Accelerating Generic Entry: A Proven Solution to the Problem of Prescription Drug Pricing

By Bert Rein
April 28, 2019

“There is no economic or legal compulsion to preserve today’s specific patent benefits to the detriment of the public health.”

https://depositphotos.com/29660399/stock-photo-medicine-business.htmlHigh prescription drug prices and their impact on costs borne by the government in Medicaid, Medicare Part D and other federal programs, is a front burner topic in Washington. The President has committed to reducing the price of prescription drugs, and pressured drug companies to hold the line. The Department of Health and Human Services (HHS) has proposed two regulatory initiatives—price disclosure in drug advertising and foreclosing rebates from manufacturers to pharmacy benefits managers (PBMs)—aimed at pushing prices down. Some Democrats have urged more sweeping actions, such as having the government negotiate Medicare drug pricing as a single buyer or regulating drug prices by reference to an international index based on government-negotiated drug prices abroad.

These proposals cannot solve the drug pricing problem. The Administration’s proposals merely tweak the status quo and put no effective restraint on new drug prices. Jawboning by the Executive has had a minimal impact. Disclosure of manufacturers’ list prices, unless accompanied by numerous and inherently confusing caveats highlighting the difference between those prices and the co-pay an insured consumer must bear at retail, is potentially misleading and, in any event, has no direct impact on prices. Eliminating rebates, as HHS’s rulemaking acknowledged, will inevitably raise health insurance costs now partly paid for by rebates while manufacturers’ pricing power remains unabated. The Democrats’ call for government power buying or price regulation would impact drug prices but also require politically sensitive government determinations about the “worth” of prescription drugs to patients—a significant step on the road to government-allocated health care.

A Proven Solution

So, do we have to settle for surrender, eyewash or non-market alternatives? Is drug pricing, as branded manufacturers claim, so complex in a largely insured world that any politically palatable initiative is bound to fail? No. In fact, there is a proven market-based solution that Congress could enable by recognizing that legally restraining competition is the foundation of current pricing excesses and confronting it directly. Ninety percent of the prescriptions filled in the United States today are sold under competitive market conditions at reasonable price levels because the market for those drugs has been opened to generic drugs and biosimilars, which are interchangeable copies of the branded drugs, making pre-entry single source branded prices unsustainable. But to incentivize new drug development, today’s legal system delays generic entry for many years after a new drug or biologic is first introduced. Drug developers are permitted to act as sole source providers of their innovative products for decades without any limitation on total cost recovery or reference to the actual cost of drug research and development.

Two legal constraints protect sole-source status. First, under the Federal Food, Drug, and Cosmetic Act (FDCA – governing new chemical entities and new uses of approved entities), the U.S. Food and Drug Administration (FDA) cannot approve an identical generic drug until at least five years after a new branded drug is approved. Under the Biologics Price Competition and Innovation Act (BPCIA – governing new biological producers) that period is stretched to at least 12 years. Statutory sole-source protection under the FDCA and BPCIA is comprehensive, including a ban on competing imports.

Second, drug manufacturers routinely secure one or more patents on new chemical and biological entities. Patent protection lasts 20 years or more from the date of filing and almost always past the end of statutory protection. Under both the FDCA and BPCIA, patent holders may sue potential competitors to foreclose entry or to impose crippling damages notwithstanding expiration of statutory exclusivity. To heighten entry deterrence, branded companies often seek, during the period of statutory exclusivity, to obtain additional patents that protect their drugs and extend sole source exclusivity in time, creating a veritable patent thicket for competitors to fight through to gain pre-patent-expiration entry.

With a sole source position legally secured, branded drug companies can price without fear of losing sales to generic competitors or inducing new entry. In addition, unlike most monopolists, branded companies benefit from drug insurance propping up patients’ ability to pay. Since the vast majority of potential patients are insured, the price they care about is their co-pay at the point of purchase. The difference between that co-pay and the cost to the dispensing retailer of the drug (driven by the manufacturer’s wholesale price) is borne by health insurance and recovered in premiums spread across the entire insured population. Where federal and state governments cover all or some of the difference, that cost is spread across all taxpayers. Branded drug companies use rebates as a means of securing favorable co-pay positions without regard to the wholesale price of their drugs.

In these circumstances, branded manufacturers not surprisingly price far in excess of the variable manufacturing cost of their drugs. They realize many multiples of even the most robust estimates of new drug development costs while they and generic manufacturers alike can sell drugs profitably in competitive markets at 10% to 20% of sole source branded prices. It may resonate politically to demonize branded drug manufacturers for high prices, but their actions are consistent with their obligations to maximize investor returns as permitted by the legal regime. Until that regime changes, blame fairly belongs to lawmakers.

Free Market-Friendly and Effective

How then could the regulatory regime be enhanced without injecting the government into health care purchasing or unduly limiting incentives for new drug development? Tinkering with the existing sole source regime for new drugs—­with or without browbeating or shaming through price disclosure—will not work. Eliminating rebates may strike at PBMs that absorb them as income rather than passing them through to reduce insurance premiums, but is likely to have minimal impact, if any, on drug prices. But reviewing the limits on competitive entry could be both consistent with a free market economy and demonstrably effective.

While today’s extended sole source status is a useful reward for innovation, there is no limit on how much operating profit an innovator can extract from a new drug or biological product. Apart from costs of discovery and securing regulatory approval of safety and effectiveness, the enormous margins over manufacturing costs being extracted in the sole-source period are returning multiples of development and approval costs to innovators. The critical questions are: 1) how much of this sole source return is actually necessary to stimulate drug innovation? and 2) whether generic/biosimilar entry opportunities and market competition can be keyed to the achievement of an adequate return.

One simple approach to the issue would be to limit sole-source protection to the exclusivity periods now established in the FDCA and BPCIA and foreclose the double dip extension of these periods through injunctive relief or lost profits damages under patent law. Today, the expiration of statutory exclusivity permits the FDA to begin approving competitive generic drugs and biosimilars but does not shield potential entrants from claims of patent infringement that can lead to entry-barring injunctions or accountability for lost profits on sole source sales in amounts that threaten the viability of a losing prospective entrant. The result is often a multi-year extension of the sole source period Congress deemed adequate to stimulate innovation, the creation of “patent thickets” prospective entrants must traverse before competition begins, and the substitution of expensive and burdensome patent litigation for rational determination of competitive entry dates.

To be fair, the patent system does promote disclosure of the formulation of new drugs and biologicals and facilitates their imitation by competitors. Moreover, the patent clause of the Constitution requires providing some benefit to patent holders. But there is no economic or legal compulsion to preserve today’s specific patent benefits to the detriment of the public health. Congress could limit those benefits by foreclosing entry-barring patent injunctions and capping total patent royalties at a reasonable percentage of revenues achieved by infringing generic competitors—e.g., 10-15%–to be apportioned between holders of all infringed patents. That limitation would permit innovators to be rewarded throughout the patent period but provide economically realistic opportunity for new entrants. It would incentivize innovators to litigate only their strongest patents and greatly reduce the incentive for creating patent thickets.

Innovators may claim, understandably, that existing statutory exclusivity periods were established in the context of full-scale exercise of patent rights and should be extended if patent remedies are curtailed. That need, however, can be tested by determining whether sole source recoveries during current statutory periods are sufficient to support necessary innovation. This is both an empirical question—how have returns in the statutory period compared to discovery and FDA approval costs?—and a policy issue—what is the appropriate balance between stimulating innovation and price competition?—that our system of government entrusts to Congress. In addition, Congress could create an escape valve to permit innovators to seek administrative extension of a statutory exclusivity period by demonstrating that unusual circumstances had unduly limited sole source returns on specific drugs.

In sum, there is a proven avenue available for permitting market competition to alleviate the drug-pricing crisis. Modifying the current regulatory regime to produce that result may not be easy politically, but it is much preferable to ineffective tweaking, a wholesale surrender, or direct, pervasive drug-price regulation.

Image Source: Deposit Photos
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ID: 29660399 

The Author

Bert Rein

Bert Rein is a founding partner of Wiley Rein LLP and widely recognized as a leading antitrust and commercial litigator and international law expert. He helps clients from a range of industries to solve their complex legal, political and business matters. He handles Constitutional litigation involving First Amendment protection of political activity and commercial speech, and specializes in federal preemption defenses to food and drug tort liability.

For more information or to contact Bert, please visit his Firm Profile Page.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 15 Comments comments.

  1. Anon April 28, 2019 1:37 pm

    It should be noted that the mechanism that attempts to tie to what Big Pharma allows itself “to be negotiated to” as far as any outside-US geographic pricing zone is NOT “offensive” in and of itself, but instead would merely take away the more typical “make the US consumer support third world market presence,” which IS based on the notion that it is the US consumer that supplements the profits of Big Pharma – and does so to an outsized degree of what any sense of normal patent protection provides. This sense is only reinforced with the other machinations of Big Pharma in the arena of trying to control natural secondary markets for items that Big Pharma has themselves put into the stream of commerce (but in those other geographic regions), and at those lower prices that Big Pharma has agreed to.

  2. Anon April 29, 2019 9:29 am

    Aside from my earlier post – and in defense of patents and strong patent systems, I have to take issue with the “advice” presented by this article, that appears to “spin” one solution as “proven” when there is no such proof, and dismiss out of hand other solutions as “won’t work” while providing no such proof.

    As to some type of “cap” or reduction in what a patentee may obtain from their innovation, I completely disagree. As a litigator and law firm founder, it appears that the author’s expertise does NOT extend to the fundamentals of the patent system.

    The patent system is NOT so tied to actual profits (nor was it intended to be) as the author seems to take for granted.

    One may — legitimately and fully — not even put a product on the market that is covered by a patent and still — legitimately and fully — keep others from doing so – no matter any “cost” of a product that anyone would charge.

    There appears to be a serious misunderstanding in relation to why we have a patent system and the whole “recoup investment” optional reason.

    This is not the first time in recent memory that a member of the Pharma industry (or attorney related to the Pharma industry) has penned an item that moves one optional reason for having a patent system into some type of “de facto” requirement for having a patent system (or seeks to CHANGE the patent system based as if the “recoup” were a necessary item.

    To the end that such is simply NOT a necessary predicate, I would challenge the dismissal of a particular factor that I believe WOULD be highly effective to “combat” what the author paints as a “scourge” WITHOUT diminishing or degrading the patent right in and of itself.

    That item would be a disclosure of the profit margins of all drugs. The author seems to want to say that such disclosure would not forestall any company from continuing to chose to charger whatever they want (or what the market would bear), but that misses the point in two ways. First, the notion of non-government interference is “touted” by the author – incorrectly and in contradiction to his preferred method which includes a de facto forced license set-up. Actual non-interference – but clarity TO the very market would make sure that THAT market could then act to bring pressure (vocal to and about the company and/or choice of purchase) WITHOUT government interference.

    Offering something up as proven (when it is not) and dismissing a mechanism that on its face better aligns with the purported goals while not inducing actual government interference (and aligns better with the actual structure of the patent system) seems like the opposite path of what the author advices is the better path.

  3. xtian April 29, 2019 9:50 am

    The author is from Wiley Rein. According to their website, they mostly represent generics, specifically Mylan. I wonder what percent of the firm’s billings are directly attributable to Mylan? Could that influence the authors position to increase “second sourcing” of drugs?

    Just a note for readers: Mylan produces about 1.1 percent of the world’s opioid products and is the 17th-largest opioid maker in the country. (https://www.dominionpost.com/2019/04/21/more-than-1300-suits-filed-against-opioid-makers-mylan-included-in-minor-role/).

  4. St. John Mountbatten April 29, 2019 1:06 pm

    I agree with the author’s broader point that hastening generic entry is the right way to control faster-than-inflation price increases in the pharma industry. Competition is a necessary component of a well-functioning market. Most of the price problems that we see in the pharma industry stem from statutory (partly patent, partly FDA law) restrictions on competition and market entry in this industry.

    I disagree, however, with the author’s suggestion of how to achieve this faster generic market entry. I am not surprised that someone who represents the generic industry would labor mightily to rework the patent system to allow generics to bring *the latest technology* more quickly to market, but such a statutory rework would not only disincentivize innovation, it would also fail to address the really distressing end of cost-growth: off-patent pharmaceuticals.

    Everyone remembers the example of Daraprim a few years ago. It was discovered that Martin Shkreli’s generic pharma company was charging a price for an off-patent drug that was many multiples of what the same drug had cost back when it was *on* patent. Shkreli was able to get away with this because the FDA was limiting competition, not because patents limited competition. Similarly, insulin prices are rising surprisingly quickly lately, not because of patent limitations, but because of FDA limitations on insulin supply.

    The real solution to cost growth is to reduce the FDA’s barriers to entry. Basically, if a drug has been proven safe and effective, then the FDA should waive through anyone who wants to manufacture that same already-proven drug. Significantly, the generic should not have to manufacture something identical to the latest-and-greatest version of the drug. It should be free to copy *any* previously approved version of the drug (unless that version was the subject of a recall for safety). That would solve 90% of the problem without the disincentives to innovation that would come from the patent-law change that the author suggests.

  5. Anon April 30, 2019 7:57 am

    FDA barriers arise in part because Big Pharma already gets special treatment when it comes to the patent game (utility, and possession at time of filing thereof).

    As I understand it (and please correct me if I am in error), the FDA barriers were added because actual utility being shown (to match claim scope) takes time that was detracting from patent term, so the Big Pharma Lobby got this “lost time” added after the patent time.

    Funny thing though for all other art units without exception, the utility that matches claim scope must be had at the time of filing.

    If Big Pharma does NOT have that at the time of filing, they are simply playing by a ‘special’ set of patent rules.

    They – the Royal ‘They’ – should not get extra FDA time and should be constrained to file when they posses the utility of their claims.

    This irrational split affects both the patent side and the FDA side, and indulgence on the patent side is “doubled down” with a non-patent “bonus.”

    No other art has been able to lobby for this type of special treatment.

  6. CP in DC April 30, 2019 8:45 am

    Any discussion about reducing drug prices that doesn’t mention Hatch-Waxman is meaningless. The Act is an integral part of reducing prices that directly contradicts the author’s claims “sole source provider for decades.” Most ANDA’s are filed at the 4th year of the 5 year protection. So be honest and provide a complete discussion, not a one-sided biased article.

    And as to using generics, well here you go, an article detailing problems with the system. Remember pay-for-delay, generics participated in that, and Ranbaxy’s 500 million fine was another find chapter. But why stop there.

    https://www.bloomberg.com/news/features/2019-01-31/culture-of-bending-rules-in-india-challenges-u-s-drug-agency

    I understand the need for fairer pricing, but preventing innovation in pharma will lead us to the fine example of India, where it’s nearly impossible to patent a drug, method of treatment, or anything related to pharma. When was the last time you saw an innovative drug developed in India? Yeah, I can’t remember either.

  7. Xtian April 30, 2019 9:42 am

    Anon@5 – What you are talking about is Patent Term Restoration. The policy is that a patent holder gets back term on his patent because the patent holder cannot enjoy selling the product that is protected by his patent unless another agency, the FDA, approves the product. No other industry has to get another governmental approval before marking his product. PTR is calculated by a complex formula that includes 1/2 time from IND to NDA, and all the time from NDA to FDA approval. Typically, this amounts to 1.5-2.5 years add to a single patent term.

    As to your utility, no other art must demonstrate through FDA-approved human clinical trials efficacy of their patented product. And because of this, the FDA mandates that the scope of your trials be published on Clinical Trials.gov. So pharma is caught in between a rock and a hard place. Not being able to establish utility but through clinical trials, but once pharma registers to do a clinical trial, they must publish their trial.

    I do not disagree with you that Pharma gets special treatment. I just think there are overriding factors that policymakers have decided warrant that special treatment.

  8. xtian April 30, 2019 10:01 am

    Something else occurred to me after reading CP in DC’s comments. The EpiPen pricing fiasco, which also is a Mylan product. See here for background. https://arstechnica.com/science/2018/08/fda-approves-generic-version-of-mylans-600-epipens-but-the-price-is-tbd/

    If you recall in this instance, epinephrin is a generic drug. What was novel about EpiPen is that it was dosed in a convenient/safe auto injector device. I believe what the generic (Teva) wanted to do was get approval for epinephrin using a device that was slightly different than the EpiPen. Why? If a drug product is “A/B” ratable to a branded product on the market, then when a person goes to the pharmacy to fulfill his prescription, the pharmacy will automatically substitute the generic for the brand. The generic gets the benefit of the brand’s market presence and doesn’t have to advertise or promote the generic version of the product. In this case, the auto injector may have been patented, and Teva was seeking approval of epinephrin in an injector that was slightly different from the EpiPen. One could see how this would be problematic – the brand and the generic would NOT be the same.

    Now nothing in this would have prevented Teva from doing its own clinical trial and getting its version of the auto injector approved on the market. However, that would mean clinical trial investment , and a sales force to promote the injector to Dr’s, a compliance department, all of which generics don’t want to do.

    This gets back to pricing. Sometimes, even a generic drug that is needed by the market (epinephrin) still requires such an infrastructure around it (clinical trial studies, manufacturing, compliance departments etc.) that it doesn’t make money for multiple companies to produce the drug because they can only compete on price. And price will go down so that its not profitable to even be a generic. That’s when you see the market reduced to a single provider, who can than jack up the prices (see Martin Shkreli’s scan).

    I think congress should focus on those types of scenarios.

  9. Anon April 30, 2019 10:53 am

    Xtian,

    No other industry has to get another governmental approval before marking his product.

    This is a misnomer and a misunderstanding/misapplication of the very essence of what a patent is (contrast the ‘negative right’ nature with some ‘positive right’ of engaging IN the marketplace.

  10. Greg DeLassus April 30, 2019 11:52 am

    CP@6 [I]n… India… it’s nearly impossible to patent a drug, method of treatment, or anything related to pharma. When was the last time you saw an innovative drug developed in India? Yeah, I can’t remember either.

    What does the first observation (impossible to patent a drug in India) have to do with the second (no innovative drugs developed in India)? An Indian pharma company can get a US patent (or EP patent, or CN patent, or JP patent, etc) for R&D work done in India. It is not as if Indian patents incentivize Indian R&D, while US patents incentivize US R&D, while EP patents incentivize EP R&D. Nearly all patent systems worldwide (including all of the commercially important large markets) incentivize R&D done anywhere.

  11. CP in DC April 30, 2019 2:39 pm

    Greg

    If you don’t protect investment, companies don’t invest, no matter the industry and no matter where the development takes place.

    The US develops the bulk of new drugs (private or in Universities), and the US is licensed separately because it is so lucrative. Remove that market by removing patent protection, and then hope Europe, Japan, and Canada yield the rate of return on investment to make up for the loss from the US market. You know that is not possible. Investment money goes elsewhere to more profitable products.

    By your logic, remove the US as a profitable market and pharma will continue strong. You need money to run a business and pharma needs a lot of money to get drugs through the pipeline. Are we to believe pursuing the other established markets will make up the difference?

    Xtian discusses the need for infrastructure to run pharma and the associated expense. It’s not as easy as it sounds.

    The difficulty of patenting pharma in India, means pharma does not bother to invest in infrastructure necessary to sell in India. You still a sales force, distribution, maybe manufacturing, maybe quality control, compliance, etc. It all costs money.

    Ok, say I’m wrong and patents worldwide drive innovation worldwide. I didn’t read that breakthrough drug that came out of India in your response. Ever wondered why? The Indian company can patent it in the US. Well, they just piggy back on the development of others (its cheaper), but what happens when the well runs dry?

  12. xtian April 30, 2019 3:40 pm

    Anon@9 Your response to my quote is a non sequitur. What other industry is prevented from commercializing its product absent approval from a government agency?

    Now, your non sequitur statement is, however, accurate in itself. A patent is a negative right. But is no-one can produce a product that is subject to my patent claims (not even the patent holder) because of the requirement for another governmental approval (the FDA). Thus, as the patent holder, absent FDA approval of any product covered by my patent, my patent right is meaningless. Who can i enforce it against? Those smarter then me realized this and came to a compromise, which is the patent term restoration act.

  13. Anon April 30, 2019 3:46 pm

    Xtian,

    I would ask you to reconsider what “non-sequitor” means when you consider just what a patent right entails.

    A patent right does NOT entail you to actually have the Positive Sense of putting a product into the market.

    A patent right carries NO sense of a guaranteed return.

    What you reference is merely the remnant of the successful lobbying effort of Pharma.

    I am not saying that such effects are not real. They are very much real. I AM saying that such are themselves non-sequitors to what a patent really means.

  14. Judge Rich's Ghost May 3, 2019 5:08 pm

    This article is a complete attack on the patent incentives that are necessary for robust new drug development. Rein uses a lot of buzzwords associated with free market thinking, but it’s just fancy wrapping. He offers zero evidence to support his claims–which, when stripped off the fancy-sounding terms, are nothing more than asking to ban patents on pharmaceutical inventions. One ought to ask who Rein is writing for (and who is paying for this). After all, Gene has, on these very pages, complained about ghost-written articles. The same standard should apply here.

  15. Anon May 4, 2019 9:17 am

    JRG,

    I agree.

    Further, since the proposed solution comes across (painfully) hollow, the article in and of itself is not effective but for rejecting that proposed solution and taking a closer look at the solutions that were “proven” not to work by the author.

    Exactly why would not a ‘full disclosure” that provides clarity to the market on true profit margins help inform the public?

    Could it be that his own sponsors would also have to abide by that clarity? It’s not as if Generics are above making an obscene profit.