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Price competition from low-cost imitators threatens the profits of brand-name manufacturers and reduces their returns on innovative activity, spurring them into actions that may blunt the impact of competition. Price competition also limits the profits of generic-drug manufacturers (see Figure 2) and leads them to seek ways of insulating themselves from intense rivalry. Market participants have responded to the regulatory rules in ways that serve their own interests, so Congress has continually reassessed the regulations and sometimes altered the rules to better achieve the law's original aims.
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Most significantly, the law set out an abbreviated process for generic drugs to receive FDA approval. Generic-drug manufacturers must establish bioequivalence to the active ingredients of the original drug and demonstrate adherence to FDA-approved manufacturing processes. This provision obviated the necessity of conducting clinical trials. Second, the law allows generic-drug manufacturers to apply for FDA approval and conduct tests of bioequivalence before the relevant patents expire — without being subject to patent-infringement claims. Finally, it specifies a process for the resolution of patent disputes between generics firms and brand-name firms.
Several aspects of this third provision are especially important. Generics manufacturers are rewarded for successfully challenging a patent: the first firm that files an Abbreviated New Drug Application is granted a 180-day period of exclusive marketing among generic products. Generics firms that challenge a patent are required to claim that their product will not infringe on any existing patents. But if a patent-infringement action is initiated by a brand-name manufacturer within 45 days of the noninfringement claim, the FDA cannot approve a generic product for 30 months or until the litigation is resolved.
The incentives created by these provisions have had profound effects on the market: today's generics industry has annual sales of about $35 billion.2 But the law has also had some troubling repercussions.
First, it has resulted in a great deal of litigation — some reflecting reasonable disagreements over the boundaries established by patents, some merely representing a profitable tactic whereby brand-name manufacturers can delay the entry of competitors. Consider the financial consequences of a 30-month delay in the release of a generic drug that would compete with a brand-name drug that earns $1 billion per year and costs a few cents per pill to manufacture. In 2003, Congress acted to limit this type of litigation by constraining the number of such suits that a manufacturer could bring in relation to a particular product. Nevertheless, to shield themselves against competition, manufacturers now carry an average of 10 patents for each drug — as compared with an average of 2 a decade ago.
There is also intense price competition among generic products. Generic-drug manufacturers have sought ways of gaining some competitive advantage over their rivals so as to be able to raise prices. One approach was to forge exclusive relationships with producers of a drug's active ingredients, preventing rivals from being able to supply the market. These arrangements were found by the Federal Trade Commission (FTC) to violate antitrust law,3 and antitrust authorities continue to monitor the conduct of generic-drug manufacturers closely.
Makers of brand-name drugs have reacted to the prospect of patent expirations by creating reformulations of key products that use a different delivery system and can therefore be patented. Examples include long-acting versions of a drug or versions that do not require the user to swallow a pill. Brand-name drug companies commonly introduce such products before the patent on the original drug expires, with the goal of inducing some users to switch to a product with a longer-running patent.
Brand-name firms have also held on to some revenue streams by launching their own "authorized generic" around the time when another generic version enters the market, usually through a licensing arrangement with a generic-drug manufacturer. These products are often launched in cases in which a generics firm has successfully challenged a patent. Examples have included authorized-generic Allegra (fexofenadine), Zithromax (azithromycin), and Pravachol (pravastatin), each of which claimed 30 to 50% of generic-drug sales. The authorized generic drug competes with the generic drug that was entitled to a period of market exclusivity, but since the original manufacturer is licensing the right to produce its own drug, it is permitted to sell a generic form. Such a move gains revenue for the brand-name manufacturer and undermines the financial benefits of the 180 days of exclusivity granted to the generic-drug firm that challenged the patent — reducing the payoff for firms that challenge patents and thereby discouraging such challenges.
In addition, some manufacturers have entered into arrangements whereby a generic-drug company agrees to delay market entry in exchange for a payment that settles its patent litigation. Such settlements occurred for K-Dur (potassium chloride), Cardizem (diltiazem), and Nolvadex (tamoxifen), among other drugs. These settlements have been fiercely contested by the FTC and health care payers as anticompetitive. Court judgments have been mixed, but an appeals court recently ruled that such agreements were legal. The final word will probably eventually come from the Supreme Court.
Moreover, in some cases, brand-name companies may find their own patented drugs competing with generic versions of rival drugs in the same class. These companies have powerful incentives to devise ways to stem revenue losses long before their own patents expire. Companies facing such threats to revenues will institute measures aimed at differentiating their products, in the minds of doctors and patients, from those of rivals. A brand-name manufacturer seeking to show a meaningful clinical advantage of its own product will mount promotional campaigns reporting research that tries to persuade physicians and patients to continue purchasing its product. A recent case in point is the Pfizer campaign to promote the clinical advantage of the statin Lipitor (atorvastatin) over a generic rival.
Thus, manufacturers of both brand-name and generic drugs have responded to the provisions of the Hatch–Waxman Act in ways that advance their own economic interests. This is exactly what policymakers should have expected to happen. The impact of public policy is always complex. In the larger context of Hatch–Waxman, some effects that are considered socially undesirable, such as a manufacturer's development of a new formulation of a product to extend patent life, can be seen as one cost that is incurred to collect the very large benefits of the law. The policy question then becomes what the net benefits of addressing the legislation's side effects might be.
Recent congressional debates have focused on regulating authorized generic drugs and limiting the ability of brand-name manufacturers to settle patent litigation through payments to generics manufacturers. In these cases, Congress seems to be directing its attention sensibly to areas in which modification of the law may reduce problematic conduct without undermining the law's benefits.
Source Information
Dr. Frank is a professor of health economics at Harvard Medical School, Boston.
An interview with Dr. Frank can be heard at www.nejm.org.
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