The U.S. system for pricing drug innovation is forged on a careful balance between innovation and access. On the whole, American consumers consent to market-based pricing for novel drugs as a way to drive investment and reward scientific success. But no system is optimal. Too many patients struggle to obtain access to the resulting breakthroughs. Healthcare costs are straining public and private budgets.
We’ve maintained a fragile political consensus that has long accepted that our market-based model is a suitable compromise for steering capital to the highest reward and also highest-risk endeavors. That political balance is becoming more frayed, at the very moment when the results of these endeavors — measured by new advances — are enormous. We’ve entered an age of unmatched medical breakthroughs, where the opportunity to cure once intractable and deadly diseases is firmly at hand. But our market-based approach needs to be modernized to work better for more consumers and sustain the fragile compact that supports it.
These market-based rewards for innovation are balanced against an expectation that there will be vigorous competition from low cost, generic drugs once patents and other exclusivities have lapsed on the branded medicines. That careful compromise mostly worked for many years. But this implicit bargain faces new strains that are contributing to the growing angst over the rising cost of novel drugs.
Some of the obstacles are scientific. It may be hard to copy the kinds of cell and gene therapies that are making up a growing proportion of newly approved drugs. Other challenges are market driven. When it comes to potentially curative therapies for very rare disorders, once a new treatment reaches the market and is prescribed to the prevalence population of those patients already diagnosed with a disease; the incidence population (those patients who will be newly diagnosed with a disease each year) may be too small of a market to sustain the cost of investment in second or third-to-market innovation. This could limit competition in these categories unless the cost of development and the price of these goods come down over time.
Still other obstacles are driven by shortcomings of policy. These include tactics that some brand drug companies pursue as a way to frustrate expected generic entry. It sometimes also includes actions by generic drug makers that delay their own launch. One such tension stems from business arrangements that generic manufacturers enter into with brand companies, where generic drug makers sometimes decide to split monopoly rents with brand sponsors rather than launch their generic competitor. To address these and similar policy challenges, Senators Lamar Alexander (R-TN) and Patty Murray (D-WA), the duo that helms the Senate Committee on Health, Education, Labor and Pensions, introduced the bipartisan Lower Health Care Costs Act last week.
The discussion draft contains a swath of provisions to strengthen the principles that support drug competition and the market-based model that drives innovation.
The new legislation has certain provisions aimed at reducing barriers to generic entry, most of which are aimed at brand companies and the tactics they sometimes use to block generic entry. The legislation addresses the use of citizen’s petitions to delay generic approval, by clarifying how and when the FDA can deny a citizen petition that’s submitted with the primary purpose of delaying a generic approval.
The legislation also updates the meaning of “new chemical entity” (NCE) to limit the potential for “ever greening” where brand drugs seek to extend their period of exclusivity by marketing subsequent versions of an already marketed drug. It states that the five years of NCE exclusivity is only available for a drug that doesn’t contain any active moiety that has been previously approved in the U.S. In addition to these provisions, the bill also contains a series of measures to encourage biosimilars.
Triggering The 180-Day Clock
But chief among its proposals – perhaps its most aggressive, and contentious measure — the bill aims to right-size a provision that provides a crucial financial incentive for generic drug makers to challenge branded patents.
In certain circumstances, when a generic drug applicant files an abbreviated new drug application (ANDA) with the FDA — requesting permission to market a new generic medicine – the application contains a paragraph IV certification. In making a paragraph IV certification, the generic drug maker is saying that it believes the patent on the branded drug is either invalid, not infringed, or unenforceable.
Under the generic framework conceived in in 1984 under the Hatch-Waxman Act, the filing of a paragraph IV certification is treated as an act of patent infringement, triggering an elaborate and carefully orchestrated process. The ensuing practice requires that the generic drug maker provide notice to the owner of the patented drug and the holder of the new drug application (NDA) of the factual and legal bases for its patent challenge. The branded drug owner then has the option of suing the generic sponsor that’s challenging its patents. If the patent and NDA holder doesn’t bring suit within 45 days of receiving such notice, the FDA can approve the ANDA. But if the brand drug owner brings a suit within this 45-day period, as is typically the case, then the FDA can’t approve the ANDA for 30 months or whenever a court determines that the patents at issue are invalid or not infringed by the generic filer.
To provide an incentive for generic filers to challenge patents on branded drugs, the first filer of a paragraph IV certification is entitled to a 180-day period of generic marketing exclusivity. This gives the generic sponsor who busts the patent on a brand drug, and markets a generic copy to a brand medicine, a period of 180 days of co-exclusivity to market their generic version alongside the brand drug. The aim of this construct is to enable the generic sponsor to price their drug at a premium during this time, given the expectation that there will only be limited generic competition during these 180 days. This is intended to allow the first generic filer to earn a more substantial return for their investment in the scientific and legal work needed to challenge a patented drug. After the 180 days lapses, other generics filers typically enter the market, and drive down the pricing still further.
While these 180 days are meant as an incentive for first-to-file generic drug applicants, there are cases where generic sponsors “park” their applications and the 180 days. This is possible because, under current law, the clock for determining when the 180-day exclusivity period begins is triggered only once the first-to-file generic sponsor is granted a final marketing authorization for their product. This means a first generic applicant whose ANDA is otherwise approvable could deliberately delay seeking final approval of their drug, and thereby prevent the FDA from triggering the 180-day exclusivity. Subsequent ANDA applicants that are otherwise eligible for approval are nonetheless blocked from obtaining final approval solely because of a first applicant’s continuing eligibility for the exclusivity.
As a result, the generic drug framework isn’t working as it was intended: As a way to quickly drive low cost competition onto the market. For generic drug makers that are first filers, sometimes the incentive isn’t necessarily to launch to obtain the period of market exclusivity, but to secure the promise of exclusivity and then decide how and when to use it. It’s become a call option that the generic sponsor can hold onto. The lack of pressure to launch can extend application delays by reducing the impetus of generic sponsors to efficiently work through regulatory challenges.
ANDA holders will also sometimes park their 180-day exclusivity in situations where they reach business agreements with brand sponsors not to launch a generic competitor. These arrangements, while decreasing in frequency, allow the branded drug maker and the first generic applicant to extend the effective patent life of the branded drug, and then divide the resulting monopoly revenues, which can be substantial. But there are other unintended consequences of the current approach.
When delays happen, patients and insurers pay significantly higher drug prices. Other generic competitors can be sidelined for years. To address these challenges, the proposal in the new legislation would trigger the clock on the 180-day exclusivity awarded to the first filer at the moment when a subsequent generic drug applicant receives tentative approval for their drug, if the first-to-file applicant hasn’t received final approval within 30 months of submission of its ANDA. This covers circumstances where the subsequent generic filer is blocked solely by a first applicant’s entitlement of 180-days of exclusivity, and where the first applicant hasn’t sought final approval. Any provision should protect generic companies from forfeiting the exclusivity if they’re actively seeking final approval.
The manufacturers of generics will argue that the provision cheapens the 180-day exclusivity award, and reduces the incentive to bust branded patents. But the fact that generic firms sometimes park this exclusivity begs a broader question. Does the incentive still provides the same level of motivation for generic firms to invest the time and risk of seeking to challenge patents as a way to trigger competition?
After all, if the 180-days of exclusivity provided a sufficient level of profitability to generic firms, why would they sometimes seek to forgo that windfall in exchange for a cash payment in the form a reverse settlement with the brand sponsor? Or why would generic firms sometimes lack a sense of urgency in advancing these first files?
The intent of the 180-day exclusivity provision was to provide a windfall incentive to entice generic firms to take on the cost and risk of challenging patents, and then race to market with generic alternatives as a way to promote competition once the lawful exclusivities and patents had lapsed on a branded medicine. If the 180 days of exclusivity is no longer a sufficient incentive to drive this market behavior, we should re-evaluate whether the reward to first generic entrants should be enhanced.
It’s true that the profitability from having 180-days of marketing co-exclusivity with a brand drug has, on average, increased along with the rise in drug prices. But so have the costs and complexity of gaining generic approval. The market behavior of generic firms would seem to indicate that the reward for being a first filer to reach the market is, on the whole, not as strong of an incentive as it once was.
One consideration could be lengthening the time for which generic firms get exclusivity. If Congress wanted to narrow this added incentive, they could apply it to subsets of drugs where there may be smaller sustainable markets or higher generic entry costs. Or it could apply to those markets and drug categories where there’s a higher public health imperative to get generic competition onto the market.
All of these challenges bears consideration as legislation advances to modernize our overall generic system, first conceived 35 years ago in Hatch-Waxman. Taken as a whole, the bipartisan legislation introduced by HELP makes meaningful steps to update that general framework and promote competition from lower cost generics.