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Twenty years ago, Congress wrote a prescription for the high cost of medicine. The Hatch-Waxman Act of 1984 virtually created the modern generic drug industry, reducing prices for many of America’s most expensive medications. Today, generics make up 45 percent to 55 percent of all pharmaceutical sales. A side effect of the act, however, has been the flourishing of patent litigation between brand-name companies and makers of generics. Increasingly joining the battle are pharmaceutical customers, especially big players who buy medicine in bulk. New York City has entered the scene with three lawsuits against brand-name manufacturers, accusing them of charging inflated prices on widely used drugs. A combination of factors have contributed to the sharp increase in litigation, which has been a boon for intellectual property lawyers who litigate the patent issues at the heart of these cases. It is an upward trend that seems unlikely to stop in the foreseeable future. Hatch-Waxman wrote rules to level the playing field for “innovators” — the companies that invent and market name brand drugs — and the companies that make the cheaper generic versions. In doing so, it made courts the referees. Before Hatch-Waxman, generic producers had to wait until all the innovator’s patents on a drug expired before they could begin work on a generic version. Hatch-Waxman allows generic drug makers to file for drug approval with the Food and Drug Administration for the medically equivalent generics of brand-name drugs while patents on the drugs are still in place. This allows generics to reach the markets as soon as patents on the originals expire. Congress balanced its desire for cheaper drugs with a competing policy: to protect brand-name manufacturers’ patents on drugs, which are expensive to develop and can be highly lucrative. As patents on the core elements of a drug begin to expire, brand-name manufacturers can add new patents to a drug that involve its “delivery system” (like making a pill that dissolves in 30 minutes rather than an hour) or dosage or a combination with another ingredient, such as a decongestant with an antihistamine. These additions do not extend the core patents, but add new patents to the drug. The effect, however, is to extend the time the drug will receive patent protection. Under Hatch-Waxman, a generic company now can make an abbreviated new drug application, called an ANDA, for a generic version of a patented drug before its expiration. The generic producer must assert that its new drug does not infringe on underlying patents or that these patents are unenforceable or invalid. A generic can claim that its drug uses a different chemical process, for example, or that the innovator improperly earned its patent from the patent office in the first place Innovators have considerable difficulty in protecting secondary patents from infringement claims, making them inviting targets for ANDA filings, said Richard Berman, a patent attorney specializing in Hatch-Waxman litigation at Arent Fox. As a result, generic makers often wait until the core patents expire and file ANDAs when the secondary patents go into effect. Hatch-Waxman gave the brand-name company a weapon too. It can stop the generic in its tracks for 2 1/2 years by suing for patent infringement within 45 days of the ANDA filing. Since generics typically take a large bite from the innovator’s market share, an innovator has a huge financial incentive to sue over a major drug, even if it ultimately loses in court. The incentive is just as great for generic makers. The first one to establish the right to make and market a medicine has a 180-day exclusivity period in which it can market its drug without competition from other generic manufacturers. “The first to file has a huge bonanza,” Berman said. Generic drug makers have grown richer since the passage of Hatch-Waxman, said Berman, allowing them to put more resources into copying brand-name drugs and placing them in position to file more ANDAs. Teva Pharmaceutical Industries, a leading generic drug maker, exemplifies this growth. It has made 57 ANDA filings for drugs with ongoing patents and its sales nearly doubled from $1.75 billion to $3.3 billion in the past three years. Any of these 57 filings is a potential target for patent infringement litigation but must still receive approval from the Food and Drug Administration even if no lawsuit is filed. A loss for innovators often triggers new lawsuits from governments and third-party plaintiffs as well. Suits like New York City’s are becoming common. Insurance companies, governments and advocacy groups claim that prices are inflated by a lack of generics. WHAT IS AT STAKE Huge amounts of money can be at stake, especially for the innovators who can make billions of dollars by staving off generic competition for 30 months. The popular painkiller OxyContin, the object of a recent patent suit in U.S. District Court for the Southern District of New York, provides 70 percent of Purdue Pharma’s $1.8 billion in annual sales, for example. A study conducted by the Federal Trade Commission (FTC) in 2002 found that in the ANDA cases it reviewed, innovators were more likely to file patent infringement suits on drugs with higher earnings. With drugs reaching $500 million or more in annual sales, they sued nearly 100 percent of the time. Generic drug makers have an obvious financial incentive to challenge the weakest patents and most profitable drugs, said Patterson Belknap’s Jeffrey Lewis, who represents innovator companies. The first generic manufacturer can generally charge from 75 percent to 90 percent of the brand-name price of a drug, said Court Rosen, a spokesman at the brand-name pharmaceutical trade association PhRMA. After the 180-day period, prices drop to about 20 percent of the brand-name price as new generic versions come to market, he said. Together, the 30-month stay and the 180-day exclusivity period for successful generic manufacturers naturally leads the parties to court. HOW MUCH LITIGATION? The dueling aims led to a balance that provides a lot of work for patent litigators. “Just about every portion of the act has been litigated,” Sandra Bresnick, an intellectual property partner at the New York office of Weil, Gotshal & Manges, said of Hatch-Waxman. “And it’s a pretty long statute.” “ANDA litigation has really picked up in the last 10 years and experienced a flurry over the last five years,” Berman said. The FTC study found that innovators sued generic makers over 73 percent of their ANDA filings. Although no one could list the exact number of ongoing cases today, patent litigators said it could easily reach into the hundreds. The suits generally are won and lost on complex scientific claims, with expert witnesses debating technical scientific matters such as the molecular structure of the competing drugs. Or they may claim that the innovator did not foresee the use of its patent in a manner employed by the generic. In one of the recent cases involving GlaxoSmithKline’s anti-depressant drug Paxil, Glaxo proved that generic producer Apotex infringed Paxil’s core patent — the first patent it had filed on the drug more than 10 years ago — because they inferred that Apotex’s generic drug had traces of the chemical compound patented by Glaxo. But the U.S. Court of Appeals for the Federal Circuit found that because Glaxo had used the patented molecular compound in clinical trials more than one year before applying with the patent office, its patent had been wrongly granted. This was a “public use” of a chemical compound. A public use in clinical trials or publication in scientific journals more than a year before the patent filing invalidates a patent. So Apotex could not be liable for infringing what turned out to be an invalid patent. The loss was not unusual for a brand-name company. Although innovators have shown little reluctance in initiating patent infringement suits, they lose most of them. The FTC study showed that generic companies won 73 percent of the ANDA related cases with few overturned on appeal by the U.S. Court of Appeals for the Federal Circuit. This has encouraged the generic companies to act aggressively. “Basically, the business plan of aggressive generics is to challenge patents in court,” said Arent Fox’s Berman. Changes in the Medicare Reform Act, enacted in December, gave an additional boost to the generic industry. Reports of their impact on the frequency of litigation are mixed. Under the old rules, an innovator could extend the 30-month stay prohibiting a generic competitor from selling its version by filing new patents for a drug after a generic manufacturer filed an ANDA. Glaxo used this strategy to extend the 30-month limit to 65 months for Paxil, according to the FTC. Apotex, in its March 31, 1998, ANDA filing claimed that it did not infringe on Paxil’s lone patent listed with the Food & Drug Administration. After Glaxo filed its first, unsuccessful suit, it filed nine new patents related to Paxil over a two-year period and sued Apotex on four of them, the FTC study said. The suits, which are pending, triggered four new overlapping 30-month stays. Urged by the FTC recommendation to curb this practice, Congress limited innovators to one 30-month stay in the Medicare Reform Act. It also allowed the generic manufacturer to begin selling its competing drug once the 30-month period finished, even if a court had failed to reach a resolution. This encouraged generic makers to push ahead with more ANDA filings, said James Czaban of Heller Ehrman White & McAuliffe. Dr. Steven Lee, who litigates ANDA cases at Kenyon & Kenyon, saw a slight decrease in new ANDA suits because of this rule change. Innovators can no longer prolong the 30-month period, he explained, so they have less of an incentive to sue on each new patent added with the administration. The “feeding frenzy” of last summer, he explained, in which innovators “were suing everybody who filed an ANDA” has slowed slightly. The FTC also inspired another change that seems likely to keep litigation in play by limiting settlements between generic drug makers and innovators. In the past, it said, innovators would settle with the first company to file an ANDA and thereby prevent the 180-day exclusivity period from kicking in. The practice had the effect of preventing future generics from entering the market indefinitely. Critics called it a “bribe,” and the FTC took action, leading to at least two antitrust consent orders and additional scrutiny of settlements. The overall impact will make it more difficult “to find a middle ground to settle cases” and lead to protracted litigation, said Patterson Belknap’s Lewis, who is handling 15 ANDA cases.

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