Hikma v. Amarin Argument Preview

Guest post by Kaidi (KD) Zhang, Stanford Law School J.D. expected 2027; UC Berkeley Ph.D. in Chemistry 2024

The Supreme Court will hear arguments in Hikma v. Amarin on April 29. The core question before the Court is seemingly straightforward but carries massive industry implications: Should a patent infringement claim based on inducement survive a 12(b)(6) motion to dismiss if the alleged infringer uses a statutorily permitted “skinny label,” but markets its generic drug as the “therapeutically equivalent” of the patented drug? 

In the decision below, the Federal Circuit held that pleading “the totality of the allegations of inducement” as “a whole” was sufficient for an induced infringement case to proceed. This ruling continued to narrow the viability of skinny labels, following the court’s earlier decision in GlaxoSmithKline LLC v. Teva Pharmaceuticals USA, Inc. (GSK), where it upheld a jury verdict of induced infringement based on a skinny label. 

In a recent Stanford Law Review article, Professors Jacob Sherkow and Paul Gugliuzza criticized the GSK decision for “turn[ing] two decades of Federal Circuit jurisprudence on drug labels and inducement on its head.” The Supreme Court declined to intervene then, but has granted certiorari in this case, which may have profound implications for the pharmaceutical industry. A brand-name drug is often approved to treat multiple different conditions (known as “indications”). Over time, the patent for the original drug compound may expire, but the brand-name company might still hold active “method-of-use” patents for specific indications. In many cases, companies pursue these additional indications after the drug is already on the market, which can extend their exclusivity.

Section viii (21 U.S.C. § 355(j)(2)(A)(viii)) of the Hatch-Waxman Act provides a statutory pathway for generic companies to enter the market before all method-of-use patents have expired. It allows a generic manufacturer to submit a statement to the FDA essentially saying: “We only want approval to sell this drug for older, unpatented uses; we are not seeking approval for the use that is still under patent.” To legally utilize the Section viii pathway, the generic manufacturer must remove—or “carve out”—all instructions, marketing, and references related to the patented use from their product’s packaging and informational inserts.

This specific dispute centers on Vascepa, a brand-name drug developed by the respondent, Amarin. Vascepa was initially approved in 2012 for a small group of patients suffering from severe hypertriglyceridemia (SH). In 2019, following a five-year study involving 8,000 patients, the drug received approval for a second indication for reducing the risks of cardiovascular events (CV). The petitioner, Hikma, subsequently developed a generic version of Vascepa (icosapent ethyl) and obtained FDA approval to sell the drug exclusively for the SH indication using the Section viii pathway. 

Notably, there are 11 companies with generic versions of icosapent ethyl approved for SH, and many of these generics (seven at the time the respondent’s brief was filed) are already on the market. Even though all generic pharmaceuticals are legally required to have the same labels carving out the CV indication, Amarin only sued Hikma because, according to Amarin, “[Hikma] alone chose to publish statements that healthcare providers would interpret as encouraging prescriptions that infringe respondents’ patents.”

Under 35 U.S.C. § 271(b), inducement liability requires that a party “actively induce[d]” a direct infringer to take specific action that suffices for “infringement of a patent.” Hikma contends it can be liable only if it actively encourages medical professionals to prescribe its generic icosapent ethyl specifically for the CV indication, and that none of its actions rise to this level. It argues that its skinny label encourages only non-infringing use, and that its external statements do not actively induce specific conduct. Hikma emphasizes that the only time the patented CV indication was mentioned on the label was to warn of the drug’s potential side effects “in people who have heart (cardiovascular) disease.” This warning, Hikma argues, cannot plausibly establish active inducement of the CV treatment method. Therefore, the case should be dismissed for failure to state a claim under the rigorous Iqbal-Twombly pleading standard.

How should policymakers incentivize and regulate convalescent serum therapy for COVID-19?

By Jacob S. Sherkow, Lisa Larrimore Ouellette, Nicholson Price, and Rachel Sachs

Over 120 years ago, a milk wagon horse named Jim was the United States’ most potent weapon against a raging diphtheria epidemic. During his lifetime, Jim—inoculated against the bacterial toxin that causes the disease—produced gallons of anti-diphtheria serum that, once extracted, could then be administered directly to patients. But tragic difficulties in making a safe and standard therapy from a single horse led Congress to pass the 1902 Biologics Control Act—the predecessor to the FDA’s current oversight over biologic products.

While convalescent sera have largely fallen out of favor since the development of modern vaccines, there is renewed hope in the space: the development of therapeutic sera from recovered COVID-19 patients. Encouraging the development of safe, pure, and potent COVID-19 convalescent serum has recently tasked policymakers with numerous challenges—some old, and some new. In this post, we explain the “manufacture” of COVID-19 convalescent sera and explore the regulatory and innovation policy difficulties in maintaining it.

How will the FDA’s new COVID-19 vaccine guidance affect development efforts?

By Rachel Sachs, Jacob S. Sherkow, Lisa Larrimore Ouellette, and Nicholson Price

Policymakers are expectantly awaiting the development of a COVID-19 vaccine, which they view as critical to future management of the pandemic. A number of pharmaceutical companies have jumped into the vaccine race, moving at record speed, with several vaccines already about to enter Phase III trials. Last week, the Food and Drug Administration (FDA) released a guidance document on the development of new vaccines for COVID-19. In this post, we review the FDA’s new guidance, consider the ways in which the FDA must attempt to balance risk and access in this context, and address the critical question of patient access to future approved vaccines.

Remdesivir Part II: Allocating Access

By Jacob S. Sherkow, Lisa Larrimore Ouellette, Nicholson Price, and Rachel Sachs

Last week, we focused on incentives for developing clinical evidence supporting the use of remdesivir for COVID-19 and analyzed the FDA’s grant of an emergency use authorization (EUA) for the drug. This week, we consider mechanisms for allocating access to the drug, including distribution, payment, and patents. Importantly, many of these issues are relatively uncommon to encounter in the prescription drug space. The government does not usually control the allocation and distribution of new drugs after marketing authorization has been granted, although it is doing so for remdesivir. These novel issues raise opportunities, but also concerns, for law and policy.

Remdesivir Part I: Incentivizing Antiviral Innovation

By Rachel Sachs, Jacob S. Sherkow, Lisa Larrimore Ouellette, and Nicholson Price

The antiviral drug remdesivir, developed by California-based biopharmaceutical company Gilead Sciences in collaboration with government scientists, has emerged as the new standard of care for COVID-19 patients. The drug has also been beset by controversy, from Gilead’s withdrawn orphan drug application to conflicting reports of clinical trial results to an opaque and haphazard distribution process. We examine the role of legal institutions in the remdesivir rollout in two posts focused on the two (separable) parts of innovation policy. This week focuses on the innovation incentives for producing information about remdesivir and other COVID-19 treatments, including the FDA’s role in deciding whether and under what conditions a new drug can reach the market. Next week we will turn to pharmaceutical allocation mechanisms, including payment and distribution.

Who’s Afraid of Section 1498?: Government Patent Use as Versatile Policy Tool

Guest post by Christopher Morten & Charles Duan

Chris Morten (@cmorten2) is the Clinical Teaching Fellow and Supervising Attorney in NYU’s Technology Law and Policy Clinic. Charles Duan (@Charles_Duan) is Director of Technology and Innovation Policy at the R Street Institute.

From vaccines to ventilators to diagnostic tests, technology has dominated response strategies to the ongoing COVID-19 pandemic. Where technology leads, patent law and policy follow. Recently, some attention has turned to federal government patent use under 28 U.S.C. § 1498. Jamie Love of KEI has called on the federal government to explore use of section 1498 in its response to COVID-19, to reduce prices, expand supplies, and ensure widespread, equitable access to patented technologies. (We have, too.) There is a long line of scholarship, including Amy Kapczynski and Aaron Kesselheim, Hannah Brennan et al., Dennis Crouch, Daniel Cahoy, and others discussing the relevance of section 1498 in a variety of contexts.

Yet others have encouraged the government to “tread lightly” and described use of section 1498 as a “nuclear option”—potent but dangerous—because it can be used to make massive interventions in the market for patented products—e.g., by issuing compulsory licenses to patents on high-priced brand-name drugs, “breaking” patent monopolies and accelerating the entry of numerous generic competitors. One recent example: a few years ago, Gilead’s high prices on hepatitis C drugs exacerbated a different public health crisis and prompted a chorus of voices, including Senator Bernie Sanders and the New York Times editorial board, to call on the federal government to exercise its section 1498 power to “break” Gilead’s patents in just this way, which might have saved tens of billions of dollars in public spending. (The federal government did not do so.)

Irrespective of the merits of 1498 as a general matter, in the context of a crisis such as the COVID-19 pandemic we see real value in bold, “nuclear option” use of section 1498 to save billions on high-priced prescription drugs and maximize their availability. But that is not the only way section 1498 can be used. It can also be used in modest, incremental, unexceptional ways—it can be as much as a scalpel or a Swiss Army knife as a nuclear weapon, and some of its virtues in this regard have gone underappreciated.

Accordingly, we highlight four particularly valuable features of government patent use under section 1498 in a crisis like the present one: (1) speed, (2) flexibility, (3) ex post determination of the appropriate compensation, and (4) determination of that compensation by an impartial adjudicator. In particular, we compare section 1498 with an alternative policy tool, patent buyouts, which can also expand public access to patented technologies, and identify several reasons why section 1498 may be the preferable tool.

How can innovation and regulatory policy accomplish robust COVID-19 testing?

By Lisa Larrimore Ouellette, Nicholson Price, Rachel Sachs, and Jacob Sherkow

It’s now clear that expansive, population-wide testing is part-and-parcel of every successful COVID-19 containment strategy. But US testing efforts, from the beginning of the pandemic until now, have been widely criticized as lacking. Perhaps as a direct consequence of this failure, the US now leads the world in COVID-19 cases and deaths. What are these tests and what’s our capacity to test; why is it important to test; how have the FDA and other administrative agencies addressed the issue; and what can we do about it?

What is the status of US testing capacity?

It is important to distinguish between two types of COVID-19 tests: reverse transcription polymerase chain reaction (RT-PCR) tests for SARS-CoV-2, the virus that causes COVID-19; and serological tests for the body’s immune response to SARS-CoV-2. The tests are not interchangeable: RT-PCR tests detect the presence of the virus’s genome, itself, and thus determine whether someone is currently infected. Someone who was once infected and has since recovered will return a negative result. A serological test, by contrast, detects whether the body has produced antibodies to the virus; that’s useful to determine whether someone has been infected for long enough to mount an immune response.

To date, virtually all of the testing has been of the RT-PCR type, useful for answering the question: Is the patient infected now? Testing centers in the US are currently running approximately 135,000 tests a day—far fewer per capita than in other countries. The US’s maximum, overall testing capacity is unclear and is, in any event, a moving target given that new tests are now being cleared by the FDA with some frequency. But it’s widely acknowledged that testing is not at the level that it needs to be to accurately assess the number of people infected with SARS-CoV-2.

There are myriad reasons for this deficit in testing: an initially slow ramp-up of tests approved by the FDA; difficulties in speeding manufacturing of kits used to conduct the tests; a shortage of reagents to conduct the tests, including solutions, primers, and even the swabs used to collect samples from patients; the capacity of clinical laboratories to run tests and return results; and less technical hang-ups like patients’ difficulties in finding or physical getting to testing sites and questions concerning who will pay for such testing.

How can the US address coronavirus drug shortages?

By Lisa Larrimore Ouellette, Nicholson Price, Rachel Sachs, and Jacob Sherkow

The escalating pandemic has caused devastating shortages not only of ventilators and personal protective equipment like masks, but also of essential medicines needed to treat COVID-19 patients. As detailed by STAT and the New York Times, prescriptions for painkillers, sedatives, anesthetics, and antibiotics are up, but the rate at which prescriptions are filled and shipped to hospitals is down. The FDA helpfully tracks drug shortages, but this doesn’t solve the problem. With the sudden spike in hospitalized patients with COVID-19 symptoms, physicians are using these drugs faster than manufacturers are making them.

What is causing these drug shortages?

Drug shortages are frighteningly common even in the best of times. A 2019 FDA report noted that from 2013 to 2017, at least 163 drugs went into shortage. (The actual number is likely much higher.) That report blamed “economic forces”—namely, price-eroding generic competition, a lack of incentives to make quality generic manufacturing more efficient, and supply chain difficulties that made the continued manufacture of older generics unprofitable. These problems are now exacerbated by the sudden demand spikes caused by COVID-19 patients. As just one example: propofol, an important drug for sedating patients who need intubation—and, historically, already in waxing and waning states of shortage—has seen prescriptions shoot up about 100%.

Supply has been slow to meet COVID-19-related demand—but slower still because of the outbreak’s disruption to the global supply chain. Many pharmaceutical ingredients are manufactured in China, which has seen slowdowns (and in some cases, shutdowns) in manufacturing sectors across the country. Furthermore, because drugs do expire, they’re not stockpiled when there’s a surplus. In some instances, countries have banned the export of drug products important for treating COVID-19 to ensure adequate supply for their own citizens. India, for example, has banned exports on hydroxychloroquine in the event the drug proves useful in treating COVID-19. It’s a wicked problem: the very thing causing the sudden spike in demand is shutting down the means of supply.

What does it mean that Oracle is partnering with the Trump administration to study unproven COVID-19 drugs?

By Lisa Larrimore Ouellette, Nicholson Price, Rachel Sachs, and Jacob Sherkow

One of the dizzying stream of innovation and health law stories to emerge last week is Oracle’s partnership with the White House to study unproven pharmaceuticals for treating COVID-19. We decided to unpack this story for ourselves and then to collectively share our thoughts in a short explainer.

What are the drugs being studied?

The initial stories about Oracle’s platform mention its use for two older drugs approved to treat malaria—chloroquine and hydroxychloroquine—that are now being tested to treat COVID-19. Both drugs are quite old: chloroquine was first approved by the FDA in 1949 and sold, until recently, under the brand name Aralen. Hydroxychloroquine, which is also used to treat lupus and rheumatoid arthritis, is sold under the brand Plaquenil and was first approved in 1955.

The impetus behind studying these two drugs stems from in vitro studies following the 2005 SARS-CoV-1 outbreak. Those studies suggested the drugs could inhibit some types of coronaviruses from both entering cells and replicating after infection—potentially serving as a preventative and a treatment. But the studies were small, in cell culture rather than living animals, and not conducted against the virus that causes COVID-19, SARS-CoV-2. Some early work with the drugs against SARS-CoV-2 may be promising but it, too, has been done in a test tube rather than an animal model.

Does Gilead's (withdrawn) orphan designation request for a potential coronavirus treatment deserve your outrage?

Many commentators were outraged by the FDA's announcement on Monday that Gilead received orphan drug designation for using the drug remdesivir to treat COVID-19. The backlash led to a quick about-face by Gilead, which announced today that it is asking the FDA to rescind the orphan designation. For those trying to understand what happened here and the underlying policy questions, here's a quick explainer:

How could the Orphan Drug Act possibly apply to COVID-19?

Under 21 U.S.C. § 360bb(a)(2), a pharmaceutical company can request orphan designation for a drug that either (A) treats a disease that "affects less than 200,000 persons in the United States" at the time of the request or (B) "for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for such disease or condition will be recovered from sales in the United States of such drug." An ArsTechnica explainer suggests that remdesivir received orphan designation under option (B), but this email from the FDA indicates that it was option (A).

The designation seems correct based on the plain language of the relevant statute and regulations: As of Monday, there were 44,183 cases diagnosed in the United States (and even fewer at the time of Gilead's request), and the Orphan Drug Act regulations indicate that orphan designation "will not be revoked on the ground that the prevalence of the disease . . . becomes more than 200,000 persons." But given the CDC's low-end estimates of 2 million Americans eventually requiring hospitalization, commentators have noted that this feels like a loophole that gets around the purpose of the Orphan Drug Act.

What benefits would Gilead have received from an orphan designation?

The main effect would have been a tax credit for 25% of Gilead's expenses for the clinical trials it is running to figure out whether remdesivir is actually effective for treating COVID-19. (The tax credit was 50% when the Orphan Drug Act became effective in 1983, but was reduced to 25% by the December 2017 tax reform.)

Lucy Xiaolu Wang on the Medicines Patent Pool

Patent pools are agreements by multiple patent owners to license related patents for a fixed price. The net welfare effect of patent pools is theoretically ambiguous: they can reduce numerous transaction costs, but they also can impose anti-competitive costs (due to collusive price-fixing) and costs to future innovation (due to terms requiring pool members to license future technologies back to the pool). In prior posts, I've described work by Ryan Lampe and Petra Moser suggesting that the first U.S. patent pool—on sewing machine technologies—deterred innovation, and work by Rob Merges and Mike Mattioli suggesting that the savings from two high tech pools are enormous, and that those concerned with pools thus have a high burden to show that the costs outweigh these benefits. More recently, Mattioli has reviewed the complex empirical literature on patent pools.

Economics Ph.D. student Lucy Xiaolu Wang has a very interesting new paper to add to this literature, which I believe is the first empirical study of a biomedical patent pool: Global Drug Diffusion and Innovation with a Patent Pool: The Case of HIV Drug Cocktails. Wang examines the Medicines Patent Pool (MPP), a UN-backed nonprofit that bundles patents for HIV drugs and other medicines and licenses these patents for generic sales in developing countries, with rates that are typically no more than 5% of revenues. For many diseases, including HIV/AIDS, the standard treatment requires daily consumption of multiple compounds owned by different firms with numerous patents. Such situations can benefit from a patent pool for the diffusion of drugs and the creation of single-pill once-daily drug cocktails. She uses a difference-in-differences method to study the effect of the MPP on both static and dynamic welfare and finds enormous social benefits.

On static welfare, she concludes that the MPP increases generic drug purchases in developing countries. She uses "the arguably exogenous variation in the timing of when a drug is included in the pool"—which "is not determined by demand side factors such as HIV prevalence and death rates"—to conclude that adding a drug to the MPP for a given country "increases generic drug share by about seven percentage points in that country." She reports that the results are stronger in countries where drugs are patented (with patent thickets) and are robust to alternative specifications or definitions of counterfactual groups.

On dynamic welfare, Wang concludes that the MPP increases follow-on innovation. "Once a compound enters the pool, new clinical trials increase for drugs that include the compound and more firms participate in these trials," resulting in more new drug product approvals, particularly generic versions of single-pill drug cocktails. And this increase in R&D comes from both pool insiders and outsiders. She finds that outsiders primarily increase innovation for new and better uses of existing compounds, and insiders reallocate resources for pre-market trials and new compound development.

Under these estimations, the net social benefit is substantial. Wang uses a simple structural model and estimates that the MPP for licensing HIV drug patents increased consumer surplus by $700–1400 million and producer surplus by up to $181 million over the first seven years of its establishment, greatly exceeding the pool's $33 million total operating cost over the same period. Of course, estimating counterfactuals from natural experiments is always fraught with challenges. But as an initial effort to understand the net benefits and costs of the MPP, this seems like an important contribution that is worth the attention of legal scholars working in the patent pool area.

How Does Patent Eligibility Affect Investment?

David Taylor (SMU) was interested in how patent eligibility decisions at the Supreme Court affected venture investment decisions, so he thought he would ask. He put together an ambitious survey of 14,000 investors at 3000 firms, and obtained some grant money to provide incentives. As a result, he got responses from 475 people at 422 firms. The response rate by individual is really low, but by firm it's 12% - not too bad. He performs some analysis of non-responders, and while there's a bit of an oversample on IT and on early funding, it appears to be somewhat representative.

The result is a draft on SSRN and forthcoming in Cardozo L. Rev. called Patent Eligibility and Investment. Here is the abstract:

Have the Supreme Court’s recent patent eligibility cases changed the behavior of venture capital and private equity investment firms, and if so how? This Article provides empirical data about investors’ answers to those important questions. Analyzing responses to a survey of 475 investors at firms investing in various industries and at various stages of funding, this Article explores how the Court’s recent cases have influenced these firms’ decisions to invest in companies developing technology. The survey results reveal investors’ overwhelming belief that patent eligibility is an important consideration in investment decisionmaking, and that reduced patent eligibility makes it less likely their firms will invest in companies developing technology. According to investors, however, the impact differs between industries. For example, investors predominantly indicated no impact or only slightly decreased investments in the software and Internet industry, but somewhat or strongly decreased investments in the biotechnology, medical device, and pharmaceutical industries. The data and these findings (as well as others described in the Article) provide critical insight, enabling evidence-based evaluation of competing arguments in the ongoing debate about the need for congressional intervention in the law of patent eligibility. And, in particular, they indicate reform is most crucial to ensure continued robust investment in the development of life science technologies.

The survey has some interesting results. Most interesting to me was that fewer than 40% of respondents were aware of any of the key eligibility decisions, though they may have been vaguely aware of reduced ability to patent. More on this in a minute.

There are several findings on the importance of patents, and these are consistent with the rest of the literature - that patents are important for investment decisions, but not first on the list (or second or third). Further, the survey finds that firms would invest less in areas where there are fewer patents - but this is much more pronounced for biotech and pharma than it is for IT. This, too, seems to comport with anecdotal evidence.

But I've always been skeptical of surveys that ask what people would do - stated preferences are different than revealed preferences. The best way to measure revealed preferences would be through some sort of empirical look at the numbers, for example a differences-in-differences approach before and after these cases (though having 60% of the people say they haven't heard of them would certainly affect whether the case constitutes a "shock" - a requirement of such a study).

Another way, which this survey attempts, is to ask not what investors would do but rather ask what they have done. This amounts to the most interesting part of the survey - investors who know about the key court opinions say they have moved out of biotech and pharma, and into IT. So much for Alice destroying IT investment, as some claim (though we might still see a shift in the type of projects and/or the type of protection - such as trade secrets). But more interesting to me was that there was also a similar shift among those folks who claimed not to know much about patent eligibility or think it had anything to do with their investment. In other words, even for that group who didn't actively blame the Supreme Court, they were shifting investments out of biotech and pharma and into IT.

You can, of course, come up with other explanations - perhaps biotech is just less valuable now for other reasons. But this survey is an important first step in teasing out those issues.

There are a lot more questions on the survey and some interesting answers. It's a relatively quick and useful read.

Using Antitrust to Fix Broken Markets

The prescription drug market is a real mess, in my view. At the very least, it is complicated, and prices for drugs seem to be higher in the U.S. than elsewhere (though teasing that out is hard, since very few pay sticker price and insurance companies negotiate deals). But I don't know what the solution is, and I'm not convinced anyone else does, either. The recent article that triggers my thoughts on this is: A Non-Coercive Approach to Product Hopping, 33 Antitrust 102 (2018), by Michael Carrier (Rutgers) and Steve Shadowen (Hilliard & Shadowen LLP). Their paper is on SSRN, and the abstract is here:

The antitrust analysis of product hopping is nuanced. The conduct, which consists of a drug company’s reformulation of its product and encouragement of doctors to switch prescriptions to the reformulated product, sits at the intersection of antitrust law, patent law, the Hatch-Waxman Act, and state substitution laws, and involves uniquely complicated markets with different buyers (insurance companies, patients) and decision-makers (physicians).

In Doryx, Namenda, and Coercion, Jack E. Pace III and Kevin C. Adam applaud some courts’ use of a product-hopping analysis that finds liability only where there is an element of coercion. In this response, we explain that the unique characteristics of pharmaceutical markets render such a coercion-based approach misguided. We also show that excessively deferential analyses would give brand-name drug firms free rein to evade generic-promoting regulatory regimes. Finally, we offer a conservative framework for analyzing product hopping rooted in the economics and realities of the pharmaceutical industry.

This very brief response essay does a good job of highlighting some of the difficult nuances associated with product hopping (something I'll describe more in a minute) in the prescription drug market. I don't necessarily agree with it - I actually disagree with the final proposal. I share this here because it prompted me to think more closely about an issue I had mostly ignored, and I respect Mike Carrier and think that he does about as good a job at presenting this particular viewpoint as anyone.

Still, I'm troubled by the use of the blunt weapon of antitrust against product hopping, even as I have misgivings about other areas of this market. Product hopping occurs when a name brand (read, patented) drug is pulled from the market in favor of a "new and improved" product (that is also patented). The concern is that the removal of the old brand from the market just as generics are arriving will fail to trigger mandatory generic substitution rules, because doctors can't prescribe the old name brand. Instead, the fear is that doctors will only fill prescriptions for the new, improved (though the parties debate the improved point) drug, for which there is no generic to substitute. Further, they won't ever prescribe the generic once the name brand is off the market.

Here's what gives me a bit of trouble about this. While I am a big fan of automatic generic substitution laws, I am skeptical that they should be used as innovation policy, to the point where the inability of a generic to take advantage of it creates an antitrust injury and also forces a company to make a product that it may or may not want to make for profit or other reasons. In other words, a system that requires a company to make a product so that other companies can sell a substitute product that sellers are required by law to sell is a broken system indeed.

The question is, where is the system broken? Some will, no doubt say that it is the patent system and exclusivity. Surely that plays a role. But I'd like to point to three other points of market failure that drug makers point to. None of these are really new, but I'm taking the blogger's prerogative to talk about them.

1. I think it is a huge assumption that doctors will only prescribe the new drug and won't prescribe the generic once it hits the market. The argument in the article above is that because doctors don't have to pay for it, they have no incentive to cost minimize. Which the incentive is certainly diminished in theory, this is not my experience with (many) doctors at all. I have had many doctors prescribe me (or my wife) "older" generic versions of drugs because they were cheaper. One funny thing is that often times those older versions were awful - like a drug my wife had to take as an awful tasting liquid because the pill version cost 3 or 4 times as much and wasn't covered by the (generally good) insurer, or a blood pressure medication I had to take because it was the standards--until I could show that I had a rare side effect.

2. I think insurance companies can regulate much of this through formularies. If you make the new drug non-formulary (or even brand cost), people will migrate to the cheaper generic substitute, even if there is no prescription available. Even if doctors don't pay, insurers sure do, and they have every incentive to make sure that generic substitutes are used if the new drug is not really an improvement.

3. I bristle a bit at the notion that generic companies must rely on substitution laws to get doctors to prescribe. I realize that's how it is done now, and while substitution laws are a good thing, there is nothing stopping generics from telling doctors why the new-fangled drug is no better than the one that was just removed from the market for the same money. We make every other industry do this. I suspect that litigation is cheaper than advertising, and while I am happy to give the industry a leg up, I am wary of giving it a pass on basic business requirements, and I am wary to taking something that's a regulatory windfall to generics (even if it is good for consumers) and making it an affirmative innovation policy. .

4. Taking this last point further, from an innovation standpoint, is there any reason why generics can't innovate their own product hopping drug? Knowing that a deadline is coming, why can't they innovate (or license) their own extended relief version in addition? Indeed, I take an extended release version of a generic drug. It costs a fortune (before insurance), and the generic is benefiting from having created/licensed it. I suppose a more salient example is Mylan's Epi-Pen, which uses a protected delivery system for a generic drug. While most people are not thrilled with Mylan's pricing strategy, it illustrates the basic point I'm trying to make: generic manufacturers are not helpless victims of the system stacked against them, they are active, rent-seeking participants willing to exploit systematic flaws in their favor.


Finally, I will say that all of my arguments are empirically testable, as are the arguments on the other side. If folks can point to studies that have demonstrated actual physician, consumer, and insurer behavior in product hopping cases, I will be happy to post here and assess!

AOC on Pharma & Public Funding

Congresswoman Alexandria Ocasio-Cortez has already gotten Americans to start teaching each other about marginal taxation, and now she has started a dialog about the role of public funding in public sector research:

This week I conducted my first-ever line of questioning at an Oversight committee hearing, which focused on the skyrocketing costs of pharmaceuticals.

Here’s what happened ⬇️ https://t.co/M6XuL61zXN

— Alexandria Ocasio-Cortez (@AOC) February 1, 2019

Big Pharma companies often say that drugs “need” to be expensive to fund research. What they don’t tell you is that they use *publicly-funded research* for expensive, privatized drugs.

This week on Oversight, @RoKhanna and I exposed how this scheme works:pic.twitter.com/ELbllU3Fxy

— Alexandria Ocasio-Cortez (@AOC) February 1, 2019

In these short videos (which email subscribers to this blog need to click through to see), Ocasio-Cortez and Ro Khanna are seen asking questions during a Jan. 29 House Oversight and Reform Committee hearing, "Examining the Actions of Drug Companies in Raising Prescription Drug Prices." So far, @AOC's three tweets about this issue have generated over 7,000 comments, 58,000 retweets, and 190,000 likes.

Privatization of publicly funded research through patents is one of my main areas of research, so I love to see it in the spotlight. There are enough concerns with the current system that the government should be paying attention. But as I explain below, condensing Ocasio-Cortez and Khanna's questions into a headline like "The Public, Not Pharma, Funds Drug Research" is misleading. Highlighting the role of public R&D funding is important, but I hope this attention will spur more people to learn about how that public funding interacts with private funding, and why improving the drug development ecosystem involves a lot of difficult and uncertain policy questions. This post attempts to explain some key points that I hope will be part of this conversation.

Kevin Soter on Causation in Reverse Payment Antitrust Claims

Readers of this blog are likely familiar with the Supreme Court's 2013 FTC v. Actavis decision, which concluded that certain "reverse payment" pharmaceutical patent litigation settlements could violate the antitrust laws and that "it is normally not necessary to litigate patent validity to answer the antitrust question." Actavis had plenty of academic input before it was decided and has continued to spark vigorous scholarly debates, such as an article by Edlin, Hemphill, Hovenkamp & Shapiro, a response by Harris, Murphy, Willig & Wright, and a reply from the original group.

But until I read Kevin Soter's forthcoming Stanford Law Review Note, Causation in Reverse Payment Antitrust Claims, I wasn't aware of the developing circuit split over reverse-payment antitrust suits brought by private individuals rather than the government.

Unlike the government, private individuals must establish "antitrust standing," including the need to show causation of injury-in-fact, which limits enforcement to groups like drug purchasers, consumer groups, or insurers that might actually be harmed by the settlement. Under the approach to causation adopted by the Fifth and Third Circuits, "plaintiffs must prove precisely how, absent the illegal settlement agreement, generic entry would have happened earlier," which can require litigation of patent invalidity or noninfringement. Other courts—including the California Supreme Court, three district courts, and perhaps the Second Circuit—use the same inference as in Actavis, "reasoning that a plaintiff who has shown an antitrust violation based on a reverse payment settlement agreement has necessarily shown an agreement to delay generic entry beyond the otherwise expected date of generic entry."

Soter sides with the latter approach, arguing that the causation inquiry for private plaintiffs is no different from the inquiry over anticompetitive effects at issue in Actavis, for which litigation of patent validity is unnecessary. And he notes that a burden-shifting approach could address lingering concerns by allowing defendants to rebut the inference of causation.

The best part of teaching at Stanford is having extraordinarily talented students who can produce works like this, and I thought it was worth highlighting for anyone who has been following the pharmaceutical patent litigation antitrust debates.

Data for the Evergreening Debate

Pharmaceutical companies would like their blockbuster drug exclusivity to last forever. But patents expire and generics enter the marketplace. This ecosystem has led to a battleground, with opposing claims about unfair competition, evergreening, patent misuse, etc. There's a fair amount of data out there, but with respect to evergreening there has been more heat than light. A recent paper by Robin Feldman (Hastings) and Connie Wang (Hastings - student) attempts to change this by gathering data on 16,000 Orange Book entries between 2005 and 2015.

For the unaware (and I'll admit that I'm mildly aware), the Orange Book is an FDA listing of all the "exclusivities" that companies claim related to their New Drug Applications (i.e., their drugs). These exclusivities might relate to patents associated with the drug, research related to the drug, approval to use the drug on new populations or for "orphan" (low incident) diseases.

Feldman and Wang argue that the Orange Book has been used by companies to "evergreen" their drugs - that is, to extend exclusivity beyond patent expiration. The paper is on SSRN and the abstract is here:

Why do drug prices remain so high? Even in sub-optimally competitive markets such as health care, one might expect to see some measure of competition, at least in certain circumstances. Although anecdotal evidence has identified instances of evergreening, which can be defined as artificially extending the protection cliff, just how pervasive is such behavior? Is it simply a matter of certain bad actors, to whom everyone points repeatedly, or is the problem endemic to the industry?

This study examines all drugs on the market between 2005 and 2015, identifying and analyzing every instance in which the company added new patents or exclusivities. The results show a startling departure from the classic conceptualization of intellectual property protection for pharmaceuticals. Key results include: 1) Rather than creating new medicines, pharmaceutical companies are recycling and repurposing old ones. Every year, at least 74% of the drugs associated with new patents in the FDA’s records were not new drugs coming on the market, but existing drugs; 2) Adding new patents and exclusivities to extend the protection cliff is particularly pronounced among blockbuster drugs. Of the roughly 100 best-selling drugs, almost 80% extended their protection at least once, with almost 50% extending the protection cliff more than once; 3) Once a company starts down this road, there is a tendency to keep returning to the well. Looking at the full group, 80% of those who added protections added more than one, with some becoming serial offenders; 4) The problem is growing across time.

I think the data the authors have gathered is extremely important, and I think that their study sheds important light on what happens in the pharmaceutical industry. That said, as I explain below, my takeaways from this paper are much different from theirs.

Brennan, Kapczynski, Monahan & Rizvi: Leveraging Government Patent Use for Health

The federal government can and should use its power to buy generic medicines at a fraction of their current price, according to Hannah Brennan, Amy Kapczynski, Christine H. Monahan, and Zain Rizvi in their new article, A Prescription for Excessive Drug Pricing: Leveraging Government Patent Use for Health. They note that 28 U.S.C. § 1498 allows the federal government to use patents without license as long as it pays "reasonable and entire compensation for such use." This provision "is regularly used by the government in other sectors, including defense," and was relied on "numerous times to procure cheaper generic drugs in the 1960s," and should "once again be used to increase access to life-saving medicines." The article is chock-full of interesting details and is a recommended read even for those who disagree with their ultimate policy conclusions.

The authors discuss how § 1498 has been used recently to acquire patented inventions ranging from electronic passports to genetically mutated mice, and how the Defense Department used § 1498 to buy generic antibiotics from Italian firms before Italy started issuing patents on drugs. They synthesize the § 1498 caselaw and note that it is not a replication of the patent damages award; e.g., lost profits are strongly disfavored, and the cases show concern with "excessive compensation" to the patent owner. Adjustments to § 1498 royalties have been made based on risks and expenses incurred by the patentee in developing and creating a market for the products, and to account for "reasonable" profits, so the authors advocate awarding pharmaceutical patentees their risk-adjusted R&D costs plus average industry returns (perhaps a 10-30% bounty). This approach to calculating patent royalties is similar in many ways to that advocated by Ted Sichelman for all patent cases, as discussed on this blog in June.

Larry Helfer on Access to Medicines

Readers interested in the social justice concerns described in Monday's post may be interested in a book chapter that was recently posted by Professor Laurence Helfer: Pharmaceutical Patents and the Human Right to Health: The Contested Evolution of the Transnational Legal Order on Access to Medicines. Helfer is one of the leading scholars of international IP institutions; see, e.g., his classic work on regime shifting.

In this new chapter, he describes the collision of two "transnational legal orders" (TLOs): one focused on IP, and one on the right to health. He breaks down the history into three phases. In Phase 1 (pre-mid-1990s) the two TLOs "existed in relatively stable but distinct policy spaces." In Phase 2 (mid-1990s to 2000), the IP TLO rapidly expanded. Phase 3 (2000 to the present) has involved "a backlash against pharmaceutical patents and a campaign by developing countries and civil society groups to increase A2M [access to medicines]." In broad strokes, this account is probably familiar to many IP scholars, but for those interested in the detailed institutional dynamics behind this story, Helfer's chapter is well worth a read.

In related news, the pharmaceutical firm GlaxoSmithKline made headlines with its recent announcement that it will stop filing patents in 50 low-income countries and will grant licenses to generics manufacturers in another 35 lower-middle-income countries.

Erika Lietzan on the Myths of Data Exclusivity

Erika Lietzan joined the Missouri Law faculty last fall after a distinguished career practicing FDA law, which included making partner at Covington & Burling and serving as Assistant General Counsel for PhRMA (the pharmaceutical lobbying organization). She thus has a wealth of knowledge about the intricacies of pharmaceutical patents and FDA approval, and scholars and reporters interested in the details of pharma news (like the Daraprim controversy) could learn a lot by contacting her.

Lietzan recently posted The Myths of Data Exclusivity. The data exclusivity period for a drug is the period during which the FDA won't allow a generic to rely on the drug's clinical trial data for approval—typically 5 years for new non-biological drugs and 12 years for biological drugs. Data exclusivity was most recently in the news as the "final sticking point" in the TPP negotiations.

Data exclusivity is typically viewed as a patent-like benefit for innovative firms that provides a market-based reward by allowing firms to charge supracompetitive prices. But Lietzan attempts to reframe data exclusivity as not a benefit for pioneer pharmaceutical firms, but rather "a period of time during which all firms are subject to the same rules governing market entry." She explains:

In 1984 [with the Hatch-Waxman Act], pioneers with non-biological drugs approved after 1962 lost something; their right to perpetual exclusive use of their research became a right to only five years of exclusive use. And in 2010 [with the Biosimilars Act], pioneers with licensed biological drugs lost something; their perpetual exclusive right was shortened to twelve years. This reframing identifies the primary beneficiary of the choice made by policymakers as follow-on applicants rather than pioneers.

Brad Shapiro on the Cost of Strategic Entry Delay in Pharmaceuticals

Pharmaceutical companies sometimes engage in "product hopping," in which they attempt to move patients to a new product with longer patent protection before the generic version of an older drug becomes available. Product hopping was recently in the news with New York state's antitrust suit against Actavis for its decision to withdraw Namenda IR, its 2x/day Alzheimer's drug (with patent protection ending July 2015), to force patients to switch to Namenda XR, a 1x/day version (with patent protection until 2029). In an opinion by Judge Walker, the Second Circuit upheld a preliminary injunction barring withdrawal of Namenda IR prior to generic entry, concluding that the "hard switch crosses the line from persuasion to coercion and is anticompetitive."

The cost to consumers of product hopping that obstructs access to generic drugs is clear. But these marketing strategies raise another potential welfare loss that receives less attention: when a pharmaceutical company delays the introduction of a new drug version until just before patent protection on the old version is set to expire, that delay can harm consumers who prefer the new version. This later cost is the focus of a new empirical paper by Professor Brad Shapiro (Chicago Booth), Estimating the Cost of Strategic Entry Delay in Pharmaceuticals: The Case of Ambien CR.