BENJAMIN N. ROIN
FDA’S PRIMARY mission is to protect consumer safety in the markets it regulates. When Congress first created the U.S. Food and Drug Administration (FDA) in 1906, its mission was to keep adulterated food and drug products off the market. Legislators expanded FDA’s mission in 1938 to include protecting consumers from unsafe drugs and gave the agency authority to block new drugs from the market until manufacturers establish their safety. In 1962, Congress again broadened FDA’s mission to protecting consumers from ineffective drugs and gave the agency additional premarket regulatory authority to demand evidence of efficacy before allowing new drugs onto the market.
This premarket regulatory authority gives FDA economic powers that extend far beyond its primary mission of protecting consumers from unsafe and ineffective drugs. By setting the evidentiary standards for establishing a new drug’s safety and efficacy, FDA controls which drugs enter the market and their development costs. Since FDA also sets the safety and efficacy standards for any later-arriving drugs that would compete against those earlier drugs, it controls the degree and timing of price competition in the market for new drugs. Consequently, FDA exerts tremendous influence over the profits from new drug development and thus over the incentives for investing in pharmaceutical R&D.
Congress formalized FDA’s dual role of protecting consumer safety and setting innovation incentives when it passed the Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman Act). Legislators wrote the Hatch-Waxman Act to give FDA two additional functions beyond regulating the safety and efficacy of new drugs: first, to encourage the production of safe (and low-cost) generics of brand-name drugs; and second, to provide adequate incentives for innovative companies to invest in pharmaceutical R&D through lengthy monopoly periods over the new drugs they develop. Both objectives involve the regulation of generic drugs.
The Hatch-Waxman Act accomplishes its first objective—encouraging the production of generic drugs—by creating a regulatory shortcut for generic manufacturers to introduce their products onto the market. Normally FDA will not allow drug manufacturers to sell their products without first establishing their safety and efficacy through extensive clinical-trial testing—a process that usually takes the better part of a decade and can cost hundreds of millions of dollars. Under Hatch-Waxman, FDA will approve a generic drug for sale to the public based on the clinical-trial data submitted in support of the brand-name drug. Hatch-Waxman therefore saves generic manufacturers from the time and expense of clinical trials, but only if they can show that their drug contains the same active ingredient as the brand-name drug, that it is “bioequivalent” to that brand-name drug, and that it will have the same label. In short, if generic manufacturers can copy the brand-name drug and its label, FDA will allow them to avoid the clinical-development stage of pharmaceutical R&D.
The Hatch-Waxman Act has been a remarkable success in accomplishing this first objective. Generic manufacturers rely heavily on the abbreviated regulatory pathway, so much so that it essentially defines their products—a generic drug is one that enters the market based on the clinical-trial data of the brand-name drug it imitates. This abbreviated regulatory pathway also gives generic manufacturers a distinct economic advantage over pharmaceutical companies in the marketplace. While pharmaceutical companies reportedly spend over $1 billion on R&D to successfully develop a single novel drug compound, generic manufacturers can imitate those products for only a few million dollars on average. Consequently, the typical retail price for a generic drug ranges from 15 to 25 percent of the brand-name drug price. By some estimates, pharmaceutical companies generally lose about 80 percent of their sales on average within four to six weeks following generic entry. Not surprisingly, generic drugs have taken on an ever-larger share of the prescription-drug market in the United States. The market share for generic drugs has gradually increased from 19 percent of prescriptions filled in 1984, when Congress passed Hatch-Waxman, to 80 percent in 2012—currently saving the U.S. health care system an estimated $1 billion every two days.
The Hatch-Waxman Act accomplishes its second objective—providing pharmaceutical companies with lengthy (but temporary) monopoly periods over new drugs to incentivize their development—through a complex set of legal protections for new drugs. Pharmaceutical companies receive an automatic five-year monopoly term over any novel drug compound (i.e., a New Molecular Entity, NME) following its FDA approval, during which time FDA bars generics from entering the market based on the brand-name drug’s clinical-trial data. But these regulatory exclusivity periods cover only a small portion of the product life cycle for most new drugs. Pharmaceutical companies can usually receive a longer monopoly term from the patent system and thus generally rely on patents to delay generic entry for long enough to recoup their R&D investments. Unfortunately, patents are an awkward incentive mechanism for pharmaceutical R&D. Firms file their patents early in R&D, and the twenty-year patent term starts running on their patent applications’ filing date. Consequently, firms typically lose much of their drugs’ patent life during development. The Hatch-Waxman Act lessens—but does not eliminate—this distortion by providing pharmaceutical companies with patent-term extensions that partially compensate for their patent life lost during R&D. Firms can extend their patent term by the sum of half of the time the drug spent in clinical trials and the full time the drug spent under FDA review, not to exceed a five-year extension or an effective patent life of more than fourteen years. Pharmaceutical companies may try to extend their monopoly protection further by acquiring secondary patents filed later in R&D—a practice known as evergreening. These later-filed patents are usually much weaker than the drug’s initial patents, in that they are narrower and/or more likely to be invalid. To minimize evergreening, the Hatch-Waxman Act creates a legal framework for generic manufacturers to challenge drug patents, and rewards successful generic challengers with six months as the exclusive generic supplier. The goal of this complex legal framework described above is to provide pharmaceutical companies with adequate protection to encourage the development of new drugs but not excessive monopoly protection that unnecessarily delays generic entry.
The Hatch-Waxman Act’s success in accomplishing this second objective has been more limited. The seemingly endless patent litigation between generic and pharmaceutical companies gives the impression—sometimes accurate—that one or both parties are abusing the system. Overall, the average effective patent life for new drugs has held steady at eleven to twelve years since Hatch-Waxman passed, which suggests that most of these perceived abuses are either exaggerated or part of the normal protection for new drugs. The Hatch-Waxman Act’s more serious problems involve gaps in the available monopoly protection for new drugs. Many of the most promising new medical treatments involve new uses for existing drugs, which firms rarely develop because the Hatch-Waxman Act provides little or no incentive to invest in drugs once generics are on the market. Moreover, many potentially valuable new drugs are left undeveloped because the idea for the drug was previously disclosed in a prior patent or journal publication, thereby rendering the drug unpatentable. Others go undeveloped because they would require a lengthy R&D period that would consume too much of the drug’s effective patent life. Of course all new drugs, including drugs that are unpatentable or take too long to develop, receive a minimum period of monopoly protection through regulatory exclusivity periods. However, the current regulatory exclusivity periods appear to be too short to motivate the development of most such drugs, since firms remain reluctant to invest in them.
All of this is familiar territory for the academic literature on the regulation of generic drugs. The following chapters move into the unfamiliar, discussing a host of questions that Hatch-Waxman never addressed. Henry Grabowski and Erika Lietzan’s chapter, “FDA Regulation of Biosimilars,” discusses the economics of regulating biosimilars. Biosimilars are imitations of biologic drugs, which were excluded from the Hatch-Waxman Act because their structural complexity makes them difficult to imitate. Congress established a new regulatory regime for generic biologics (or biosimilars) in 2010 as part of the overall health care reforms. Professors Grabowski and Lietzan argue that, at least in the short run, the economics of biosimilars are likely to differ substantially from the economics of traditional generic drugs because of the significantly greater barriers to entry for biosimilars. Arti Rai’s chapter, “The ‘Follow-On’ Challenge: Statutory Exclusivities and Patent Dances,” analyzes a particular component of the new biosimilar regulatory framework—the procedures for patent disclosure and litigation between brand-name and biosimilar manufacturers—and expresses concern that these procedures may create opportunities for collusion. Kate Greenwood’s chapter, “From ‘Recycled Molecule’ to Orphan Drug: Lessons from Makena,” discusses possible strategies FDA might use to reign in abusive pricing practices by orphan drug manufacturers, including allowing early generic competition. Finally, Marie Boyd’s chapter, “FDA, Negotiated Rulemaking, and Generics: A Proposal,” argues that FDA should use negotiated rulemaking to address the issues raised by the preemption of state law failure to warn claims against generic drug manufacturers and to amend its drug labeling regulations.
