Of all the problems troubling the U.S. healthcare system, too little litigation is not one of them. And yet, the “Creating and Restoring Equal Access to Equivalent Samples Act of 2016” (CREATES Act), which is currently being rushed through Congress, takes just such an approach. If implemented, the CREATES Act will worsen the incentives for pharmaceutical innovation, increase the amount of frivolous litigation, and put patients health at risk.
The Hatch-Waxman law and current pharmaceutical regulations are intended to strike a balance between incenting innovation and incenting a competitive pharmaceutical market that makes drugs more affordable. Flaws in the current market certainly exist, but, on net, the current regulations strike a reasonable balance between these goals.
For instance, generic markets represented 89% of the total drugs dispensed in 2015, up from 61% in 2005. Additionally, drug innovations continue to flourish. For instance, in 2015, 45 new drugs were approved, up from an average of 28 between 2006 and 2014.
This balance is maintained by allowing innovative manufacturers to recover their cost of capital during a period of market exclusivity, which typically lasts around 12 years, while also allowing generic manufacturers to enter the market in order to drive average prices down. Before a generic drug can enter the market, however, the manufacturers must demonstrate that the generic medicines are the same as and bioequivalent to the innovative drug with which they are designed to compete.
Demonstrating similarity requires clinical trials that include both the new generic drug as well as the existing innovative drug. Typically, obtaining the innovative drug is a straightforward process for the generic manufacturer.
However, there are some medicines where the FDA imposes additional risk management plans on the manufacturer of the innovative drug due to the potential risks associated with these medicines – for instance, the FDA will require additional risk management plans for those drugs with higher risks of serious infections, severe allergic reactions, potential birth defects or potential liver damage. These risk management plans that the innovative manufacturer must develop are known as Risk Evaluation and Mitigation Strategies (or REMS).
For those few drugs that require REMS with elements to assure safe use (ETASU), the process a generic manufacturer must follow to obtain the drug is more complicated. Of course, the FDA’s entire purpose of creating the REMS with ETASU program is to create additional safety protocols around these drugs, which will often coincide with a larger regulatory burden. It should not be surprising, therefore, that the process is more time consuming.
Latching on to the problem of rising healthcare costs, some generic drug manufacturers allege that some innovative manufacturers use the REMS process to prevent or delay generic medicines from coming to market.
Enter the CREATES Act. However, instead of helping patients, the CREATES Act distorts the entire purpose of the REMS with ETASU plans.
Currently, when a generic manufacturer needs to obtain samples of one of these drugs, the manufacturers will negotiate a plan to ensure that an adequate REMS process is developed and followed by the generic manufacturer. The CREATES Act biases this negotiation process.
Under the CREATES Act, if a plan is not concluded within 31 days, then the generic manufacturer has the right to sue the innovative firm. And, because the CREATES Act biases the rules in favor of the generic manufacturers, it is likely that the generic manufacturer will prevail. Therefore, the negotiation between the two manufacturers is no longer on equal footing – the scales are now tilted in favor of the generic manufacturer.
The ability to use litigation as a cudgel if the CREATES Act is passed, means generic manufacturers will have an incentive to not negotiate in good faith. Instead, their incentive will be to run out the 31-day negotiation timeframe and allow the courts to decree what a fair price should be. In fact, the proposed legislation may create perverse incentives for generic developers, for which winning these cases could be vastly more lucrative than actually selling the product.
The CREATES Act will also hold the innovative manufacturer responsible for certain actions taken by the generic manufacturers when using the innovative manufacturer’s drug. The combination of these two provisions significantly increases the financial risks from developing new drugs, and therefore, reduces the incentives for innovative manufacturers to invest the required 15 to 20 years and billions of dollars into developing new drugs. Ultimately, patients suffer as fewer lifesaving or life improving medicines are developed.
Striking the right balance between innovation and affordability should be the prime objective of regulators. On this criteria, the CREATES Act simply strikes the wrong balance and Congress should not support this Act.