Here's a topic that occupied a bit of my time earlier this month. (Then, I went on holiday, and left my colleagues holding the bag ;) ) Its a bit out of date and a bit rough, but still gets the main points across...
ONTARIO FORMULARY MOVES TOWARDS TENDERING
The Ontario government recently announced a new tendering program for the listing of generic pharmaceutical products as benefits on the Ontario Drug Benefit (“ODB”) formulary. This program promises to radically change the way multi-source drugs are sold in the $7.6 billion Ontario pharmaceutical market.
A move towards tendering on the ODB formulary is a critical public policy issue, connecting the cost of pharmaceuticals to the public, the cost of administering the ODB programs to the Ontario government, Federal patent and pharmaceutical policy, revenue streams for pharmacies, and the future structure and health of the generic pharmaceutical industry. The resolution of these questions will have significant long-term results, and will also reflect the Ontario government’s ability to generate and implement good public policy. This presents strong challenges – both immediate and long term – for the generic pharmaceutical industry, and may also have a significant long-term impact on the brand-name industry in
The
To market pharmaceuticals in Canada, a company must first obtain a Notice of Compliance (NOC) from the Canadian federal government. In Ontario, the next step for generic drugs is to be listed as interchangeable and a benefit on the provincial drug plan formulary. Interchangeability, which controls which drugs may be interchangeably dispensed by a pharmacist when filling a prescription, is not affected by the new tendering program.
A listing as a benefit means that the Ontario government will pay for the product for patients who are covered by the ODB scheme, generally based on age and financial status. A key issue is the amount the Ontario government is willing to pay for a given product, the “list price”, which is negotiated up-front. Generally, as long as a generic product was able to ensure supply and meet Ontario’s cost expectations (generally 50% of the reference “brand” price), it would be listed on the formulary.
A listing as a benefit on the formulary is the key to both the public (covered by the ODB scheme) and private markets in Ontario. Most pharmacies stock only two versions of a drug, the brand name and one generic, to minimize the pharmacy’s operating costs. Generally, a manufacturer’s product that is not listed as a benefit is not likely to be purchased by pharmacies, who instead will purchase a product that can be sold to their ODB customers as well as their non-ODB customers. Once listed as a benefit, generic pharmaceutical manufacturers compete for pharmacy shelf-space by offering the pharmacies professional allowances - after-sale rebates that are limited to 20% for ODB sales and unlimited as a percentage of sales in the private sector market.
There is a two-tier pricing system in Ontario under which private sector payers pay more for generic and brand-name pharmaceuticals than the price listed on the ODB formulary. In the case of brand-name drugs, the ODB Executive Officer may negotiate secret rebates from brand-name drug makers for patented products. The tendering scheme extends this to the generic drug sector.
The New Tendering Scheme
Under the new scheme, companies will bid for listing as a benefit on the ODB formulary. The two best bids will be listed as benefits for a two-year term (with a possible one-year extension), while all other companies will be de-listed from the ODB formulary. Companies will compete not on list price (which will remain at 50% of the brand price for all bidding companies), but primarily on a confidential volume-based discount to be rebated to the Ontario government, along with other objective and subjective factors. The amount of the secret rebates will not be disclosed by the government, and any disclosure by the winning companies will result in the forfeiture of the listing. This is expected to widen the spread between the prices paid by the government and private payers for multi-source products.
As a pilot project, four drugs - gabapentin, enalapril, ranitidine, and metformin - will be put up for tender on August 1.
Effect on Generic Industry
This scheme, if implemented widely, will disrupt the business models for firms in the generic pharmaceutical industry that sell in the Ontario market, which represents 39 percent of the Canadian market. Instead of predictable access to the formulary, companies will be engaged in a feast or famine competition for the market. In addition, it may be anticipated that even for the winning companies, profit margins on products will be small as generic companies are squeezed between rebate demands by both the Ontario government (to get on the formulary) and pharmacies (to be stocked). Some Ontario-focused generic companies (Ontario is home to one of the largest concentrations of generic drug manufacturers) may be driven out of business, or less dramatically the industry may consolidate through mergers or acquisitions into larger companies that can better manage the uncertainty associated with multiple tendering competitions.
Effect on Pharmaceutical Patents and Brand Name Companies
The immediate effect of this change on brand name companies will be small. Brand name companies are unlikely to compete directly in the tendering process, as a win would reduce the reference “brand” price, the maximum price at which the brand name is allowed to sell in Ontario, to the “list” price specified in their bid, a maximum of 50% of the original brand price. Brand-name drug companies are particularly sensitive to list price reductions as they can put pressure on their prices in other markets, such as the large and lucrative U.S. market. However, brand companies may compete via authorized generics, a company licensed by the brand company to produce the product under whatever patent protection the brand company may possess. Brand companies may also compete in situations where they are already openly selling their products for lower prices in other jurisdictions, as may happen in Ontario with ranitidine.
The more important effect of the tendering scheme from the point of view of brand name companies may be to extend and strengthen their effective Canadian patent rights. The primary mechanism in
Ontario is 39% of the total Canadian market. If tendering is widely used in
Challenges for the Generic Industry and Ontario
The government announcement has generated particular opposition from pharmacists and the generic pharmaceutical industry. The generic industry must confront the longer-term policy drivers that underpin the
As a final complication, this policy announcement and implementation is proceeding at an unusual pace, with the tendering policy first announced to the industry on July 4, 2008 with no previous consultation, written comments to be received by July 11, and the first call for bids to have taken place on July 25. The only written description of the program provided to stakeholders is a power point presentation and a question and answer document. Furthermore, it appears that the policy has taken various Ontario cabinet ministers by surprise. After industry submissions and meetings with government officials, the date of the first call for bids was pushed back by a week to August 1, 2008. However, it is unclear whether the previously announced schedule – a closing date of August 22 and a decision to be announced on September 12 - will be likewise delayed.
This is perhaps an inevitable result of the design of the relevant institutions for developing drug policy in Ontario, which grants significant power and discretion to one official (the “Executive Officer”), who perceives their mandate as solely to lower the immediate costs of administering the ODB program to the exclusion of any other considerations, including increased costs because of later generic market entry and with little formal oversight by other bureaucrats or elected officials. A combination of power with an exclusionary focus on only one of many public interest objectives is likely to generate poor public policy.
It is also unclear, if the pilot is successful, how widely the tendering system may be used. It has been suggested that the system may be widely implemented; however, in the wake of complaints from industry it has also been suggested by government sources that tendering may be limited to only about a dozen products. In any case, even a limited tendering scheme in the present may turn into a widespread tendering scheme in the future.
Tendering on the ODB formulary is a critical public policy issue. It directly affects the cost of administering the ODB programs to the
Alexander Stack
Gilbert’s LLP The Federal Court of Canada recently handed down a decision in the first-ever appeal from the re-examination procedure introduced into the Patent Act in 1987. Genencor International, Inc. v. Commissioner of Patents and Attorney General of Canada 2008 FC 608 sets a number of important precedents, including determining the role of the initiator of the re-examination and the standard of review, and highlights difficulties with the present re-examination system. The trial judge also made a surprising ruling that it is not necessary for patent examiners to interpret claims by the same methodology as courts, raising the specter of many future complications. We can refine our views on the strategic use of re-examination proceedings in light of this decision.
The Re-examination Procedure
Re-examination provides a relatively inexpensive, summary procedure to have the Patent Office reconsider the claims of an issued patent. Any person may request re-examination by filing a request with written prior art (patents, patent applications or printed publications). Within three months, a Re-examination Board of at least three persons, two of whom must be Patent Office employees, determines whether the prior art presents a substantially new question of patentability of any of the claims in the issued patent compared to the proceedings during the initial prosecution. If the Board finds that the prior art does not raise a substantially new question of patentability, the process ends with no right of appeal on the part of the initiator of the re-examination. If a new question of patentability is found, the Board then has 12 months in which to cancel, accept or amend the claims in the issued patent. The patentee makes submissions during this period, typically making arguments in support of its issued claims, and if desirable submitting amended claims for consideration. The final decision of the Board may be appealed to the Federal Court, as was done in this case.
No Role for the Initiator of the Re-examination
The Genencor proceedings reinforce the limited role of the initiator of the re-examination beyond the initial request. In this case, the re-examination was initiated by Novozymes A/S, who alleged that the Genencor patent was anticipated by prior art that was not considered in the initial examination. The Re-examination Board agreed, and cancelled all of the claims of the Genencor patent.
When Genencor appealed to the Federal Court, Novozymes sought standing as a party. The Federal Court of Appeal affirmed that the initiator has no role after persuading the Board that a re-examination is warranted. Subsequent written submissions by Novozymes were not considered or even read by the Board, and on appeal Novozymes was refused standing as either a party or intervenor. This decision confirms that re-examination is an ex parte proceeding, and that the initiator of the re-examination has only a minor influence on its outcome.
Standard of Review
Gibson J. found that the appropriate standard of review of the Board’s decision is “reasonableness”, or that the decision of the Board should not be interfered with in the absence of “palpable and overriding error”.
In contrast, in typical infringement or impeachment actions, no deference is given to the decisions of the patent examiner. However, in a typical patent action, the parties have placed evidence before the court which was not before the examiner, making the question of deference moot. This raises unanswered questions regarding the standard of review of patent examiners’ decisions in impeachment and infringement actions if no new evidence or arguments are placed before the court, and plays into the strategic use of re-examination procedures, as discussed below.
It may seem odd that the patentee lost its patent without the opportunity to be heard before a court on a standard of correctness, with expert witnesses and an authoritative judicial construction of the claims. However, it should not be forgotten that the patentee was the beneficiary of ex parte hearings before the Board and Court, with no written or oral evidence or arguments presented by parties adverse in interest. As might be expected, this situation is generally perceived to be favourable to the patentee, and this is the first of 47 re-examination decisions under the post-1987 Patent Act to be appealed by a patentee.
Difficulties with the Re-examination System
As emphasized by Gibson J., the re-examination procedure set up by Parliament presents difficulties. Primarily, there was no party to contest the patentee, Genencor, on the substantive merits of the Board decision. As discussed above, the initiator of the re-examination, Novozymes, was denied party or even intervener status.
The Commissioner of Patents declined to participate, citing non-intellectual property case-law holding that it is inappropriate for federal agencies to defend their decisions during appeal proceedings. This left the Attorney General of Canada to be necessarily added as a party under the Federal Court Act, but the Attorney General declined to address the merits of the Board decision, arguing only that the procedures provided by the Patent Act and the principles of natural justice were followed by the Board.
As a result, the proceedings before the Federal Court were ex parte on the merits, which while consistent with the statutory scheme of the Patent Act, placed the trial judge in an uncomfortable position. To some extent, the trial judge’s discomfort was relieved by his finding that the review was on a reasonableness rather than a correctness standard. However, if on appeal the correct standard for review is found to be correctness, Gibson J. described his position as “untenable” on substantive issues.
The Different Roles of Courts and Examiners?
Surprisingly, Gibson J. analyzed the approach patent examiners may take to claim construction and concluded that certain Supreme Court jurisprudence applied to trial and appellate courts, but not to examiners. He quoted Binnie J. of the Supreme Court of Canada, who wrote in the 2000 Whirlpool case that a simple dictionary approach to construing claims must be rejected in favour of a reading of the specification to put claim terms in context. Gibson J. then specifically rejected the applicability of this ruling to patent examiners during the examination of patents, whether as part of a re-examination or during normal patent prosecution. Gibson J. returned to this point a second time in his decision, writing that “[C]ounsel for Genencor is urging that the Court place on the Board a burden mandated for courts by the forgoing quotation from Whirlpool, which is entirely inappropriate to their experience, to their accustomed role and the role that is contemplated for them by the re-examination provisions of the Patent Act.”
It is unclear from reading the decision why Gibson J. felt it was necessary to address this issue in this manner, as the record from the Re-examination Board reveals resort by the Board to the specification of the Genencor patent in construing the claims.
Fundamentally, this ruling suggests that a patent claim may be office-valid, but court-invalid, and vice-versa. The results are pernicious. For example, in an appeal from re-examination – the situation in the Genencor case - it may be that the claims are invalid under the claim construction allowed in the patent office, but valid under the claim construction required of the courts. However, since the only question on appeal is on whether the Board properly performed its duties, the patentee has no route to re-issue the claims or get them before a court for a judicial consideration: if the patent was properly rejected under the claim construction standards that apply to patent examiners, that is the end of the matter. Assuming the Genencor case is appealed, this specific finding is most likely to be overturned.
Discussion
From a strategic point of view, the re-examination procedure has typically been disfavoured by counsel to potential patent defendants, largely viewed as providing an opportunity for patentees to strengthen their claims in an ex parte process rather than as a simplified procedure to knock out invalid claims. The Genencor hearings reinforce these views, given the rejection of Novozymes’ attempts to influence either the Re-examination Board or the appeal to the Courts. However, it should be noted that if the Genencor decision stands, patentees will find it difficult to overturn unfavourable decisions by the Re-examination Board, suggesting that in limited situations a re-examination reference may be a fruitful move by a potential patent defendant.
For patent holders, this case and recent Canadian jurisprudence on the standard of review of administrative decisions suggests viewing re-examination more favourably. Possibly, where the facts and arguments on claim validity made before a patent examiner are identical to the facts and arguments before the court, the court is legally obliged to review the examiner’s decisions on a reasonableness rather than a correctness standard. If that is the case, it may be advantageous for a patentee anticipating a particular validity attack to submit the argument to a Re-examination Board and argue the matter in an ex parte proceeding rather than risk an impeachment action with full participation by an opponent. However, the application of recent case-law on the standard of review in the patent context is largely unexplored, and this particular advantage of the re-examination process may be illusory.
Finally, one implication of the Genencor position that patent claims may be construed differently by examiners and courts is that the initiator of re-examination may be entitled to two “kicks at the can”. Potential patent defendants can submit an argument to a Re-examination Board, and if it is accepted, under Genencor the patentee is faced with difficulty in overturning the Board’s decision. If the argument is not accepted by the Board, the potential defendant can argue the validity before the courts by noting that the Board’s method of claim construction is not the same as the Court’s. In other words, the initiator of the re-examination gets to attack the patent on the basis of two different claim constructions. However, as noted above, the position that examiners and courts vary in their approaches to claim construction is the aspect of the Genencor decision most vulnerable to appeal.
It is unknown at this time whether the Genencor decision will be appealed to the Federal Court of Appeal. If it is, several interesting issues may well be raised. The adoption of a standard of review of reasonableness rather than correctness depends in part on the identification of patent examiners as being highly skilled in relation to their mandates and as persons skilled in the art, which may be questioned or at least should be further explored. As noted by Gibson J., the very structure of the re-examination process raises questions of whether a review on the standard of correctness is tenable. Finally, the finding that patent examiners can take a different approach to claim interpretation than the courts is of fundamental importance to the patent system, and hopefully will be subject to appellate approval or revision.
Alexander Stack
Gilbert’s LLP
My name is Alex Stack, and I am an associate with Gilbert’s LLP in Toronto with an unnatural interest in patent law and things associated with it: innovation policy, competition law, trade law, other intellectual property. Recently, I’ve been doing a lot of work in the pharmaceutical industry, but I’ve also done a fair bit in mechanical and software patents ( I lived through the .com bubble!). I mainly do litigation, opinion work and government relations, although in the past I’ve been primarily a solicitor (including patent and trade-mark prosecution).
I am mainly starting this blog as an outlet for my short occasional writings, thoughts or babbling on patent law or whatever else interests me (football, anyone?). I’ve set myself a goal of posting at least once a month, and we’ll see how things go. Hopefully, I’ll be able to convince some other people to join me on here, but I’m going to keep it simple for now.
I’m new to this, so please bear with me as I figure this blogging thing out!
