Earlier this year, it was reported that Enbrel, a leading drug approved to treat autoimmune disorders, was discovered to have a startling “side effect” of reducing the risk of Alzheimer’s disease by 64%. If true, this would be a major medical breakthrough for one of the most intractable and heartbreaking conditions known to man.

Seemingly, all that was needed to convert this side effect into a new blockbuster indication for Enbrel was a clinical trial to confirm efficacy. But Pfizer, Enbrel’s manufacturer, which knew of the Alzheimer’s data in 2015, declined to make any further investments in the drug. How was this possible?

The answer lies in our country’s antiquated policies on drug competition. Around the time Pfizer learned of Enbrel’s possible link to Alzheimer’s, it was bracing for competition from a new, generic-like drug product called a biosimilar that could be marketed as a substitute for Enbrel. If Pfizer were to invest in new clinical studies for the Alzheimer’s indication, it could not prevent an emerging biosimilar from being prescribed or substituted for this indication, even if it were patentable. As long as the Enbrel biosimilar was neither labeled nor promoted by its manufacturer to treat Alzheimer’s, it could be marketed as an Enbrel substitute without risk of infringement. With little chance of recovering any further investment in Enbrel, Pfizer may have decided to pass on what could have been a golden opportunity to advance the treatment of Alzheimer’s.

Many established drugs face the same risk/reward conundrum: although the risk of unlocking new treatments may be low, the reward will mainly benefit the competition if the drug is about to be genericized. Counterintuitively, corporate resources that could be directed to low risk investments in old drug development will instead be diverted to high-risk investments in new drug discovery, regardless of the potential reward to the public health.

Fortunately, the problem of incentivizing new investments in old drugs is addressable with a simple regulatory “reset.” The only question is whether the FDA has the political will to overcome the regulatory inertia.

Drug pricing and patents

Drug pricing models are incredibly complex. Researchers estimate it costs over $2.6 billion to bring a new drug to market, compared to under a billion only a decade ago. To recover those costs, manufacturers require an adequate period of market protection-comprised of both short-term regulatory exclusivities and longer-term patent rights-against generic and biosimilar entries. In theory, the longer the period of market protection, the lower the drug price needed to recover the upfront costs. Unfortunately, it’s not so simple in practice.

If a patent is considered strong, the drug’s monopoly is more certain. If patent protection is weak, the drug’s monopoly may be short-lived. As a result, drug manufacturers must constantly “handicap” their patent portfolios to predict the market protection period on which drug pricing is based. An undervalued portfolio puts upward pressure on prices with the result that consumer’s may be overcharged; whereas an overvalued portfolio will drive prices down and put the manufacturer’s investment at risk.

Patents under attack

Before the America Invents Act (AIA) passed in 2011, nearly all drug patent litigation occurred after a generic manufacturer “put skin in the game” by committing the resources required for market entry, but before the FDA gave permission to launch. This was a governing principal of the 1984 Hatch-Waxman Act. The AIA created a new inter partes review (IPR) mechanism for challenging patent validity before the U.S. Patent and Trademark Office. Now anyone can challenge a drug patent in an IPR proceeding without going to court.

IPRs were supposed to make it easier to eliminate weak or invalid patents that unfairly block competition. But because an IPR proceeding can invalidate a drug patent quickly, cheaply, and before any generic is ready for launch, it’s often used to end-run the Hatch-Waxman Act-adding a new risk factor to the drug pricing model.

The shrinking role of patents

The emerging field of precision medicine-where genotyping ensures that patients are correctly administered the right drug based on biomarkers-highlights the erosion of patent protection for medical advancements. Biomarker discoveries hold great promise for improved healthcare, yet the incentives to pursue such discoveries are missing thanks to recent U.S. Supreme Court decisions. In 2012, the Court ruled in Mayo v. Prometheus that diagnostic tests that merely identify diseases or genetic conditions constitute observations of “natural phenomena” and are not patentable. A year later, in Assoc. of Molecular Pathology v. Myriad, the Court ruled that isolated gene discoveries cannot be patented because they involve “laws of nature.” Together, these decisions shrink the use of patents as a means for recovering R&D costs for many of the discoveries required for precision medicine.

New uses for old drugs

Under Hatch-Waxman, if a brand drug is protected by a patent listed in the FDA’s Orange Book, a generic manufacturer must “certify” that patent before its drug can be approved, either by awaiting its expiration or by challenging it. But if the brand drug is protected by a method of use patent, the generic may file a “section viii” statement telling the FDA that it is not seeking approval for the patented use. The generic then “carves” the patented use information out of its label and receives an FDA designation of “therapeutic equivalence” or an “A” rating.

By bestowing an A-rating on a “skinny labeled” generic, the FDA warrants that it is substitutable for the brand, giving the generic a “free ride” on the brand investment for the carved out use. In effect, the brand patent becomes worthless and unenforceable. Biologic manufacturers face a similar situation of free-riding biosimilars that carve patent protected uses out of their labels to avoid infringement. The result is a regulatory-driven disincentive for pioneer manufacturers to make new investments in drugs that are about to face competition.

When Congress enacted the patent carve out provisions in Hatch-Waxman, their intent was to allow physicians to judge whether a skinny labeled generic should be prescribed for off-label use. But the FDA’s AB-rating policy takes off-label prescribing out of physicians’ hands. Physicians do not generally compare brand versus generic labels, FDA rules do not require skinny-label generics to advertise their carve outs, and pharmacies are not required to tell physicians when they substitute generics for brand drugs. While Congress understood that physicians often prescribe drugs for off-label uses, it never contemplated a physician's on-label prescription being filled by a pharmacist with an off-label drug.

The FDA could fix this disconnect by adding a notation to its Orange Book listing that alerts doctors and pharmacists whenever an AB-rated drug was being approved with a skinny label. It could also require generic and biosimilar labeling (and advertising) to call attention to drugs that are not fully substitutable for all uses approved for the referenced brand. Off-label prescribing would then be back in physicians’ hands where it belongs, low cost skinny-labeled generics would take over the markets for non-protected uses as Hatch-Waxman intended, and brands would be incentivized by enforceable exclusivity rights and patent protections to invest in new uses for old drugs for the benefit of the public.

Congress, the FDA, and the courts can correct these problems. Patents are not the enemy – they are the engine that drives drug R&D and brings new medicines to life. Bringing down the costs of drugs for consumers while increasing investment in new and old drugs – to uncover treatments to devastating diseases like Alzheimer’s – is within reach. That would be a win-win for everyone.

Terry G. Mahn is head of the Regulatory and Government Affairs Practice at Fish & Richardson. He can be reached at mahn@fr.com.

The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.