Recent years have highlighted potential abuses in how pharmaceutical firms interact with the patent system. Through an array of strategies, some pharmaceutical manufacturers have used patent laws to gain extended patent lifespans and deter potential legal challenges, both of which worry consumer advocates who note the significant increased costs to consumers resulting from delaying generic entrants. This article will cover potential abuses of patents as well as proposed reforms to patent laws to address those potential abuses.
Description of Potential Patent Abuses
I-MAK, a leading researcher in pharmaceutical patent abuse, has published1 revealing statistics on drugs it identified as potentially subject to generic-delaying abuses. In one study of 12 leading drugs, it found an average of 125 patents filed and 71 patents granted per drug, with an average patent lifespan of 38 years (compared to the 20 years envisioned by the patent system) and an average 68 percent price increase over a five-year period. Another study focusing on just three drugs suggested an excess cost of $55 billion to the U.S. health care system in the next 15 years due to delayed generic availability for just those three drugs. These results are obtained through a variety of strategies that will be discussed later in this article.
Patent terms are extended beyond 20 years through a strategy called “evergreening.” Evergreening occurs when a patent holder files secondary patents on an invention to renew the 20-year patent exclusivity period. Secondary patents can be obtained for any of the multitude of patentable aspects of a drug. For example, an initial patent may relate to the method for using the drug, a subsequent patent may cover treatment of a new disease, and yet others can be a crystalline form or process for manufacturing the drug. Continuing the example, if these four patents were filed in five-year intervals starting in 2000, while the first patent would expire in 2020 (a 20-year term from the first patent in 2000), the fourth patent would not be filed until 2015 and its 20-year patent term would extend to 2035, effectively granting the drug a 35-year patent term.
While evergreening admits to a simple definition and explanation, it is more difficult to adjudicate when a secondary patent is frivolous and intended solely to renew patent exclusivity. Much of pharmaceutical innovation is incremental in nature, and secondary patents can represent true innovation with real medical benefits to patients, and as such they do not deserve “second-class” status in the patent system. Competitors are not prohibited from overlapping with expired primary patents, so they potentially could market unimproved versions of the drug without risk of infringement claims. Research2 has shown that more than 80 percent of reformulations are not temporally connected to impending generic entry, though the remaining 20 percent is obviously concerning—and even the 80 percent could suggest a long-term strategy that could run counter to the patent system’s desired goals.
“Product hopping” is a similar strategy to evergreening, but it uses reformulations of a drug to both extend exclusivity and prevent Abbreviated New Drug Application (ANDA) applicants from referencing the primary patent. The ANDA fast-track process requires that applicants only prove bioequivalence to a reference brand-name drug and not undergo a full safety and efficacy evaluation. But a brand can develop a reformulation of a drug that is covered by a secondary patent and then pull the original drug off the market. This eliminates the ability of an ANDA application to prove bioequivalence to the original drug (the drug is not available to be compared against in the bioequivalence assessment).
In one well-published example,3,4 a brand manufacturer switched from a twice-a-day pill to once-a-day without any other noticeable drug improvement, allowing it to gain 14 additional years of patent protection and exclude generic entrants. The original formulation of the drug was profitable, so the subsequent decision to pull the initial drug off of the market did not seem to make economic sense except to thwart generic competition. A U.S. Court of Appeals subsequently upheld a nationwide injunction requiring the brand manufacturer to continue manufacturing the older version of the drug until 30 days after the generic forms of the drug became available. The panel noted that courts are generally skeptical about claims that secondary patents harm competition and that secondary innovation generally benefits consumers. However, the panel determined that the patent owner, in this case, acted coercively and in an anticompetitive manner that is subject to antitrust liability.
A related strategy involves a brand manufacturer withholding samples from a potential generic distributor, inhibiting its ability to perform a bioequivalence assessment. A 2007 law5 allowed the U.S. Food and Drug Administration (FDA) to require drug safety plans for drugs with serious side effects or the potential for abuse—these are known as Risk Evaluation Mitigation Strategy With Elements to Assure Safe Use (REMS with ETASU). These REMS plans may include simply educating doctors and patients about risks, but in some cases they also could require that distribution be limited to approved pharmacists or health care providers. Brand manufacturers have told potential generic entrants that they are unable to provide samples for the bioequivalence analysis because of these REMS plans.
The FDA has been vocal6 in stating that these rules should not inhibit generic entry, and it even published7 a record of letters received from generic applicants regarding restricted access to drug samples. At the time, a brand manufacturer and generic manufacturer arranged shared safety protocols themselves, so aside from publishing this record, the FDA’s ability to intervene unilaterally was limited.
Some brand manufacturers have questioned which law requires them to do business with the generic company, regardless of REMS plans. For example, one brand distributor explicitly restricted access to samples by requiring pharmacies to not use the product in “clinical trials or other studies.”8 The CREATES Act of 2019, a proposal discussed later in this article that has been enacted as law, remedied this situation significantly.
Another strategy colloquially referred to as a “patent thicket” uses the presence of multiple patents on a drug to deter potential litigants. The patent holder needs only to prove that at least one patent is infringed by a generic entrant, so the generic entrant is burdened with proving that every patent covering a drug (among potentially more than 50 approved patents) is invalid—this can be a steep burden. Recent years have seen class-action lawsuits brought against some of the industry’s most profitable drugs under the grounds that a patent thicket created artificial barriers to entry for generics. A recent ruling9 by a U.S. District Court potentially walked back the ability to bring such suits, finding that the company subject to the suit “has exploited advantages conferred on it through lawful practices and to the extent this has kept prices high … existing antitrust doctrine does not prohibit it.”
A final strategy to delay generic entry is “pay-for-delay.” Settlements are common when legal action is brought through the Hatch-Waxman Act, inter partes review (IPR) or other legal action entirely. The terms of these settlement agreements are not often publicly available. They have raised concerns10 about the possibility of anticompetitive practices, specifically when these agreements involve a brand producer paying a generic producer to delay the entry of the generic into the market.
The 2003 Medicare Prescription Drug, Improvement and Modernization Act (MMA) requires pharmaceutical companies to file certain agreements with the Federal Trade Commission (FTC) and Department of Justice, though the FTC’s ability to bring antitrust suits is limited by previous court rulings. An FTC study11 using data for settlements from 2004 and 2009 showed that of 218 agreements studied, 66 included some form of compensation from the brand manufacturer to the generic manufacturer combined with a delay in generic entry. These agreements, the study found, contribute to an average 17-month delay in generic entry and suggest a $35 billion cost associated with pay-for-delay settlements over the following 10 years.
Generic companies argue these types of settlements allow for generic entry earlier than existing patents would have allowed were those patents deemed valid. Yet consumer advocates fear these types of settlements may artificially inflate drug costs and create anticompetitive duopolies.
Recent Legislative Proposals
A number of legislative proposals offered in recent months have focused on intellectual property reforms for the pharmaceutical industry. Many of the proposed bills intersect directly with the strategies previously discussed.
The CREATES Act of 2019,12,13 signed into law in December 2019 as part of the Further Consolidated Appropriations Act of 202014 and as a bipartisan effort chiefly sponsored by Sen. Patrick Leahy (D-VT), attempts to make samples more easily accessible for generic manufacturers. The bill allows generics to bring action in federal court to obtain samples needed for bioequivalence analyses and allows for limited damages to be awarded in particularly egregious cases of sample withholding. It also gives the FDA more discretion to approve alternative safety protocols to bypass impediments caused by REMS plans. The Congressional Budget Office (CBO) has estimated15 that the Act could lower federal spending on prescription drugs by $3.8 billion between 2019 and 2029.
Another bipartisan effort, the Preserve Access to Affordable Generics and Biosimilars Act,16,17 cosponsored by Reps. Jerrold Nadler (D-NY) and Doug Collings (R-GA), prohibits settlement agreements where “a branded drug firm pays a potential generic competitor to abandon a patent challenge and delay entering the market.” Settlements would not be illegal per se, but they would need to demonstrate that the agreement provides procompetitive benefits that outweigh the anticompetitive effects, with the proposal specifying that in making this evaluation it cannot be assumed that generic entry would not have occurred before the expiration of challenged patents nor that allowing earlier entry is necessarily procompetitive. Civil penalties up to three times the value gained by the violating parties could be assessed if the FTC proves an agreement violates these provisions.
The Prescription Drug Price Relief Act,18 proposed by Sen. Bernie Sanders (I-VT), would legislate the voiding of patent rights and regulatory exclusivity on pharmaceutical products if the prices of covered drugs were found to be excessive. The legislation defines “excessive” as when the average U.S. manufacturing price exceeds the median price charged in five reference countries, or if the price of the drug is “higher than reasonable” taking into account data on research and development costs, health outcomes, the value of the drug to patients, revenues and recent price increases, all of which would be submitted to the Department of Health and Human Services (HHS) annually.
Similarly focused on drug pricing, the FLAT Prices Act19 introduced by Rep. Jared Golden (D-ME) would shorten regulatory exclusivity periods by 180 days if the price of a drug increased by more than 10 percent over a 12-month period, 18 percent over a 24-month period or 25 percent over a 36-month period.
Each additional 5 percent price increase over these thresholds would contribute to an additional 30-day shortening of the exclusivity period. The secretary of HHS could waive or decrease the reduction in exclusivity if it is determined that the price increase is necessary to ensure production of the drug and does not unduly restrict patient access.
The Biologic Patent Transparency Act,20,21 which had bipartisan sponsorship by Sens. Susan Collins (R-MA) and Tim Kaine (D-VA), closes the gap in information required by the FDA’s Orange Book and Purple Book. While patent information is contained in the Orange Book, the Purple Book does not contain patent information. This impacts the ability of biologic biosimilar manufacturers to use an ANDA application to resolve patent disputes via the Hatch-Waxman Act. It also creates additional complexity and uncertainty for a generic challenger through the IPR process because they need to first identify all relevant patents and then successfully challenge them. The bill would require the Purple Book to include patent information and limit the enforceability of secondary patents when a biosimilar application has already been filed with the FDA.
The Affordable Prescriptions for Patients Act,22,23 sponsored by Sens. John Cornyn (R-TX) and Richard Blumenthal (D-CT), codifies definitions of patent thicketing and product hopping within the FTC Act, which could enable the FTC to bring antitrust suits against companies that employ these strategies in abusive ways. The legislation allows manufacturers to make rebuttals against an FTC determination of patent thicketing by showing secondary patents provide clinically meaningful therapeutic or safety benefits, improved product purity or potency, more efficient manufacturing or other benefits to patients. Similarly, product hopping can be defended by providing evidence that the follow-up product provided clinical benefits and that this was the least likely means to reduce competition.
Intellectual property rights are but one of many interwoven complex factors that impact the prices consumers pay for drugs. The previous legislative solutions that created the current system have attempted to balance these complexities, and patent reform can be a key tool to positively steer the pharmaceutical industry toward meeting patient needs, fostering innovation and promoting long-term stability.
Actuaries can play an important role in this process by combining a deep and holistic understanding of the U.S. health care system with analytical and financial expertise. They can contribute to the quantification of value, projection of utilization patterns and the calculation of savings related to various patent decisions and related social policy.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
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