Bills Claiming to Eliminate ‘Pay for Delay’ Will Harm Patients
Proponents from states such as California, Oregon, and Connecticut all claim that “pay for delay” legislation is necessary to rein in the pharmaceutical industry’s anti-competitive practices. If implemented, the bills will impose a high cost on patients by raising the costs of medicines and delaying generic entry into the market.
Pay for delay tactics refers to the practice of patented drug manufacturers paying off generic manufacturers for the sole purpose of delaying the launch of competitive products. When successful, such tactics enable patented drug makers to inappropriately extend their exclusivity period and earn ill-deserved profits. When these anti-competitive practices occur, they violate the spirit of the entire patent system and should be prevented.
But, such practices are exceedingly rare. Typically, the observed litigation and settlement practices are the intended outcomes of the federal regulatory system. Consequently, the advocates of pay for delay legislation suffer from a fundamental misunderstanding of the federal regulatory environment’s intentions.
Current pharmaceutical regulations have their genesis in the Hatch-Waxman Act, which has been in effect since 1984. This framework does an exceptionally good job of balancing the oft-contradictory goals of incenting innovation and promoting widespread access to medicines.
Before Hatch-Waxman, the U.S. developed 31% of all new medicines. Now, because of the beneficial incentives created by this Act, the U.S. develops a majority of all new medicines and is the undisputed global leader in innovation and drug development. Americans also have access to more innovative medicines than any other country — nearly 90% of all of the newly launched medicines between 2011 and 2017. The average OECD country has access to around one-half of these medicines.
The Hatch-Waxman framework has also enabled a robust generics market to develop. Prior to Hatch-Waxman, only 13% of all medicines sold were generic medicines. Today, they are 90%, which is the highest generic share in the world. Thanks to their wide availability and use, generic medicines save U.S. patients $313 billion annually.
While both the innovative and competitive markets are working well, it is the transition between these periods that gets tricky.
To help foster this transition, the Hatch-Waxman framework encourages generic companies to challenge the patents of a branded medicine before the patent expires. In fact, the first company to successfully challenge the patent gets the exclusive rights to market the generic drug for 180 days — a powerful incentive to challenge these rights.
Consistent with these incentives, a 2016 Journal of Medical Economics study found that generic challenges of branded drugs’ patents have grown. As of 2014, the patents of 76% of all drugs were challenged compared to 9% in 1995. For those drugs with over $250 million in sales, 94% experienced patent challenges. Further, the average time a drug had exclusivity prior to a challenge is now just a bit under six years. Back in 1995, a patent challenge did not arise until a drug had been on patent for nearly 19 years.
With patent challenges abounding, it is unsurprising that there are also a large number of settlements. These settlements end the legal uncertainty and, from the patients’ perspective, encourage quicker generic entry into the market, which is evidenced by the large number of challenges that are occurring earlier and earlier during the branded drugs’ exclusivity period. Therefore, the settlement process is encouraging a more competitive market.
Once it is understood that the current policy framework intentionally encourages litigation, and therefore manufacturer settlements, it becomes clear that pay for delay legislation will not improve this system. The bill will establish a standard that effectively assumes patent settlements are “anti-competitive” unless they can be proven otherwise — guilty until proven innocent.
Instead of encouraging settlements, these reforms will encourage potentially long and costly litigation processes all under the guise of fixing “pay for delay”. Ironically, this will increase the costs of medicines and delay when generic medicines will be available to patients compared to the current system.
Pay for delay legislation is predicated on a misnomer, which is why this legislation will ultimately harm patients. In reality, most patent settlements reflect the intended outcomes from a complex regulatory framework that is designed to encourage faster generic competition.
Dr. Wayne Winegarden is senior fellow in business and economics, and the director of the Center for Medical Economics and Innovation at the Pacific Research Institute.