A game of generics

A recent workshop hosted by the US Federal Trade Commission saw acting chairman Maureen Ohlhausen discuss the impact of patents on drug pricing and competition in the marketplace. Kevin O’Connor, partner at Neal Gerber & Eisenberg, explains

What was discussed at the FTC workshop?

The focus of the FTC workshop was competition in prescription drug markets. Much of the discussion focused on strategies to encourage competition in order to lower prices and improve access.

There was generally agreement that it continues to be important to protect intellectual property rights associated with new pharmaceuticals so that innovative companies have appropriate economic incentives to develop vital new drugs and undertake the costly work necessary to demonstrate safety and efficacy. At the same time, rapid entry of generic products to the market was identified as an important driver of lower prices for pharmaceuticals.

US Food and Drug Administration (FDA) commissioner Scott Gottlieb identified certain practices that delay generic entry and may receive increased governmental scrutiny. He was particularly concerned with practices that restrict a generic firm’s access to branded drugs that they need to perform necessary bioequivalence studies.

How do patents affect drug pricing and competition?

Innovative, or branded, companies can maintain high prices because patents, as well as regulatory exclusivity, allow them to prevent generic firms and others from entering the market.

It should be noted that competition can be fostered between branded companies as second or subsequent products having the same or similar mechanism of action creates competition that can lower prices and improve access. (The hepatitis C market is one example.)

On the flip side, once patent regulatory exclusivities have expired, the first generic competitor’s product is typically offered at 20 to 30 percent discount to the price charged by the branded product. Subsequent generic entry continues to lower prices with discounts of up to 85 percent or more seen when a large number of generic firms are each competing for business.

Nevertheless, expiration of patents and regulatory exclusivity does not ensure lower prices or increased access. FTC acting chairman Maureen Ohlhausen discussed the complexity of pharmaceutical markets. She noted that for some unpatented pharmaceuticals, generic firms refrain from entering the market or do not enter the market in sufficient numbers to drive prices down. The disincentives for generic firms to enter the market—whether complex manufacturing requirements, rare diseases with small patient populations, or low reimbursements—need to be more fully understood before solutions can be identified.

What are some of the strategies employed by patent holding pharmaceutical companies?

Innovator companies often pursue patents covering methods of treatment or formulations that provide exclusivity beyond the exclusive term afforded by the patent covering the drug itself (such as the active ingredient). Indeed, off-patent competition may not occur upon expiration of the patent on the active ingredient but rather later due to patents covering a formulation or a particular method of use.

Such patenting strategies are often criticized for extending patent protection. Nevertheless, it bears mentioning that the federal law and its implementing regulations explicitly contemplate the exclusivity afforded by such patents. Moreover, generic firms are not required to match the formulation or seek approval for all approved uses of a branded pharmaceutical product to obtain approval of their generic product.

What measures are in place to stop practices that delay generic entry?

Over the last decade, the FTC has brought numerous enforcement actions opposing so-called “pay-for-delay” or “reverse payment” settlement agreements on antitrust grounds. The FTC indicated that following the US Supreme Court’s 2013 decision in FTC v Actavis, it has seen a downward trend in the number of reverse payment settlement agreements.

More recently, members of Congress as well as the FDA and FTC have been exploring measures to curb another practice that may delay generic entry: the availability of samples for reference products under a restricted distribution system. Distribution of a drug may be restricted under FDA-required risk evaluation and mitigation strategies (REMS) in order to safeguard the public and prevent potential abuse or diversion. Branded companies can also voluntarily adopt a restricted distribution policy by using exclusive contracts with distributors or specialty pharmacies to limit access to the product.

In any event, there have been allegations that branded companies use restricted distribution arrangements as a way to block generic firms from accessing the test samples needed to demonstrate bioequivalence or biosimilarity. The most notable example occurred with Turing Pharmaceuticals’ antiparasitic drug daraprim.

On the patent side, one of the changes enacted by the America Invents Act was the introduction of new procedures, such as inter partes review, for third parties to challenge granted patents. The legal standard for invalidating a patent in the patent office is lower than in a district court, which benefits the challenger. Generic firms—and others—have increasingly used IPRs to try to invalidate patents covering pharmaceutical products.

Could increased scrutiny harm incentives for pharmaceutical companies and have a knock on effect for innovation?

Absolutely. The patent system and the generic/biosimilar drug approval processes were designed to balance the incentive for a branded company to develop and seek approval of new drugs with the desire to facilitate generic or biosimilar competition following the period of exclusivity.

Any changes to these systems should be carefully assessed to ensure that the interest in incentivising the development of new, better, and/or safer drugs is not undermined. Particularly as the pharmaceutical landscape shifts from blockbuster drugs to more targeted therapeutics and precision medicine, it will remain as important as ever to balance the incentives for investment in innovative therapies with the desire to ensure competition after a reasonable period of exclusivity for the innovator product.

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