Is the Hatch-Waxman System Broken?

As the industry and the public focuses on mergers, tax inversions, pricing, and the drying up of research pipelines, there seems to be little interest in re-evaluating the underlying intellectual property regime intended to promote research and development of new drugs. While that regime has largely remained unchanged since the Hatch-Waxman (HW) Act was first passed in 1984, much else has changed, including increased discovery and research costs, longer development and approval times, greater regulatory hurdles, and mandatory substitution laws, all resulting in a very different environment than the proponents of the law envisioned in 1984.  

HW was intended to be a fair compromise between research-based pharmaceutical companies that invent new drugs, and obtain regulatory approval to sell them, and generic companies that copy them. A bit like communism, the deal looked great on paper but broke down over the years in practice. It is our opinion that the 1984 Act has more than achieved its goals of providing lower-priced generic drugs to the American consumer, but that the goal of incentivizing research and new drug discovery has fallen short.

In order to sell a drug in the US, marketing approval must first be obtained from the FDA. This is a time-consuming and expensive process taking anywhere from 10 to 15 years and costing over a billion dollars. This daunting statistic is made even more so when one realizes that for every 10,000 drugs discovered, only one ever survives the rigorous FDA process and makes it to market. 

In 1984, the time to obtain FDA approval, as well as the cost to do so, was much less. The increase in cost is perhaps not even as significant as the increased number of years the process requires. Since patent protection must be obtained at the time of drug discovery, each year that is consumed gaining FDA marketing regulatory approval chips away at the patent’s 20-year term. This is exactly why the research-based companies initially thought the HW trade was a good one. In exchange for allowing generics to piggy-back on the innovator’s health approvals, research-based companies were awarded certain limited patent term extensions to recoup a portion of the years lost during the onerous regulatory process. 

Prior to 1984, the burden of providing efficacy and safety data to the FDA was required of generic drugs, thus limiting their availability. Hence, in an effort to get more lower-priced generic drugs to the American consumer, while maintaining incentives for innovation, Sen. Orrin Hatch and Rep. Henry Waxman negotiated the HW deal, thus allowing generic companies to use the regulatory data of the innovative company during their own regulatory review process. As if this was not enough incentive for generic companies, HW added another sweetener to the deal. It awarded six months of marketing exclusivity to the first generic company to knock out a drug’s patent, in essence awarding a mega million dollar prize (and in some cases a billion dollar one) to the generic company with the most aggressive and clever legal team. 

It didn’t take the generics long before they were all trying to win this prize. When the law was first passed, generics would typically challenge patents toward the end of the term of the drug’s primary patents. However, generics quickly began to challenge each and every patent as soon as was possible under the HW rules-a short four years from the date the innovator launched its product. It quickly seemed that, according to the generics, there was not a single valid pharmaceutical patent in the US. 

Now, ironically, this same system has made hostages not only of big Pharma, but the generic companies as well. Since there is rarely, if ever, a single first filer, no generic company can obtain the coveted six months of marketing exclusivity. Without this incentive, generic companies are now faced with a win, they lose; lose, they still lose outcome. For example, if the group of first filers (that often numbers in the teens) wins the patent battle, the generics essentially lose the war anyway. The patent is held invalid, and all generics can enter the market at the same time, thus creating an instant commodity. And commodities don’t make money, even when owned by a single entity, much less when shared by several. 

We recently sat through a patent infringement trial for one of our firm’s clients. During a break, one of the generics’ attorneys came up to us to say hello. Many years ago, he had represented research-based companies defending against the continuous onslaught of generic attacks against patents. We not so jokingly told him that we were surprised to see that he was now representing the generics and that he should be ashamed of himself. He did not seem to get our hidden criticism. Rather, he laughed and said, “Well, it’s always fun, isn’t it?” 

Really? For whom, we wondered? 

It certainly wasn’t fun for our client trying to protect the patent on one of its major products. It didn’t seem that it was even all that much fun for the generics, many of whom had realized the “tails you win, heads we lose” conundrum. Perhaps it was fun for the legal teams whose practices are dependent on such cases. 

The final breakdown in the system occurred when the current pay-for-delay plethora of plaintiff antitrust lawsuits became the soup du jour, and a new rash of cases were filed challenging virtually each and every abbreviated new drug application (ANDA) patent settlement that has been entered into in the last 10 years.

Regardless of how well the agreements complied with the edicts set forth by the Federal Trade Commission (FTC), or even if the FTC and the Department of Justice reviewed and “blessed” the settlement, both the research-based, as well as the generic companies have been forced into more expensive lawsuits to defend them. The only karmic irony in all of this is that for the first time the generics are getting a taste of what “winning” actually means in these types of ransom-like cases. Winning simply means that after years of litigations, millions of dollars in legal fees and countless sleepless nights, all that is “won” is the preservation of the status quo. 

What is the cost of these vicious circles of litigations for Americans? Less money available to funnel back into much-needed research. As stated in the recently published book, Inflection Point (authored by Medford-Rosow), at the end of the day, only research-based companies can be counted on to finally find a cure for diseases. Our government will not do that for us, nor will generic companies. 

It is our opinion that the HW system is indeed broken and a rebalancing of the interests between generics and research-based companies is necessary. Clearly, without future research, there will be very few new drugs, not only for American consumers, but for generic companies to copy. 

Among the most valuable intellectual property developed by the research-based companies for a drug is the clinical trial and related data needed for FDA approval. Under present law, only five years of protection for this data is available, and a patent challenge can be filed four short years after the innovative product is launched. While perhaps appropriate in 1984, today this is out of balance and heavily favors the generic industry. 

Europe and Japan provide ten years of data exclusivity and there are no ANDA provisions.  The US did lead the way in providing 12 years of data exclusivity for new biologics, but now even this seems threatened. Therefore, as a first, but certainly not last, step in rebalancing the interests between consumers, generics and research-based companies, we are advocating an increase in the number of years of data exclusivity awarded to all new drug discoveries, analogous to what is currently provided in Europe and Japan, as well as to that awarded to newly-discovered biologics. The US is by far the largest market in a global pharmaceutical arena, and all research-based companies, whether domestic or foreign, are significantly affected by the patent and data exclusivity regime. 

A system that encourages the killing of the goose that lays the golden egg is rarely a good trade in life. 

For anyone.

Traci Medford-Rosow and Peter C. Richardson are partners at the law firm of Richardson & Rosow LLC