Final USMCA Text is a Missed Opportunity for Innovation
Dec. 12, 2019
Earlier this week, Speaker of the House of Representatives Nancy Pelosi (D-CA) reached an agreement with President Donald Trump on passage of the United States-Mexico-Canada Agreement (USMCA), which if passed into law would replace the defunct and much maligned North American Free Trade Agreement (NAFTA). In what has become surreal political theater, the House released draft Articles of Impeachment while agreeing to deliver President Trump one of his primary campaign promises. As we near the close of the decade, politics in the nation’s Capitol have become bizarre indeed.
Acting on False Assumptions
Not everyone is happy about the latest version of the USMCA agreed upon by the White House and House Democrats, including the U.S. Chamber of Commerce, which continues to support the overall agreement but has great concerns about the new provisions in the latest negotiated agreement between President Trump and Speaker Pelosi, which strikes expanded protection for biologic drugs from the agreement completely. Over the summer, House Democrats vocally opposed granting 10 years of regulatory data protection (RDP) for biologics inventions—an increase from 8 years in Canada and from 5 years in Mexico—arguing it would result in higher drug prices and delayed entry for biosimilars.
“We are seriously disappointed by the removal of certain intellectual property provisions, including but not limited to the biologics provision,” said Thomas Donohue, CEO of the U.S. Chamber of Commerce.” The decision to remove key intellectual property protections was based on the false assumption that these provisions would raise U.S. drug prices.”
Donohue is precisely correct in his analysis. Exclusive rights, whether in the form of data exclusivity or patent rights, do not raise drug prices. The belief to the contrary is a frequently held misconception that simply ignores the many years of research and development and the extraordinary financial investment required to innovate in the pharmaceutical and biologics areas. The belief that exclusive rights raise drug prices also ignores the many years and substantial cost it takes to navigate a byzantine Food & Drug Administration (FDA) approval process.
Still further, the myth that patents and data exclusivity raise drug prices ignores the unfortunate truth that the vast majority of drugs lose money or never make it to market in the first place, with only 10% of drugs actually achieving blockbuster status. While no one likes paying high prices for drugs, high prices don’t just pay for the successful drugs but also for the rest of the drugs that lost money on the market and those that never made it to the marketplace.
Patents and exclusive rights, such as data protection, do not enable super competitive prices, but what they do is allow prices to reflect true costs. The reason drugs are cheaper in other countries is because those other countries have price controls. If pharmaceutical and biotech companies want to sell into those countries, they have to charge those low prices.
It is the absence of exclusive rights that drives costs lower than a level that can justify the extraordinary cost of research, development and engaging with the FDA for efficacy and safety testing. The absence of exclusive rights enables free riders to take from innovators who invested substantial amounts of time, money and energy. You simply don’t get innovation when you allow free riders to take before innovators have recouped investments plus a suitable return on that investment to make the risk undertaken worthwhile.
While it may seem logical on the surface to believe that less data exclusivity and shorter patent protection is the answer, less protection does nothing to address the cost drivers associated with innovating in the first instance, nor does it address the cost drivers associated with the FDA efficacy and safety testing. Similarly, erosion of exclusivity similarly erodes the willingness of investors to undertake risk, which results in less innovation, not more innovation. Thus, had the USMCA continued to include strong data exclusivity for biologics, innovation would have been fostered.
“The original biologics provision would have resulted in more funding for innovative medical research with no additional cost to U.S. consumers,” Donohue explained. “Now, the only beneficiaries will be foreign governments and consumers who will continue to free-ride on the benefits of American research into new cures without contributing to their development.”
Stigmatizing IP in the Political Discourse
In its penultimate form, the USMCA called for each country to provide at least 10 years of data exclusivity for biologics, which kicks in once the innovator submits the data to the government for approvals. This data would under any other circumstance be business proprietary information that was held secret but is being released to prove that the drug in question is efficacious and safe.
The U.S. Trade Representative offered a ratchet down provision relative to biologic exclusivity whereby if Congress did decrease protections in the United States from the currently available 12 years of data exclusivity protection to the minimum 10 years under the Agreement, then Mexico and Canada could similarly ratchet down their data exclusivity protections under the Agreement in similar fashion. For a time, this compromise seemed to be the likely solution, but obviously in the end did not satisfy Speaker Pelosi and House Democrats.
Not only did the President and Speaker fail to achieve a good agreement or reasonable compromise on data exclusivity for biologics but what they have achieved damages the political will around IP by stigmatizing protections for innovations in the United States, making them politically untenable. Data exclusivity in any real or responsible form is now a political hot potato, which, entering an election year where campaign rhetoric can already be expected to be imprecise, is likely to lead to such vilification of intellectual property that it will only make it harder for innovators in all areas of technology to succeed.
Aside from the USMCA’s removal of data exclusivity being the wrong move to encourage medical innovation, it also sends the wrong message both domestically and internationally relating to intellectual property rights generally. This is another example of death by a thousand cuts for innovators and intellectual property owners and represents the further stigmatization of intellectual property rights in the public discourse.
The failure of the USMCA to deliver intellectual property protections for biologics is a missed opportunity to demand that our closest neighbors live up to higher standards. Negotiating with reluctant trade partners around the world will become all the more difficult.