Striking the right regulatory balance for pharmaceuticals is no easy task. On the one hand, policy should promote drug affordability by encouraging robust competition. On the other hand, policy should encourage future innovations by granting these drugs temporary market exclusivity.
While these goals appear contradictory, the federal government’s drug approval process has reasonably balanced these competing interests for many years. This approval process is based on legislation passed in 1984 colloquially known as the Hatch-Waxman Act.
One of the primary goals of the Hatch-Waxman Act was to encourage the manufacture of generic medicines. In 1984, the year the Hatch-Waxman Act was passed, 19 percent of all medicines sold were generics. 34 years later, generic medicines now account for nearly 90 percent of all medicines sold. Judged against the goal of promoting greater use of generic medicines, Hatch-Waxman has been a success.
Just as important, the Hatch-Waxman Act was designed to encourage the development of new innovative medicines. Judged against this goal, Hatch-Waxman has also been a success.
Since 1984, the number of new, life-altering, medicines that have been introduced has flourished. New medicines are now available that maintain our health (such as statins to treat high cholesterol), improve our daily well-being (such as treatments for rheumatoid arthritis (RA)), and prevent once deadly diseases (such as the antiretroviral therapies to treat HIV).
In short, the current system has crafted a careful balance between incenting a competitive market to control prices, while also providing branded manufacturers sufficient patent protection to incent continued innovation.
Then came the America Invents Act (AIA) of 2011.
As I argued previously, the AIA worsened the policy environment for the pharmaceutical industry. Perhaps most troubling, the AIA created a new de facto legal process known as inter partes review (IPR). IPR proceedings are a simpler, less costly, means for any party to challenge the validity of a patent holder’s claim. IPR proceedings also have a lower legal standard than the federal court system because it does not presume that the patent is valid. Therefore, IPR claims are more likely to be upheld regardless of their merits.
With respect to some industries that are plagued by patent trolls, such as technology firms, the IPR process may make sense. However, it was never appropriate for the pharmaceutical industry.
Unlike a smart phone, a single pharmaceutical medicine is not protected by hundreds of patents; instead, the average medicine contains between 3 and 5 patents. Therefore, the benefits that the IPR process is designed to create is inapplicable to pharmaceuticals.
There are costs, however.
The lower costs and greater chances of success from filing an IPR claim encourages excessive IPR challenges against pharmaceutical patent holders. Further, since anyone can file or threaten to file IPR cases, the current IPR process creates all sorts of adverse incentives.
One particularly nefarious incentive, as reported in the Wall Street Journal, enables a party to make money simply by filing an IPR patent challenge. The profit opportunity arises because filing an IPR claim will likely lower the stock price of a pharmaceutical company, regardless of its merits.
Therefore, if a party files an IPR challenge, and then shorts the stock (a financial investment that increases in value when the stock price of a company falls), the “claimant” will financially benefit if (when) the stock declines. Of course, the decline in the stock’s value was created by the actions of the claimant creating a clear conflict of interest.
There is, undoubtedly, something wrong with a system that enables claimants to financially benefit from simply filing lawsuits regardless of the lawsuit’s merits. And, it is not hard to predict the economic result – a surge in meritless patent challenges, and a decline in future drug innovations.
Fixing this problem should be a top priority for Congress. Such legislation would recognize that the patent needs of the pharmaceutical industry differ from the patent needs of the technology industry. Consequently, Congress should exempt pharmaceuticals from the IPR process, and re-establish the primacy of the Hatch-Waxman Act that has proved so successful over the past 30 years.