Article by Mircea Achiriloaie and Dennis Fernandez

Some of the issues facing the drug industry were highlighted by recent amendments of the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act. Finding cures for the myriad of ailments that afflict us is perhaps the grandest promise of the remarkable contemporary life sciences advances. Fulfillment of this promise is receiving much attention from the scientific and investment communities. The pains of the therapeutics industry are thus of interest not only to those experiencing them, but also to policy analysts seeking the right balance between incentives to the private sector and public good, and to entrepreneurs exploring present opportunities. This article presents the basic concepts of drug commercialization underlying the Hatch-Waxman Act, the main changes brought by the December 2003 amendments, and their strategic implications.

The industry

Any general characterization of the drug development process is likely to obscure the serendipity that is still necessary for success. Still, development of a drug typically involves the stages of target identification and validation, lead identification and optimization, manufacturing, toxicology testing, clinical studies, and finally marketing. Overall, the cost of bringing a new drug to the market is estimated to be between $0.5-1 billion. Paradoxically, however, significant recent advances in understanding basic biology and escalating drug development expenditures have not been paralleled in the past years by the number of new drugs brought to the market. The crisis facing the pharmaceutical industry has drawn rivers of ink from commentators, with little consensus on what the future might hold.

A large number of players contribute to the process of drug development, from academic research in basic biology, to biotechnology companies contributing to various stages of drug development, to giant multinational pharmaceutical companies. Most relevant to the Hatch-Waxman Act are two players. A first player can be referred to as the innovative developer, which incurs the cost of bringing a drug to the market. A second player can be referred to as the generics manufacturer who manufactures and commercializes drugs developed by others after they passed into the public domain. Passing of a drug into the public domain occurs after the expiration of any period of market exclusivity awarded to the innovative developer, as detailed below. It is worth noting that the innovative developer and generics manufacturer labels are perhaps best employed on a case-by-case basis, as the same company may wear different hats in specific contexts.

Market exclusivity

The drug development process is expensive and fraught with uncertainties. On the other hand, the industry might have the lowest ratio of costs of imitation to innovation. Innovative companies must recoup their enormous investments, and do so through periods of market exclusivity. During these periods, revenues of the innovative company from sales of the developed drug are high due to supracompetitive pricing. Patents are the most important basis of market exclusivity. They will be discussed in more detail below. It is noteworthy, however, that other sources of market exclusivity for drugs exist, and they are routinely employed as appropriate by innovative companies to maximize their profits. Accordingly, innovative companies can sometimes maintain their competitive edge through litigation, reformulations, line extensions, over the counter switching, orphan drug status, competing after expiration, pediatric extensions, metabolite defense, citizen petitions, market exclusivity for new drug application (NDA) holders, and accelerated approvals. Finally, under the Hatch-Waxman Act, a single generics manufacturer may also sometimes share a brief (180 days) period of market exclusivity with the innovative company, as explained below.

Patents

Generally, patents confer their owners a limited period of market exclusivity for exploiting an invention. Since market exclusivity is essential for recouping drug development investments, it is not surprising that patents are of central importance to innovative companies. The term of a patent, i.e. the period of time the patent is effective, is in general 20 years from the date of the filing of the patent application. An application for a drug patent, however, is usually made quite early in the lengthy drug development process to ensure that that a valuable patent issues to protect the drug development investment. Thus, much of the vital drug patent term runs not during a period of drug commercialization when market exclusivity is of value, but during periods of pre-clinical and clinical development and tests, and regulatory review.

Drug-related patents can cover different aspects of a single drug. For example, relevant patents may cover therapeutic compositions of matter, methods of using compositions in treatment of specific diseases, or methods of manufacturing therapeutic compositions. This is significant because different patents may be filed and therefore expire on different dates. Innovative companies can try to prolong their patent monopoly by strategically staggering filings of drug patents.

Regulatory review

The drug industry is subject to regulation by the US Food and Drug Administration (FDA). The FDA requires applications for marketing approval from companies wishing to commercialize drugs. Significant for the Hatch-Waxman Act are two types of applications. One is a New Drug Application (NDA) that the innovative company must submit before approval of a new drug for commercialization. An NDA contains results of extensive human clinical trials, and FDA review is focused on risks and benefits analysis. Another application was created by the Hatch-Waxman Act and is termed an Abbreviated New Drug Application (ANDA). This is an application that the generics manufacturer files for approval of commercialization of a copycat drug. An ANDA contains results of limited clinical trials as its FDA review is focused on bioequivalency of the ANDA compounds to the corresponding original NDA1

The regulatory review period for a new drug takes currently on average about 14 years. This period runs concurrently with any patent term for the drug. Thus, the regulatory review period usually erodes much of the patent term, and the remaining term is unpredictable from the outset. This was one reason for enacting Hatch-Waxman legislation.

The Hatch-Waxman Act

The Hatch-Waxman Act sought to strike the proper balance between the interests of the innovative drug companies, the generics manufacturers, and the public2. According to the legislation, innovative drug companies could have their patent term extended by up to five years if a remaining composition of matter or method of use patent term was shorter than 14 years. Prior to the act innovative companies could not know that any patent term would remain after regulatory review. Generics manufacturers were given the low cost ANDA path for market entry. In addition, generics manufacturers were allowed to perform otherwise patent infringing activities, such as drug manufacturing and use, during the patent term as long as these activities were performed for obtaining FDA approval. Prior to the act generics manufacturers had to wait until the patent expired and only afterwards manufacture and test the drug. Consequently, the patent term of the innovative company used to be effectively extended, albeit for an unpredictable period. The public was to benefit from the legislation because development of new drugs was encouraged, yet prices of drugs were likely to drop significantly immediately after the expiration of patent protection.

An important aspect of the Hatch-Waxman Act was paragraph IV certification (21 USC §355(j)(2)(A)(vii)(IV)). As mentioned above, a drug may be covered by more than one patent. As the legislators understood, innovative companies would routinely attempt to expand their patent monopolies as much as possible by obtaining additional patents related to the FDA-approved drugs. The best entities to monitor the quality of patents would be generics manufacturers, as overturning questionable patents would clear the way for earlier marketing of generics. Consequently, innovative companies have to list all the patents they have that cover drugs on the market in a publication entitled Approved Drug Products with Therapeutic Equivalence Evaluations, better known as the Orange book. When filing an ANDA, a generics manufacturer needs to certify that the ANDA product does not infringe any listed patents.

Under paragraph IV a generics manufacturer certifies that an innovative company’s patents listed in the Orange book are invalid or not infringed by generics manufacturing and commercialization. After the FDA accepts the ANDA, the generics manufacturer must inform the innovative company of the paragraph IV certification. Then, if the innovative company initiates a lawsuit against the generics manufacturer within 45 days of receipt of the ANDA applicant's notice, the FDA is precluded from approving the ANDA for a period of the earlier of 30 months or until disposition of the lawsuit. The first generics manufacturer to successfully file a paragraph IV certification would share a period of 180 days of exclusivity with the innovative company, as a reward for its risk and effort in clearing the way for market entry of for generic drug versions.

The aftermath of the Hatch-Waxman Act

Overall, the Hatch-Waxman Act seemed to be work well. Without this legislation Forest Laboratories would most likely have never developed the drug Celexa. The generics drugs sector also flourished with an increasing generics market. However, problems arose as well3. The number of paragraph IV lawsuits increased alarmingly. For example, during the first ten years of the Act 30 lawsuits were filed. By contrast, 32 lawsuits were filed in the year 2001 alone. Thus, the paragraph IV litigation incentive resulted in significant costs, ultimately borne by consumers. Additionally, innovative companies were often listing their new patents in the Orange book late, derailing generics manufacturers’ plans to enter the market. Settlements of paragraph IV litigation sometimes had a suspicious aura of collusion to extend a monopoly4. Ambiguities in the Hatch-Waxman Act became apparent, leading to inconsistent interpretations in different cases. As the Hatch-Waxman Act appeared to generate problems in addition to solutions, reform of the system was expected.

Hatch-Waxman amendments

An amendment to Hatch-Waxman legislation was approved in December 2003. Some of the most important changes or clarifications brought by the amendment are summarized below5.

Each NDA holder is entitled to a single 30-month stay for paragraph IV certified ANDA approval. Generics manufacturers need only certify with respect to patents listed in the Orange book at the time the ANDA is filed (§1101(a)(2)(A)(ii)(I)). Any subsequent listing of a patent does not require a new certification and a new 30-month stay. Moreover, an ANDA may be approved by the FDA following a judgment by a District Court (rather than a Federal Circuit decision) that the patent is invalid or not infringed if the judgment comes before the expiration of the 30-month stay.

Generics manufacturers are authorized to bring declaratory judgments against innovative companies (§1101(a)(2)(C)). There are two requirements for this provision to apply. First, the innovative company must fail to sue within 45 days of the paragraph IV notification. Second, the ANDA applicant must offer confidential access to the application if the paragraph IV certification is based on non-infringement, but confidential access is not required if the certification is based solely on patent invalidity. Of course, declaratory judgment jurisdiction by federal courts is also subject to constitutional limitations.

Generics manufacturers are given a cause of action for wrongful listing of patents in the Orange book (§1101(a)(2)(C)). An order to remove patents from the Orange book can only be asserted as a counterclaim, and no money damages may be awarded to the challenger. Grounds for wrongful listing are that the listed patents do not claim the approved drug or an approved method of using the drug.

The 180-day exclusivity period can be shared by all applicants who submit ANDAs with paragraph IV certification on the same day (§1102(a)(1)-(2)). The period of exclusivity starts when the first ANDA applicant markets the product. Market exclusivity may be forfeited under a number of circumstances, such as failure to timely market, failure to effectively pursue FDA approval, expiration of listed patents, or agreement in violation of antitrust laws.

Certain settlement agreements must be filed with Federal Antitrust Authorities (§§1111-1113). Agreements between generics manufacturers and innovative companies must be filed if they affect the 180-day exclusivity period or manufacturing, marketing, or sale of the drug. Agreements need not be filed if they solely concern purchase of raw materials, equipment or facility contracts, employment or consulting contracts, packaging and labeling contracts, money only settlements, or walk away settlements.

The Hatch-Waxman amendments need to be considered in making decisions regarding generics marketing and paragraph IV disputes. While an ANDA may be approved following a 30-month stay or as a result of a District Court decision, it is not always desirable to promptly start marketing the generic drug. The problem is that profits to be made from generic drugs sales are often lower than damages caused to innovative companies. Thus, as a result of an unfavorable Federal Circuit review, a generic manufacturer can end up paying an innovative company for damages in excess of profits made, i.e. profits lost by the innovative company as a result of what turned out to be infringing sales. Given this risk, the decision of whether to promptly market an ANDA product or to wait for a Federal Circuit ruling need to be made depending on the strength of the generics manufacturer’s case.

While clearly not required under the Hatch-Waxman amendments, generics manufacturers might still want to notify innovative companies of paragraph IV certifications for late listed patents in order to precipitate litigation. Also, even though NDA holders are not entitled to an additional 30-month stay, they will want to sue for injunction barring generic entry. The declaratory judgment provisions could be useful to second ANDA applicants if the NDA holder did not sue the first ANDA applicant because invalidity or non-infringement of a patent nullifies the exclusivity period of the first applicant. Finally, settlements of paragraph IV litigation need to be carefully crafted. For example, in light of seemingly inconsistent judicial precedent, it remains uncertain whether settlements that delay generics entry in exchange for payment from innovative companies necessarily violate antitrust laws.

Conclusion

Rather than overhauling the Hatch-Waxman structure, the recent amendments only tweaked the system to settle some of the problems that became apparent. Given the enormous stakes, continued attempts at gaming the system seem inevitable. Hence, future Hatch-Waxman amendments are likely to further refine the balance between the interests and roles of innovative companies and generics manufacturers. For now, a heated debate is centered on the question of expansion of the Hatch-Waxman scheme to biologic therapeutic products.

Footnotes

1. See also Robert W. Pollock and Gordon R. Johnston Pharmaceutical Patent and Exclusivity Complexity: Implications for Generic Product Introductions

2. Robin J. Strongin, Hatch-Waxman, Generics, and Patents: Balancing Prescription Drug Innovation, Competition, and Affordability, NATIONAL HEALTH POLICY FORUM Background Paper, Jun. 21, 2002.

3. Sarah E. Eurek, 2003 Duke L. & Tech. Rev. 0018

4. Federal Trade Commission, Generic Drug Entry Prior to Patent Expiration: An FTC Study, July 2002, http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf

5. See also Michael Padden and Thomas Jenkins, National Law Journal, February 2004.

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.