The battle between brandname and generic companies can be classically deemed a struggle for economic profit. Generally, the process of bringing a new drug to market takes about twelve years, and costs around $359 million. It has been estimated that only one in five thousand compounds makes to the second round of testing while only one in five of those receives final approval. Pharmaceutical companies take huge gambles for the hard-earned right to sell new drugs to consumers and should rightly expect to recoup their investment and make a profit. While patent rights guarantee market exclusivity for a finite period to innovator pharmaceutical companies ("innovators"), one debated issue in the pharmaceutical industry revolves around the transition time between the innovators' market exclusivity and the generic drug manufacturers' ("generics") entry into the market. Most innovators want to hold off any dilution of their market by generic drugs that compete with their brand-name product for as long as possible. The financial incentive to do so is clear. However, a battle over the billion dollar drug market inevitably ensues as the generics seek to gain access to the market to profit on the sale of new drugs.
One controversial tactic employed by innovators in this battle is the "authorized generic." The "authorized generics" phrase is not defined in the Federal Food, Drug, and Cosmetic Act (FDA Act) or FDA's regulations. FDA, however, has recently referred to "authorized generics" as the "marketing of a product approved under a new drug application (NDA), by that NDA holder, under that NDA, but at a lower price and not under the 'brand' name, possibly through a different channel of distribution."
The authorized generics situation arises when a brand name company expects that its patent protection or market exclusivity will expire in the near future. The company recognized that the FDA will likely approve a generic drug application once the protection expires and expects to lose a substantial amount of profit to the generic competition. Therefore, the brand company might try to reach an agreement with a generic company or a third-party distributor to market an "authorized generic" version. This approach is an attempt by the brand name company to minimize the loss in profits. For example, an NDA holder might change the product's label or imprint (e.g., to reference a distributor).
In essence, authorized generics are just brand drugs with a generic label. A pharmaceutical company supplied its drug to a carefully chosen generic firm and allows that firm to market the product as a generic in return for royalties. Sometimes brand companies create their own companies to subsidiaries to manufacture authorized generics.
Authorized generic increases competition for ANDA applicants. The drug industry has presented data that more than two dozen authorized generics have been launched since 2003.[1] For example, in January 2004, Eon Labs (the ANDA applicant) began marketing a generic copy of Wellbutrin SR, after having secured a 180-day marketing exclusivity period.[2] At the same time, GlaxoSmithKline (the NDA holder) released an authorized generic, which undercut the value of the exclusivity period that Eon Labs had been awarded after challenging GlaxoSmithKline's patent.[3] According to industry experts, the six-month window during which other generics are excluded from the market provides immense profits to the ANDA holder. Therefore, if an authorized generic were released during the exclusivity period, the generic that undertook the process of challenging the innovator's "meritless" patent would not be rewarded with the same amount of profit because of the increased competition posed by the authorized generic.
In authorizing a generic to market its drug, the goal for innovators is to retain a portion of the market during the 180-day exclusivity period awarded to ANDA applicants subsequent to paragraph IV challenges. Under this type of arrangement, the authorized generic will usually replace the brand-name manufacturer's label with its own.[4] Because the authorized generic is selling the brand-name drug rather than a generic version of the brand-name drug, its sale is not prohibited during the ANDA filer's exclusivity period. As would be expected, such an arrangement most likely will include an agreement that the authorized generic share its profits with the innovator in consideration for the license. By selling the innovator's already approved drug, the authorized generic sidesteps the Hatch-Waxman Amendments' statutory language, which only prohibits non-approved ANDA applicants from selling the drug during that period of exclusivity.
II. OPPONENTS OF AUTHORIZED GENERICS
The major opposition to authorized generics practice comes from, as expected, generic companies. Generics argue that such authorized generics decrease the profits and incentives of the first ANDA filer who assumed the risk of a patent infringement suit. Because the authorization may give another generic company the opportunity to enter the market quickly even if it is not the first ANDA applicant entitled to the period of exclusivity, the ANDA filer who has obtained the 180-day exclusivity period is usually compelled to lower its prices because of the increased competition. Therefore, allowing authorized generics to enter the market during that time serves as a penalty for the applicant who is successful in obtaining a 180-day exclusivity period.
In 2004, several generics filed Citizen Petitions with the FDA to seek prohibition of the marketing and distribution of reduced-price authorized generic versions of brand-name products during an ANDA applicant's 180-day exclusivity period. In the first half of 2004, Mylan Pharmaceuticals, Inc. ("Mylan")[5] and Teva Pharmaceuticals USA, Inc. ("Teva")[6] submitted petitions to the FDA on the issue of authorized generics and Apotex Corporation ("Apotex")[7] filed a comment in support of Mylan's petition. In the petitions, the generics contend that allowing licensing agreements between authorized generics and innovators cripples the generic manufacturer's ability to derive a higher profit margin during the exclusivity period, which is when generics usually recoup the litigation costs incurred in challenging patents. Without the financial reward, generics argue they will have little incentive to challenge patents, especially patents protecting drugs with modest sales. Further, they allege that authorized generics will eventually obstruct consumers' access to lower-priced drugs in the long term.
In response to generics' opposition to the practice of authorized generics, innovators argue that the practice promote early introduction of multiple competitive products and allow consumers expedited access to lower-priced generics[8] --goals that are aligned with the intent of Congress in passing the Hatch-Waxman Amendments and the Medicare Amendments. In addition, proponents of authorized generics argued that authorized generics respects innovator marketing rights and is an additional tool for generic companies to fill "holes" in their pipeline or to enter new treatment areas.
III. CURRENT STATE
1. FDA's position on authorized generics
The FDA rejected both Teva's and Mylan's Citizen Petitions in a July 2, 2004 ruling.[9] The FDA stated that it would not prohibit authorized generics from marketing an innovator's drug during the first ANDA applicant's exclusivity period. The FDA found that this decision would advance the goal of more rapid access to lower-priced prescription drugs because authorized generics increase early competition and allow consumers more rapid access to lower-priced drugs, particularly during the exclusive 180-day period when the prices for generic drugs are often higher than they are after other generic manufacturers are able to enter the market. By emphasizing that the FDA does not generally review business dealings between drug manufacturers, the FDA also clarified that its mission is to protect and promote the public health. The FDA concluded that the marketing of authorized generics is a pro-competitive business practice, and that, therefore, it would not intervene as the petitioners had requested.
The FDA makes three main arguments in support of its refusal to prohibit authorized generics from marketing during an ANDA applicant's exclusivity period: (i) the authorized generics are marketing a brand-name product, not a generic product;[10] (ii) the FDA does not have the authority to regulate commercial marketing arrangements;[11] and (iii) authorized generics do not undermine the goal of the Hatch-Waxman legislation to bring more affordable pharmaceuticals to the market.[12]
The FDA rejected the Citizen Petitions' arguments that authorized generics are anti-competitive by stating that "[t]he Agency does not believe their marketing should be delayed…this marketing appears to promote competition in the pharmaceutical marketplace, in furtherance of a fundamental objective of the Hatch-Waxman amendments," and that "[T]he competitive effect of introducing a lower-priced authorized generic version of an NDA holder's product appears akin to that which one ANDA applicant's product might have relative to that of another ANDA applicant where exclusivity is shared."
In addition, FDA noted that product or manufacturing changes by an NDA sponsor for an authorized generic will not likely be "major" changes that require prior approval: "Sec. 506A [of the Federal Food, Drug, and Cosmetic Act] does not allow the Agency to require pre-approval of the kinds of manufacturing changes typically associated with the marketing of an authorized generic." FDA said, "Ordinarily, these changes to not raise significant safety or efficacy concerns; they do not substantially alter the content of the label or make the dosage form any less safe or effective." A company can instead notify FDA of non-major changes in the NDA annual report. FDA stated "[N]owhere does the Act … prohibit an ANDA or NDA holder's use of alternative marketing practices for its own approved new drug (so long as any related manufacturing changes do not pose safety or effectiveness concerns)."
FDA then concluded its rejection of the arguments against authorized generics with the following summary:
The marketing of authorized generics during the 18-day exclusivity period is a long-standing, pro-competitive practice, permissible under the Act. We are not persuaded by petitioners' arguments that the Agency can, must, or should prohibit such marketing. Therefore, we declined to interfere with these business arrangements and practices.
2. FTC's position on authorized generics
FTC's position historically has been that authorized generics agreements are pro-consumer because they allow multiple generic entrants sooner, [13] and FTC "Has declined to pursue cases brought to its attention involving AG deals."[14] The FTC decided recently that, in at least one specific instance, authorized generics do not raise issues under Section 5 of the Federal Trade Commission Act, which prohibits anti-competitive arrangements and unfair and deceptive business practices. Specifically, the FTC allowed Bristol-Myers Squibb and Teva to proceed with a licensing deal negotiated to settle patent litigation involving Paraplatin (carboplatin). Under the arrangement, Teva would launch an authorized generic under BMS's NDA, before BMS loses its pediatric exclusivity. In rendering its decision[15], the FTC stated:
[t]he settlement agreement provides no mechanism for BMS to share supracompetitive profits with Teva. Teva earns profits only by competing. Because Teva's payments to BMS likely will reduce Teva's profits, Teva will have the incentive to bring this ANDA drug products to the market as soon as possible after the exclusivity period. Importantly, the settlement agreement does not prevent Teva from marketing its own product under its ANDA at any time after October 14, 2004 . Even while selling BMS's product, Teva retains the ability and incentive to price independently.
These factors led the FTC to determine that, in at least this case, an authorized generic arrangement did not warrant regulatory action.
3. Courts' position on authorized generics
In the December 23, 2004 decision, in Teva Pharmaceuticals, Industries, Ltd. v. FDA,[16] the United States District Court for the District of Columbia June 3, 2005 , the circuit court affirmed the district court's decision.
VI. OTHER POTENTIAL CHALLENGES TO AUTHORIZED GENERICS
To date, neither FDA nor the FTC is objecting to or blocking authorized generics. Nevertheless, the debate is not over. One potential challenge is whether brand companies should be required to report an authorized generic price as its "best price" for Medicaid rebate purposes.
Repackaging agreements that involve creation of a new National Drug Code number could be viewed as an attempted to evade best price. For example, in April 2003, Bayer pled guilty to a criminal violation of the FDC Act as part of a settlement of a federal investigation into Medicaid best price reporting. Bayer admitted that it violated the FDC Act by failing to notify FDA that it was selling the antibiotic Cipro under s special label for Kaiser Foundation Hospitals between August 1995 and December 1995. The investigation, which began in 2000 and was led by the U.S. Attorney's Office in Boston
In the Bayer case, according to the government complaint, "The only physical difference between the private labeled Cipro and Cipro previously sold to Kaiser was the label that Bayer affixed to the bottles," which included a new NDC number and the phrase "Distributed by Kaiser Foundation Hospitals." The government alleged that Bayer made the arrangement "for the sole purpose of avoiding, decreasing and concealing its obligation to pay additional rebates to the Medicaid program." In the settlement, Bayer paid a $257 million fine and GSK paid $86.7 million.
V. CONCLUSION
Authorized generics are a reality -- one that brand name companies might consider to stop the economic bleeding when exclusivity or patent protection expires, and one that generics must consider. One generic company might see an authorized generic relationship as a means to enter the market earlier than expected, while another company with generic drug exclusivity might see this approach as a threat, and encroachment on, its business interests.
Thanks for reading.
Connie
connie@patentonomy.com
www.patentonomy.com
[1] Gleen Singer, Industry's Biggest Manufacturers Enter Generics Through Loophole; Consumers, Smaller Firms Could Suffer, Sun-Sentinel, Aapr.10, 2005, at 1E.
[2] See id.
[4] Teva Pharmaceuticals USA, Inc., Citizen Petition, 2004P-0262/CP1, at 4 (June 9, 2004 ), available at http://www.fda.gov/ohrms/dockets/dailys/04/June04/061004/04p-0261-cp00001-01-voll.pdf [hereinafter Teva Petition]
[5] Mylan Pharm.,Inc., Citizen Petition, 2004P-0075/CP1, at 1 (Feb.17, 2004), available at http://www.fda.gov/ohrms/dockets/dailys/04/feb04/021804/04p-0075-cp00001-vol1.pdf [hereinafter Mylan Petition].
[6] Teva Petition, supra note 4, at 6.
[7] Apotex Corp., Comment of Apotex Corp. in support of Citizen Petition Docket No. 2004P-0075/CP1, at 4 (March 24, 2004), available at http://www.fda.gov/ohrms/dockets/dailys/04/apr04/040204/04P-0075-emc00001.pdf (filed in support of Mylan Petition) [hereinafter Apotex Comment]
[8] FDA, FDA Talk Paper: FDA Supports Broader Access to Lower Priced Drugs (July 2, 2004 ), http://www.fda.gov/bbs/topics/answers/2004/ANS01296.html.
[9] Letter from William K. Hubbard, Associate Commissioner for Policy and Planning, Department of Health & Human Services, to Stuart A. Williams, Chief Legal Officer, Mylan Pharmaceuticals Inc., and James N. Czaban, Heller Ehrman White & McAuliffe LLP (July 2, 2004) (denying Mylan and Teva Petitions), available at heep://www.fda.gov/ohrms/dockets/dailys/04/july04/070704/04p-0261-pdn0001.pdf [hereinafter FDA Ruling].
[10] FDA Ruling, supra note 9, at 3-6.
[11] Id.
[12] Id.
[13] The Pink Sheet 5/31//04.
[14] The Pink Sheet 5/3/2004 .
[15] published in a May 24, 2004 Advisory Opinion.
[16] Teva Pharm., Indus. v. FDA, 335 F. Supp. 2d 111 (D.D.C. 2004).
[17] See id.
[18] Teva Pharm., Indus. v. FDA, 410 F.3d 51 (D.C. Cir.2005).
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