Consumers, media outlets, and politicians all bemoan the cost of prescription

Promoting Generic Drug Competition in the United States Pharmaceutical Market: What Went Wrong with Hatch-Waxman, Why McCain-Schumer Will Not Work, And What Will Allison K. Young, Esq.* Introduction Consumers, media outlets, and politicians all bemoan the cost of prescription medication today. Indeed, the cost of prescription drugs in the United States is rising dramatically, according to some private sector estimates by 14% to 18%, each year. 1 The dollar amount of that increase for 2001 alone is estimated at between $160 billion and $170 billion. Generic drugs typically cost less than half of their brand name counterparts, and their availability in the market often motivates brand name manufacturers to lower the price of their products. Over the past twenty years, laws have been enacted attempting to accelerate generic competition in the drug industry. Unfortunately, those efforts have not had the success legislators hoped for and have created new obstacles to pharmaceutical competition. U.S. retail sales of generic prescription drugs totaled $11.1 billion in 2001, in contrast to brand name prescription drug sales of $121 billion. In 2001, generic drugs were dispensed in 45% of all prescriptions filled, but consumed only approximately 8.4% of all drug therapy dollars spent at retail. Conversely, brand name prescription drugs represented only 55% of all prescriptions but consumed approximately 91.6% of all drug therapy dollars spent at retail. *Allison Young graduated from the University of Maryland School of Law in 2002, and is licensed to practice law in California. Ms. Young interned at the Antitrust Division of the Office of the Attorney General for the State of Maryland in 2001, assisting in the multistate prosecutions and investigations of alleged antitrust competitive practices in the pharmaceutical industry. 1 Amy Barrett and John Carey. Drug Prices: What s Fair? How Can We Encourage Research and Still Keep Prices Within Reach? Business Week, December 10, 2001. 1

Legislators have struggled with this paradox over the years and passed complex laws in an effort to propel generic drugs into the market quicker and more economically. In 1984, Congress passed the Hatch-Waxman Act attempting to strike a careful balance in the pharmaceutical industry. The purpose of the law was to encourage the expedition of generic drug products into the marketplace in an effort to lower the sky-high prices of prescription medication. Congress also wanted to maintain the integrity and strength of the patent system and continue to provide incentives to brand name drug manufacturers to innovate and discover new medications. In the United States, it is an act of infringement to make, use, or sell a product which is claimed in a patent. Therefore, generic drug manufacturers had to wait until patent protection for brand name pharmaceuticals expired before they could participate in the Food and Drug Administration s approval procedure to produce and market a generic drug. One provision of the Hatch-Waxman Act, known as the Bolar Exemption, addressed this concern by declaring there is no act of infringement if one makes or uses a product or process claimed in a patent prior to its expiration for purposes of gaining regulatory approval. This allows generic manufacturers to gain FDA approval and be prepared to introduce generic drugs immediately upon the expiration of the brand name manufacturer s patent. Additionally, the Hatch-Waxman Act created an Abbreviated New Drug Application ( ANDA ) procedure, whereby generic manufacturers merely have to demonstrate their drug is the bioequivalent of an already approved drug and thus do not have to duplicate the lengthy and expensive clinical trials proving safety and efficacy. ANDA filers must also file a certification along with their application referencing all 2

patents associated with the brand name drug that are listed by the FDA in their publication known as the Orange Book. Through these certifications, the ANDA filer must declare either that their product will not be marketed prior to the expiration of the patents, or that the patents are unenforceable or invalid, or their product will not infringe the listed patents. The hope of this process was that generics will be able to enter the market quicker and more will do so since they do not have to fund expensive clinical trials. By allowing generics to be prepared to enter the market on the same day the brand name loses its patent protection, Congress also hoped to limit resulting extended exclusivity periods for the brand name drugs beyond the patent terms proscribed by law. The Hatch-Waxman Act acknowledged this procedure greatly encroaches upon the integrity of patent jurisprudence in the United States and thus designed an intricate system of stays against generic application approvals if patent holders assert their rights, and exclusivity grants for generic manufacturers who first challenge potentially invalid patents. It is these automatic suspensions of ANDA approvals and exclusive rights awarded to generics that have been manipulated for anticompetitive results, created de facto patent extensions for the brand name pharmaceutical manufacturers, and the reason Congress once again is considering legislation to remedy the problems inherent in the Hatch-Waxman Act. Senators John McCain of Arizona and Charles Schumer of New York have introduced legislation in Congress, known as the McCain-Schumer Bill, in an attempt to close the loopholes which were created by Hatch-Waxman. Many refer to this proposed legislation as a generic industry wish list. Some of the provisions would be 3

effective, but the bill is silent on many problems, has internal inconsistencies, and may create more ambiguities than it resolves. The bill also does not address the fundamental underlying problem of creating responsibilities for the FDA which lie outside of the agency s field of competence. The bill continues to allow patent listings in the FDA s Orange Book, which are listed solely upon the unverified assertions of the patent holder, to preclude ANDA approvals and trigger additional exclusivity grants to the brand name drug manufacturer, regardless of the authenticity of the listing. To truly accelerate generic drug competition in the U.S. pharmaceutical industry, legislators need to divorce intellectual property protection under the patent laws from considerations of a product s safety and efficacy, and remove the responsibility of protecting patent rights from a federal agency whose mandate has nothing to do with the perpetuation of the patent system. I. The Nature of the Underlying Problem A. The FDA Approval Process In order to market a drug product in the United States, a drug manufacturer must gain the approval of the Food and Drug Administration ( FDA ). Under the Federal Food, Drug, and Cosmetic Act ( FFDCA ), 2 in order to obtain approval a drug manufacturer must submit a New Drug Application 3 (a NDA ) to the FDA presenting comprehensive data on three separate phases of clinical trials conducted on patients to show the safety and efficacy of the drug. These trials are extremely costly and time 2 21 U.S.C 301 et seq. (1999). 3 21 U.S.C. 355(a) (1999). 4

consuming 4, and until 1984 were required for any and all drugs seeking approval to enter the U.S. market. That meant that any drug manufacturer wishing to develop and sell a generic version of a drug that was already on the market and had been approved by the FDA had to duplicate those same trials. Thus the goal of lower priced alternatives remained an illusion since the costs and time to replicate the data necessary for the original approval was cost prohibitive. B. The Hatch-Waxman Act Eighteen years ago, in an effort to expedite generic drug entry into the marketplace and lower the cost of medications, Congress adopted the Drug Price Competition and Patent Term Restoration Act, also known as the Hatch-Waxman Act 5 after the bill s sponsors. The Hatch-Waxman Act created a new form of application referred to as an Abbreviated New Drug Application ( ANDA ) which allows a generic manufacturer to avoid much of the costly and lengthy application process. The ANDA applicant merely has to show that the drug is the same as and is bioequivalent to the previously approved pioneer drug (i.e., the brand name) without having to replicate the safety and efficacy studies required to gain FDA approval. Additionally however, the ANDA must include a certification 6 with respect to any patents for the brand-name drug product that are listed in the FDA s so-called Orange 4 The Pharmaceutical Research and Manufacturers of America (PhRMA), the lobbying arm of brand name pharmaceutical companies, claims that the average pioneer drug costs $802 million in R&D, and takes 10-15 years to move from the laboratory bench to the pharmacy shelf. www.phrma.org. Some scholars however put the amount at closer to $250-500 million. See Robert Levy, The Pharmaceutical Industry: A Discussion of Competitive and Antitrust Issues in an Environment of Change, Bureau of Economics Staff Report. Fed. Trade Commn. (Mar. 1999). See also Stephen S. Hall, Prescription for Profit, N.Y. Times Mag. 42 (Mar. 11, 2001). 5 Pub. L. No. 98-417, 98 Stat. 1585 (1984), codified at 21 U.S.C. 355 (1984). 6 21 U.S.C. 505(j)(2)(A)(vii). 5

Book. 7 The certification must make one of the following statements: (I) no patent information on the drug product that is the subject of the ANDA has been submitted to FDA; (II) that such patent has expired; (III) that the generic will not commence marketing the drug until the expiration of patents listed in the Orange Book, and the date on which such patents expire; or (IV) that such patents are invalid, unenforceable or will not be infringed by the manufacture, use, or sale of the drug product for which the ANDA is submitted. This last certification is known as a paragraph IV certification. A notice of a paragraph IV certification must be provided to each owner of the patent that is the subject of the certification and to the holder of the approved NDA to which the ANDA refers. 8 The submission of an ANDA for a drug product that is claimed in a patent is an infringing act if it is intended to be marketed before the expiration of the listed patent(s) (as is the case in a paragraph IV certification). Therefore, the act of filing a paragraph IV ANDA alone may be the basis for a patent infringement suit to be filed against the ANDA filer 9. Under Hatch-Waxman, if the patent holder files suit against the paragraph IV ANDA filer within 45 days of receiving notice of the certification, the FDA must automatically impose a 30-month stay against the approval of any ANDA (including the 7 Officially known as Approved Drug Products with Therapeutic Equivalence Evaluations, the Orange Book lists all patents related to every approved drug, as submitted by the pioneer drug applicant. 21 U.S.C. 355(j)(7)(A)(iii) (1999). The applicant must include information on any patent covering the drug, method of using the drug for treatment of disease, or delivery of the drug, for which a claim of patent infringement could reasonably be asserted against an unauthorized party. 21 U.S.C. 355(b)(1) (1999). 8 Additionally, the paragraph IV ANDA filer must provide the patent and NDA holder(s) a detailed statement of the factual and legal basis for the ANDA applicant s opinion that the patent is unenforceable, not valid or will not be infringed by marketing a generic product. 9 21 U.S.C. 355(j) ( submitting an ANDA application for a drug claimed in a patent or the use of which is claimed in a patent is an act of infringement. ). 6

one subject to the suit) until there is a final adjudication of the suit, the patents expire, or the generic begins marketing their product (whichever comes first). 10 C. The Orange Book By law, the ANDA filer must file certifications with respect to those patents held by the NDA holder pertaining to the brand name drug that are listed in the Orange Book. Therefore, it is the Orange Book listings that give rise to many of the problems. The 180- day exclusivity granted to the first paragraph IV ANDA filer, as well as the 30-month stay of the approval of any ANDA following initiation of an infringement suit as a result of the filing of a paragraph IV ANDA, all revolve around certifications made by the ANDA filer with respect to patents that are listed in the Orange Book. Patent holders inform the FDA of patents they hold and request their listing, which the FDA grants without review. If an ANDA filer challenges those patents via a paragraph IV certification, and claims to the FDA that the patent is improperly listed (for instance, that the patent does not cover what the patent holder claims it covers), the FDA will send a letter to the patent holder, requesting that they reaffirm that the patent covers what the patent holder claimed it covers, and that the patent is properly listed. If the patent holder does so, the inquiry is at an end, the FDA accepts the patent holder s assertion, and will not remove the patent from the Orange Book, nor approve the ANDA if suit has been filed. Unfortunately, there is no way for an ANDA filer to challenge an improper listing of a patent in the Orange Book in a court of law. The Federal Circuit held in Mylan 10 21 U.S.C. 355(j)(5)(B)(iii) (1999). 7

Pharmaceuticals, Inc. v. Thompson 11, affirmed in Andrx Pharmaceuticals, Inc. v. Biovail Corp. 12, and most recently reaffirmed in 3M v. Barr Laboratories, Inc. 13 that there is no private cause of action for delisting a patent from the FDA s Orange Book under the FFDCA. In Mylan, the ANDA applicant sued the FDA and the NDA holder, alleging the pertinent patent had been improperly listed in the Orange Book, and moved for declaratory and injunctive relief requiring the NDA holder to delist the patent. On appeal, the Federal Circuit concluded that the ANDA holder s cause of action was not tied to any recognized patent infringement defense but rather was an attempt to assert a private right of action for delisting and made clear that there was no private cause of action for delisting under the FFDCA. 14 The Federal Circuit reaffirmed that holding in Andrx, finding that a claim of improper conduct in the FDA proceeding was required to be raised initially before the FDA itself and thereafter in a judicial review proceeding brought under the Administrative Procedure Act ( APA ), 5 U.S.C. 702-706. 15 In fact, as was most recently suggested in dicta in 3M v Barr Laboratories, 16 an ANDA applicant must now first survive administrative challenge to their paragraph IV certification notice, then attempt to use those same channels of an FDA administrative hearing and an APA action to challenge Orange Book listings, since it is not permitted to do so via a court challenge under the FFDCA. This means that a patent holder can 11 268 F.3d 1323, 60 USPQ 2d 1576 (Fed. Cir. 2001), (holding nothing in the Hatch-Waxman Amendments alters the statement in section 337(a) of the FFDCA that all such proceeding for the enforcement, or to restrain violations, of this chapter shall be by and in the name of the United States [emphasis added] (citing 21 U.S.C. 337(a) (1994))). 12 276 F. 3d 1368, 61 USPQ 2d 1414 (Fed. Cir. 2002). 13 Minnesota Mining and Manufacturing and Riker Laboratories, Inc., and Alpharpharm, Ltd.v. Barr Laboratories, Inc. 2002 U.S. App. LEXIS 8346 (May 1, 2002), (stating we hold that 355(j)(2)(B) cannot be enforced by a private party in a patent infringement action, but must be enforced, if at all, only in the context of an action under the Administrative Procedure Act. ). 14 268 F.3d at 1332, 60 USPQ 2d at 1583. 15 276 F. 3d at 1379, 61 USPQ 2d at 1421. 8

improperly list patents in the Orange Book, requiring the filing of a paragraph IV ANDA certification, file an infringement suit which automatically triggers the 30-month stay (resulting in an additional two and a half years of no generic competition), and there is next to nothing that the ANDA filer can do to challenge the listing, since the FDA will not make independent determinations as to the validity of the listing and merely defers to the assertions of the patent holder. D. Incentives for the Generic Applicant Defending against a patent infringement suit is not for the faint of heart. It s extremely costly in capital and personnel resources, time, and company morale. In an effort to encourage generics to undertake the risk of a lawsuit and the expense of challenging a patent, the Hatch-Waxman Act provides an incentive for generics who file a paragraph IV ANDA certification, 17 by granting the first filer of a paragraph IV certified ANDA a 180-day exclusivity period, in which the ANDA filer is protected from competition by any other generic competitor for the same drug. This 180-day exclusivity period begins from the earlier of (1) the date a court decides the patent in question is invalid, unenforceable, or not infringed, or (2) the date the generic manufacturer begins marketing its drug. 18 Initially, there was a proposed requirement 19 that the first ANDA applicant submitting a paragraph IV certification be sued for patent infringement to obtain the 180-day 16 3M v. Barr Laboratories, 2002 U.S. App. LEXIS 8346 (May 1, 2002). 17 The FDA lists patents in the Orange Book based solely upon the assertions of the patent holder, rather than making any independent determinations that the patents are valid, cover what the applicant claims, or actually pertain to that drug, claiming (rightly) that it is not the agency s field of expertise to render decisions about patentability. 18 21 U.S.C. 355(j)(5)(B)(iv) (1999). 9

exclusivity. This interpretation was believed to be most consistent with the language of Hatch-Waxman and furthered the congressional intent to encourage challenges to patents that may be invalid or unenforceable 20. In response to a comment on the proposed rule, the FDA added a requirement to the final rule that the first ANDA applicant submitting a paragraph IV certification must successfully defend a patent infringement suit to be entitled 180-day exclusivity. The "successful defense" requirement was established in order to eliminate "an incentive for frivolous claims of patent invalidity or noninfringement because it would give ANDA applicants exclusivity even if the applicant was unsuccessful in defending against the patent owner's lawsuit" 21. The FDA s litigations and successful defense requirements for 180-day exclusivity were considered in Inwood Laboratories, Inc. v. Young, 22 ; Mova Pharmaceutical Corp. v. Shalala, 23 and Granutec, Inc. v. Shalala 24. In Inwood and Mova, the court held that 180 days of marketing exclusivity should be granted to the first ANDA applicant who files a paragraph IV certification, regardless of whether the applicant is subsequently sued for patent infringement. These decisions were upheld on appeal. The district court in Mova following the appeals entered an order on June 1, 1998, stating that the successful defense requirement of 21 C.F.R. 314.107(c)(1) was invalid, and permanently enjoined the FDA from enforcing it. 19 The proposed rule containing 314.107(c)(1) was published in the Federal Register of July 10, 1989 (54 FR 28872, 28929). 20 54 FR 28872 at 28894. 21 59 FR 50338 at 50353. 22 723 F. Supp. 1523 (D.D.C. 1989), vacated as moot, 43 Fed. 3d 712 (D.C.Cir. 1989). 23 955 F. Supp. 128 (D.D.C. 1997). 24 No. 5:97-CV-485-BO (1) (E.D.N.C. July 3, 1997). 10

E. The Consequences of the Hatch-Waxman Act The Positive Effects The Act seems to have achieved its purpose in many respects. Generic drug availability is on the rise. A 1998 Congressional Budget Office study found that savings to consumers purchasing generic drugs in place of more expensive brand name bioequivalents amounted to between $8 and $10 billion from retail pharmacy sales alone in 1994. 25 Generic drug industry reports claim that generic drugs typically cost 50% or less than brands with generics often entering the market at prices 25% less than brands, then dropping to 60% off the brand price after two years. 26 Since the passage of Hatch-Waxman, the generic drug share of U.S. prescription sales has grown from 19% in 1983 to over 40% in 1995. There has also been an increase in the percentage of branded drugs that have a generic competitor on the market nearly 100% of the top-selling drugs with expired patents have generic versions, compared to only 36% in 1983, and generic share of prescription drug volume has increased by almost 150% since 1984. 27 The Hatch-Waxman Act has not stifled innovation, despite the doomsday predictions by the brand name pharmaceutical companies, collectively known as Big Pharma. In fact, the prospect of facing generic competition and losing their patent protection spurred Eli Lilly to develop a time release once weekly dosage version of 25 Congressional Budget Office, How Increased Competition From Generic Drugs Has Affected Prices and Returns in the Pharmaceutical Industry, ch. III, at 1,20 (July 1998). See also David A. Balto, Pharmaceutical Patent Settlements: The Antitrust Risks, 55 Food and Drug L.J. 325 (Fall 2000). 26 Generic Drugs: Saving Money at the Pharmacy, The Federal Trade Commission Web site, April 1998. www.accesstoaffordablemedicine.com, March 2002. 11

their blockbuster drug Prozac, which helped motivate many other pharmaceutical companies to create longer duration time released products (not withstanding the motivation to increase exclusivity). The Negative Effects Unfortunately, there have also been some ill and unintended consequences. The Act was meant to lower drug costs by stimulating competition in the pharmaceutical market. Legislators hoped to provide generics a quicker and less expensive approval process, incentives for challenging invalid patents through the 180-day exclusivity period, and compensate innovator drug companies wishing to defend their intellectual property patents by the grant of the 30-month stay of ANDA approvals during patent litigation. However, many pharmaceutical companies have used these incentives (some would call them loopholes) to actually extend exclusivity periods and block competition from entering the market. While Big Pharma employs a variety of different methods to extend the period of exclusivity for their drug, this paper focuses solely on the exploitation of the Hatch- Waxman Act. 28 The most common means of twisting Hatch-Waxman into a vehicle for Big Pharma to extend exclusivity is through patent litigation. Recall that if the patent holder sues a paragraph IV ANDA filer within forty-five days of being notified of the certification, the FDA will not even consider any application related to the drug in 27 Antitrust Issues in Settlement of Pharmaceutical Patent Disputes, Comments by Thomas B. Leary, Commissioner, Federal Trade Commission, Sixth Annual Health Care Symposium, Chicago, Illinois, November 2000. See also Congressional Budget Office, id note 14 at Ch. III, 1, 5, and 27. 28 Some alternative means involve gaining multiple patents on various aspects of a drug, varying dosages, and methods of use and staggering the time when they are applied for so that when one patent expires, others are still effective. These strategies are known as patent stacking and evergreening. Another method is via a six-month exclusivity extension awarded for conducting pediatric testing. While six months may seem short in terms of years of patent protection, consider that for spending only an estimated 12

question for thirty months, essentially granting the patent holder an additional two and a half years of marketing exclusivity. This encourages a present NDA holder to file suit every time any generic files a paragraph IV certification, even if the suit would be frivolous, since regardless of the merits of the suit the FDA must automatically grant the stay, blocking all generic competition. A closely related potential for abuse is the 6 months of exclusivity granted to the first paragraph IV ANDA filer. The exclusivity for a generic version only begins when either the patent infringement litigation is finally adjudicated, or upon the commencement of marketing by the generic. Therefore, if litigants settle the suit out of court, the only mechanism to trigger starting the clock on the 180-day exclusivity is the marketing of the generic product. This situation has led to cases where brand name companies (the patent holder) pay the generic company (the alleged infringer) to defer or abandon marketing generics pursuant to the settlement agreement. Therefore, this exclusivity grant under the Hatch-Waxman Act meant as an incentive to the generic, can actually be a backdoor method of restraining competition by keeping generic products out of the marketplace indefinitely. 29 $3 million on a pediatric trial, Claritin was granted the six-month exclusivity, resulting in additional earnings of close to $1 billion. 29 21 C.F.R. 314 purports to provide when the exclusivity period will commence. However, the language of the statute does not indicate with any precision when that should occur, or any penalty for failure to begin marketing. The statute simply says that the applicant must promptly notify the FDA when it does begin marketing; if the applicant does not promptly notify the FDA of the commercial marketing commencement date, the FDA will consider the date of first marketing to be the date of ANDA approval. The statute does not define what is meant by promptly. The statute also does not define what might trigger the FDA s decision to consider the first filer s date of ANDA approval to constitute the date of first marketing. Presumably, the FDA s consideration would be a retroactive response to a subsequent ANDA filer wishing to market the generic at issue sometime after the first ANDA filer had already begun marketing. The statute leaves open the question whether (assuming the paragraph IV ANDA filer was not sued for infringement) the paragraph IV ANDA filer may decline to commence marketing at all for a period of time and if so how long a period of time might be permissible before the first filer will be deemed to have lost his exclusivity period, if ever. 13

Big Pharma is not the only player exploiting the ambiguities in Hatch-Waxman. Another unfortunate byproduct of the Act has been the creation of a litigation cottage industry, with some generic companies exploiting the exclusivity grants as a revenue resource without ever intending to actually produce and manufacture a generic pharmaceutical. Their strategy is to attract an infringement suit and get paid off in a settlement, never intending to market a drug. As an example of abusive behavior, Barr Laboratories, one of the largest generic drug manufacturers in the United States, actually pays its outside patent lawyers several hundred thousand dollars a month to search patent listings in order to target patented drugs. Barr then files a paragraph IV ANDA on a targeted drug for the purpose of actually getting sued so that the brand name company will pay them off in a settlement of the litigation. Bruce Downey, Barr s Chief Executive Officer, discussed this strategy openly during a speech at an investment conference in 2001, stating we see no end to the patent-challenge opportunities as long as branded firms continue to get patents. I look at it as them generating business opportunities for Barr. 30 Indeed, Barr has had many recent victories in the patent-challenge context over major drug manufacturers. In one case challenging Cipro, Bayer-AG ( Bayer ) settled with Barr agreeing to either sell Cipro to Barr for resale, or alternatively to pay Barr $30 million a year (which Bayer has been doing so far). In a settlement with AstraZeneca over the drug tamoxifen (Nolvadex), Barr is permitted to buy the drug at a 5-15% discount and then resell it. One analyst estimates that such settlement arrangements account for over 65% of Barr s revenues from the past four years. 31 And in the case of 30 Bethany McLean. Prozac, A Bitter Pill, Fortune magazine, www.fortune.com. August 13, 2001, at 4. 31 Id. at 4. 14

Prozac, Barr made it clear to Lilly that it actually wanted to settle the case, for $200 million and the right to begin selling Prozac prior to the expiration of the patent. The only reason that case did not settle is Lilly refused to go for the deal. The Unintended Consequences These abusive manipulations of the provisions of the Hatch-Waxman Act have led to some egregious behavior on the part of both brand name pharmaceutical companies and their generic counterparts. To fully understand how these manipulations play out in reality, consider the following cases. FTC v. Hoechst Marion Roussel, Inc., Carderm Capital L.P., and Andrx Corporation In March of 2000, the FTC filed a complaint alleging that Hoeschst and Andrx settled an infringement suit with an agreement whereby Andrx (the first filer of an ANDA with a paragraph IV certification) was paid millions of dollars to delay marketing a generic version of Cardizem. 32 Since Andrx held the first filer status, it also held the 180-day exclusivity period. By not marketing, this prevented any other generic from gaining FDA approval, and effectively kept Cardizem free of competition. According to the FTC, Andrx agreed it would not market their product even upon gaining FDA approval, would not relinquish their 180-day exclusivity to any generic competitor, and they would not market any other non-infringing generic. 33 32 See Federal Trade Commission, FTC Antitrust Actions in Pharmaceutical Services and Products, www.ftc.gov/bc/rxupdate.htm. 33 Glasgow, Lara. Stretching the Limits of Intellectual Property Rights: Has the Pharmaceutical Industry Gone Too Far? 41 J.L. & Tech. 227 (2001). 15

Abbott Laboratories and Geneva Pharmaceuticals Abbott realizes roughly $550 million a year from its brand name drug Hytrin, used to treat prostatic hyperplasia and hypertension. Geneva, a generic drug company, received FDA approval to produce a generic version of Hytrin upon the filing of a paragraph IV certified ANDA and inevitably drew an infringement suit by Abbott. Abbott and Geneva entered an agreement to settle the suit, which included provisions that Geneva would neither market their generic version, nor relinquish their 180-day exclusivity period, in exchange for receiving payments in the amount of $4.5 million per month from Abbott. 34 Mylan v. Bristol Myers Squibb Bristol Myers Squibb ( BMS ) held a patent for BuSpar (buspirone hydrochloride or buspirone, an antianxiety medication) that was set to expire on November 22, 2000. On November 21, 2000 however, BMS received a new patent, the 365 patent, which claimed a method of use of a buspirone metabolite. 35 Immediately after receiving the patent, BMS approached the FDA to obtain listing of the 365 patent in the FDA s Orange Book. BMS certified to the FDA that the 365 patent covered FDA-approved uses of buspirone and further certified that a claim of infringement could reasonably be 34 See In re Abbott Labs., 2000 FTC LEXIS 15 (Mar. 16, 2000). 35 In their application for a new patent, BMS initia lly claimed that the patent would cover (i) methods of using a metabolite of buspirone, and (ii) methods of using a prodrug of buspirone. A metabolite is a chemical produced by the body, while a prodrug is an inactive precursor of a drug that is converted into its active form by the body s metabolic process. The Patent and Trademark Office issued a restriction requirement that an application for a patent could include only one invention. In response, BMS limited its patent application to include only claims to a method of using the prodrug of buspirone. The Patent and Trademark Office, however, rejected this claim because it determined that usage of the buspirone prodrug had been in the public domain for approximately fourteen years, and was therefore unpatentable. BMS then abandoned the prodrug claim and asserted that the patent would cover methods of using a buspirone 16

asserted against a manufacturer of generic buspirone. These certifications were in direct contradiction to BMS s position taken before the Patent and Trademark Office when it originally obtained the 365 patent. 36 Two generic drug manufacturers, Mylan Pharmaceuticals and Watson Laboratories, had received FDA approval and were prepared to market generic versions of BuSpar on November 22, 2000. However, based on BMS s eleventh-hour assertions before the FDA that the 365 patent extended its exclusive rights to sell buspirone, the FDA stopped Mylan and Watson from marketing their generic versions. F. Big Pharma s Arguments Big Pharma claims that their actions are within the scope of the law, and they are entitled to protect their patent rights. The loudest and most fatalistic argument made by the brand name pharmaceutical industry is that they need to realize large profits on drugs in order to recover their research and development costs, and reinvest that money into innovation in order to create newer and better lifesaving medications. The crux of Big Pharma s battle cry is that if they continue to face increased competition, while seeing a reduction in their profit margins, they simply won t be able to pursue research and development of new lifesaving medications. In a most ominous statement, Robert Armitage, the general patent counsel for Eli Lilly, (in discussing the loss of the last two years on Prozac s patent through a court determination it was invalid) claimed [f]or two metabolite. This patent covers only the systemic administration of buspirone metabolite into the body; it does not cover any FDA-approved uses of buspirone. 36 Before the Patent and Trademark Office, BMS took the position that the `365 patent did not cover any FDA-approved uses of buspirone. BMS took this position because any FDA-approved uses of buspirone would have been unpatentable prior art. In correspondence with the FDA, however, BMS conveyed that the `365 patent covered FDA-approved uses of buspirone for purposes of obtaining an Orange Book listing. 17

years users will get somewhat cheaper Prozac, and Lilly will lose revenues that would have enabled us to develop one new drug. Which lifesaving drug won t we develop? 37 Indeed, on the day the last patent for Prozac was invalidated, a patent which would ve ensured exclusivity until 2003 38, Lilly had to notify the SEC which halted trading in its stock, and Lilly lost $36 billion in market cap. 39 But before anyone is tempted to feel sorry for Lilly, consider that Lilly is in a better position today than it was prior to losing its stranglehold on the Prozac market. Lilly s stock, while down from its all time high two years ago, was still selling at twentysix times earnings last August, more than most big pharmaceutical company stocks. Its antipsychotic drug, Zyprexa, has already generated more revenues than Prozac even though it has only been on the market for five years; and Lilly has a powerhouse newproduct pipeline including drugs like Xigris (for septis), and duloxetine, which Lilly believes could be more effective than Prozac, not to mention around $250 million in annual sales thanks to Prozac Weekly. 40 The astronomical amount of revenue currently generated by pharmaceutical sales greatly exceeds the amount of money needed to research and develop new medications at today s rates. Even if the cost of developing and bringing to market a brand name drug is roughly half a billion dollars, the average legitimate exclusivity period granted to these pharmaceutical companies is about twelve years. Many of these drugs earn upwards of 37 McLean. Prozac, A Bitter Pill id. at 8. 38 That decision was handed down on August 9, 2000. 39 However, only the 2003 patent was invalidated while the 2001 was upheld. Lilly received an extra six months of exclusivity on the valid patent for having performed pediatric testing. That additional six months of exclusivity amounted to an extra $1 billion in revenue. 40 McLean. Prozac, A Bitter Pill, see id. at 7. 18

$1 billion per year or more in earnings. 41 To put it in perspective, consider that since 1988, the return on equity of the five biggest U.S.-based drug manufacturers Merck, Eli Lilly, Pfizer, Pharmacia, and Schering-Plough has averaged 30% a year. In 2000, it was 36%, compared with 27% for Microsoft Corp., and 21% for companies in the Standard & Poor s 500-stock index. 42 As for the argument that Big Pharma will forgo developing lifesaving drugs because they won t have the money to do so, the truth is they already do, though not due to any shortage of revenue but rather because lifesaving drugs are not cash cows. In spite of annually increasing R&D budgets, there are still no major breakthroughs or new blockbuster drugs for the most serious of illnesses and diseases. 43 The fact is the vast amount of funding does not go into drugs to fight the most serious of diseases like AIDS and cancer, but rather big money-making drugs used by tens of millions of patients to treat less serious aliments. Merck-Medco estimates that more than half of the projected doubling in its spending over the next five years will come from just two main types of drugs, i.e. cholesterol-lowering and other heart-related medications, and neurological medications, such as psychiatric drugs or painkillers. 44 Additionally, Big Pharma spends millions of dollars in developing new classes of drugs to treat the same conditions already being treated by older drugs, even though the 41 Prilosec (heartburn medication) earns its maker AstraZeneca roughly $4 billion a year, Prevacid (ulcer medication) earns Tap Pharma $2.8 billion a year, and Paxil (antidepressive) earns GlaxoSmithKline $1.8 billion a year (figures from the Drug Patent Expiration List, www.gphaonline.org/news/drugs.php). That means that Big Pharma recoups its initial R&D costs in roughly the first six months of marketing their blockbuster drugs, and then just reaps billions in profits for the next decade or so. 42 Barrett & Carey. Drug Prices: What s Fair? id. at 64. 43 PhRMA claims that pharmaceutical companies spent upwards of an estimated $30 billion to discover and develop new medications in 2001, while simultaneously arguing that today s high drug costs are warranted to stock the R&D coffers considering they will lose over $30 billion (25% of the market) within the next 5 years when many profitable drugs come off patent, and there aren t enough new blockbusters in the pipeline to cover increased costs. www.phrma.org. 19

benefits of the newer drugs are often marginal at best. For example, heavily advertised painkillers Celebrex and Vioxx, with combined worldwide sales of $5.6 billion, are no more effective than Motrin, but cost up to 60 times as much, according to Dr. Sharon Levine, associate director of Kaiser Permanente s physician unit. Finally, many industry critics point to miserable R&D productivity relative to its cost in dollars. According to Big Pharma, the bill for developing a new drug is between $500 and $880 million. 45 However, the actual amount spent on any one marketable drug is roughly one-quarter of that when you look at the drug development process. 46 In the past, researchers would make a number of variations of drugs and test each to determine which ones worked. Now with the explosion in pharmaceutical research technology and information about genes and biology, researchers attempt to identify particular targets in a particular disease (say a damaged gene that causes cancer), and then develop a drug for that target. This process can take ten years or more, meaning that about half of the estimated $500-$880 million would not be spent at all. Instead, that amount represents the opportunity cost, i.e., the measure of what the money tied up in the drug for so many years could have earned with alternative investments. 47 II. Fixing the Problem To be sure, answering the question of how to advance generic drug availability, lower the overall cost of pharmaceuticals, and still promote the advancement of science and innovation while protecting patent rights in the United States is not easy. The most 44 Barrett and Carey, Drug Prices: What s Fair, see id at 63. 45 The Myth of Rising Drug Prices Exposed, Pharmaceutical Research and Manufacturers of America. www.phrma.org/press/ 46 Barrett and Carey, Drug Prices: What s Fair? see id. at 64. 20

successful means of achieving all of those goals is likely to be a combination of approaches. Currently, the only vehicle for policing the behavior of participants in the field lies in the hands of state and federal agencies and private lawsuits, e.g., for antitrust allegations. These types of suits are complicated, difficult to prove, costly, and take years to work their way through the courts. During this time pharmaceutical companies by virtue of their exclusivity in the market are able to charge non-competitive prices for medications patients need. 48 A. Approaches to Lower Prescription Drug Costs Obviously, education is one step. Consumers should be better informed about how generic medications compare to brand name drugs and the value in taking generic drugs, since many people falsely believe that generic drugs are somehow different, and may not be as effective, as brand name drugs. Employers offering health care policies, doctors, and health care insurers often fail to steer patients toward generic drugs that may offer better value, or teach patients how to take medications properly. The drug manufacturers themselves could also be encouraged to lower the cost of medications through improved efficiency in their R&D productivity in order to save money which could be put back into the reserves. Better guidelines governing the directto-consumer advertisement of drugs could also be put back into place. Many drug companies spend large sums to market expensive drugs to people who do not need them, or spend millions to develop new versions of older drugs which may afford minimal 47 Id., at 64. 48 Currently, it is estimated that there are twelve separate actions pending against Big Pharma companies. See Ceci Connolly. Firms Use Strategy to Stretch Out Profits From Lucrative Drugs, The Washington Post, March 25, 2002. 21

improvement and benefit while making dubious advertising claims that the drug is more effective, or an improvement upon the older version, or has bigger benefits than it actually does. 49 Other approaches to reduce costs may include requiring insured patients to pay out of pocket a percentage of a prescription s cost, with percentages being more for expensive brand name drugs and less for generics, disseminating better information to consumers about suitable drug alternatives, reduce the need for medications (and hospital stays and surgeries) by promoting preventative steps, and closing the legal loopholes in the Hatch-Waxman Act, which major drug companies have employed to maintain their exclusivity and limit competition. Combinations of these approaches may help reduce the costs of prescription medication in this country, but it is the last of these, reforming Hatch-Waxman, which would be most immediately attainable and most likely to have the biggest impact upon drug costs. B. The McCain-Schumer Bill In an effort to address the previously described problems with the Hatch-Waxman Act, Senators John McCain (R., Az.) and Charles Schumer (D., N.Y.) introduced legislation in Congress on May 1, 2001 to amend Hatch-Waxman. The bill is known as the Greater Access to Affordable Pharmaceuticals Act (GAAP), Senate bill 812, but is more commonly referred to as the McCain-Schumer bill. The bill is reproduced in its entirety in Appendix B (i-xi), but the following are the principle provisions relevant to the Hatch-Waxman Act. 49 For example, Glaxo heavily markets Relenza, an expensive new flu drug, but it only shortens symptoms by a day. 22

Under the McCain-Schumer legislation 50 : The automatic 30-month stay granted by the FDA to brand-name drug makers who file suit against a generic manufacturer's patent challenge would be eliminated. Instead, brand name manufacturers would seek a preliminary injunction from the courts. In an effort to clarify and expedite certification, brand-name manufacturers would be required to list all of a drug's relevant patents and certify with the FDA that the list is complete and accurate. Generic drug makers would be able to seek a declaratory judgment on any patent listed in the Orange Book, the FDA's catalog of currently-held patents, just as brand-name manufacturers have standing to sue on any patent challenge. The 180-day exclusivity period granted to the first generic applicant would become available to the next-filed applicant if the first applicant: reached a financial settlement with the brand-name to stay out of the market until the patents have expired; fails to go to market within 90 days once their application is effective; does not get FDA approval within 30 months; fails to challenge a new patent within 60 days; withdraws their application; or is determined by the Health and Human Services Secretary to have engaged in anti-competitive activities. 51 The McCain-Schumer bill is well intentioned, and some of its provisions may be more appropriate than others. The bill on the whole, however, has multiple problems, internal inconsistencies, and some provisions that may be unconstitutional. Rather than enacting ever increasingly intricate legislation to address perceived abuses of the present 50 Press release from the official website of U.S. Senator John McCain, http://mccain.senate.gov/generic01.htm. 51 Other provisions are Individuals or groups filing citizen petitions would be required to certify that their petitions are factually-based, warranted by existing laws or regulations, and are not submitted for any anticompetitive purposes, such as to cause unnecessary delay. Any petitions that are believed to be used for anti-competitive purposes would be investigated by the FTC and any company making false statements would be subject to existing criminal penalties ; The multiple methods of establishing bioequivalence that are currently recognized by FDA regulations will be incorporated into statute, reducing frivolous legal challenges and accelerating consumer access to those drugs that require alternative forms of testing ; The Federal Trade Commission would study the bill's effectiveness within five years of its enactment to see whether it has increased consumer access by promoting competition and has enabled generics to come to market in a fair and expeditious manner consistent with the intellectual property rights of patent holders. 23

Act, the most effective approach is to return to and apply existing law and statutory schemes that have long proved effective in other legal areas. The 30-month stay One of the most significant proposals of the McCain-Schumer bill is the elimination of the 30-month stay granted to patent holders who challenge paragraph IV certified ANDAs through patent litigation. This proposal is likely to have the most impact on eliminating the current incentive to patent holders to bring frivolous lawsuits to gain an extension of exclusivity. Presently, the Hatch-Waxman Act requires the FDA to perfunctorily stay approval of any ANDA upon the mere filing of a patent infringement action challenging an application containing a paragraph IV certification. This gives the FDA extraordinary power to extend the exclusivity granted by a patent. Patent law is not the expertise of the FDA. Therefore, the agency grants the stay without any consideration of the merits of a patent challenge or of the validity or enforceability of the patent in question. In every other industry, a patentee itself must institute an infringement suit to enforce its patent rights. Only in the pharmaceutical industry is the patent holder bestowed active assistance from a federal agency in enforcing its patent rights, by permitting the agency (which is supposed to base approval of the product solely upon safety and efficacy) to grant de facto patent extensions and preclude market entry based upon questions of potential infringement. On the other hand, placing this issue in a judge s hands where the parties must meet well established standards in order to obtain a preliminary injunction would significantly reduce the incentive for frivolous litigation 24

designed merely to garner an automatic and frequently unwarranted two and a half year patent term extension. The 180-day exclusivity Judicial scrutiny, however, does not address the problem of exclusivity extension resulting from litigation settlement agreements where the patent holder pays the alleged infringer to postpone marketing while they retain their 180-day exclusivity. Patent holders may argue these agreements are justified because they reinforce the presumption of validity of their patents 52, and settling patent infringement lawsuits promotes judicial efficiency and economy. However, Big Pharma cannot use its patent rights to extend their monopolies outside of the exclusive rights afforded by the patent laws. 53 Allowing a patent holder to buy off a competitor who is challenging the patent would allow just such an extension of monopoly power. It might be contended that these settlement agreements allow the generics to maintain their 180-day exclusivity grants, since this period would otherwise be triggered when the generic began marketing its product. The period would continue to run even if the patent holder successfully obtained a preliminary injunction. Therefore the generic would lose its incentive to challenge potentially invalid patents or to offer the consuming 52 35 U.S.C. 282. 53 See e.g., United States v. New Wrinkle, Inc., 342 U.S. 371, 378 (1952) ( Patents give no protection from the prohibitions of the Sherman Act to [plans to restrain commerce] when the licenses are used in the scheme to restrain. ); Hartford-Empire Co. v. United States, 323 U.S. 386, 406 (1945) ( Rights conferred by patents are indeed very definite and extensive, but they do not give any more than other rights a universal license against positive prohibitions. The Sherman law is a limitation of rights rights which may be pushed to evil consequences and therefore restrained. ) (quoting Standard Mfg. Co. v. United States, 226 U.S. 20, 49 (1912)); Morton Salt Co. v. Suppiger Co., 314 U.S. 488, 492 (1942) ( The public policy which includes inventions within the granted monopoly excludes from it all that is not embraced in the invention. It equally forbids the use of the patent to secure an exclusive right or limited monopoly not granted by the Patent Office and which it is contrary to public policy to grant. ) 25