Nicholson Price II: Making Do in Making Drugs

"M&M chocolate candies are made with a precision far beyond the capabilities of many drug manufacturers." This is the intriguing opening to a thorough critique of innovation in pharmaceutical manufacturing by Nicholson Price II (Petrie-Flom Fellow), Making Do in Making Drugs: Innovation Policy and Pharmaceutical Manufacturing (forthcoming in B.C. L. Rev.). Although drug discovery "is the focus of a calibrated innovation policy," Price argues that drug manufacturing is typically inefficient and non-innovative for two reasons: high regulatory barriers, on the one hand, and ineffective intellectual-property incentives, on the other.

In the first part of the paper Price describes several regulatory barriers that have discouraged firms from innovating in how they make drugs. He suggests the main barrier stems from the FDA's pre-approval process: basically, whenever a firm files a New Drug Application (NDA), it must also include a description of the methods for the "manufacture, processing and packing of such drug," which must be approved by the FDA prior to marketing. Fearing delays in gaining market approval, firms simply avoid using innovative techniques when possible. Price also details several important post-approval barriers, including cumbersome notification and reporting requirements, and "lock-in" of outdated procedures at a variety of levels. Even when the FDA does not mandate particular technical standards in its approval process, the industry tends to adhere closely to examples provided in non-binding FDA guidelines. Price gives the amazing example of the FDA's 1987 Guideline on General Principles of Process Validation describing a "three-batch" manufacturing regimen, which the FDA only recently updated in 2011. The same "three-batch" regimen is apparently still used by some firms today. If true, this seems a clear demonstration of innovation proceeding at inefficient and socially suboptimal levels, largely as a result of too much regulation.

It is the second half of Price's paper, though, that is most fascinating to me. According to Price, the drug industry has sufficient IP incentives to develop new drugs and new treatment uses of drugs (though of course drug industry reps might disagree). But, says Price, IP incentives to develop new and better manufacturing methods are comparatively low. The main reason is simply that these are process, not product inventions. This means they can be kept secret even while being used, relying on trade secret laws to prevent "misappropriation" by employees or competitors. So the cost of choosing to disclose and patent instead is high. At the same time, the benefits of getting a patent are low due to the ease of "inventing around" a method once its function is known, and the difficulty of detecting infringements. In addition, Price identifies more specific limits to the utility of patents in this context—most of which stem, again, from the fact that this is a such a high regulation field. For instance, 35 U.S.C. § 271(e)(1) creates a safe harbor for generics attempting to gain FDA approval, which essentially lets generics copy pioneer firms' manufacturing methods, even when they are patented, so long as the generics' use is "reasonably related to the development and submission of information" for obtaining FDA approval. For all these reasons, trade secrecy is the main IP-like incentive for drug manufacturing methods. But according to Price, trade secrecy isn't enough due to difficulty of enforcement, the costs of maintaining secrecy, and the fact that trade secrecy can only be used for certain types of innovations. In addition, Price says, trade secrecy hinders the ability of subsequent innovators to build on what pioneers come up with, which they might otherwise be able to do through patent licensing. As a result, we are left with a bifurcated innovation ecosystem, in which early, broad patents are the lifeblood of expensive-to-develop drugs and treatment uses, while manufacturing methods for those same drugs are kept secret and remain what Edmund Kitch might call underdeveloped "technological prospects."

It is hard to disagree with Price's diagnosis of the problem—under-innovation in drug manufacturing—and its dual causes—high regulatory barriers and low IP incentives. But many might object to one of Price's proposed solutions: use the high regulation to create higher IP incentives. Price gives two ways the FDA could achieve this. First, the carrot: introduce new periods of exclusivity specifically for manufacturing methods, lasting around two or three years. Second, the stick: mandate disclosure of all manufacturing processes. This would eliminate trade secrecy and effectively "enforce manufacturing patents" as the norm. This, of course, could lead to under-innovation problems of its own, depending on how broad the scope of the exclusive rights are, how easy it is for others to "invent around" or license them, and how important decentralization is to innovation in this area.

Price's paper leads to a host of new and interesting questions, and his thorough research revealing potential shortcomings of the FDA approval process is likely to be very useful for scholars like Rebecca Eisenberg and Ben Roin (who have suggested relying on FDA-administered market exclusivity as alternative mechanisms for encouraging certain types of innovation) and to members of the drug industry itself, who are likely to be quite interested in Price's diagnosis of industry-wide inefficiencies in their manufacturing methods. I look forward to reading more of Price's valuable work on the interface between IP and regulatory regimes.