Maybe Hatch-Waxman Data Exclusivity Isn't So Good For Traditional Drugs After All

    By Kevin E. Noonan --

The principal debate involving follow-on biologics legislation has revolved around the length of the data exclusivity term granted to innovators.  The bill voted out of the Senate Health, Education, Labor and Pensions (HELP) Committee earlier this year has a 12-year data exclusivity term, which is shorter than the term supported by industry groups such as the Biotechnology Industry Organization (BIO) and also shorter than the term supported by the only peer-reviewed economic analysis of record.  There have been many competing proposals, including a 7-year term supported by the Obama administration (see "White House Recommends 7-Year Data Exclusivity Period for Follow-on Biologics"); a 5-year term provided in a bill (H.R. 1427) supported by Committee on Energy and Commerce Committee Chairman Henry Waxman (D-CA) in the House of Representatives (see "Waxman Introduces Follow-on Biologics Bill"); and finally the grant of no data exclusivity under a set of questionable assumptions promulgated by the Federal Trade Commission (see "No One Seems Happy with Follow-on Biologics According to the FTC").  Most recently, a pair of patent attorneys (one of whom has deep ties to the generic pharmaceutical industry) and a medical school professor proposed a 5-year data exclusivity term in an article published in last week's New England Journal of Medicine (see "NEJM Authors Say Five Years of Data Exclusivity Would Be Sufficient").

Under these circumstances, an article published in this latest issue of Science is rather surprising.  The article, by Matthew J. Higgins of the Georgia Institute of Technology and Stuart J.H. Graham of the University of California, Berkeley Law School suggests that the current Hatch-Waxman regime having a 5-year data exclusivity term and provisions for generic drug companies to challenge innovator drug patents is responsible for the dramatic drop-off in new small molecule drugs (from an average of 35 in 1996–2001 to 20 in 2002–07), and that the solution is to increase (indeed, double) the data exclusivity term for conventional drugs to 10 years, consistent with trends in Europe, Canada, and Japan (see "Balancing Innovation and Access: Patent Challenges Tip the Scales").

The authors start by reviewing the economic incentives for generic drug challenges to innovator drug patents.  The biggest factor is the 180-day exclusivity period awarded to the generic challenger that is the first to file an Abbreviated New Drug Application (ANDA).  The authors estimate that the average revenue garnered by a generic during this period is $60 million, which is 12 times the average cost of ANDA litigation ($5 million).  This differential exists because during that 6-month period the first successful generic challenger can price the generic substitute just below the brand-name drug price (representing a "savings" to consumers).  This potential windfall has motivated generic companies to engage in "prospecting" by filing numerous ANDAs with Paragraph IV certifications (that the patent protecting the innovator's drug is invalid).  This conclusion is supported by a review of the number of ANDA lawsuits filed over the past ten years:

A total of 749 lawsuits have been filed challenging innovator drug patents during this period, involving 243 brand-name drugs.  The authors note that the FTC has shown that "72% of Paragraph IV challenges filed between 1992 and 2000 resulted in litigation, with the generic drug challenger winning 42% of the time," citing Generic Entry Prior to Patent Expiration: An FTC Study (FTC, Washington, DC, 2002).  Moreover, the drugs challenged in recent years have revenues of less than $100 million, showing that "blockbuster" drugs are no longer the only targets of Paragraph IV challenges.

The economic effect on innovator drug companies is large, averaging about a 12% loss in revenue.  This loss "exceeded companies' gains from the patent extensions awarded to them," according to the authors, an outcome that is ironic considering the policy "balance" of the Hatch-Waxman regime between reducing the time needed for a generic drug to reach the market after innovator patent expiry and restoration of patent term lost to the period of regulatory review.  Using Merck's Fosamax as an example, the authors state that Teva's successful Paragraph IV challenge permitted generic competition 4 years before Merck's patents were to expire, costing the company about $1.5 billion.  (Teva is reported to have 160 pending ANDA filings and to be involved in 92 Paragraph IV challenges, "putting at risk over $100 billion in sales," citing Teva's Securities and Exchange Commission Form 20-F filing in 2007.)  This lost revenue represents the cost of bringing two new drugs to market in the U.S.

As a result, innovator pharmaceutical companies are motivated to produce new branded drug offerings that bolster their existing franchises subject to generic challenge.  However, these are not "new" drugs, but rather are predominantly reformulations representing only "marginal improvements" over existing forms of these drugs.  The rate and number of successful Paragraph IV challenges is also reducing the average effective patent life for innovator drugs, particularly "blockbuster" drugs which remain the most attractive targets for Paragraph IV challenge (and the correspondingly higher value of the 180-day generic exclusivity term).

The authors suggest as a solution changing the data exclusivity term under the Hatch-Waxman act from 5 years to 10 years, using a comparison with other "Western" countries as justification:

Citing Professor Grabowski's research, as well as a report from the National Academies of Science and Engineering and the Institutes of Medicine (Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future (National Academies Press, Washington, DC, 2007), the authors assert that extending the period of data exclusivity is necessary to overcome the "market failure" in the pharmaceutical industry caused by the Hatch-Waxman Paragraph IV challenges of patents on innovator drugs.  While they also suggest other regulatory incentives for drug development in particular areas (such as Alzheimer's disease and osteoarthritis), "[a]t a minimum, we should all note that Paragraph IV challenges are contributing to this failure when discussing the future of health care and long-term access to new treatment."

The irony of this report will not be lost on anyone following the data exclusivity period debate over  follow-on biologics, and the authors' conclusions provide a direct challenge to those advocating a shortened term for biologic drugs based on the "successes" of the Hatch-Waxman regime for small molecule drugs.

Comments

[Marcos Oliveira]

The important point in this article is that 42% of patents challenged were found not valid, that is, the public at large were paying monopoly prices for medicines that were not inventions at all!!

[Kevin E. Noonan]

Dear Marcos:

Not exactly fair - if the medicines were not inventions, why weren't they available already? There is a case to be made that, even if something isn't an "invention" it might make sense to give some exclusivity to the company that gets it through clinical trials and on the market. That's one reason for a 5-year data exclusivity term, separate and apart from any patent exclusivity.

But you are right, the number is much higher than might be expected - it would be interesting to look at the "whys" of the "losses," since "doesn't infringe" is just as good a reason for a loss, and some generics might have designed around the innovator's formulation just enough to not infringe (which is different from a "not a patentable invention" verdict).

Thanks for the comment.

[Derek Freyberg]

It's difficult to see how the table makes any case that exclusivity should be increased. The EU (with the most generous exclusivity) and US (with the least) both have an R&D:sales ratio of about 20%, while Japan and Canada (in the middle) have 10%.
I believe, though I haven't looked for evidence to support this, that the increase in para. IV filings, including the doubling in the last couple of years, is the result of increasing challenges to "follow-on" patents as older compounds lose basic patent protection (think LIPITOR, for example, which loses basic protection next year).

[Kevin E. Noonan]

Dear Derek:

The authors present the case in absolute rather than relative amounts. Their point is that a company can't invest money in R&D that it didn't make and that Paragraph IV litigation promotes behavior antithetical to new drug development.

Once again, we have the tools to see if anything would change if we increased the data exclusivity term, and we can do it one of two ways. We can change the term and see what happens or we can wait and watch Europe to see if they regain their former preeminence in the pharma field due to the effects of the longer data exclusivity term their drugs receive in the EP.

Thanks for the comment.

[Feigin, Patent Attorney]

Lawsuits would go up anyway... where there's lots of money involved and decreasing returns from selling your goods... companies start suing for more.

[Bob]

Having previously worked as an industrial chemist, I have my doubts as to whether much of these "lost revenues" would be invested back into R&D.

A PhD chemist fresh from grad school today makes about 1.5 times what he or she would have made in 1985. Over the same period of time the CPI has doubled. Thus, research chemists have received an effective 25% pay cut over the last quarter-decade. Meanwhile, many other white-collar professionals have experienced breathtaking salary increases during the same time period (e.g., attorneys, finance professionals, marketing professionals, etc.). Big Pharma's collective stinginess toward chemists has played a big hand in depressing their salaries relative to other similarly educated professionals. And salary expenditures are generally a reflection of corporate priorities.

R&D investment does not yield a quick bottom-line payoff. At the same time, you can squeeze R&D and not feel a pinch for years to come. So in a world where short-term profits reign supreme, chemists have become expendable, and glorified party planners (i.e., drug sales reps) have become essential. But on the other hand, it's hard to innovate if you lay off your chemists, and provide few professional incentives to the chemists who remain. That's where Big Pharma finds itself today.

Certainly P-IV challenges have contributed to the drying up of the pharma pipeline. But the bigger culprit is Big Pharma's relentless drive for short-term profits.

Sure, a longer period of data exclusivity would probably increase profits a bit. But Big Pharma's track record gives no indication that this additional revenue would go to rebuilding the companies' R&D enterprises.

I do tend to think that a two-tiered approach to data exclusivity is better, i.e., longer for true NCEs, and shorter for enantiomers, prodrugs, polymorphs, formulations, and methods of use. Maybe 10/3 or 12/3? This would create greater incentives to innovate, and decrease the incentives to invest in lifecycle extensions.

[Kevin E. Noonan]

Dear Bob:

Thanks for your perspective. While I'm sure the reason for the small molecule pipeline problem involves many factors, these authors make a surprising point no one else is making.

Thanks for the comment.

[Prashant]

I agree with Bob. There is no reason for polymorphs, prodrugs or enantiomers should get the same data exclusivity period as real NCEs unless there is significant incremental innovation involved.

Also, if this is implemented, it may make sense to allow generic / other branded companies an opportunity to oppose a patent "pre-grant". There is no reason why something that is frivolously patented should stand throughout the exclusivity period and only be challenged thereafter. This will ensure that such frivolous patents are overturned at the very outset and only the ones that merit exclusivity get monopoly status.

[Stuart Graham]

Thank you Mr. Noonan for beginning a good discussion of our article. I would like to offer one clarification, however: We were careful not to suggest that challenges are responsible for the dramatic drop-off in new small molecule drugs. In fact, we said explicitly that this decline is due to several factors (see first paragraph), one of which we contend is the H-W challenge regime, particularly as it is being used today. As economists, we know that incentives matter. Our main point was that the incentives to do R&D in the first place have been undermined by the challenge regime, and its expanded use. We stressed that H-W rightly tried to strike a balance between access and innovation, but our concern is that the balance has swung recently away from the latter. When the incentives to do something are eroded, it is less likely that the thing will be undertaken (in this case, innovation). That is our point on this score, in a nutshell.