It’s a common strategy used by pharmaceutical companies to try to retain exclusive rights to make and sell brand-name drugs: applying for a new patent on a secondary component of the medication. If the patent on the core chemical of a lucrative product is about to expire, the strategy goes, just file for a patent for the coating on the drug, or its delivery mechanism, or some other non-central component of the pill.


Is this kind of legal maneuver on the up and up, a legitimate attempt by the big pharmaceutical companies to recover the huge costs of developing new drugs? Or are the brand-name firms inappropriately gaming the system for their own benefit, to the detriment of generic-drug manufacturers, consumers and insurance companies forced to pay big bucks for brand-name medications?


Health care and legal experts at Wharton and other professional schools say there is some truth to both positions. It is important that brand-name companies remain profitable and healthy if only because the United States is increasingly the driving force behind global pharmaceutical innovation. On the other hand, wide-scale availability of inexpensive drugs is desirable, and generic companies are experts at making huge quantities of medicines.


According to these experts, an 18-year-old law that was designed to eliminate friction between brand-name and generic companies contained some unintended, but significant, flaws, which have led to court battles between generics and giant pharmas. What’s more, some say, the system for obtaining patents also contains shortcomings, in that patents can sometimes be too easily obtained.


And, they note, no quick fix is in sight that would satisfy all parties. Edward T. Swaine, professor of legal studies at Wharton, says that “the average person’s view is, ‘I have a pill in my hand that costs $4.50 a day. I could have one in my hand that costs 50 cents a day. If the [generic] company is capable of making it for that price, why can’t I get that?’ But a lot of commentary ignores the fact that it’s very difficult to figure out the right incentives that will bring the initial [brand-name] products to market.”


“We have two locomotives heading toward each other,” adds Robert Field, professor of health care policy at the University of the Sciences in Philadelphia and an adjunct professor at Wharton. “One is the drug companies’ R&D enterprise, which is extremely expensive and quite risky. That engine is fueled by money, and if we can’t fund it we are not going to have the miracle discoveries that we have become used to. On the other side is cost pressure. There’s no sense producing miracle drugs if nobody can pay for them. One way to do that is through generics’ competition. Those two goals are in conflict.”


Or, as Arti Rai, a professor at Penn’s Law School, puts it: “There is no clear cut good guy and bad guy.”


The controversy centers in large measure on a 1984 bill called the Hatch-Waxman act, which established a process by which generic drugs are approved by the U.S. Food and Drug Administration and which gave brand-name companies ways to legally protect their medicines.


Understanding Hatch-Waxman


Hatch-Waxman was a giant compromise. On one side of the controversy were the brand-name pharmas, which wanted to do all they could to protect their rights under patent law. On the other side were the generic-drug makers and many public-health advocates who wanted patients to have greater access to cheaper drugs.


Before Hatch-Waxman took effect, a federal appeals court had ruled that a generic company violated the law if it started testing a patented drug in an attempt to develop a knockoff drug with the intention of seeking FDA approval to bring it to market. The ruling meant that generic companies could not even begin to think about developing an equivalent of a brand-name medicine until the medicine’s patent was fully expired. In effect, the ruling meant that it would take longer for generics to bring drugs to market.


Hatch-Waxman addressed this court ruling by negating it. The legislation said that a generic company would not violate patent law by experimenting with a patented drug as part of the process of seeking FDA approval.


Hatch-Waxman also contained provisions to help brand-name drug manufacturers. Among other things, “the bill gave brand-name companies the ability to block generics from coming on the market by essentially just filing a lawsuit alleging that the generic was an infringement on some patent,” Rai says. “Ordinarily, you have to prove you have a case of a patent being violated. Under Hatch-Waxman, there was no need for proof. Once the patentee files a suit for infringement, the patentee gets an automatic 30-month delay in the regulatory process, which ends up being a 30-month ‘injunction’ preventing the generic drug from coming on the market.”


Why did Congress give big pharmas such a tool? Lawmakers were concerned that a flood of generics would destroy the market share of brand-name medicines. If pharmas could not get an immediate injunction, there would be no possibility of rebuilding that market share if the patent was later proven valid.


Unintended consequences


But Hatch-Waxman has had unintended consequences over the years, says Rai. For one thing, giving brand-name firms the ability to sue “has ended up creating situations where pharmas have an incentive to file not just one patent on the drug – [that being] the main patent on the chemical entity that is the drug – but also for patents later on that cover [less central] aspects of the drug, like dosage, tablet shape or coating.”


As a result, patents that might be struck down if a case were ever to go through full litigation end up helping brand-name pharmas just because of their existence. In other words, Rai says, Hatch-Waxman “creates an incentive to drug companies to file for patents they otherwise wouldn’t.”


Hatch-Waxman has had other effects, too. One portion of the bill created an “exclusivity period” that benefited certain generic-drug makers. If a generic company was the first generic firm to try to bring a drug to market by saying a patent was invalid or not infringed upon by the generic equivalent, the company would have a six-month period of exclusivity over other generic companies. With a popular drug, this six-month period can mean a tremendous amount of money to the generic company enjoying the exclusivity, legal experts say.


“The intent was to give incentives to generics to try and fight patents if they thought they had a legitimate basis to do so, but it appears that it has become an invitation to collude,” says one lawyer who asked not to be identified.


An alleged case of collusion would work this way: A generic company files for exclusivity, and that action results in an infringement suit by the brand-name firm. The generic and brand-name companies then cut a deal with one another under which the generic enjoys the exclusivity period, which keeps other generics from making that drug. But the generic does not actually bring the drug to market for a time – a delay that gives the brand-name company six additional months of exclusivity to the brand-name medicine.


“Usually there’s a payment to the generic to stay off the market,” says this lawyer. “That’s what a lot of people are concerned about. There are no explicit safeguards in Hatch-Waxman against this. [Congress] thought this would be an antitrust matter, but that’s expensive …


“Certainly, the manufacturers say this is not collusion at all but a normal hedging of bets during litigation,” the lawyer adds. “It’s perfectly rational for parties in litigation to reach agreement on what the outer limits of liability would be. But it raises flags. Anytime you have a patent holder paying the alleged infringer, the money is flowing the wrong way and that, to me, raises flags. You can imagine a scenario where that might be a sophisticated way of dealing with risk. Without more, I wouldn’t say that’s a per se antitrust violation.  But it would raise eyebrows.”


Indeed, the Federal Trade Commission in the last few years has accused a number of brand-name pharmas of paying off generic firms to delay competition from generic medicines.


The McCain-Schumer Bill


An attempt to revamp Hatch-Waxman has come in the form of a bill introduced by Senators John McCain and Charles Schumer. The measure, which is supported by consumer groups, insurance companies, state governors and some large employers, would limit the ability of brand-name companies to protect their monopolies. Among other things, it would eliminate the 30-month ‘injunction’ period during which the FDA cannot approve a generic drug while a patent challenge is pending. Brand-name pharmas oppose McCain-Schumer.


Rai supports elimination of the 30-month injunction period. “One relatively simple change,” she says, “would be to take out the provision that allows for the 30-month automatic delay in the generics coming to market, and to require the pharmas to prove that they have a case. Why not hold them to standards that all patentees are held to – that your patent is valid? This would mean that the generic could come on the market for the time period before the [brand-name company] got the injunction and before it proved to the court that the patent was valid. The generics would not infringe patents they thought valid because they would know that if the patent had validity, they would have to stop manufacturing the drug and pay significant damages.”


Rai doesn’t expect the provisions of Hatch-Waxman to be changed any time soon. “Congress is focused on other things now, and McCain and Schumer have had a reform bill around for a few years.”


For his part, Swaine says those who support McCain-Schumer should not discount the need for the major drug companies to have enough revenue for research and development. He acknowledges that there have been cases where brand-name firms “have sought improper patent protection.” But, he adds, “The thing that I find frustrating about the public discussion is the notion that the bad guys are the brand-name pharmas and that the good guys are the generics and concerned states. I’m suspicious of that. I think there are generic companies that are good, and the more the merrier in terms of competition. But litigation reveals that things are more complex than that.”


According to Sean Nicholson, professor of health care systems, “it seems completely irrational that these [brand-name] companies, once they’re facing the impending loss of a patent, will fight like crazy. It’s got a bad public relations component to it. It looks like they’re profit-grubbing companies, and they are leery of being perceived that way.”


Still, Nicholson adds, he is sympathetic to the needs of the brand-name firms because losing market share to a generic company can be catastrophic, especially when there are no new blockbuster drugs in the pipeline, which is the case with many major companies these days. “The FDA sets the rules and the pharmas play by those rules,” Nicholson says. “It’s not the pharmas’ fault for doing something that’s acceptable to the FDA.”


Two proposals


Field, the adjunct professor of health care at Wharton, outlines two suggestions that he says might reduce the conflict between generics and brand-name companies.


One idea is to change the starting point for a patent. Instead of having a patent’s period start from the time the fundamental molecule of a drug is discovered, it would begin when the medicine receives FDA approval. “That would provide much more certainty to brand-name companies because the patent wouldn’t depend on the vagaries of the regulatory process,” Field says. “The regulatory process can be capricious. There’s no way to predict with certainty how long it will take, when the FDA will ask for additional data, when a clinical trial will take place. It would make it easier to set a definite end point when general competition is allowed.


Another idea is designed to protect some of the financial interests of brand-name pharmas by placing a surcharge, or royalty, on generic medicines. The surcharge, which would make generic medicines less expensive than brand-name drugs but more expensive than a regular generic, would be turned over to the brand-name company. Field says he has not completely vetted this idea, but says some type of surcharge would ensure that generic companies are not “freeloading off someone else’s research.”


The patent issue


Some legal experts say legislators and others concerned about the drug controversy may wish to take a close look at the whole process of applying for and receiving patents from the U.S. Patent and Trademark Office (PTO).


“Unfortunately in many cases because the patent office gets 200,00 patent applications a year, it ends up issuing patents on things that would not, if a court were to examine the patent, be considered patentable,” says Rai, the Penn law professor. “Ordinarily, that’s not a huge problem because if you’re trying to enforce your patent you can’t get injunctive relief until the court examines the patent. But [in the case of a brand-name drug company suing a generic firm and obtaining the automatic 30-month injunction] the court doesn’t get a chance to examine the patent before the injunction.”


Moreover, Rai says, the patent office does not have the capacity to examine closely the number of applications it receives. The vast majority of applications are approved, but about half the number of patents that end up in litigation are determined to be invalid for various reasons.


Rai suggests that the high number of patent approvals may stem from the way the patent office’s compensation system works. “Patent examiners get more kudos for granting patents than denying them,” she explains, “because granting them means you have disposed of the whole thing and compensation is based on the number of dispositions you do in a given year.”


While a brand-name company’s attempt to obtain a patent for something like a drug’s coating or delivery system may seem relatively frivolous to some consumers, Swaine does not see it that way. “My only concern is we generally do regard those sorts of innovations as patentable,” he says. “It isn’t only the biggest gear in the machine that’s patentable. And you want the big pharmas to increase patient comfort or make any additional part of the [drug-taking] process easier.”


“The patent office should be issuing patents for things that are innovative and socially useful,” says the attorney who asked not to be quoted by name. “To the extent that I can do something useful with the coating or delivery mechanism, why not? … The magic word in patent law is non-obvious. They can only get a patent on a coating that’s non-obvious regarding the other coatings out there.”


This observer acknowledges, however, that “there is an issue whether the PTO is competent as to deciding what’s obvious and not. It’s understaffed and way underfunded … The ability of the PTO to do its job is a real scandal. But that applies to all patents.”


Besides, he adds, “the PTO doesn’t know what you will use the invention for. They don’t know it’s a coating for a brand-name drug about to go off the market. They do every analysis to determine whether it’s non-obvious, which means good enough. If it is, they stamp it and say ‘good.’ That’s what we ask of them. It’s more the FDA, in the way we set up the mechanism, regulations and statutes that we probably should complain about if we think these extraneous patents are slowing down the speed of generics. I don’t know how much they really are. People claim they do but I’m skeptical.”