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By last year, the regulations governing the competitive balance between innovator pharmaceutical companies and generic drug manufacturers could fairly be described as a system in disarray. Implementation of the 1984 Hatch-Waxman Amendments to the Federal Food, Drug, and Cosmetic Act had, in the view of many, become distorted in ways that destroyed the delicate balance intended by the original legislation, increased barriers to the introduction of cost-saving generic drugs, and created significant uncertainty in business planning. And so, after several years of intense lobbying, Congress passed a series of changes to Hatch-Waxman as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The final reforms are much more modest than earlier bills put forth by the generic industry and, for the most part, codify concepts already established by the courts and the Food and Drug Administration itself. However, the new law does incorporate some significant changes to the most contentious feature of Hatch-Waxman — the complex mechanisms designed to encourage legal challenges by generic companies to the patent rights of innovator drug companies. In the original Hatch-Waxman, Congress created what has proven to be a convoluted and nearly inscrutable system for generic applicants to attack the validity or applicability of drug patents. The patent challenge system has spawned intense competition, highly creative legal strategies, and a seemingly endless string of court cases that have repeatedly redefined the understanding and expectations of industry and government regulators alike. The Medicare Reform Act sought to bring clarity and fairness to this system, but its success remains to be proven. RISKS AND REWARDS In a nutshell, innovator drug companies must submit to the FDA basic information about patents claiming an approved drug or a method of using the drug, which the FDA will then list in its “Orange Book.” Under Hatch-Waxman, Congress expressly sought to encourage generic companies to seek approval of generic versions of approved drugs before the listed patents expire. It did so by creating a special litigation procedure and offering a valuable incentive. To seek approval of a generic drug before the expiration of listed patents, a generic applicant must submit a so-called Paragraph IV certification with its Abbreviated New Drug Application (ANDA). Paragraph IV certifications assert that the listed patent is invalid, unenforceable, or not infringed by commercial marketing of the proposed generic product. The applicant must also send a Paragraph IV notification to the innovator company, providing a detailed statement of the factual and legal bases for its assertion. The innovator then has 45 days in which to sue the generic applicant for patent infringement. If such a suit is brought, ANDA approval is automatically stayed for 30 months while the case is litigated. If the generic applicant wins the case, the stay is lifted, and ANDA approval may proceed. If the case is not decided after 30 months, generic approval may also be granted, but marketing of the generic drug will be risky because the patent owner may then obtain monetary damages if it later prevails in the infringement litigation. Because Paragraph IV challenges involve significant risk and expense to the generic applicant, Congress provided a reward: The first generic applicant to file a Paragraph IV ANDA is eligible for a 180-day exclusivity period in which it is the only company permitted to market a generic. Marketing of other companies’ generic versions of the same drug is prohibited until 180 days after either a “court decision” holding the patent to be invalid or not infringed, or the date the first applicant begins commercial marketing of the generic product. A LITIGATION MAGNET Undoubtedly the 180-day exclusivity period has been the most litigated aspect of the Hatch-Waxman scheme. Exclusivity disputes have focused on the basic eligibility requirements, including how many applicants may be eligible for exclusivity as to a single product, and when and how the start of the 180-day period is triggered. In addition, strategic use of exclusivity has led to both private and governmental antitrust actions. The most significant parts of the Medicare Reform Act’s Hatch-Waxman changes address these issues. In the beginning, a Paragraph IV applicant had to win an infringement action brought by the patent holder before the FDA considered it eligible for the exclusivity period. But the courts invalidated this “successful defense” requirement in 1998. That, in turn, increased the incentive for generic applicants to file Paragraph IV certifications. Subsequent lawsuits redefined what type of “court decision” triggers the start of exclusivity. The FDA had originally required a final nonappealable decision in favor of the generic applicant, but at least two courts held that the statute unambiguously requires the exclusivity period to start on the date of a favorable trial court decision, even if that decision will be appealed. Generic applicants then faced a difficult choice if they won at the District Court — launch their product while an appeal was pending and risk substantial monetary damages if they lost on appeal, or watch their 180 days drain away while waiting for the U.S. Court of Appeals for the Federal Circuit to affirm their lower court victory. Further complicating eligibility for 180-day exclusivity, the FDA has interpreted the statute to allow multiple applicants to share exclusivity for a particular generic product in two situations. First, if two or more applicants file a Paragraph IV ANDA on the first day that any Paragraph IV ANDA is filed, they will share exclusivity. This approach has been codified by the Medicare Reform Act. Second, and more controversial, is the situation in which multiple patents have been listed in the Orange Book for a single innovator product, and several different generic applicants are the first to file a Paragraph IV certification with respect to the different patents. FDA policy has awarded exclusivity on a patent-by-patent basis and, thus, forced multiple first-filers to share exclusivity here as well. But the agency indicated in a very recent court filing that this policy has been reversed prospectively by the Medicare Reform Act. Moreover, use of the policy with respect to a pre-existing exclusivity dispute was rejected by the U.S. District Court for the District of Columbia. The court held in early January that the applicant who filed the first Paragraph IV certification to any listed patent is the only applicant eligible for the 180-day exclusivity period for the generic drug. That decision is being appealed by the FDA, which has refused to apply it to any other pre-existing exclusivity dispute until the appeal is decided. The exclusivity period has also become a key consideration in patent settlement agreements between generic and innovator drug companies. In one high-profile settlement, the first Paragraph IV filer agreed to keep its generic drug off the market in exchange for multimillion-dollar payments from the innovator company. Because there was neither a court decision nor commercial marketing of the generic drug to trigger the start of the 180 days, approval of subsequent generic products was indefinitely blocked. These types of settlements have become a focus of antitrust investigations by the Federal Trade Commission and numerous private antitrust suits. The Medicare Reform Act addressed this issue by requiring settlements of Hatch-Waxman patent cases to be reported to the FTC. LEGISLATIVE CHANGE The most sweeping change under the Medicare Reform Act is the repeal of the “court decision” exclusivity trigger, which has been replaced with a complex set of exclusivity forfeiture provisions. For any nonfirst applicant to overcome the exclusivity barrier, any and all first applicants must have forfeited their exclusivity. Any one of several forfeiture events will clear the way for subsequent ANDAs, including: • Withdrawal of all first applicants’ ANDAs. • Amendment of the first applicants’ Paragraph IV certifications that qualified them for the exclusivity period. • Failure of the first applicants to obtain tentative FDA approval within 30 months of their ANDA filings. • An agreement between the first applicant and another ANDA applicant or the innovator company that violates antitrust law. • Expiration of all patents that the generic applicants challenged to qualify for an exclusivity period. In addition, there is a multi-prong “failure to market” forfeiture provision, whereby a first applicant forfeits exclusivity if it fails to begin marketing its drug by the latest of the following dates: • Seventy-five days after final approval of the ANDA or 30 months after submission of the ANDA (whichever is earlier). • Seventy-five days after a court issues a final nonappealable decision, or signs a settlement or consent decree, that includes a finding that the patent is invalid or not infringed. Such a decision or order can come in an infringement action against any applicant whose ANDA has received tentative approval, or in a declaratory judgment action brought by an ANDA applicant against the patent owner. • Seventy-five days after the challenged patent is withdrawn from the Orange Book. These failure-to-market provisions seem complex, and it is likely that they will require FDA regulatory interpretation. However, it also appears that they will give first applicants strong exclusivity protection, at least so long as litigation is ongoing with respect to the exclusivity-eligible patents. 2004 AND BEYOND The Hatch-Waxman changes enacted by the Medicare Reform Act are predominantly reactive measures that attempt to address past difficulties arising under the old law. In most respects, the changes codify interpretations that were more or less settled through court decisions and FDA policies. While the new exclusivity forfeiture mechanisms are different, they are by no means simpler than the old regime, and will certainly undergo further interpretation as well. But there is one major issue of contention that was not addressed by the Medicare Reform Act — the concept of generic, or “follow-on,” biologics. Innovator biologics, which are typically large-molecule proteins, differ in composition, manufacture, and effect from small-molecule chemical pharmaceuticals. They are generally approved via Biologics License Applications under the Public Health Service Act. Significant scientific questions have been raised as to anyone’s ability to produce “generic” biologics that are presumptively equivalent to the innovator products. In other words, it is legally and scientifically questionable whether an abbreviated pathway can exist under current law for approval of follow-on biologics. Given the high cost of cutting-edge biologics, the first wave of which are nearing the end of patent protection, Sen. Orrin Hatch (R-Utah), chairman of the Senate Judiciary Committee, and others have indicated a desire to legislate a streamlined approval mechanism for lower-cost versions. As interest increases, this newest kind of generic drug will be a matter ripe for legal, scientific, and public policy debate. James N. Czaban is a shareholder in the D.C. office of Heller Ehrman White & McAuliffe. Czaban’s practice focuses on FDA regulatory, policy, legislative, and litigation matters, especially those arising under the Hatch-Waxman Amendments. He can be reached at [email protected].

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