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special to the national law journal Michael J. Wise is a partner, and James J. Zhu is an associate, in Seattle-based Perkins Coie’s Los Angeles office. Lena Adishian, a summer associate at the firm, contributed to the article. The drug price Competition and Patent Restoration Act, commonly known as the Hatch-Waxman Act, was enacted on Sept. 24, 1984, with the hope of striking a balance between two conflicting objectives: first, making available more low-cost generics to consumers, and second, encouraging continued pharmaceutical innovation. To achieve these objectives, the act allows generic companies to shorten the lengthy Food and Drug Administration (FDA) drug approval process by filing abbreviated new drug applications (ANDAs). In the meantime, the act provides a patent term extension for approved drugs to restore some of the time lost on effective patent life during the drug approval process. Since the enactment of the act, generic entry has risen significantly. However, the effective use of the extension as well as its actual impact on the incentive for drug innovation may need to be revisited. Over the past 18 years, the generic industry has enjoyed robust growth and consumers have, in turn, benefited from the lower cost and greater availability of generic drugs. The generic share in the overall prescription market has grown from 19% in 1984 to 45% in 2001. See Generic Pharmaceutical Assoc.: News & Issues: Facts and Figures-Generic Market Share (2003), www.gphaonline.org/pdf/market-share.pdf. Today, within the first year of entry, a generic drug may immediately capture about 60% of the market share. Generic prices average about 61% of innovator drug prices during the first month of entry and drop to 37% within two years. See Henry G. Grabowski and John M. Vernon, “Effective Patent Life in Pharmaceuticals,” 19 Int. J. Tech. Mgmt. 98 (2000). Meanwhile, brand-name pharmaceutical companies have benefited from the availability of extensions under the act. The patent term extension is calculated through a statutory formula, which includes the full regulatory review time for the new drug application (NDA) and one-half of the clinical testing time. The total effective patent life, which spans the period from the date of FDA approval to the “restored” date of patent expiration, is capped at 14 years. Moreover, the extension may not exceed five years from the original patent expiration. Thus, the act has extended an average of 2.33 years of effective patent life per drug and afforded some economic benefits to pharmaceutical innovators. See Grabowski & Vernon, supra. A one-day extension on a billion-dollar drug may represent a $3 million return to fund future research. The potential benefits of the extension provisions are not without limitations. The term of the patent must not have expired and may never have been extended. Only one patent may be extended in the same regulatory review period for an approved drug product, and the extension is limited to what is claimed in that patent and approved by the FDA. Furthermore, the FDA’s approval must mark the first permitted commercial marketing or use of the product. A “product” eligible for the extension refers to an approved drug product containing a new active ingredient that has not been used in any other approved drug. The “first permitted commercial marketing or use” limitation may be slightly relaxed for certain drug products manufactured under a claimed process that primarily uses recombinant DNA technology. These extension limitations may have strong implications, not only on how patent holders should act once their drug has been approved, but also on how patent practitioners should draft patents. If attention is not given to these limitations at the patent drafting stage, the extension may be underutilized. Despite their importance, extension issues rarely draw attention at the patent drafting stage because the odds of a drug candidate being approved by the FDA are very low. According to Pharmaceutical Industry Profile 2003, of 5,000 to 10,000 screened compounds, 250 enter preclinical testing, five enter clinical testing and only one is approved by the FDA. See Pharmaceutical Research and Manufacturers of America, Pharmaceutical Industry Profile 2003, www.phrma.org. Since patent applications for drug candidates are usually filed before preclinical testing, the odds of a patented drug candidate being approved by the FDA are presumably no more than 1 in 250. Not surprisingly, extension issues often go unnoticed at the drafting stage. Nonetheless, once a drug candidate is approved, the extension is one of the most important means by which innovator companies can recoup their research investment and sustain continual innovation. Thus, extension issues should be considered as early as possible, preferably at the patent drafting stage. The extension issues in patent drafting need to be contemplated in light of the invention and the business or regulatory strategies. For example, claims directed to different active ingredients should be placed into separate applications. Terry G. Mahn, “Patenting Drug Products: Anticipating Hatch-Waxman Issues During the Claims Drafting Process,” 54 Food Drug L.J. 245 (1999). This technique is particularly important when a derivative of a compound is considered a different active ingredient from the compound itself. If claims for a compound and its derivatives are placed in the same patent, the extension for the FDA-approved compound will preclude the possibility of attaining separate extensions for the derivatives. While claims for various active ingredients are kept separate, process claims linked to a single active ingredient are preferably combined into the application for that active ingredient. Since only one patent is eligible for an extension in a given regulatory period for a drug product, this procedure is recommended to ensure that the process claims are included under the extension. However, the combination of such claims may invite restriction requirements from the U.S. Patent and Trademark Office (PTO), which typically holds that composition and process are independent inventions that may not be claimed in one application. In these situations, measures may be taken to retain the combination. For instance, traversal, i.e., objection, must be made to point out errors in the restriction and to preserve the right to petition for reconsideration. Since election must be made in response to a restriction, it is to be preferred that a group of composition claims be elected in order to incorporate any withdrawn process claims after the allowance of the composition claims through a rejoinder process. The withdrawn process claims may be rejoined in the same application if they depend on, or otherwise include, all the limitations of the allowable composition claims. The PTO further recommends that the process claims be amended in the form of dependent claims and presented at an early stage of the application, since the amendments will be entered as a matter of right before final rejection or allowance. Another extension issue at the patent drafting stage arises from the limitation that the extension applies only to what is claimed in a patent and approved by the FDA. For example, a patent may contain a narrow claim directed at treating partial seizures and a broader claim directed at treating neurodegenerative diseases. If the FDA approves the partial-seizure indication, an extension may be extended to the narrow claim but not the broader claim. More significantly, no extension benefit would have been conferred had the narrow claim not been included in the patent. Thus, communication among practitioners, inventors and business or regulatory personnel is essential for a full understanding of the nature of the invention and its specific clinical implications for which claims are drafted and for fulfillment of the patentability requirements. Nonetheless, no matter how much attention is paid to the extension issues at the early stage of a patent application, the effective patent life can be increased only to the extent afforded by the act. Even with the extension, the average effective patent life for approved drugs is about 11 to 12 years, which is significantly below the 18.5-year average patent life for patented products in other industries. See Grabowski & Vernon, supra. The Congressional Budget Office has found that the extension available under the act is not sufficient to preserve fully the return for marketing innovator drugs. To the contrary, the act reduces the return by 12% due to rising generic competition. Economic return is further hampered by increasing research and development costs for new drugs (from $231 million in 1987 to $802 million in 2000 per new drug), the lengthy drug approval process, intensifying competition among innovator drug companies, generic entry before the expiration of patents and the rapid expansion of managed health care organizations, all of which have emerged since the passing of the act in 1984. Accordingly, consideration should be given to understanding the long-term impact of the act on investment return and medical innovation. Senate vote On June 19, the Senate voted to include the Gregg-Schumer Greater Access to Affordable Pharmaceuticals Amendment to the Senate Medicare bill. On June 27, the House passed its own version of a Medicare prescription drug bill that also contained provisions for greater access to generic drugs. Under Hatch-Waxman, an NDA holder’s challenge to a generic applicant’s Paragraph IV Certification-declaring that the NDA holder’s patents listed in the Approved Drug Product with Therapeutic Equivalence Evaluations, known as the Orange Book, are invalid or will not be infringed-bars the FDA from granting ANDA approval for up to 30 months. The Gregg-Schumer bill (S. 1225) includes a provision that prohibits an additional 30-month stay for innovator patents listed in the Orange Book after the ANDA filing date. Furthermore, both bills allow a generic drug company to assert a counterclaim seeking an order to require a patent holder to correct or delete a listed patent in the Orange Book. It appears that the current legislation will further clear the pathway for generic entry and tilt the balance in favor of generic companies. Given that the average effective patent life of approved drugs is far below that of other nondrug patented products, such a tipping of the balance may convey cheaper generics to consumers today at the expense of better drugs tomorrow. Thus, if this new legislation is enacted, its impact on long-term pharmaceutical innovation may warrant a greater need for re-evaluation. The biopharmaceutical industry might want to urge Congress to re-evaluate the impact of Hatch-Waxman on drug innovation and possibly to extend the effective patent life of innovator drugs to a term commensurate with the average patent life of products in other industries. Congress has the constitutional power to extend the term of patents, just as it has done with copyrights under the Copyrights Term Extension Act. Eldred v. Ashcroft, 537 U.S. 186 (2003). In conclusion, companies should consider patent term extension issues at the early stages of biopharmaceutical patent drafting. While consumers enjoy cheaper generic drugs today, the impact of the Hatch-Waxman Act and the current legislation on innovation for better drugs tomorrow may need to be reconsidered.

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