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The Hatch-Waxman Act became law more than 20 years ago, but still dominates pharmaceutical patent litigation. The act has evolved far beyond initial expectations and is responsible for creating the modern generic drug industry. Today, patent terms continue to expire on branded “blockbuster” pharmaceuticals, creating new generic markets and legal issues to test the limits of the Hatch-Waxman Act. Accordingly, the act and its progeny will remain critical to consumers and the pharmaceutical industry for years to come. This article will examine the effects of the Hatch-Waxman Act on the competition in the pharmaceutical industry, the latest judicial developments in this area and recent efforts concerning biopharmaceuticals. In the early 1960s, a new drug application (NDA) only required proof that a drug was safe in clinical trials. Regulatory review by the Food and Drug Administration (FDA) was brief by today’s standards because proof of efficacy was not required. After the patent term for a drug expired, the FDA would approve a generic version as long as the scientific literature confirmed the compound’s safety. Generic drug makers submitted this literature in what they termed a “paper-NDA.” In 1962, Congress amended the Food, Drug and Cosmetic Act of 1913 (FD&C Act) to require that all drugs be proven safe and effective through clinical trials. The lengthier regulatory review encroached on the patent term of a new drug, making it more difficult for branded pharmaceutical manufacturers to recoup their research-and-development investments. Moreover, when the patent term of a drug expired, it was expensive for generic drug makers to bring to market a generic version because they were required to conduct their own clinical trials of safety and efficacy. The Drug Price Competition and Patent Term Restoration Act of 1984, sponsored by Senator Orrin G. Hatch, R-Utah, and Representative Henry A. Waxman, D-Calif., partially restored drug patent terms lost to regulatory review while creating a complex scheme to promote the manufacture of generic drugs. The cornerstone of the Hatch-Waxman Act was the abbreviated new drug application (ANDA), a new type of paper-NDA that provides approval for a generic drug upon a showing of its “bioequivalence” to the branded counterpart. The new law also provided a “safe harbor” exception to infringement liability for a generic drug maker to begin the testing and approval process before its branded counterpart’s patent term expired, further accelerating the generic approval process. IMPACT OF HATCH-WAXMAN The Hatch-Waxman Act has been a windfall for the generic drug makers. According to the Congressional Budget Office, the average interval between patent expiration and generic market entry has decreased from more than three years in 1983 to less than three months today. The proportion of branded drugs facing generic competition after patent expiration has increased from 35 percent in 1983 to virtually 100% today. Last year, Congress enacted an increase of $8 million for the FDA’s Office of Generic Drugs, which is expecting a 37 percent increase in generic applications this year. According to the Generic Pharmaceutical Association, the generic drug business has quickly become an industry behemoth with $18.1 billion in annual sales. In fact, four of the top five U.S. pharmaceutical companies based on prescriptions dispensed are generic drug makers. The Hatch-Waxman Act was not so kind to the branded manufacturers. According to the Pharmaceutical Research and Manufacturers of America (PhRMA), the average drug development period has increased from eight years in 1960 to 14 years today. Also, the average effective patent life for a prescription drug now is only 11.5 years, compared with 18.5 years for other products. For every 1,250 new compounds developed today, only four will ever enter preclinical testing and only one will eventually receive FDA approval. The average cost to develop a new drug has doubled since 1987, now at an all-time high of approximately $800 million. At the same time, the average return on investment from a new drug has dropped by 12 percent since 1984. As it turns out, seven out of 10 branded drugs fail to cover their research and development costs. According to a 1998 Congressional Budget Office study, the Hatch-Waxman Act “has probably not made drug development unprofitable on average, but it may have made some specific projects unprofitable.” ‘MERCK V. INTEGRA’ DECISION The Hatch-Waxman Act created a “safe harbor” for using a patented invention in a way that is “reasonably related to the development and submission of information” under the federal drug laws. Although the initial focus concerned testing for data to meet FDA requirements, the increase in research tools brought to light new questions concerning the act’s language. How early in the developmental period did the safe harbor extend? Owners of research tool patents believed that the safe harbor only concerned activities immediately preceding FDA submission, while branded pharmaceutical manufacturers, involved in developing new drugs, saw the safe harbor as beginning far earlier. In Merck KGaA v. Integra Lifesciences I Ltd., 125 S. Ct. 2372 (2005), the U.S. Supreme Court considered the scope of the safe harbor protection for activities under the FD&C Act, which requires submission of research data to the FDA in two phases: an investigational new drug application for clinical trials and an NDA for marketing new drugs. Integra, the patent owner, argued that the safe harbor provision was inapplicable because its patented peptides had been used in preclinical research and ultimately were excluded from submissions to the FDA. The court found “no room in the statute for excluding certain information from the exemption on the basis of the phase of research.” Rather, a unanimous Supreme Court held that the “safe harbor” provision on its face protects “all” uses of patented inventions that are “reasonably related” to the development or submission of “any” drug information to the FDA. The Merck decision pleased PhRMA and the American Association of Retired Persons. Both had argued that the Federal Circuit’s decision would have “threatened” and “delayed” drug development. REVERSE-PAYMENTS CASES Although most patent litigation arising between branded and generic drug manufacturers is taken to trial, some cases have settled. In view of the disparate risks of the two parties (an $800 million investment v. the ability to grab an immediate share of a valuable and already developed market), the leverage and bargaining positions of the branded and generic companies are different from those of typical parties to a patent litigation. Over the years, several Hatch-Waxman Act litigations have settled through the use of “reverse payments,” in which the generic drug maker receives a large payment and is permitted to enter the market at a future date. Although both the branded and generic drug makers have found reverse payments to be an acceptable means of settling unpredictable patent litigation, the Federal Trade Commission (FTC) has taken the position that such arrangements are anti-competitive. Last summer, the 11th Circuit issued an important decision on reverse payments in Schering-Plough Corp. v. Fed. Trade Comm’n, 402 F.3d 1056 (11th Cir. 2005), petition for cert. filed, No. 05-273 (U.S. Aug. 29, 2005). Schering-Plough filed suit for infringement after several generic drug makers filed ANDAs for generic versions of the patented drug. Before trial, the parties entered into reverse-payment settlements. The FTC ruled that the settlements violated the antitrust laws. However, the 11th Circuit reversed and held that the unique exclusionary power inherent in patents outweighed any potential anti-competitive effects. The 11th Circuit’s antitrust analysis differed from those that the FTC and the 6th Circuit have applied in patent matters. Interestingly, the Supreme Court sua sponte invited the solicitor general to brief the matter on behalf of the United States despite the presence of the FTC as a party, a hint to some about the Supreme Court’s interest in taking up yet another Hatch-Waxman Act issue. ISSUE OF BIOPHARMACECUTICALS In 1984, when the Hatch-Waxman Act became law, the biopharmaceutical industry was still in its infancy, with only one product on the market. (As opposed to traditional drugs, which are small molecule compounds synthesized through chemistry, a “biopharmaceutical” is a more complex product manufactured through a process that uses biological organisms.) Today, more than 150 biopharmaceuticals are available, including insulin, interferons, growth hormones and monoclonal antibodies. Scientific advances in the last 20 years have enabled the biotechnology industry to produce safe and effective biopharmaceuticals directed to severely debilitating and life-threatening diseases such as multiple sclerosis, rheumatoid arthritis and enzyme deficiencies. The FDA approved more than 30 new biopharmaceutical products last year, and 600 additional therapies are currently in development. Analysts estimate that by 2010 biopharmaceutical sales will exceed $60 billion. The FDA operates under different statutory approval mechanisms for drugs and biopharmaceuticals. While the FD&C Act governs the former, the Public Health Services Act governs the latter. Pharmaceutical manufacturers submit clinical data information in an NDA under the FD&C Act, while biopharmaceutical companies submit a biologics license application (BLA) under the Public Health Services Act. Generic drugs have the benefit of the ANDA under the Hatch-Waxman Act Amendments to the FD&C Act, but there is no such provision for generic or “follow-on” biopharmaceuticals in the BLA process. Although in the past the FDA has treated a few natural source proteins-including insulin, hyaluouronidase and growth hormone-as traditional drugs for regulatory purposes, it has recognized the lack of legislative authority for it to address generic biopharmaceuticals outside the BLA process. In fact, the FDA has called for “broad public comment on legal and related policy issues related to follow-on biologics.” Not surprisingly, the generic drug industry is lobbying for legislative changes that would add a regulatory mechanism similar to the Hatch-Waxman Act to the approval process for follow-on biologics. However, unlike the small molecule compounds that make up traditional drugs, establishing “bioequivalence” for biopharmaceuticals may not yet be feasible as a scientific matter. HEARINGS ON THE ISSUE In April 2004, Genentech Inc., a pioneer in this field, filed a citizen’s petition with the FDA requesting that the agency “initiate an inclusive public process to discuss these issues.” In June 2004, the Senate Committee on the Judiciary’s Subcommittee on Intellectual Property held hearings on this subject and heard testimony from representatives of the FDA, the drug and biopharmaceutical industries and academia. At the conclusion of these hearings, Hatch stated as follows: “I believe that many, if not all, follow-on biologicals will require at least some form of human clinical testing … As a co-author of the Drug Price Competition and Patent Term Restoration Act of 1984, I firmly believe that whatever we do on the legislative front should observe a principle of attempting to balance incentives for both pioneer and generic drug firms. While I am all for rolling up our sleeves to work to help develop an abbreviated approval system for off-patent biologics, we must be properly respectful of the intellectual property of research-based firms because this is what undergirds the whole pharmaceutical enterprise … “Rather than just saying no, please consider engaging in a constructive public policy dialogue that focuses on identifying the legitimate scientific and legal obstacles that must be overcome to create a fast track approval system for off-patent biologics. At the same time, come forward with ideas that will improve the legal environment for pioneer biotechnology firms.” Twenty years after its enactment, the Hatch-Waxman Act continues to have profound effects on consumers and the pharmaceutical industry. We will continue to see high-profile cases and legislative hearings concerning its provisions and their myriad effects into the future. In addition, momentum is increasing for a new law that would provide a regulatory scheme for follow-on biopharmaceuticals similar to the Hatch-Waxman Act. Although the legal and economic issues presented by such a scheme appear strikingly similar to those considered in 1984 regarding generic drugs, the scientific and safety issues inherent in follow-on biopharmaceuticals will be the subject of further study and debate. We may see the passage of an abbreviated approval mechanism for follow-on biologics, but it may not be quite so “abbreviated” as that in the Hatch-Waxman Act. Michael A. O’Shea is a partner in the Washington office of Akin Gump Strauss Hauer & Feld. Christopher M. Mikson is senior counsel to the firm’s Philadelphia office. Their practice focuses on patent litigation.

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