Australia: A Kiwi-sized "Spanner in the works" of the TPP?

Last Updated: 12 June 2013
Article by Charles Tansey and Gareth Dixon

We have previously reported on progress toward the Trans-Pacific Partnership ("TPP") – a Free Trade Agreement ("FTA") presently under negotiation by Australia, Brunei Darussalam, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. Recently, the negotiating parties set themselves a goal of finalising the agreement by October 2013.

The TPP will have very real consequences in respect of (to name but a couple) the Australasian healthcare industry, and patent law reform in New Zealand. For the negotiating parties, it represents an opportunity to trade freely with the United States. However, it is also somewhat politically-sensitive such that in order to do so, certain concessions will probably need to be made.

It now seems unlikely that the TPP will be concluded in October, as previously hoped. John Key, the Prime Minister of New Zealand is on record speaking to a Chinese news agency, describing ongoing negotiations as "complex". Mr Key appeared happy to prolong negotiations toward the TPP if it meant China joining the agreement.

The notion of China joining the TPP is nothing new. Indeed, the United States has welcomed Chinese participation (and also the large Asia-Pacific economies of Japan, South Korea and India) provided that they "come up to speed" in respect of the standards required of the agreement. Mr Key's comments suggest that New Zealand's preference would be for reach over expediency – and one could imagine this to be true of many of the other parties to the TPP. For a small country such as New Zealand to be party to an FTA with the world's two biggest economies (not to mention the possibility of Japan, South Korea and India) would be something of a "bonus".

We will wait and see how this plays out over the next few months. However, until such time as the TTP is concluded, one should not anticipate too much – if indeed any – progress in relation to New Zealand's new patents legislation. In this respect, the horse must continue to lead the cart...

The TPP is intended to be a high-level agreement specifically aimed at emerging trade issues. Of such issues, IP is expectably one of the foremost. We say "expectably" because one of the main criticisms of the TPP negotiations has been the apparent secrecy under which they have been conducted. Set against the seemingly expansive scope of the agreement, this provides matter ripe for the conspiracy theorists. Indeed, in August 2012, the Australian Government and Opposition joined forces to vote down a motion by the Greens to disclose the full draft text.

However, "secrecy" ain't what it used to be. Wikileaks has seen to that – and in 2011, a number of controversial draft clauses (many of which were IP-related) were leaked to the public; to be best of our knowledge, their authenticity doesn't appear to have been disputed. That said, nine rounds of negotiations have concluded in the interim, meaning that although many of the original clauses may have since changed somewhat, the content of the leaked material at least provides some guidance as to what we may be in for...

It will come as no great surprise to hear that the United States appears to be "driving" the negotiations. Moreover, from a patents point-of-view, it will come as no great surprise to hear that the United States is strongly behind their "Big Pharma" when it comes to negotiating the deal.

In a nutshell, there are fears that the TPP may reduce access to affordable medicines throughout the region party to the agreement. Additionally, many worry that the TPP may not be flexible enough to accommodate existing non-discriminatory drug reimbursement programs and the diverse health systems of the member countries.

Australia already has a Free Trade Agreement with the US; this came into force back in 2005. It is therefore no coincidence that as we will see throughout this article, Australian patent law (especially as it pertains to pharmaceuticals) is presently closer to US law than is New Zealand's. However, on the other hand, it is worth noting that the leaked Wikipedia materials suggest that the TPP is intended to go far beyond the AU-US FTA (or indeed any other FTA). As we will see, Australia will likely need to make further concessions in order to secure a deal that goes far beyond the realms of tariff reduction and trade promotion.

Shelston IP acts throughout both Australia and New Zealand. In the remainder of this article, we examine some of the effects that the TPP may have on our respective health systems, which share many similarities – but also some significant differences.

Australia, via the Pharmaceutical Benefits Scheme ("PBS") and New Zealand, via the Pharmaceutical Management Agency ("Pharmac") both have a government agency that provides subsidised prescription drugs to their residents. Whilst there may be fundamental differences in their scope and operation, such schemes effectively ensure that residents have affordable and reliable access to a wide range of necessary medicines.

Are the PBS and Pharmac under threat from the TPP?

Certainly, the respective governments of both Australia and New Zealand think not. Indeed, the New Zealand Prime Minister, has gone on record stating that "Pharmac is not for sale [during the TPP negotiations]". So why then the paranoia?

Quite simply, we need the US more than they need us. In order to secure the TPP (and with it, for example, access to the lucrative US dairy market), both Australia and New Zealand will likely need to yield in several key areas. With this in mind – and as mentioned above, about all that has been made publicly-available over fifteen rounds of TPP negotiations is the Wikileaks material – this is probably where the paranoia kicks in.

Of the leaked material, "Article 8" relates to patents – and it is the draft clauses relating to clinical data exclusivity, linkage, patentable subject matter and patent term that are the real "eye openers" in terms of their potential effects on our pharmaceutical and healthcare industries.

"Clinical data exclusivity" relates to the protection of the clinical data submitted to a government regulatory agency in order to prove the safety and efficacy of a new drug – and the prevention of generics manufacturers relying on such data in their own applications for regulatory approval. Big Pharma has long argued that since obtaining clinical data is so expensive, it is unfair to let their competitors rely on such data without incurring costs themselves. On the other hand, excessive data exclusivity periods make things harder (more expensive) for generics manufacturers, ultimately keeping prices high.

Both Australia and New Zealand presently allow "springboarding" of a pharmaceutical patent – that is, the use of patented subject matter (during its patent term) to obtain the clinical data necessary for the regulatory approval process. The rationale has always been so that generics are able to enter the market the day after the patent expires – thereby preventing a de facto extension of term. However, as springboarding often means that the generics manufacturer obtain their own data rather than rely upon another's, this doesn't appear to be at odds with the intent of the draft proposal (which reflects Big Pharma's above-mentioned concerns).

Presently, both Australia and New Zealand provide five-year data exclusivity periods. The US, on the other hand, provides five years for new pharmaceutical chemical entities, three years for new indications – and twelve years for biologic products. Under the TPP negotiations, they are thought to be pushing for something similar throughout the countries party to the agreement.

Net effect: Drug prices wouldn't necessarily rise as such – but may take longer to fall due to a lack of competition from generics, who would face greater expenses and possibly longer delays in getting their products onto the market.

"Patent linkage" delays regulatory approval of a generic pharmaceutical until such time as any patents covering the drug in the relevant territory have expired – it's almost like a counter-balance to springboarding. In essence, two government agencies (the regulatory body – in the US, the Food and Drug Administration ("FDA") and the Patent Office) communicate so as to ensure that neither undercuts the efforts of the other.

In the US, the FDA maintains a list of pharmaceuticals currently under patent; this is popularly known as their "Orange Book". They will not provide marketing approval for a generic that would infringe any of the patents recorded in the book until such time as the relevant patent has expired. Moreover, a 30-month stay of marketing approval is activated where generic applicants challenge the validity of existing patents.

By comparison, in Australia, the burden is reversed. An applicant for regulatory approval must declare whether their product would infringe an existing patent and must notify the patentee of this declaration. The Therapeutic Goods Administration ("TGA") will not provide approval for a generic copy which would infringe an existing patent.

New Zealand currently has no patent linkage provisions, nor are any contemplated in the impending new legislation (the Patents Bill 2008) which is presently before Parliament.

Doctors Without Borders has previously noted that patent linkage effectively requires the various regulatory authorities to assume responsibility for policing patents. The European Commission's Pharmaceutical Sector Inquiry Report of November 2008 cautioned against patent linkage and referred to innovator-blocking tactics in relation to generics and obstacles to innovation.

Net effect: Drug prices wouldn't necessarily rise as such – but may take longer to fall, as generic competitors will take longer to reach the market.

Patentable subject matter and New Zealand. Don't get us started. We've penned several recent articles outlining New Zealand's on-again-off-again stance relating to the patentability of computer software. The present "compromise" position remains at odds with the time-honoured ratio from the 1980 US case of Diamond v Chakrabarty. However, whereas "everything under the sun made by man" would look somewhat out of place in a multi-lateral trade agreement, the formalised US proposal only allows subject matter to be excluded from patentability on the very narrow grounds that its commercial exploitation would be contrary to "ordre public" or morality.

From a pharmaceuticals point-of-view, this may open up access to patents for methods of medical treatment of a human being using a pharmaceutical; these are presently banned in New Zealand (although they are allowable in Australia).

Net effect: Broadening the definition of patentable subject matter may allow patentees a more liberal scope than they are presently afforded in New Zealand. More pharmaceutical patents – or more correctly, more pharmaceutical indication patents mean higher prices – and for longer. The situation in Australia probably wouldn't change a great deal, where the ambit of patentable subject matter is already rather broad.

According to the Wikileaks material, the US also proposes doing away with pre-grant patent oppositions – a cornerstone of both the Australia and New Zealand patent systems. From a pharmaceuticals perspective, this effectively prevents competitors (such as generics) from challenging the grant of a patent in advance – and leaves them with the considerably more arduous task of persuading the relevant authority (be it the Patent Office or a Court) to change its mind after a patent has been granted. This is particularly relevant in the case of "follow on" drugs, which may represent only a very modest advance on those whose patent protection is nearing its end.

Net effect: The onus falls heavily upon Patent Examiners to "get it right". If they don't, the burden then falls, perhaps unfairly, on interested parties such as generics. It goes without saying that if a patent is granted on a drug that is perhaps not worthy of patent protection – and if a competitor is dissuaded from challenging such grant due to cost and complexity, then the consumer is the overall "loser" such that they then have to pay a patent premium on a drug that should, in an ideal world, be relatively inexpensive.

One final key US proposal arises in respect of an "extension of term" for pharmaceutical patents. By "extension of term", we're talking about the same sort of thing as a Hatch-Waxman extension in the US, or a Supplementary Protection Certificate in Europe. In short, Australia offers one, New Zealand (presently) does not.

The main arguments advanced in favour of an extension of term for pharmaceutical patents are to ensure that the patent system provides adequate incentives for investment in the development of new pharmaceuticals; and to provide incentives for pharmaceutical companies to invest in the country providing for the extension. On the other hand, the main proposition against extending the term of a pharmaceutical patent is the cost that would be imposed on consumers; these costs occur directly through increased retail prices and indirectly though higher costs to the public health system.

As signatories to the TRIPs agreement, Australia and New Zealand are obligated to offer a minimum patent term of twenty years; there is no requirement to provide a longer term, although they are free to do so should they wish. Accordingly, Australia and New Zealand have each drawn very different "lines in the sand" in respect of balancing the arguments for and against a pharmaceutical extension of term.

Under section 70 of Australia's Patents Act 1990, the term of a pharmaceutical patent may be extended for up to five years subject to a patentee meeting certain, rather strict criteria. An extension of term is intended to provide some measure of compensation to a patentee, who before being able to sell a patented drug, must first conduct safety and efficacy tests to the satisfaction of the local authorities.

New Zealand patent law does not offer an equivalent to section 70 of the Australian legislation. Moreover, no equivalent is proposed in the Patents Bill 2008, which, as mentioned above, is presently before Parliament.

In New Zealand, pharmaceutical extension of term was the subject of a governmental review dating back to a discussion paper released in June 2003. When all the "pros and cons" were considered, the New Zealand Government opted against enacting a pharmaceutical extension provision on the basis of its economic impact on consumers – and this is the side on which New Zealand's "line in the sand" has been presumed to lie.

However, enter the TPP negotiations. The US Government publishes an annual report entitled Foreign Trade Barriers, in which it particularises laws and regulatory mechanisms of foreign countries that are considered significant barriers to US exports. In this document, US pharmaceutical companies have identified New Zealand's lack of pharmaceutical extension (and its prohibition on patents for methods of medical treatment, discussed above) as being of particular impediment to trade.

Although somewhat speculative, the TPP could see New Zealand patent law aligned for compatibility with Australia's section 70, so that US Big Pharma are able to maintain their New Zealand patents for longer – and in turn, make greater profits.

Net effect: New Zealand patents can be held by Big Pharma for longer, keeping generic competitors at bay and maintaining higher prices. Australian patent law is already fairly well aligned with the content of the leaked material in this regard.

In summary, the TPP has the potential to radically alter the healthcare landscape in both Australia and New Zealand by effectively boosting the patent monopoly rights already held by Big Pharma. Tipping the scales in favour of these corporations may endanger government agencies such as the PBS and Pharmac – the respective cornerstones of the Australian and New Zealand health systems.

Whereas both governments have denied that such a regime will be entered into, the apparent secrecy of the negotiations has made many stakeholders somewhat nervous. Indeed, given the previous (seemingly "firm") commitment to finalise the TPP by October 2013, things may be about to "get ugly". Conspiracy theorists throw in the fact that a further US proposal is to allow corporations to directly sue governments that impose barriers to "potential profits" (e.g., Phillip Morris' attempts to sue governments imposing plain packaging requirements on tobacco products) – and suggest that this is likely to be our respective governments' only real "non-negotiable".

It is also interesting to note that New Zealand's Patents Bill again sits idle while the TPP negotiations rumble on. Only time will tell. Watch this space.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Charles Tansey
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