Thursday, January 27, 2005

Forbes' Drug Patent Peril?

In "Drug Patent Peril," Forbes criticizes the current form of the Hatch-Waxman Act. There are many issues here, to which I will return. Recall in the pre-Hatch-Waxman days, we knew when drugs would go off-patent.

Note that Forbes mis-states annual sales figures for Lipitor at 7.4 billion.

from Forbes:

If investors are treating unlikely patent upsets as if they were foregone conclusions, the stocks could be undervalued. But that points to a problem with the Hatch-Waxman Act, the U.S. law governing patent challenges. Generic firms are encouraged to challenge patents in the hopes of hitting a home run. If investors discount stocks even based on frivolous patent challenges, drug companies are not being rewarded for the drugs they actually have on the market.

At the end of the day, that means that medicines on the market are worth less--and that, in turn, there is less incentive to develop new treatments.

Already, it costs more than $800 million, by some estimates, to develop a new drug. That's as much as it cost to send robot probes to Mars. Yet Pfizer is actually spending that much on test for one new medicine to raise good cholesterol and clear clogged arteries. Sanofi is developing an anti-smoking, anti-obesity pill that doctors at the Cleveland Clinic plan to test to see if it prevents heart attacks and strokes. Lilly is in the middle stages of developing its own heart drug. In ten years, any of them might be one of the best-selling medicine in the world.

But investors seem numb to the potential. What are needed are clear rules about how to balance the need for cheap generic drugs against the need for new medicines.

One solution: Offer drug companies a set period of exclusivity, without fear of patent challenges, after a drug is approved. In return, they agree not to mount any challenge to generics. (See: "Solving The Drug Patent Problem.") That would make it crystal clear when drugs would go off patent from the outset--without all the lawsuits.

Some solution is necessary. Otherwise, generic drug firms may not have any new blockbusters to challenge.

***Comment on Forbes' "Drug Patent Peril"***

The Hatch-Waxman Act had two primary objectives: streamlining the procedures for bringing generic drug products to the market AND compensating "pioneer" companies for loss of time in the lengthy drug approval process.

When a generic company wishes to bring a drug to market BEFORE the expiry of a patent on a drug of a pioneer company, it makes a so-called "paragraph IV" certification that its product does not infringe or that the patent is invalid. If the pioneering company brings a Hatch-Waxman litigation over the filing, the generic company must present a good faith defense of infringement and/or invalidity. If the generic company fails to present a credible defense, it can lose the case on summary judgment AND it can be liable for attorneys fees. This is just like any other legal case. Thus, there are protections against "frivolous patent challenges." Furthermore, wise investors would look into the underlying merit of any litigation, as they have done, for example, in the recent challenge to LIPITOR.

When a pioneering company loses a Hatch-Waxman challenge, as for example with SmithKline Beecham over nabumetone (RELAFEN), there are usually very good reasons why they lose. With nabumetone, the chemical compound nabumetone already existed in the chemical literature BEFORE Beecham filed for a US patent on its composition of matter, and Beecham even knew about this prior art. Thus, it was foreseeable that the '639 patent would be found both invalid and unenforceable. In the particular case of nabumetone, there were later law suits by affinity parties who felt that they had paid too much for something in the public domain. A good investor would be able to see these issues coming down the line.

The Forbes article is notable for what it failed to say, sort of a variant of the legal concept of a "negative pregnant."

Forbes did not mention that pioneer drug manufacturers have
abused the original Hatch-Waxman Act by filing inconsequential patents just before their original patents expired in order to prevent competition from generics. Forbes did not mention that several recent drugs are just enantiomers of earlier discovered racemates, for which drug research costs are well below their proposed figure. Forbes did not mention that pioneer
manufacturers also have entered into competition-stifling
agreements, cutting deals with the first generic manufacturer to exploit a loophole under the Hatch-Waxman Act and effectively keep generic manufacturers off the market until (after)the expiry of the patent.

Forbes problem --If investors are treating unlikely patent upsets as if they were foregone conclusions, the stocks could be undervalued-- concerns lack of knowledge by investors, not problems with the Hatch-Waxman Act.

The Forbes proposal --Offer drug companies a set period of exclusivity, without fear of patent challenges, after a drug is approved-- is a mixed metaphor. The period of patent exclusivity is measured from the date of filing with the Patent Office, while the approval of the drug is by the FDA. Offering the drug companies the length of the patent itself is pre-Hatch-Waxman. There are a lot of issues with Hatch-Waxman, including those currently pending before the Supreme Court in Merck v. Integra. Maybe Forbes should evaluate the big picture.


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