Extending Exclusivity for Biopharmaceuticals to Deter Competing Generics: a Review of Strategies, Potential Mitigation, and Similarities to Infringement

Technology and Innovation, Vol. 21, pp. 215-227, 2020 ISSN 1949-8241 • E-ISSN 1949-825X Printed in the USA. All rights reserved. http://dx.doi.org/10.21300/21.3.2020.215 Copyright © 2020 National Academy of Inventors. www.technologyandinnovation.org

EXTENDING EXCLUSIVITY FOR BIOPHARMACEUTICALS TO DETER COMPETING GENERICS: A REVIEW OF STRATEGIES, POTENTIAL MITIGATION, AND SIMILARITIES TO INFRINGEMENT

Charles E. Phelps

Departments of Economics, Public Health Sciences, Political Science and Office of the Provost, University of Rochester, Rochester, NY, USA

Some patents confront infringement—unauthorized use of the inventions in the patent—thus violating the exclusive use intent of the U.S. Constitution’s creation of the patent system to encourage innovation. In other situations, the reverse occurs—patent holders seek to extend their exclusivity period to prevent competitive entrants. This commonly occurs in biopharmaceutical products markets, where annual revenues on many patented drugs exceed $1 billion per year and (most importantly) where several pathways allow extension of exclusivity. This paper reviews the relevant legislation (Bayh-Dole Act, Orphan Drug Act, Hatch-Waxman Act, and Food and Drug Administration (FDA) Modernization Act) as well as the safety and efficacy regulations of the FDA that control marketing of biopharmaceutical products. The paper then assesses methods used to extend patent exclusivity—some legal, some clearly illegal, and some with ambiguous legal status—in order to deter generic entrants. These methods include using FDA “citizen’s petitions,” creating generic equivalents of branded drugs to block other generic entrants, deterring potential generic competitors from gaining samples to prove bioequivalence to original formulations, seeking additional patents to extend exclusivity (sometimes for trivial changes), paying potential entrants to delay entry, subdividing the potential patient population to qualify for extensions granted by “orphan drug” status, and (most recently) selling patents to Native American tribes to prevent challenges to their validity. The paper concludes by discussing remedies—primarily legislative—that could either eliminate these actions and/or clarify their legality. Then follows a comparison between these entry-delaying strategies and patent infringement itself.

Key words: Patent infringement; Patent exclusivity; Delay of competitor’s entry

INTRODUCTION Discoveries.” The first U.S. patent, signed by George The U.S. Constitution creates the concept of intel- Washington, covered a process for making potash, lectual property (IP) and patents, stating in Article 8, a component of fertilizer. The Congress determines Section 8, that the Congress shall have the power “[to] the duration of such protection, currently set at 20 promote the Progress of Science and useful Arts, by years for U.S. patents, with a de facto additional securing for limited Times to Authors and Inventors five years provided in the Drug Price Competition the exclusive Right to their respective Writings and and Patent Term Restoration (Hatch-Waxman) Act

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Accepted: February 1, 2020. Address correspondence to Charles E. Phelps, Ph.D., 30250 S Highway 1, Gualala, CA 95445, USA. Tel:+1- 707-897-9063. Email: [email protected]

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(1984) for biopharmaceutical products. Other leg- America’s precipitous slide into industrial irrelevance” islation has extended the period of exclusivity in (3). Further benefits of Bayh-Dole are summarized biopharmaceuticals for “orphan drugs” (drugs to by a report from the National Academies of Sciences, treat rare diseases) and for creation of new pediatric Engineering, and Medicine (4). This emerging IP formulations. Although the Constitution grants the development and the licensing thereof, of course, also right to exclusive use to IP holders, it does not pro- created major issues associated with patent infringe- vide federal protection of that right. Right-holders ment, the topic of this special issue of Technology and must enforce their own rights by taking legal action Innovation. Many highly developed nations around against persons who infringe upon the right—the the world have created legislation mimicking Bayh- legal equivalent of trespassing on physical property. Dole, including many members of the European Thus, protecting against infringement creates a cost Union (EU), Russia, China, Japan, and South Korea. to the IP owner—the costs of legal challenges to the Much of this innovation came from U.S. higher infringer—as well as resource use to detect and pre- educational institutions (the majority from their vent infringement. A considerable literature discusses medical centers) and major independent laborato- the optimal legal structure to deter infringement (1), ries, supported by grants from the National Institutes but a basic idea persists: the socially optimal amount of Health, the National Science Foundation, and other of infringement is not zero since costs of enforcing governmental agencies. Most of the very large patent patent rights exceed potential benefits to the pat- earnings (“blockbusters”) for higher education have ent owner for some infringements (2). This simple come in the biomedical field, but many universities point from economics bears repeating in many set- make little or no net revenue from their technology tings: IP owners must balance the added gains from transfer operations, and many spend considerable finding and challenging infringers (who logically resources combatting real or imagined infringement will become smaller and harder to find over time of their IP. with active detection and legal challenge) with the Both the stupendous sums of money involved and ever-growing costs of finding those “last” infring- the complexities of markets for biopharmaceuticals ers and legally halting their infringement. The “last create legal issues of parallel complexity—the use of infringer” might be a single citizen who buys drugs legal and regulatory mechanisms to delay and deter in Canada and carries them across the border to the entry by seeking to extend the period of IP exclusiv- U.S. (technically, a “reimportation”). ity beyond that originally granted in the law. These Underlying this process in the U.S. is a fundamen- activities almost never involve university technology tal change in the creation of IP for research conducted transfer operations since they pertain to commercial using grants from the federal government—the 1980 activities of biopharmaceutical manufacturing and Bayh-Dole Act. Specifically, that Act states (Section sales, activities in which universities, independent 202a) that “[e]ach nonprofit organization or small labs, and other relevant inventors almost never get business firm may, within a reasonable time after involved. disclosure as required by paragraph (c)(1) of this Patent infringement violates the goals and spirit section, elect to retain title to any subject invention.” of IP law by taking earnings away from inven- This act created a boom in IP filings by universities tors that they rightfully own—the first half of and other not-for-profit organizations and a blossom- the Constitutional “bargain” about exclusive use. ing of “technology transfer” offices across the land. Delaying entry, in parallel, violates the second half The Association of University Technology Managers of that bargain: “for limited times.” When compa- (AUTM) has cataloged the growth in innovation aris- nies use quasi-legal and illegal tactics to delay or ing from this act. They state that the Bayh-Dole Act deter entry of competitors when their legal period “unlocked all the inventions and discoveries that had of exclusivity has expired, they also violate the goals been made in laboratories throughout the United and spirit of the Constitutional bargain. States with the help of taxpayers’ money. More than Since much of the deliberate entry delay activity anything, this single policy measure helped to reverse occurs in markets for biopharmaceutical products, I EXTENDING EXCLUSIVITY TO DETER GENERIC ENTRY 217 first review the relevant market and structures, then Cosmetic Act of 1938. Most importantly for drugs, the mechanisms used to create delay of competitive that 1938 act required proof of safety of new drugs entry, followed by discussion of potential remedies before they could be marketed. That landmark leg- to prevent such behavior, and conclude by discussing islation still importantly controls the marketing of parallels between infringement and entry-delaying biopharmaceutical products and medical devices. tactics. The next major change came with the 1962 Kefauver-Harris Drug Amendments, which required SPECIAL ASPECTS OF BIOPHARMACEUTICAL not only proof of safety but also a demonstration of MARKETS efficacy of new drugs. This set in place the major In the U.S. and virtually all developed countries, FDA mechanisms embodied in the current FDA biopharmaceutical products (and medical devices) review process. Preclinical analyses test for toxicity, cannot be legally sold without prior governmental and drugs clearing that step move to a three-phase approval of their safety and efficacy. They also com- clinical review (5). Phase I studies (typically 20 to monly require that the product can only be used 100 healthy volunteers) test for safety and calibrate with a prescription from a qualified clinician. The dosages. Phase II studies (typically several hundred U.S. agency responsible for this, the Food and Drug people with the targeted medical condition) test for Administration (FDA), has a complex review process efficacy and side effects. Drugs passing Phase II go designed to gather information about a drug’s safety on to Phase III studies (often with several thousand and efficacy through a series of clinical trial tests volunteers who have the targeted medical condi- and subsequent (“Phase IV”) follow-up on the drug tion) to measure efficacy (vs. “standard treatment” after marketing approval to find previously unde- or a “control” if no treatment exists) and assess rates tected safety issues, which could lead to removal of of adverse reactions with higher precision than the marketing approval or limitations on the uses of the smaller Phase II studies allow. Drugs passing this drug or medical device. hurdle proceed to marketing approval and Phase Recognizing the many unique aspects of biophar- IV, where volunteers who receive the marketed drug maceutical development, several major legislative acts (typically some thousands) are followed in the Post- have emerged to deal with specific aspects of this pro- Market Safety Monitoring Program. cess. I next review the four key acts—the FDA proof The cumulative probability of achieving marketing of efficacy (Kefauver Amendments of 1962), the 1982 approval is low. According to FDA data, 70 percent Orphan Drug Act, the 1984 Hatch-Waxman Act, and pass from Phase I to Phase II, 33 percent of those pass Section 505A of the FDA Modernization Act of 1997. to Phase III, and 25 to 30 percent of those go to Phase IV post-market surveillance. Thus, the cumulative FDA SAFETY AND EFFICACY APPROVAL probability of success is about six to seven percent. Background History All of the costs of testing the failed drugs are borne The history of drug regulation in the U.S. began by investors who supplied the funds to carry out the in 1906 when President Teddy Roosevelt signed into required research—presumably in anticipation of law the Food and Drugs Act, which prohibited inter- expected returns high enough to justify the invest- state commerce in misbranded and adulterated drugs ment. Simple math tells us that—in our patent-driven and foods. In 1911, the Supreme Court ruled (in world—those drugs making it to market must have US v Johnson) that the 1906 law did not forbid false high profitability in order to induce the requisite and misleading claims about therapeutic efficacy of investment for new drug innovation. Insufficient drugs but only about the ingredients. The Congress incentives for innovation—just like infringement— quickly closed that loophole in 1912 with the Sherley dampen investors’ enthusiasm for investing in the Amendment. Little else of relevance changed for highly uncertain prospect of success with any new drugs until 1933 when the FDA began to seek a major biopharmaceutical product. revision of the FDA law, starting a five-year battle Some potential markets are intrinsically small, that ended in 1938 with the Federal Food, Drug and creating two difficulties in attracting investments: 218 PHELPS

First, small populations make it difficult to recruit the therapeutic superiority (rather than just equivalence), required number of patients to test the drugs (mostly a substantially stronger regulatory hurdle for poten- Phase III studies). Second, for those that make it to tial competing drugs than elsewhere applied. market, the market size is intrinsically limited. We The U.S. Orphan Drug Act has been replicated next turn to legislation designed to alter this land- in many countries with similar rules. The Japanese scape and then evaluate the ways in which these acts equivalent (“nanbyou diseases”) uses a new limit of have created numerous opportunities for delaying 180,000 patients (increased in 2017 from 50,000), entry of generic competitors. representing about 14 per 10,000, a standard now more generous than the U.S. version (and almost Legislative Response to These Challenges four times their previous rule). The EU uses a limit As experience grew with the new environment for of five per 10,000 and requires that the disease be biopharmaceutical innovation, it became apparent life-threatening or debilitating. None of these rules (in the view of the U.S. Congress) that the incentives consider international sales or potential treatable did not direct innovation sufficiently towards dis- populations, so the possibility of international sales eases that were relatively rare. The view also emerged makes orphan drug production more promising than that the delays in achieving FDA approval deterred if just considering each country’s domestic market innovation since the patent is regularly issued at the separately. These targets create incentives for drug start of the approval process, but marketing could not manufacturers to create artificially small target mar- begin until FDA approval. Thus, concerns arose that kets to qualify for orphan status, as I discuss below, incentives for innovation were eroded or blunted by with some “blockbuster” drugs receiving multiple the FDA-generated marketing delays. These concerns “orphan drug” awards. led to three major legislative changes that directly affected markets for biopharmaceutical products. The Drug Price Competition and Patent Term Restoration Act (Hatch-Waxman) of 1984 The Orphan Drug Act of 1983 Henry Waxman, congressman from California, In response to concerns about these “small size” was not only central in creating the Orphan Drug markets, the U.S. passed in 1983 the Orphan Drug Act but also the Drug Price Competition and Patent Act, which established a series of rules designed to Term Restoration Act of 1984, which is widely draw investment into these markets. The FDA has known as the Hatch-Waxman Act. For our purposes, identified about 7,000 “rare diseases,” and they esti- Hatch-Waxman had two major components—one mate that 30 million Americans have at least one of to encourage innovation and the second to encour- these conditions. To qualify for “orphan drug” status, age generic entry. Regarding the first component, there must be fewer than 200,000 people in the U.S. it assures five years of market exclusivity for a new who have the targeted medical condition (about six chemical entity (NCE) by prohibiting the FDA from per 10,000 people currently) or an analysis showing licensing a generic product for five years after mar- that the drug would not be profitable even if marketed keting approval even if a patent had expired. This for seven years. The FDA has (since 1983) approved protection arises through “data exclusivity,” wherein 650 drugs to treat these conditions, almost all using the patent holder need not share information about special provisions of the 1983 Orphan Drug Act (6). the chemical compound in the drug to potential The primary incentives are (a) a 50 percent tax credit generic competitors. Second, it extends the patented for clinical testing costs borne by the manufacturer period by the time the drug was under FDA review, with carry-forward and carry-back provisions, (b) up to five years’ maximum extension for time spent guarantee of seven years of market exclusivity after in regulatory review (but not if the applicant fails to marketing approval even if the period of patent exclu- respond with due diligence to FDA inquiries). The sivity has expired, (c) grants for drug development, maximum extension is five years, but also the patent (d) fast track approval, and (e) a requirement that protection is limited to 14 years after FDA regulatory potential drugs for the same clinical condition prove approval and can only be used for a single patent on EXTENDING EXCLUSIVITY TO DETER GENERIC ENTRY 219 each NCE. Pharmaceutical products are often pro- billion per-year blockbuster, it can gain an additional tected by multiple patents, and the innovator must $0.5 billion in revenues by working towards pediatric choose which of those to use for the patent exten- formulations—commonly a profitable investment— sion period. The Congressional Research Service has before generic entry can legally occur. created a useful summary and analysis of this complex act (7). THE ROLE OF GENERICS IN PRODUCT PRICING Regarding generic competition, at the end of the IN BIOPHARMACEUTICALS period of exclusivity, Hatch-Waxman set in place a Markets for biopharmaceutical products have number of incentives to induce generic entry, in rec- many unique features, one of the most important of ognition of the importance of generic competition which is the role of generic drug entry when legal to eventually bring down prescription drug prices. exclusivity ends. Economic theory alone does not A key component was the creation of a shorter pro- give a strong prediction about the effect of entry. In cess for generic entrants to receive approval, requiring the two simplest models of duopoly (two sellers), them merely to prove that their product was bio- one (the Bertrand model) leads instantly to the low- chemically equivalent to the patented product—the est possible price (the price that pure competition Abbreviated New Drug Application (ANDA). As would set), while the other (the Cournot model) we shall see below, even this process created a new leads to prices below the monopoly price but above way for original patent holders to attempt to forestall the competitive price. The problem seems to hinge generic entry. This act also created a 180-day period on complicated details about the nature of the proof exclusivity for the first generic entrant. This cre- duction process and the extent to which products ated a second pathway for original patent holders to are substitutes for one another (9), so to really learn delay entry, also discussed below. what happens with generic entry, it seems best simply to turn to real world data. Fortunately, we have The FDA Modernization Act of 1997 – Pediatric some analysis of this issue from the Federal Trade Formulation Extension Commission (FTC). This process is less well known but provides a The FTC study assessed the patterns of generic ready method for many patent holders to extend entry in numerous biopharmaceutical products after their exclusivity period by six months. All they need legal exclusivity ended (10). The results are somewhat to do is to set in motion a process to develop pedi- disheartening for consumers hoping for instant price atric formulations of their drugs. While this will relief. Their data show prices of drugs at the end of a likely have little pertinence for some diseases (e.g., 24-month period after competition is allowed. Figure Alzheimer’s Disease), it readily applies to numer- 1 shows their primary results, where “1” is the price ous drugs. The process begins when the FDA sends for a single producer (during exclusivity) and values a Written Request for data from the manufacturer below one indicate the proportional price realized (8). However, the manufacturer can set in motion with various numbers of generic entrants. The dashed the process to generate that request. The Written line shows how prices behaved if there were even- Request asks the company to describe studies that tually five or more generic manufacturers. The solid are needed to achieve the pediatric formulation and (kinked) line shows the two-year price drop (relative the time frame for their completion. Two important to the price during exclusivity) for one through four features here differ from Hatch-Waxman. First, the eventual manufacturers. Many market forces affect six-month period automatically extends the patent the number of competitors, including the market size life—not just a guarantee of a period of exclusivity (smaller markets likely lead) and high fixed costs of (as with the Orphan Drug extension). Second, and entry, both of which could limit the number of even- of more consequence, it applies to all formulations, tual competitors. doses, and methods of administration of the drug, For the most competitive markets (eventually 5+ so it extends the patent protection of the existing manufacturers), the price can fall to 20 percent of adult-targeted drugs. Thus, if a company has a $1 the single-seller price. For less-competitive markets 220 PHELPS

Figure 1. The vertical axis is scaled by the price of drugs relative to the price with only one (exclusive) seller. The horizontal axis shows the number of manufacturers at various points in time. The upper line represents the trend when there were never more than four manufacturers. The lower (dashed) line shows the trend when the market eventually reached five or more manufacturers (10). that include four or fewer final manufacturers, prices HOW CAN I STALL THEE? LET ME COUNT THE typically only fall by about half from that of the sin- WAYS! gle-seller price. However, in both cases, prices fall Given the annual revenue for many drugs (often steadily with the number of entrants. This is precisely measured in billions), even small extensions in the why there is an economic gain to deterring or delay- duration of patent exclusivity have major profitability ing entry from generic competitors—it keeps prices consequences for biopharmaceutical manufactur- up even after the legal period of exclusivity ends. ers. Observers of recent biopharmaceutical market activity have identified a number of ways that com- THE ROLE OF HEALTH INSURANCE IN PRICE panies can forestall entry, often using components of SETTING the laws designed to incentivize development of new Biopharmaceutical products have one final unique products and/or entry by generic competitors. I next feature: They are essentially the only products with summarize the most prominent of these strategies. legally-created exclusive rights to the market that is (This section draws on work reported in the Harvard also covered by insurance that affects the way consum- Business Review and in JAMA Internal Medicine, to ers buy the product. Health insurance, by lowering the which readers are referred for more detail (12,13).) product price, not only increases the demand for the Perhaps not surprisingly, many of these strategies are product, but it also reduces consumers’ sensitivity to actually “loopholes” found in legislation designed to price increases. Thus, the dramatic increase in health increase innovation and competition, the Orphan insurance coverage of prescription drugs between Drug and Hatch-Waxman Acts, and are all poten- Hatch-Waxman’s passage (1984) and now has altered tially fixable with legislative changes (see final section the economic situation importantly. Instead of about on “Remedies”). one-third of retail prescription drug costs being covered, the figure is now almost 90 percent, so much of Cry Wolf (Use a “Citizen Challenge” to Question whatever market forces might have existed to control the Safety of a Potential Entrant) prices of on-patent drugs has evaporated. This invites The ANDA process created by Hatch-Waxman manufacturers to raise prices almost at will (11). potentially shortcuts an expensive and time-con- This adds to the value of deterring entry by poten- suming step in the new drug approval process. To tial competitors, the topic to which we turn next. do this, generic manufacturers must simply prove “bioequivalence” of the new product to the original EXTENDING EXCLUSIVITY TO DETER GENERIC ENTRY 221 product. One way to delay entry is to have some- REMS rules forbid the sale of product samples to body challenge the safety of the new product using potential competitors. Although the FTC has deter- the “citizen challenge” to a federal rule. mined that attempts to limit access to product Far from being a vehicle for human citizens to par- samples are illegally anti-competitive, the FDA has in ticipate in the governance of their country, this has recent years received 150 statements about potential become a tool for biopharmaceutical manufacturers generic entrants’ inability to obtain product samples to delay entry of generic competitors. Companies reg- (17). This report (from the Congressional Research ularly file “citizen petitions” to claim that the FDA Service) details the limitations on samples and other process for assessing bioequivalence is insufficient, strategies companies use to deter entry using the with most of such claims filed near the end of expi- REMS process, another example of how biopharma- ration of their original patents, clearly designed to ceutical manufacturers have used Hatch-Waxman delay entry (14,15). FDA data show the extent to and related rules to delay generic entry. which these are not true safety concerns: From 2008 (after a pertinent rule change) to 2015, of 167 peti- Build Picket Fences (Create New Patents for Minor tions filed to challenge the bioequivalence process, or Trivial Changes in the Drug) only eight (under five percent) were approved (16). Another pervasive strategy to deter entry uses the basic structure of the patent system through a Clone a Twin (Be First to Create Generic well-understood process of creating defensive patents Competition to Your Own Patented Drug) that have little to no real innovation but which (when Another use of the Hatch-Waxman Act further granted by the United States Patent and Trademark delays entry. To encourage generic competition, Office (USPTO)) extend the period of exclusivity. Hatch-Waxman grants a 180-day period of exclusivity The common name for this process is “evergreen- to the first generic entrant. But with this comes a reg- ing.” It is pursued extensively by biopharmaceutical ulatory Catch-22: inevitably, if they wish, the original companies. In a recent decade (2005 to 2015), 74 patent owner can bring the first generic product to percent of patents issued for drugs were for existing market simply by introducing an unbranded generic drugs, not new ones. This process naturally occurs version into the market before any other companies most often in “blockbuster” (over $1 billion per year enter. Of course, they can do this without difficulty sales) drugs. Of approximately 100 blockbuster drugs by introducing their own generic (twin) version onto in the study period (10 years), 80 percent had their the market before the patent expires on the branded patent extended at least once, and almost half had version. Since no other entrant can legally begin sell- patents extended more than once (18). Some of ing until the patent expires, this gives the opportunity these involved creation of new patents, while others for an almost automatic six-month extension of any involved use of the numerous other ways to extend biopharmaceutical patent. existing patents as created by the Orphan Drug Act and successor laws. I discuss the most prominent of Shell Games—Hide the Pea (Block the Ability of these next. Potential Competitors to Prove Bioequivalence) Evergreening strategies often involve small refor- This is another gambit related to the ANDA pro- mulations of the product—packaging, coating, pill cess. Generic entrants cannot prove bioequivalence size or shape, and other changes that have no effect without a sufficient sample of the original chem- on the drugs’ safety or efficacy but which can delay ical compound. Thus, if drug manufacturers can entry. Many other patented changes have no effect on keep sufficient samples out of the hands of poten- the drug’s efficacy or safety, but some do create addi- tial generic competition, they can delay entry. This tional benefits, e.g., when shifting from three times commonly occurs as part of the FDA-required Risk a day to once a day use by patients, thereby increas- Evaluation and Mitigation Strategies (REMS) that ing adherence to the treatment protocol (11). In one drug manufacturers must create to manage safety well-documented case, a drug maker sought a new issues about certain of their drugs. Some of these patent on a standard oral drug for a new “delivery” 222 PHELPS process—grind up the pill and eat it with applesauce that pay-for-delay arrangements are subject to anti- (19). trust scrutiny using the “rule of reason” approach to judging illegality. The Supreme Court let stand in Pay to Go Away (Deter Generic Entrants) 2016 a ruling that such deals can come under scru- In this approach, patent holders pay potential tiny even if they do not involve cash payments (in entrants to delay entry into the market. The FTC a case involving GlaxoSmithKline and Teva). The estimated that pay-for-delay arrangements cost U.S. FTC has subsequently sought laws that would make citizens $3.5 billion per year in drug prices that are the behavior presumptively illegal, hence removing higher than they would otherwise be (20). Thus, pay- a legally gray area and providing stronger deterrence for-delay is an important issue for generic entry. against the practice. I return to this issue in a later Pay-for-delay occurs through specific legal mech- section (“Remedies”). anisms designed to sidestep what would otherwise be an obvious violation of the U.S. Sherman Antitrust Slice the Salami (Break a Big Market into Many Act. The Sherman Act is blunt and direct. Section Small “Orphan Drug” Markets) 1 says, “Every contract, combination in the form The Orphan Drug Act specifies that a drug may of trust or otherwise, or conspiracy, in restraint of be eligible for its special benefits if the potential U.S. trade or commerce among the several States, or with patient population is 200,000 or fewer. Some drugs foreign nations, is declared to be illegal.” Section can treat different diseases, and the FDA allows drugs 2 specifies the penalty: “Every person who shall to have orphan status for each separate indication. monopolize, or attempt to monopolize, or combine This gives strong incentives for drug makers to find or conspire with any other person or persons, to ways to partition the potential eligible population monopolize any part of the trade or commerce among into subsets—defining them as distinct target pop- the several States, or with foreign nations, shall be ulations—each of which has under 200,000 potential deemed guilty of a felony [. . . ]” (emphasis added). patients. A report by Kaiser Health News shows that That’s pretty straightforward. Given that, how does of the 10 best-selling (total revenues) drugs in 2015, pay-for-delay happen in generic entry? seven had qualified at least once for orphan status A classic pay-for-delay 2008 case involved Provigil, (21). Directing the orphan drug program has also a highly successful “blockbuster” prescription drug been lucrative: Two recent former directors of the for several sleep disorders, made by Cephalon (a U.S. orphan drug office have opened consulting services company). The “pay-for-delay” involved potential to guide drug producers’ efforts to gain orphan status. entry by Teva (an Israeli generic drug maker) and To be clear, many of these secondary uses of drugs three other generic manufacturers. The potential both require new studies to validate their safety and entrants challenged the one remaining patent (relat- efficacy and treat patients that have no other options. ing to the size of the particles of the drug) protecting But irrelevant partitioning of patients into subgroups Provigil. Cephalon settled all of these cases with the doesn’t actually create new treatment choices for generic entrants, including payments totaling $200 patients; it just expands patent protection. An unfor- million to drop the four lawsuits, in exchange for tunate consequence is that true innovation is thereby their promises not to produce the generic equivalents discouraged since the Orphan Drug Act prohibits the for six years—until 2012. The FTC sued Cephalon FDA from approving competitive drugs for seven (which had since been acquired by Teva in 2011), years as part of the incentive to create the original and the case was finally concluded in 2015, with a drug. large financial settlement paid by Teva (ironically, as As science learns more about the role of genetic Cephalon’s new owner) and, perhaps more impor- patterns in treatment response, the ability to under- tantly, an agreement by Teva not to enter into any take medically irrelevant but financially beneficial such contracts in U.S. drug markets. salami slicing will increase. For a fictional example, The case hinged crucially on a U.S. Supreme Court suppose that what was once considered a single dis- ruling in FTC vs. Actavis, which confirmed (in 2013) ease (say, a cancer or a neurologic disease) is now EXTENDING EXCLUSIVITY TO DETER GENERIC ENTRY 223 recognized to have five genetic patterns that lead submitted for review to the U.S. Supreme Court by to the same symptoms, and (to keep the arithmetic the St. Regis tribe (who now owned the patent). The simple) suppose that these each occur with simi- Supreme Court denied certiorari (refused to con- lar frequency (and all under 200,000 in the U.S.). sider the case) on April 15, 2019. This decision leaves Suppose now that four of them respond to an existing standing the Appellate Court ruling and denies the treatment and one does not. The apparent “success validity of the sale, thus closing that loophole in pat- rate” of the drug to clinicians would be 80 percent. ent law. But now the new genetic information identifies these As in many of these matters, Allergan’s drug had as five distinct diseases. In concept, the patent holder “blockbuster” status, with $1.5 billion sales in the pre- could get new orphan drug status for each of these vious year, and represented 9 percent of Allergan’s genetic patterns, which are now classified as different revenue. diseases. But nothing would have changed the pros- pects for the cancer patients—80 percent would be REMEDIES cured, and 20 percent would have nothing to help Most of these issues require legislative interven- them. This issue will loom larger as “personalized tion since these strategies are for the most part either medicine” begins to make clear the various genetic legal or within legally gray areas. None of these are subtypes of diseases now thought to be a single entity. without controversy. Biopharmaceutical manufacturers would almost certainly challenge attempts to Invent a Klingon Cloaking Device (Sell the Patent undertake these changes since they all deter actions to Somebody Who Can’t Be Sued) that have been commonly used by at least some com- In another recent strategy, Allergan faced a legal panies in the biopharmaceutical industry. Without challenge to new patents that it had filed to protect suggesting that these represent a comprehensive list, its dry-eye product, Restasis. Generic drug makers some legislative changes that would reduce these Teva and Mylan had challenged the new patents, “evergreening” and similar strategies could include claiming that they did not materially differ from pre- the following. vious (and expired) patents. In an attempt to forestall the legal challenge to this standard “evergreening” FDA and Citizen Challenges strategy, Allergan sold the new patents to a Native To the extent possible, the FDA should find ways American tribe (St. Regis Mohawk), seeking to ren- to remove the ability of patent holders to deter entry der the patent legally “invisible,” just as the Star Trek’s through frivolous “citizen challenges.” This must be Klingon Empire could make its space ships invisible done, of course, in ways that do not impinge on issues with their “cloaking device.” (Making a three dimen- with true safety concerns, but some common ground sional object invisible has remarkably been achieved must surely exist that removes frivolous challenges in actuality (22).) The crux of the case involved invok- without harming patient safety. This would respond ing tribal sovereign immunity in the inter partes to the concerns outlined in the section entitled “Cry review process of the Patent Trial and Appeal Board Wolf” and references therein. (discussed in more detail in the final section of this paper). Generic drug maker Mylan MV asked the USPTO USPTO to invalidate Allergan’s new patents on the Patent examiners have discretion concerning grounds that they were “obvious ideas.” Allergan sold what constitutes a novel and non-obvious inven- the new patent to the St. Regis Mohawk tribe and then tion. Reducing or eliminating patents for frivolous was granted a license for use (in exchange for mon- changes would help and would reduce the burden etary payments). The USPTO rejected the Allergan on the post-grant review and inter partes processes maneuver, and Allergan appealed five months later that must now challenge such patents. The Patent to the U.S. Court of Appeals for the Federal Circuit Trial and Appeal Board (PTAB), which oversees this (which specializes in patent cases). The Appellate process, was created by the America Innovates Act Court backed the USPTO, and the case was then (2011) and replaces the previous Board of Patent 224 PHELPS

Appeals and Interferences (BPAI). The PTAB created obtaining product samples is presumptively illegal, a new mechanism to challenge newly-issued patents with criminal penalties both for the corporation and in an administrative (rather than judicial) setting in individuals involved in the process. This clarity would post-grant reviews. The previous BPAI was primar- assure the fastest possible generic entry. ily a mechanism to seek reversal of patent denials (“appeals”). The PTAB authority creates a simpler Congressional Revision of the Orphan Drug Act mechanism to challenge new patents that arise (for First, the Congress should define limits on the example) as part of an “evergreening” strategy. What number of orphan status awards. Second, they should standards might the PTAB use to rule on the valid- limit awards based on total revenue of the product ity of new patents? so that “blockbuster” awards, for example, would A simple suggestion arises: If the FDA does not not qualify. Third, the FDA has potential options consider a modification of an existing drug so novel within the current legislation to curtail excessive as to require a full set of new safety and efficacy use of the Orphan Drug benefits. Perhaps most tests, then USPTO examiners or the PTAB post- importantly, they could adopt the Japanese prac- grant review process (whichever applies in each tice for orphan drug protection requiring that an case) should deny their validity. The FDA’s mission orphan drug be proven superior to existing treatment is patient safety, but if they see no need for further options (not merely “equivalent” or a lesser standard safety and efficacy studies, then the change is almost such as non-inferior). One analysis states that this certainly not novel. If the FDA were to conduct its change alone would eliminate much of the frivolous reviews in normal fashion, then the PTAB could read- salami slicing without creating obvious reduction ily rely on the FDA’s scientific judgement to determine of incentives for true innovation (23). The National if the innovation was “novel.” There may be other Academies of Sciences, Engineering, and Medicine reasons to avoid issuing a new patent or invalidat- report Making Medicines Affordable offers further ing it in post-grant review, so an FDA requirement analysis of the Orphan Drug Act and possible revi- for new tests should not be taken as proof that the sions (24). new formulation is novel and non-obvious, but lack of requirement of a new FDA rule can reliably signal Revision of Hatch-Waxman Regarding Generic that the product innovation is trivial and not deserv- Entry ing of new patent protection. Congress should revise the Hatch-Waxman Act to exclude the existing patent holder from the 180-day Congressional Legislation Affecting the generic exclusivity benefit. The intent of that part of Department of Justice the act is to induce generic entry competition, but The Congress should enact legislation that clearly when the protection is granted to the incumbent pat- makes pay-for-delay illegal rather than relying on the ent holder, it delays—not encourages—generic entry. current court-set standard requiring rule-of-reason analysis (and hence creating a gray area where behav- LESSONS FOR INFRINGEMENT ior is of unknown legality). The FTC has urged that In closing, let me return to the linkages between Congress take this action to clarify the legal issue. If infringement and deliberate entry delay. Both behav- pay-for-delay is presumptively illegal, then even dis- iors violate at least the spirit of the Constitution’s cussing a possible arrangement would be illegal under intent—to create the right of exclusive use to inven- the Sherman Act, with criminal penalties for both tors for a time specified in the law. When the law the corporations involved and individuals conduct- says 20 years (or 25 years for most drugs with the ing the discussions or transactions, as the language Hatch-Waxman extensions), techniques to extend in the Sherman Act quoted above indicates. that protection beyond the legally established time The FTC and the Department of Justice (and, if horizon are undesirable. The best way to combat necessary, legislation) should also make clear that them (as is also true for patent infringement) is to any method to prevent generic manufacturers from clarify when they are illegal. Since in both the cases EXTENDING EXCLUSIVITY TO DETER GENERIC ENTRY 225 of infringement and efforts to delay entry, the prob- procedures through the PTAB. The Supreme Court ability of detection of illegal behavior is well below concluded in 2018 that this process was constitu- 1.0, higher penalties are appropriate (e.g., treble dam- tional (27) over the objections of (among others) ages) to make the expected cost of a violation higher. large pharmaceutical companies who dislike the pro- In both cases, the use of injunctions may be import- cess. Hedge fund manager Kyle Bass has instituted ant (1). several dozen inter partes challenges against pharma- One common area appears in both infringement ceutical companies to attack what he argues (through and entry delay: the role of the PTAB to examine his Coalition for Affordable Drugs) are trivial pat- a patent’s validity. On the “infringement” side of ents designed only to extend the exclusivity period the discussion, a major issue has been the work of of drugs with expiring patents (28). so-called “patent trolls” who do no innovation but, Of course, there are very few “free lunches” in the instead, purchase patents and then sue other com- world, and some small start-up companies have found panies by claiming infringement. themselves on the wrong end of inter partes patent The same issue arises in deliberate entry delay, challenges from big companies who use the threat of primarily with the major increase in patents filed on the challenge to negotiate favorable licensing terms. existing drugs. In recent years, the median number of As in many features of intellectual property law, this patents on new molecular compounds has increased process can both favor and disfavor the same group from one to three—a clear indication that the use of of inventors. Such is life. secondary patents to extend the period of exclusivity There is no easy prescription for revising current has increased (25). Generic manufacturers have used law. The proper pathway for future amendments will the PTAB processes extensively to challenge patents require ongoing analysis of the effects of the “rules filed by biopharmaceutical companies, particularly of the game” as they now exist, and this review must those designed to increase the period of exclusivity span a wide array of issues. For example, the Orphan as patents approach their expiration times. Drug Act may have tilted the innovation incentives The PTAB has a dual review procedure—post- too far towards drugs with small markets because of grant review and inter partes challenges. The the extra incentives to develop products for “rare” dis- post-grant review process must be initiated within eases. Similarly, the consequences of key elements of nine months of a patent being granted and allows the America Invents Act must come under continu- challenges to patents on every issue affecting pat- ous review, including most notably the key provisions entability. Once nine months have passed (or all of “first inventor to file” (compared to the previous post-grant review processes have been completed, “first to invent” rule) and the processes established whichever is later), the inter partes review process for post-grant review. These are tasks for academ- begins. It has a narrower set of conditions under ics (economists, lawyers, and inventors, hopefully which the petitioner may challenge a patent and a working together) and for trade organizations repre- higher standard of proof. (Post-grant review merely senting inventors of various types. They should have requires that success of the petitioner is “more likely a full menu of research awaiting them. than not,” while the inter partes process requires a stricter standard of “reasonably likely” to succeed.) In considering potential legislative changes to U.S. patent law through time, academic organizations such as the Association of American Universities, REFERENCES the Association of American Medical Colleges, the 1. Hylton KN, Zhang M. Optimal remedies for American Council on Education, and the Council of patent infringement. Int Rev Law Econ. 2017; Government Relations have regularly and strongly 52(C):44-57. supported the development of post-grant review 2. Darby MR, Karni E. Free competition and procedures that were timely and predictable (26). the optimal amount of fraud. J Law Econ. The America Invents Act of 2012 created just such 1973;16(1):67-88. 226 PHELPS

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