(Bloomberg) -- The Drug Price Competition and Patent Term Restoration Act — better known as Hatch-Waxman — was signed into law by President Ronald Reagan 34 years ago. Sponsored by Senator Orrin Hatch of Utah, a devout conservative, and Representative Henry Waxman of California, a flaming liberal, its primary purpose was to make drugs more affordable by kick-starting the relatively new generic drug industry.
This law made it much easier to bring generic drugs to the market — for instance, the kind of clinical testing required to get a new drug approved by the Food and Drug Administration was largely eliminated for generics. To supply an extra incentive, the first manufacturer to have a particular drug ready would get the market to itself for 180 days before all the other companies came out with their generic version.
To mollify the big pharmaceutical companies, Hatch-Waxman extended the patent protection for branded drugs for up to 14 years. Once the patent expired, the pharmaceutical company was supposed to accept the reality that it would have to compete with generic companies.
Hatch-Waxman worked exactly the way it was supposed to for a long time. For many high-priced drugs, once the generics flooded the market, the price went down by as much as 90 percent. Statins are a good example: The price of generic Lipitor is about $19 for 90 tablets, while the price of branded Lipitor is $165 for 30 tablets. The market share for the branded drug often dropped by 75 percent or more.
Over time, Big Pharma learned how to game the law. As the patent for the original drug approached expiration, companies added wrinkles — a new coating for the pill, a time-release version, and so on — that they then patented. If the patents were approved, and they usually were, the exclusivity clock would start ticking all over again.
In other cases, they would pay the generic company to keep its version of the drug off the market for a few more years. Or they would tie the generic company up in court, alleging infringement. Meanwhile, the generic companies realized that with drugs that had a small patient population, they could issue a generic version and still charge high prices because other companies were unlikely to enter the market.
The gaming of Hatch-Waxman is one of the two most important reasons why drug prices are so out of control. The other reason is that drug company executives — like executives in every other industries — began kneeling at the altar of “shareholder value.” And the easiest way to boost profits, and thus the stock price, was to raise prices relentlessly.
The rheumatoid arthritis drug Humira is a perfect example of what has happened. It is the biggest selling drug in the world, with its manufacturer AbbVie Inc. estimating that it will bring in over $16 billion in worldwide revenue in 2018. It can cost up to $50,000 a year for a patient who suffers from the disease. It has no generic competition. Yet its original patent expired in 2016.
In the years leading up to 2016, AbbVie, which gets two-thirds of its revenue from that one drug, surrounded the drug with 100 new patents. “A patent fortress” it’s called — one so impenetrable that no generic company will ever be able to break it down.
On Friday afternoon, President Donald Trump is expected to lay out his ideas for lowering drug prices. Parts of his plan, as laid out in previews of his speech, would be mildly helpful, such as forcing drug companies to be more transparent about their prices. Parts are absolutely daft, like his expected call for other countries to pay more for drugs so Americans can pay less. (How exactly is that going to work?)
And at least one part of his plan — the part he promised when he was campaigning — has been sadly removed: allowing Medicare to negotiate directly with the drug companies over pricing. Given that Medicare spends over $400 billion on drugs, it would have tremendous negotiating power, that could yield billions in savings. Of course, that is exactly what the Republicans are afraid of, and why they persuaded the president to take it off the table.
But the single best way to get drug prices under control would be to put the teeth back into Hatch-Waxman. It would not be a particularly difficult thing to do. First, shorten the patent exclusivity period to 10 years. (Drug companies say they need the longer time to recoup their research and development costs, but the truth is most companies spend more on marketing than R&D.)
Second, outlaw the practice of paying companies to keep generics off the market and similar forms of gamesmanship. Third — and most important of all — don’t allow companies to extend the period of exclusivity beyond the original 10 years.
If a company wants to patent a new pill coating, fine. But that patent can no longer be part of a patent fortress keeping generics out of the market. Once the 10 years are up on the patent for the original compound, generic versions of the drug can come onto the market. Period. Indeed, to save a little more money, I would eliminate the 180-day window companies now get if they are the first to develop a generic version. Generic companies like Teva Pharmaceutical Industries and Mylan NV have grown into major corporations; they don’t need that incentive anymore.
Would this solve the drug-pricing problem entirely? No. The temptation to boost profits by raising prices will remain strong. But it could help enormously by giving new life to generic competition. For the first 20 years of its life, Hatch-Waxman did a remarkable job of keeping drug prices under control. With a few tweaks, it could do so again.
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