supplementary protection

The effect of CSPs is straightforward on its face: a patent on a new medicine can be extended for up to 2 years, with the maximum being equal to the time difference from patent application to product approval, minus 5 years. Thus, if the time difference is 6 years, the CSP granted is 1 year. Most new chemical entities will be eligible for the full 2 years. The merit of this approach is that it provides the most compensation in exclusivity duration to those medicines that have the longest approval lags and arguably provides a fairer distribution of patent protection across products. Although the 2-year maximum CSP is shorter than those offered in Europe and the United States, the mechanism of CSPs is familiar from other jurisdictions [2]. One notable limitation of the CSP is that it does not provide any rights that can be applied to products manufactured solely for export.

Bill C-30 also creates a ‘timely submission requirement’ for CSPs [3]. This condition stipulates that a CSP will be granted only if the patentee’s application for marketing approval in Canada occurs within 12 months of the first application for marketing approval in any of the EU countries, the United States, Switzerland, Australia, or Japan. This is not a trivial condition. As my research has shown, at least 40% of drugs have historically been submitted to Health Canada over 1 year later than in either the EU or the United States [4]. This proportion would certainly be higher if including Japan.

3. Patented medicines (notice of compliance) regulations

The changes to the patented medicines (Notice of Compliance) regulations caused by Bill C-30 are much more complex. Under the old regime, generic firms would seek to enter through summary proceedings, in which invalidity or infringement claims were heard on an expedited basis, without discovery. These hearings were not finally determinative of patent validity or infringement, so, after a generic was allowed to enter through the summary process, the patentee could sue for infringement in a full action (with discovery). Similarly, an unsuccessful generic could seek impeachment of the patent. This system led to many criticisms: both sides complained of double jeopardy, since the same patent could be litigated twice, though with a potentially different (and more complete) set of facts the second time around. This was not only costly but also bred uncertainty for all parties.

The new regime simplifies this process, so that there is a complete trial to establish infringement/invalidity. The target is that this trial process (including the release of a decision) can be conducted within a 2-year period. During this period, there is an automatic injunction of generic entry. The proposed rapidity of this process appears optimistic, given the timeline of patent infringement actions in the past. Associated with this change, it will now be possible for either side to effectively appeal the decision.

The implications of these revisions to the process are not obvious. The new rules bring Canada much closer to the US model, given the continuing linkage between regulatory approval of generic drugs and the patent status of the brand, although, importantly, Canada does not offer 180-day exclusivity to the first generic product.

The revised rules change incentives considerably. The first notable change relates to the cost for a generic firm of attempting to enter the market at all, and for the patentee of defending the market. In the old system, if a generic firm challenged the validity of a patent or asserted non-infringement, the cost for both sides was relatively low. Now, since there is discovery and the necessity of a full trial, the costs are much higher at the first stage. The additional costs are likely to be several million dollars on each side.

For commercially important markets, the higher costs of a full trial would occur in any case, since, following a decision in the initial summary hearing, there would typically be a patent action. For many smaller markets, however, the summary hearing was the only litigation, as the parties would determine, based on the limited evidence in that case as well as the size of the market, that the cost of further litigation was prohibitive. This suggests there will be some smaller markets where the potential generic entrant simply decides that it is not worth attempting to enter, since the costs of putting together the Notice of Allegation will be too high. In particular, in cases where the basis of generic entry is an allegation of invalidity, the generic firm will be required to ‘provide a detailed legal and factual basis for any allegation of invalidity’ to help the patentee ‘to begin reviewing and assessing these documents without having to await service’ of the generic firm’s pleadings [5]. The cost of this effort may be a deterrent to trying to enter.

For invalidity allegations, a second consideration may limit the willingness of generic firms to challenge patents: success in the patent case will likely automatically open the door for all other generic firms, even those that are hesitant to enter markets where they are subject to any infringement risk. In comparison, at present, an invalidity finding in the summary proceeding does not remove the risk of an infringement action from any firm. Since many generic firms do not have the capacity to assess infringement risk, or the size to accept such risks, typically there are relatively few entrants in Canadian generic markets until the infringement risks are more or less eliminated. This means that, for firms that are willing to take risks, there are some profits to be captured by being an early entrant. This provides some reward to the firms that engage in litigation and challenge patents. With the new regulations, the profits from being willing to challenge patents are likely to be reduced, since the challenger will have no (or little) temporal advantage over other firms.

A second important change is that a generic firm that wins in a trial can seek damages for any loss suffered as a result of delayed market entry. This will result in larger damages when delays in market entry are short. Under the previous regulations, the damages were limited to sales that would have occurred during the delay period. The change is important since the first generic firm in the market typically captures a long-lasting market share advantage [6,7]. Even a short delay of a few weeks may lead to a permanent loss in market share. Thus, the potential damages that would arise from, say, a 1-month delay in entry could be much larger than the total sales of the molecule in that month.

4. Expert opinion

The effect of the CSPs on patentees’ revenues is not as straightforward as the extension suggests. Given that the average duration of exclusivity in Canada is approximately 12 years, a 2-year extension appears to suggest that pharmaceutical company revenues might increase by 2/12 or about 17%. Private insurers, which do not have fixed budgets, may see increases in total spending because of the CSPs. However, public insurers face spending caps because of limited provincial healthcare budgets. If exclusivity periods are longer but healthcare budgets remain constant, then either prices have to be reduced or some products and services will not be covered [8]. It seems probable that the budget for the provincial drug plans will not simply expand because of CSPs. Thus, the net impact on combined pharmaceutical company revenues from provincially insured patients is probably closer to zero than to 17%. The effective control valve for provincial insurance plans is the decision of whether to include new drugs from the formulary: forcing down the prices of existing drugs is much harder than delaying coverage of new drugs. As a result, extending exclusivity will likely lead to a reduction in the number of drugs on the formulary, or the conditions under which they are covered, leading to reductions in population health.

It is not clear whether the timely submission requirement for CSPs will push firms to accelerate submissions to Health Canada; slow submissions already result in reduced exclusivity periods. Since payers are, in any case, slow to insure new drugs, there may be little benefit for companies to try to accelerate submissions on the basis of a CSP that pays out many years in the future.

The effect of the changes to the procedures by which generic market entry is permitted will have mixed effects: for large markets, a reduction in costs because of less duplication; and for some small markets, delays in generic entry compared to the status quo. For patentees, both of these effects are positive, but for generics and payers the outcome is mixed.

Declaration of interest

The author has provided expert testimony on behalf of generic firms in numerous cases relating to patent litigation between patentees and generic firms. The authors have no other relevant affiliations or financial involvement with any organization or entity with a financial interest in or financial conflict with the subject matter or materials discussed in the manuscript apart from those disclosed.

Additional information

Funding

This paper has not been funded.