Haydn Evans is Vice President, IP Outsourcing, Eurpe, at CPA Global (UK).

Haydn Evans

 Pharmaceutical companies with operations in the UK stand to benefit from the British government's plan to encourage innovation by 'thinking inside the box'. 

The box in question is the Patent Box — a planned preferential tax regime that will reward innovative, intellectual property (IP) rich companies for the active patents they hold. Under the scheme, corporation tax on profits arising from products or services protected by patents will be slashed from the current 26% to just 10%. The Patent Box scheme (1) is currently at advanced stages of consultation, with draft legislation expected to be published in autumn 2011 and the scheme scheduled to go live from 1 April 2013. 

The scheme is part of the government's efforts to enhance the competitiveness of the UK tax system and to re-establish the UK as a location of choice for innovative, high-tech companies. One of the major supporters of the scheme is GSK, which has cited a number of its own important developments in the UK that the Patent Box would help facilitate, including:   

Securing new investment in the manufacture of GSK's next-generation respiratory inhalation device and further investment in its continuous tablet manufacturing technology.

Ensuring that the UK is the location for GSK's next biopharmaceutical manufacturing plant; and development of a planned manufacturing centre of excellence to support its global dermatology franchise.

Making a significant contribution to the construction of a new facility at the University of Nottingham focused on the development of 'green chemistry' technology. 

Launching a new €56.8-million UK Venture Capital Fund. 

According to GSK, these new investments would create an estimated 1000 new jobs in the UK over the lifetime of the projects.  The investments would also benefit the wider construction industry and the more than 10000 companies that supply GSK with services and facilities in the UK. 

To claim the Patent Box tax deduction, a business must actively hold a qualifying patent and receive income related to that patent. Income derived may be embedded in patented products; for example, it may come from patent licensing and royalties or from patent sales. It could also be income from damages paid by third parties for infringing a qualifying patent. The benefits of the Patent Box will be accessible both through legal ownership, including acquired patents, and through holding an exclusive licence to exploit a patent commercially. In addition, the scheme will apply equally to patents developed under partnership or joint venture. 

The government proposes that the Patent Box should include patents granted by the UK's Intellectual Property Office (UKIPO) and the European Patent Office (EPO). Furthermore, it will include worldwide income earned by UK-based businesses from inventions covered by a qualifying patent, not just income that falls within the territorial limitations of the particular patent. Currently, the plan is for all active UKIPO/EPO patents to be eligible, including those that have been subject to supplementary protection certificates. However, the UK Treasury has said that it won't extend the 10% corporation tax rate to other forms of IP, such as copyright and trademarks, although businesses holding such IP rights will benefit from lower overall rates of taxation.  

The scheme will be phased in over five years, starting at 60% of the potential benefit and rising to 100% in the fifth year.  

The proposed model for calculating patent profits is based on the premise that businesses that have developed valuable patents will produce additional returns compared with companies without such intellectual property. The amount of this extra profit, known as the 'residual profit', is a measure of the profit created by the patents rather than though routine business activities.  

The proposed model operates on a company-by-company basis, but has three main steps:  

Businesses must allocate a proportion of their profits to 'qualifying income' (i.e., that which can be attributed to patents). To achieve this, the whole company's taxable trading profits (before finance costs and R&D enhancement) will be apportioned pro-rata based on the proportion of the company's total turnover that qualifies for the scheme. 

The company must calculate the amount of 'residual profit' they have achieved by deducting a simple fixed percentage return on routine activities conducted by the company from the profit allocated to 'qualifying income'. 

The business must identify how much of the 'residual profit' on a product or service is attributed to the patent and how much to other forms of IP, such as brands/trademark, copyright and artistic design. The government currently favours the use of a ratio of relevant costs to attribute the appropriate part of the 'residual profit' to patents, rather than requiring a valuation of patent and brand IP. 

For the third step, the ratio of expenses incurred by the company that are classified as 'patent' or 'brand' expenses also needs to be considered. Patent expenses would include all R&D costs recognised in the statutory accounts (not only those eligible for R&D tax credits), as well as costs related to patent filing, renewal and protection. Brand expenses would include marketing, selling and promotional costs, expenses related to trademark development and protection, and design costs not classified as R&D.  

The Patent Box represents an important incentive and innovative companies should be looking at ways to open the Patent Box to exploit its full potential. Firstly, companies should ensure they have the right level of patent protection in place at the IPO for the profits generated by their products and services to qualify for the proposed Patent Box regime. Second, it is important that companies are able to demonstrate that their patents are active and properly managed. Any company claiming a Patent Box tax deduction must "actively" hold the patent and remain "actively" involved in the ongoing decision-making connected with the exploitation of the patent. The Treasury does not want passive holdings to qualify, which would be contrary to its policy aims.  

With the UK government taking such steps to encourage innovation, it will certainly raise the importance and value in companies' corporate management of maintaining and protecting intellectual property — and making it work more effectively for them by increasing profits, while reducing their tax burden. 

is vice president of intellectual property outsourcing at CPA Global, responsible for managing the company's IP outsourcing services across Europe. 

1. HM Treasury, "Patent Box" (UK, 2010). 

Articles

By introducing a Patent Box scheme that offers reduced taxes to innovative companies, the UK government hopes to encourage investment in the country.

'Thinking Inside The Box' To Encourage Innovation

If there was ever a question about the importance of intellectual property (IP) and patent protection in the pharmaceutical industry, it is about to be answered as the world's top drug makers approach the edge of the 'patent precipice' — the expiry of key product patents coupled with the launch of cheaper generic versions of blockbuster medicines. Because of this, the industry could lose up to £70 billion (€78 billion) in annual sales by 2016.

Although the pharma industry is well placed to survive the fall, patents are likely to be crucial to companies as they devise more competitive and acquisitive growth strategies. Companies that invest the time and money upfront on a coherent and comprehensive patent strategy will probably emerge the strongest. To get it right, many of these companies will choose to work with patent and IP specialists, and will outsource certain aspects of their patent work. This article will examine the dangers presented by the patent precipice and discuss what can be done to mitigate its effects and maximise the return on investment in patent portfolios.  

Patents have always been a vital tool for the pharma industry. With the average cost of developing a new medicine estimated in excess of $800 million (€887 million),

  strong patent protection provides the opportunity to recoup investments. It takes approximately 10–15 years to develop a new medicine,

  from compound discovery through to FDA approval, so significant portions of the 20-year patent term for a new drug are lost before a product ever generates any sales. In fact, the average effective patent life for medicines is only 11.5 years,

  meaning that the strength of patent protection and the likelihood of obtaining exclusivity are vital considerations for drug companies investing in new technologies or products. 

One of the clearest demonstrations of the value of patent protection will occur in the next few years involving the core patents protecting the best selling drug of all time: Pfizer's cholesterol lowering medicine, Lipitor.

  These patents will expire in June 2011 and many have predicted that, within the first year alone generic competition will cost Pfizer approximately 80% of the £8 billion (€8.9 billion) it receives annually from global sales of the drug.

  This would put the current combined value of the two or three core patent families protecting Lipitor at approximately £6.5 billion (€7.2 billion) a year; equivalent to approximately 20% of Pfizer's total sales for 2008. Pfizer is not alone: Eli Lilly has recently announced that it is to shed 5500 jobs

  because between 2010 and 2013 more than half of Lilly's current revenue will become exposed to generic competition and essential patents on four of its five top-selling drugs will expire.  

Looking ahead, patent strategy will also play a key role in supporting new activities that companies will have to undertake to remain competitive, such as the acquisition of companies in adjacent markets — companies will need a good idea of the patent landscape they plan to operate in and will have to conduct adequate due diligence to understand the patent holdings of potential targets. Companies will also have to increase their focus on open innovation, which will require patent protection. All of these factors will lead to an increased focus on innovation and patent protection — not just in company legal departments, but across R&D departments, at board level and, perhaps more crucially, among shareholders and investors. 

The first reaction to a looming patent expiry for high-grossing products is to cut costs. Once this is complete, pharma companies look to other solutions to recoup the predicted loss of revenue and improve their faltering product pipelines; consolidation being one solution that has been resorted to by a number of firms. 

Companies are also looking to generate additional revenues from adjacent markets, with the biotech sector coming under particular scrutiny. In March this year, for example, Roche purchased the biotech company Genentech for $34 billion.

  Other companies are looking at becoming favoured co-development partners for biotechs, with some embracing young start ups, which is a big change for the often risk-averse pharma industry. In the future, pharma companies are also likely to spread their nets even wider by looking at medical device companies or even the generic manufacturers that compete against them.  

These measures will go some way to restructuring companies by helping them improve their product pipelines and insulating them from the effects of expiring patents. But what can they do to protect what they already have, or what they are about to invent or acquire? 

Patent protection can preserve billions of euro of revenue, but it does not always receive the attention it deserves. It is imperative for IP departments to recruit highly trained staff, appoint quality service providers, bring in state-of-the-art tools and implement water-tight processes to manage these valuable assets. 

Patents need to be managed throughout their life cycle — from when they are filed to their expiry. Good decision-making at the time of patent filing can reduce the chances of complications further down the line when patents are at the end of their life and, ideally, achieving their highest values. While it is hard to know with any certainty at an early stage which filings will or won't go on to protect revenues, having the right processes in place for all filings will act as an insurance policy and cover the organisation for either eventuality. 

Even before a first filing, steps should be taken to understand the patent landscape in the technical domain of interest. Each time a patent is filed, patent searches should be commissioned to ensure full awareness of any prior art (previous publications) that may prohibit or reduce an invention's chances of obtaining strong patent protection. Throughout the life of a research or development project, additional searches should be conducted to determine whether the company will end up with a successful product and if it will have the right to use that product without infringing any third party patent rights. New patent publications are published weekly so it is important to update these searches regularly to be confident that each project is continuing productively. This 'real time' continual checking of patents in the field can be onerous for an organisation, which is why many have outsourced this function.  

Patents must also be renewed periodically at each of the global patent offices for which protection is sought. Companies with a portfolio of more than a handful of patents can find it very difficult to manage this internally and the risks of missing a renewal payment can be as severe as complete loss of patent protection. If a large portfolio has been amassed, the cost of renewing each patent will be significant and it will be a necessity to review the portfolio on a regular basis to ensure that each of the patents is in some way linked to the company's business strategy.  

Sometimes, patents that are not core to business activities can still be of value by being 'out-licensed' to generate additional revenue. This process, known as patent portfolio optimisation, plays an important role in keeping a company's collection of intellectual assets both manageable and profitable. As the pharma industry continues to deal with tight budgets in a challenging economic environment, in-house intellectual departments face the need to make difficult strategic decisions with regard to which patents should be protected, which can be 'out-licensed' and which should be dropped altogether to reduce overheads. This process is essential and can take time and the help of external industry expertise for a company to fully analyse the strategic value of every patent it owns.  

With the management of patent assets coming under increased scrutiny, many firms choose to appoint an IP management partner who works with the company's IP department to ensure its patent portfolio is kept in good health and aligned with the company's wider business strategy. 

During the past few years, the IP outsourcing industry has exploded and the range of services provided has grown, from offering simple IP renewals, to allowing companies to outsource everything from IP research to patent portfolio optimisation. CPA Global estimates that the administration of more than half of the world's IP is outsourced to a third-party provider in some way or another, as corporations and law firms seek to ensure the good health of their (or their clients') intellectual assets without exposing themselves to risk or the unnecessary expense of hiring large in-house teams. This is particularly important in the pharma industry, where firms' IP portfolios can be large and requiring constant attention; the threat of a missing annual patent renewal in a single jurisdiction, costing a few euro, could end up in the loss of billions. 

Patents are some of the most valuable assets held by a pharma company and they must be given the time and attention they deserve, with meticulous patent management and process rigour becoming a prerequisite for those working in the pharmaceutical field. The risk of getting it wrong is huge and is one reason why many companies are working with specialist providers to help them manage their patent portfolios. The trend to work with a provider is likely to continue as patent protection becomes ever more valuable and the patent precipice comes more sharply into view. 

 is Vice President for EU Search Operations at CPA Global (UK). 

1. Reuters, "Drugmakers warn of $140 billion patent 'cliff'" (2007). 

http://uk.reuters.com/article/idUKGRI22300720070502

2. J. DiMasi, R. Hanson and H.Grabowski, 

4. The US Congressional Budget Office, "How Increased Competition from Generic Drugs Has Affected Prices and Returns in the Pharmaceutical Industry" (1998). 

7. The Times, "Drugs market uncertainty costs 5,500 Eli Lilly jobs" (2009).  

8. The Times, "Roche clinches takeover deal with Genentech" (2009). 

Pharma faces imminent expiries of key patents and increasing competition from generics. To protect what they already have, or what they will invent or acquire, companies must give patent protection the attention it deserves.