POLICYFORUM
INTELLECTUAL PROPERTY
Drug Patents at the Supreme Court
Arguments for paying generic drug makers
to abandon patent challenges may rest on
dubious assumptions.
C. Scott Hemphill and Bhaven Sampat*
U
.S. pharmaceutical patent policy is compared with drugs approved between 1985
poised for a major review by the U.S. and 1987 (4). Multiple patents with overlapSupreme Court. Later this month, the ping terms result in a longer nominal term of
Court will hear a case, Federal Trade Com- protection. In Europe, the trend is similar (1).
mission (FTC) v. Actavis, Inc., about a tactic alleged to be illegal by U.S. regulators, so- Secondary Patents
called “reverse payment” settlements of pat- Part of this growth reflects a rise in secondent litigation. A maker of a branded drug pays ary patents. These provide regulatory proa “generic” drug maker offering a competing, tection to ancillary aspects of drug innovaunbranded version of a drug, to abandon its tion—such as particular drug formulations
challenge of the branded firm’s patent. This and compositions—beyond the core, traditactic has also received regulatory scrutiny in tional protection, a patent on a novel active
Europe (1, 2). The Court’s ruling promises to ingredient. Secondary patents have become a
reset the innovation/access balance for drugs, focus of branded patenting and a major focus
whatever the result. We explain the stakes of for generics’ efforts to enter the market before
the case, and how settlements of “secondary” patent expiration. Such patents are viewed as
patents affect that balance.
less effective bars to generic entry, compared
In 1984, the U.S. Congress enacted the with active ingredient patents (5, 6). SecondHatch-Waxman Act to balance incentives ary patents are thought to be less likely to
for drug innovation against robust consumer meet legal standards of patent validity. Their
access. The act enables generics to challenge prevalence, notwithstanding this, reflects the
branded firm patents that they believe were fact that the Patent and Trademark Office
erroneously issued (invalid) or impertinent (PTO) generally provides only a limited
(not infringed), under the theory that such review of patent applications, which is driven
patents ought not deprive consumers of low- by resource constraints and incentives facing
priced generic drugs. Cheaper generic drugs examiners. It is also easier for generic firms
have saved purchasers billions of dollars per to avoid infringement by inventing around
year—an estimated $1 trillion in the United secondary patents, for example, by devising
States over the past decade, according to an alternative formulations. For these reasons,
industry-sponsored study—which makes generic firms’ challenges to these patents are
such drugs a powerful way to keep down likely to be on stronger footing, a point on
health-care costs (3).
which we provide empirical evidence below.
Under rules created by the act, a generic
Previous work suggests that secondary
must wait until patent expiration or assert patents, particularly late-expiring ones, are
that one or more branded patents are invalid disproportionately targeted for preexpiration
or not infringed. That challenge is an act of challenge by generic firms (7). Such chalpatent infringement, which often prompts the lenges serve a potentially valuable role, subbrand to file a lawsuit to prevent the generic’s jecting a questionable patent to a second look
product launch. The outcome of that suit— after issuance. This is important given the relincluding a settlement—determines when atively cursory review provided by the PTO.
the generic firm can enter the market.
Aside from reducing prices sooner, the secSince 1984, branded firms have substan- ond look may have a salutary effect on innotially stepped up their patenting efforts, in an vation, channeling innovative efforts toward
effort to postpone the loss
of exclusivity. In the United
0.23
0.52
0.25
States, patents per drug All patents (n = 277)
roughly doubled for the
Active ingredient
0.62
0.05
cohort of drugs approved
patents (n = 55)
between 2000 and 2002
Secondary
Columbia Law School; Health Policy
and Management, Columbia University, New York, NY 10032 USA.
*Corresponding author. bns3@
columbia.edu
1386
new chemical entities (which typically have
“strong” active ingredient patents) and away
from incremental improvements (which rely
more on secondary patents). That channeling
is valuable, provided that litigation tends to
validate more deserving innovations.
Reverse Payment Settlements: Disrupting the
Balance?
Beneficial effects of patent challenges can
be lost by postchallenge settlements. Consider AndroGel, the drug at issue in the
Supreme Court case. AndroGel is a testosterone replacement therapy manufactured by
Solvay. In 2003, two drug makers—one of
which was later bought by Actavis—sought
to introduce generic versions of the drug.
Although AndroGel is protected by a patent
that expires in 2021, the generics challenged
this patent as invalid, and not infringed by
the proposed generic products (8). After the
challenges, Solvay sued for patent infringement. In 2006, the parties settled. Under the
settlement, generic AndroGel will not be
available until 2015, compared with 2006 or
2007 if the patent had been found invalid or
not infringed.
The FTC, which brought suit to prohibit
the deal, alleges that Solvay made large payments to the generics, in violation of antitrust
law, to induce them to abandon patent challenges and to delay entry for 9 years. The FTC
argues that such deals, which are increasingly common (9), harm drug purchasers by
prolonging the period of monopoly profits
enjoyed by a branded firm. Such settlements
have yielded >$12 billion in estimated overcharges since 1993 (10).
Branded drug makers argue that a relaxed
approach to reverse payment settlements
is desirable because higher profits promote
essential research and development (R&D)
that lead to new drugs (11). In defense of
settlements, representatives of both branded and
generic firms have pointed
to outcomes of lawsuits
0.33
that do not settle. Often, the
branded firm wins (12, 13),
0.14
0.29
0.57
patents (n = 222)
which results in generic
entry at patent expiration.
0.0
0.2
0.4
0.6
0.8
1.0
In a case where the branded
Brand win
Generic win
Settlement
firm would probably win, it
Outcomes for all drugs first eligible for patent challenge between 2000 and 2008.
is argued, a settlement with
22 MARCH 2013 VOL 339 SCIENCE www.sciencemag.org
Published by AAAS
POLICYFORUM
a late entry date may reflect the expectations
of the parties (14). The more that settlements
pertain to cases the branded firm will probably
win, the less we ought to worry about reverse
payment settlement as disrupting the second
level of review provided by patent challenges
and litigation (15).
Settlement and Secondary Patents
These arguments are amenable to empirical
analysis (16). Previous empirical work (10)
collected public information about identified settlements with evidence of payment.
For each drug in this data set, we collected
information about which patents were litigated and settled. Each patent was coded,
on the basis of whether at least one claim
covered an active ingredient, by using the
method outlined in (7). If not, the patent was
coded secondary (17).
For the patents at issue in settled litigation, 89% were secondary patents (18). Far
from offering generic entry earlier than under
the presumed likely outcome, a brand win,
reverse payment settlements usually limit
early entry on patents that would otherwise
result in a generic firm win. There is therefore
serious concern that settlement unduly delays
generic entry, harming consumers and potentially distorting R&D incentives.
This conclusion rests on the premise that
active ingredient patents are more likely
than secondary patents to be found valid and
infringed. Some secondary patents are found
valid and infringed, and some active ingredient patents are not (19). To evaluate this
generalization, we collected information on
completed patent litigation on all drugs that
first became eligible for challenges between
2000 and 2008. The litigation covers 277
patents and 147 drugs. For each patent, we
determined the outcome of litigation at the
district/trial court level: brand win, generic
win, or settlement, and coded the patent as
described above.
Of the 48% of cases litigated to completion (not settlement), the branded firm nearly
always wins a suit asserting an active ingredient patent (92%), but usually loses asserting
secondary patents (32% wins) (see the chart).
This is consistent with the generalization that
active ingredient patents are indeed more
likely to be found valid and infringed.
For 52% of cases, settlement is the
result. Not all settlements in this data set
involve reverse payments; we use these data
only to assess win rates for different types
of patents when litigated to completion. As
win rates can be hard to interpret when there
is an option to settle (20), we examined litigation in an era when settlements were less
common, before 2006 (21). For this subset
(n = 25), all patents were litigated to completion. The branded firm won every dispute
involving active ingredient patents and lost
nearly all secondary patent litigation (14%
wins). These results are consistent with the
full sample; generic challengers are likely
to prevail on secondary patents if litigated
to completion.
We have shown that reverse payment settlements disproportionately focus on secondary patents, and that, consistent with previous qualitative characterizations of these
patents, secondary patent challenges are usually won by generics when litigated to completion. This challenges the argument that
reverse payment settlements should be tolerated because they are on patents that brands
are likely to win. Reverse payment settlements, focused on patents where the generic
likely would have prevailed, interrupt the
valuable patent-testing process when generic
drug makers challenge patents before expiration. Such settlements are most disruptive
in the very context, secondary patents, where
this testing is most important.
If the FTC wins its case, we can expect
fewer settlements with entry-delaying payments and a consequent increase in early consumer access to lower-priced generic drugs.
Reverse payment settlements on secondary
patents would be replaced by either procompetitive settlements or litigation, where we
would expect a high degree of generic success.
Some settlements with payments will survive,
because the FTC’s proposed rule allows drug
makers to justify a payment by proving that
it was made for unrelated services, not delay;
defensible in light of the avoided litigation
expense; or otherwise procompetitive.
If the Court endorses reverse payment settlements, we can expect delayed generic competition until the patent expires, even for drugs
whose patent protection is weak. There might
seem to be a benefit, with additional profits
enjoyed by branded firms fueling new innovation. But this argument can be applied to
any other conduct, even illegal, such as pricefixing, that raises branded profits.
Our results uncover a further critique,
that this bonus accrues mainly to secondary,
less important aspects of innovation. Thus,
reverse payment settlement (if permitted by
the court) can be expected to primarily benefit follow-on formulations and other forms
of innovation covered by secondary patents.
We doubt whether distortion in favor of secondary innovation is desirable, particularly
given concerns about the slowdown in production of new chemical entities. At a minimum, it is this selective subsidy that settle-
ment advocates must explain and defend,
not any subsidy to R&D generally.
References and Notes
1. European Commission, Pharmaceutical Sector Inquiry Final
Report (EC, Brussels, 2009).
2. J. Kanter, K. Thomas, New York Times, 1 February 2013,
p. B1.
3. IMS Health, An Economic Analysis of Generic Drug Usage
in the United States (IMS Health, Falls Church, VA, ed. 4,
2012).
4. C. S. Hemphill, B. N. Sampat, J. Empirical Legal Stud. 8,
613 (2011).
5. A. Gal, S. Nikhil, Predicting para IV: Generic companies
have the upper hand in formulation patent cases (Bernstein
Research, New York, 2007).
6. C. Correa, Guidelines for the examination of pharmaceutical patents (Working Paper, WHO, Geneva, 2007).
7. C. S. Hemphill, B. N. Sampat, J. Health Econ. 31, 327
(2012).
8. The contested patent does not cover the compound
testosterone or the synthesis of artificial testosterone,
the patent protection to which expired decades ago. The
patent covers particular formulations of testosterone.
9. FTC, Agreements filed with the FTC under the Medicare
Prescription Drug, Improvement, and Modernization Act of
2003: Overview of agreements filed in fiscal year 2012—A
report by the Bureau of Competition (FTC, Washington, DC,
2013).
10. C. S. Hemphill, Columbia Law Rev. 109, 629 (2009).
11. W. J. Tauzin, testimony before U.S. Senate Committee on
the Judiciary, 17 January 2007.
12. For example, settlement defenders point to a recent analysis (13), which suggests that branded firms win a majority
of cases. This study does not distinguish between patent
types.
13. RBC Capital Markets, Pharmaceuticals: Analyzing Litigation
Success Rates (RBC CM Research Publ., Toronto, 2010).
14. B. Dickey, J. Orszag, L. Tyson, Ann. Health Law 19, 367
(2010).
15. The FTC rejects special dispensation for settlements in
cases the branded firm is likely to win. In its view, a large
payment secures less competition than the branded firm
could expect by asserting the patent alone in litigation or
settlement. Whether the branded firm would likely win or
lose, a large payment disrupts the alignment of interest in
early entry ordinarily shared by the generic firm and drug
purchasers—the generic firm is compensated for accepting
the delay, but purchasers are not.
16. We evaluate defenses of reverse payment settlements that
rely on assumptions about brand and generic win rates,
also the implications of settlements on innovation incentives. Settlement advocates offer other defenses, including
that a payment is sometimes necessary to induce a procompetitive settlement and thereby economize on litigation
costs. Assessing these is beyond the scope of this paper.
17. The method reflected a strict approach to active ingredient
patents: A patent claim covering a particular enantiomer,
polymorph, or salt did not qualify.
18. This calculation omits three patents where the settlement
was a variant on the standard reverse payment agreement
(100% secondary) and five patents where the settlement
occurred after a district court judgment (60%).
19. A. Gal et al., How watertight are composition-of-matter
patents? Judge rules Baraclude’s CoM patent is invalid
(Bernstein Research, New York, 2013).
20. G. Priest, B. Klein, J. Legal Stud. 13, 1 (1984).
21. In 2005, a U.S. appeals court decision, FTC v. ScheringPlough Corp., signaled increased judicial tolerance for
reverse-payment settlements.
Acknowledgments: A grant from the Public Health Law
program of the Robert Wood Johnson Foundation supported
this research. We thank K. Shadlen for comments.
Supplementary Materials
www.sciencemag.org/cgi/content/full/339/6126/1386/DC1
www.sciencemag.org SCIENCE VOL 339 22 MARCH 2013
Published by AAAS
10.1126/science.1235857
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