‘Pay-for-Delay’ Generic Drug Bill Will Harm Californians


San Diegans and all Californians will pay a high price should a bill introduced by Assemblyman Jim Wood, a Democrat from Santa Rosa, become law. Proponents claim the bill is necessary to rein in anti-competitive practices by the pharmaceutical industry, but in reality, it will delay generic entry and raise the costs of medicines for Californians.

The ostensible rationale for Assembly Bill 824 is to stop “pay-for-delay” tactics. “Pay-for-delay” refers to the practice of patented drug manufacturers paying off generic manufacturers for the sole purpose of delaying the launch of competitive products. Consequently, the manufacturer of the patented drug is able to extend its exclusivity period and earn ill-deserved profits.

Such practices are rare, but where they do occur, they are anti-competitive and violate the spirit of the entire patent system. But, Assemblyman Wood’s bill reflects a fundamental misunderstanding of the pharmaceutical market. In fact, the federal regulations governing the market encourages the exact outcomes that are occurring.

These regulations have their genesis in the Hatch-Waxman framework that have been overseeing patented and generic medicines since 1984. This framework does a very good job of balancing the oft-contradictory goals of incenting innovation and encouraging competition.

Starting with innovation, before Hatch-Waxman the U.S. developed 31% of all new medicines. This has grown to 57% of all new medicines following Hatch-Waxman. Americans also have access to more medicines than any other country — nearly 90% of all of the newly launched medicines between 2011 and 2017. The average OECD country has access to around one-half of these medicines. Australians can only access one-third.

Simultaneously, the Hatch-Waxman framework has helped establish the United States’ robust market for generic medicines. The market share for generic medicines went from 13% in 1983 (prior to the passage of Hatch-Waxman) to 90% today. This is the highest share of generic medicines in the world that, according to the Association for Accessible Medicines, saved consumers $265.1 billion annually.

The tricky part of this balance arises when the market transitions from patent exclusivity to generic competition. As part of Hatch-Waxman, generic companies are encouraged to challenge the patents of a branded medicine before the patent expires. In fact, the first company to challenge the patent gets the exclusive rights to market the generic drug for 180 days — a very powerful incentive.

Consistent with these incentives, a 2016 Journal of Medical Economics study found that generic challenges of branded drugs’ patents have grown. As of 2014, the patents of 76% of all drugs were challenged compared to 9% in 1995. For those drugs with over $250 million in sales, 94% experienced patent challenges. Further, the average time a drug had exclusivity prior to a challenge is now just a bit under six years. Back in 1995, a patent challenge did not arise until a drug had been on patent for nearly 19 years.

With patent challenges abounding, it should not be surprising that there are also a large number of lawsuits, and a large number of settlements. The settlements represent the negotiated balance between both manufacturers.

From the patients’ perspective, these settlements end the legal uncertainty, and encourage quicker generic entry into the market, as evidenced by the large number of challenges that are occurring earlier and earlier during the branded drugs’ exclusivity period. Therefore, the settlement process encourages a more competitive market.

Once it is understood that the current policy framework intentionally encourages litigation, and therefore manufacturer settlements, to encourage the introduction of cheaper generics, faster, it becomes clear that Wood’s bill will not improve this system. The bill will establish a standard that effectively assumes patent settlements are “anti-competitive” unless they can be proven otherwise — guilty until proven innocent.

Instead of encouraging settlements, AB 824 encourages a potentially long and costly litigation process. Ironically, this process will increase the costs of medicines and delay when generic medicines will be available to patients compared to the current system.

While the bill should not be passed because AB 824 does not illustrate any understanding regarding how the regulatory process actually works, at a bare minimum it should be amended to reverse the new “guilty until proven innocent” standard.

This standard is being imposed under the misnomer that these settlements are nothing more than “pay for delay” tactics, when most of these settlements are the intended outcomes from a very complex regulatory framework that are designed to encourage faster generic competition.


Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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