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In the first of this insight series, we outline the proposals and discuss their potential impact on pharmaceutical innovation.

PART 1 – Reforming the Incentive Ecosystem

The European Commission has proposed reforming the EU pharmaceutical legislation, which is about 20 years old. Depending on how the proposed changes take shape over the upcoming trilogue discussions between the European Commission, European Parliament, and Council of the EU, this could have significant implications for the European innovation ecosystem by altering some of the existing incentive mechanisms for developing innovative pharmaceutical products.

This week marked an important milestone on the way to the pharmaceutical legislation reform as the European Parliament adopted its position. Notably, their position differs significantly from the European Commission proposal published about one year ago, in April 2023. This would suggest potentially more heated debates in the upcoming months when the legislative process continues.

Over the coming months, we will take a deep dive into key elements of the changes that are coming and their potential impact through a series of Insights articles authored by members of OHE’s Economics of Innovation research team. In this – Part 1 of the OHE Insight series –we introduce the proposed changes to the regulatory protection incentive system and equip you with the relevant background and the journey toward the reforms. We highlight key areas of potential impact (intended and unintended) and remaining questions that warrant further research.

What are the overarching objectives of the reforms?

The European Commission stated the following overarching objectives for a new Pharmaceutical Legislation:

  1. To guarantee a high level of public health by ensuring the quality, safety and efficacy of medicinal products for EU patients;
  2. To harmonise the internal market for the supervision and control of medicinal products and the rights and duties incumbent upon the competent authorities of the Member States.
  3. To make sure all patients across the EU have timely and equitable access to safe, effective, and affordable medicines;
  4. To enhance security of supply and ensure medicines are always available to patients, regardless of where they live in the EU;
  5. To offer an attractive innovation- and competitiveness- friendly environment for research, development, and production of medicines in Europe;
  6. To address antimicrobial resistance (AMR) and the presence of pharmaceuticals in the environment through a One Health approach;
  7. To make medicines more environmentally sustainable.

What is the background to the reforms?

The discovery and development of pharmaceutical innovation is rewarded with intellectual property protection in the form of patents, which provide innovators with a de facto monopoly term to enable developers to recoup their heavy investment in the research & development (R&D) phase. The maximum period of patents is 20 years; patents are filed early on in development, so in practice the effective patent life of a medicine once marketed is around 13 years on average.

The EU regulatory framework sets out the rules and obligations on R&D and the medicines authorisation processes to ensure that medicines are safe and effective. Additionally, it establishes incentives designed to effectively prolong the protective period and generate a higher return on investment for innovators under certain conditions.

The current EU pharmaceutical legislation was adopted in the early 2000s and offers the following additional incentives:

 

  • Regulatory data protection (RDP): protects the innovator’s non-clinical and clinical data from use in generic or biosimilar approvals (8 years from the date of approval)
  • Market protection (MP): protects the innovator’s product from the launch of generic or biosimilar products (2 years from the end of RDP; potentially an additional year if a new indication is approved)
  • Supplementary protection certificate (SPC): extension of patent protection (5 years maximum, potentially an additional 0.5 years for completion of paediatric requirements)
  • Orphan market exclusivity (OME): protects the innovator’s orphan medicinal product from the launch of similar medicines in the same indication (10 years from the date of approval; potentially an additional 2 years for completion of paediatric requirements)

What are the proposed reforms?

In April 2023, the European Commission published two proposals for a new Directive and a new Regulation to replace the existing EU pharmaceutical legislative framework (consisting of four legislative texts). At the core of the proposed reform is the creation of a more targeted incentive system, which is a departure from what the European Commission currently describes as a “one-size-fits-all” system, which gives all innovative medicines the same eight years of RDP and up to 3 years of MP thereafter.

In the 2023 proposals by the European Commission, the system would provide significantly lower baseline rewards. For new medicines, baseline regulatory data protection (RDP) would be reduced to six years. For orphan medicines, OME would be nine or five years for an application without novel clinical development. Additionally, the reform would provide a variety of novel and targeted extensions that reward new indications (+ 12 months RDP), unmet needs (+6 months RDP or 12 months OME), comparative studies (+6 months RDP), and launching the product in all 27 member states within two years of approval (+ 2 years RDP or +1 year OME). Furthermore, the Commission created a new type of data protection dedicated to repurposed medicines, which could receive an enhanced 4-year data protection for the first time. Finally, the Commission proposed introducing a reward system for the development of novel antibiotics to combat AMR, structured around transferable data exclusivity vouchers (TEVs) which offer 1 additional year of RDP for the innovator of a novel priority antimicrobial. The innovator could use this exclusivity voucher for the innovative antibiotic or alternatively sell it to generate an immediate monetary reward.

One year on from these proposals, in April 2024, the European Parliament (with the support of the ENVI subcommittee) adopted its position to significantly modify the initial proposals by the European Commission. While the European Parliament generally supports a more targeted incentive system, it believes in strengthening incentives to foster pharmaceutical innovation in the EU. They outline a modest reduction of baseline RDP protection for all medicines to seven and a half. Only a few conditional RDP extensions would be applicable, which can extend RDP only to a maximum of eight and a half years if there is an unmet medical need (+12 months RDP), comparative clinical trials (+6 months), or R&D activities in the EU (+6 months). The proposal for a conditional reward for launching in all EU member states has been removed, though there are still requirements for timely launch for member states that request it. Other targeted incentives for new indications have been removed relative to the original European Commission proposal. Similarly, no reduction of baseline protection is foreseen for orphan medicines, but products addressing a high unmet need would profit from one additional year of OME. In the context of rewarding innovation that targets an unmet need, the European Parliament also stimulates a discussion as to the “legal” definitions of “unmet need” or “high unmet need” and how it should be sufficiently inclusive and consider the patient voice. This is welcome, but clarity on this definition over the coming months will be critical for stakeholders, if the provision is to have the intended effect.

In line with the ordinary legislative procedure, the Council of the EU and the European Parliament will continue debating on the proposals in the coming months. This process will also be interrupted by the European elections on 6-9 June.

What are the implications for the economics of pharmaceutical innovation?

Intellectual property protection in the form of patents is seen as a critical component to the economics of pharmaceutical innovation because it allows the innovator to generate a return on investment during the time of protection, thereby providing an incentive for R&D. In principle, additional data and market protection periods subject to the proposed reforms can offer the same benefits and rewards. Still, there is limited direct evidence on the relative impact of such incentives. More research in this area would be helpful in better estimating and anticipating the positive and negative consequences of the proposed reforms, particularly in relation to R&D and on the global competitiveness of Europe in attracting pharmaceutical industry investment.

Impact on medicine costs: Reducing RDP may lead to cost-savings for health systems and payers amid the lower level of protection and subsequent earlier generic market entry. The European Commission’s impact assessment report by Technopolis found that the baseline reduction of RDP by 2 years would reduce annual costs for public payers by EUR 1.13 billion and stimulate the generic market with an additional profit of EUR 266 million per year. The European Parliament’s more modest proposal of a 0.5 year reduction would be expected to have a more modest impact, in the same direction.

Impact on return on investment and R&D activities: Reducing RDP may lower the return on investment for innovators, with potential spillover effects on R&D spending and access to pharmaceutical innovation. In general, there is a link between pharmaceutical market size and the development of pharmaceutical innovation. Consequently, factors and incentive systems that can reduce the pharmaceutical market size may negatively affect the R&D of pharmaceutical innovation. A report by Copenhagen Economics found that countries with RDP incentives have higher access to existing medicines and clinical trials. The European Commission’s impact assessment report by Technopolis anticipates that the baseline reduction of RDP by 2 years (as per the initial proposals) would reduce gross profits for innovators by 15% (EUR 1,97 billion/year), which is associated with spillover effects on follow-on R&D investment (~EUR 670 million reduction when assuming a 20% R&D rate). In this context of negative spillover effects, a report by Dolon for the European Federation of Pharmaceutical Industries and Associations (EFPIA) estimated that the proposed two year reduction in RDP would result in 22% fewer pharmaceutical products being developed up to 2035, associated with an estimated annual reduction in R&D investment of EUR 2 billion.

Impact on equitable access to innovation across the EU: A conditional RDP reward for launching a product in all 27 EU member states within two years was originally proposed to improve equitable access to pharmaceutical innovation. The European Commission’s impact assessment report by Technopolis anticipates that this reward would lead to a 15% increase in access to innovative medicines, associated with a EUR 444 million gain for payers and patients. However, some argue that it is disproportionate to place all responsibility (and consequence) of failure to launch in all countries on industry, as it relies on member state competent authorities; this was the position taken by European Parliament this week, who voted to scrap this provision.

Impact on the global competitiveness of the EU to attract R&D investment: The European Commission expects no negative consequences to Europe’s competitiveness in attracting R&D investment as they believe there is no direct link between regulatory incentives and where the innovation occurs. EFPIA disagrees, stating that regulatory and market protection will be considered by companies when deciding on where to invest and conduct R&D, but acknowledging that a wide range of factors are considered including the science ecosystem, manufacturing and technical capabilities, and fiscal incentives. Further research on where pharmaceutical companies conduct their R&D activities and why is needed to anticipate the impact of these reforms on the EU’s global competitiveness.

In considering the impact of reform, we have highlighted the potential consequences of reduced regulatory data protection on (lower) medicine spend and (lower) incentives for innovation, but these must be balanced with the targeted additional incentives potentially being introduced for things like addressing an unmet need. This week’s proposals by the European Parliament, if adopted, certainly make for a far less radical reform than that originally envisioned by the European Commission one year ago. That said, there were some surprises in the European Parliament’s proposal beyond the scope of the regulatory protection matters we discuss in this Article, including calls for more coordination and cross-border agreements on pricing and procurement across Member States.  

We will watch with interest how the debate evolves, and how radical (or diluted) the reform turns out to be for innovation incentives in the pharmaceutical market.  

Outlook

The potential consequences of tweaks to the incentive system of regulatory data and market protection are deservedly getting a lot of attention. The balance between alternations to baseline incentives and the addition of targeted incentives is nuanced and careful consideration and research into the intended and unintended consequences is needed.

The reform proposals contain other specific measures of great importance for pharmaceutical innovation. One topic of particular interest to us at OHE is policies to promote the development of novel antibiotics. Notably, the European Parliament proposes to introduce a legal mandate for the European Commission to establish a Union push and pull incentives scheme as an additional measure to incentivise the development of novel antibiotics which could include market-entry rewards delinked from sales, ‘play or pay’ fees, or voluntary joint procurement with subscription payment mechanisms. This would mark an important development towards more innovative and collaborative approaches to procurement. They also expressed scepticism towards a transferable voucher incentive system that was proposed by the European Commission to promote antibiotic development. We will take a deeper dive into this topic in the next Insight article in our series.

Over the coming months, we will continue to look at critical proposals, outline their impact on the pharmaceutical innovation ecosystem, and discuss evidence or gaps in knowledge. In upcoming editions of this OHE Insights series, we will cover incentives in areas of market failure (e.g. orphan drugs and antimicrobial resistance), supply and environmental sustainability incentives, and also the international context, exploring how these changes align or contrast with changes we observe across the globe to the incentive ecosystem for pharmaceutical innovation.

References

Copenhagen Economics, 2023. Regulatory Data Protection – How adopting regulatory data protection can increase medicine availability, innovation, and investment. [online] Available at: https://copenhageneconomics.com/publication/regulatory-data-protection-how-adopting-regulatory-data-protection-can-increase-medicine-availability-innovation-and-investment/ .

Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs (European Commission), 2018. Study on the economic impact of supplementary protection certificates, pharmaceutical incentives and rewards in Europe: final report. [online] Publications Office of the European Union. Available at: https://data.europa.eu/doi/10.2873/886648 [Accessed 10 Apr. 2024].

Dolon, 2023. Revision of the General Pharmaceutical Legislation: Impact Assessment of European Commission and EFPIA proposals. [online] Available at: https://www.efpia.eu/media/msadqxbf/revision-of-the-general-pharmaceutical-legislation-gpl-impact-assessment.pdf [Accessed 5 Apr. 2024].

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European Commission, 2023c. Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the Union code relating to medicinal products for human use, and repealing Directive 2001/83/EC and Directive 2009/35/EC. Available at: https://health.ec.europa.eu/system/files/2023-04/com_2023_192_1_act_en.pdf [Accessed 4 May 2023].

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European Federation of Pharmaceutical Industries and Associations, 2024. Make or break: The future of Regulatory Data Protection in Europe. [online] Available at: https://www.efpia.eu/news-events/the-efpia-view/blog-articles/make-or-break-the-future-of-regulatory-data-protection-in-europe/ [Accessed 10 Apr. 2024].

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