The Perils of Regulating Drugs by Sound Bite

The Perils of Regulating Drugs by Sound Bite

There is a legal adage that “hard cases make bad law.” California may soon rediscover this wisdom.

Assembly member Jim Wood has introduced a bill (AB 824) with the intention of discouraging “pay-for-delay” tactics. “Pay-for-delay” practices refer to a situation when a manufacturer of a patented drug pays the manufacturer of a generic drug to delay launching its competitive product in order to extend its exclusivity period. Undoubtedly, these practices are anti-competitive and violate the spirit of the entire patent system.

Such practices should be eliminated, but Assemblyman Wood’s bill makes things worse. The proposed policy demonstrates a profound misunderstanding of a very complicated market and, as a result, will jeopardize patients’ access to innovative medicines tomorrow, and threaten California’s economic prosperity today.

To see why, a deeper understanding of the pharmaceutical market is required.

The Hatch-Waxman framework, effective since 1984, oversees the current market for medicines that are typically purchased at a pharmacy counter. The Hatch-Waxman framework does a very good job of balancing the oft-contradictory goals of incenting innovation and encouraging competition.

Starting with innovation, before Hatch-Waxman the U.S. developed 31% of all new medicines. This share grew steadily once Hatch-Waxman was implemented and U.S. headquartered companies now develop 57% of all new medicines.

It is precisely because the current law incents innovation that Americans have access to nearly 90% of all of the newly launched medicines between 2011 and 2017. The country with the next highest access rate was Germany, where people only had access to 71% of all of the medicines. Australians could only access one-third of these medicines.

Simultaneously, the Hatch-Waxman framework has helped establish the U.S.’ robust market for generic medicines. The market share for generic medicines went from 13% in 1983 (prior to the passage of Hatch-Waxman) to 90% as of 2017. This is the highest share of generic medicines in the world that, according to the Association for Accessible Medicines, saved consumers $265.1 billion in 2017.

The tricky part of this balance arises when the market transitions from patent exclusivity to generic competition. As part of Hatch-Waxman, generic companies are allowed to challenge the patents of a branded medicine before the patent expires. In fact, the first company to challenge the patent gets the exclusive rights to market the generic drug for 180 days – a very powerful incentive.

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 a bit under 6-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 should not be surprising that there is also a large number of lawsuits, and a large number of settlements. The settlements represent the negotiated balance between both manufacturers.

From the patients’ perspective, these settlements end the legal uncertainty, and encourage quicker generic entry into the market, as evidenced by the large number of challenges that are occurring earlier and earlier during the branded drugs’ exclusivity period. Therefore, the settlement process encourages a more competitive market.

Whether or not the system could be better designed is a different question. The current policy framework is intentionally encouraging litigation, and therefore manufacturer settlements, in order to encourage the introduction of cheaper generics, faster.

Once this context is understood, it becomes clear that Assembly member Wood’s bill (AB 824) 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.

This standard is being imposed under the misnomer that these settlements are nothing more than “pay for delay” tactics, when in reality the vast majority of these settlements are the intended outcomes from a very complex regulatory framework that are designed to encourage faster generic competition.

AB 824 does not account for any of these “real-world” complexities, nor does it show any understanding regarding how the regulatory process actually works. Instead, the bill implements policies based on persuasive sound bites. And, while this may be an effective political strategy, legislating by sound bite rarely achieves its goals, or effectively solves problems.

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