Obama’s Generic Proposal Is No Prescription for Health Savings

President Obama has been taking shots at the pharmaceutical industry since announcing his deficit reduction plan in a speech last Wednesday (April 13). Despite relying on major drug company support for enacting ObamaCare last year, the President has lately been bashing the industry for high drug prices. He now insists we can reduce health care costs by billions of dollars over the next decade by speeding up the availability of generic drugs and favoring them over more expensive brand name medicines.

Ironically, the plan would threaten brand and generic firms alike, and the proposals would actually result in higher health care costs over the long run.

One initiative would crack down on litigation settlements in which brand manufacturers pay potential generic competitors to drop patent challenges. Critics, including Obama’s Federal Trade Commission, claim they are anticompetitive and condemn these settlements as “pay-for-delay” because successful patent challenges would get generics to market sooner.

The Administration claims that banning settlements could save $9 billion in federal health spending over 10 years. In practice, though, a ban would actually delay the introduction of more generic drugs than it would accelerate, resulting in higher drug prices.

Current law provides incentives for generic producers to challenge potentially weak drug patents in court. But when faced with the uncertainty of patent litigation, brand manufacturers sometimes offer to settle the lawsuits by paying the challengers to drop the litigation. They also agree to let the generics on the market a few years before the patents in question expire. Furthermore, the FTC already has authority under antitrust laws to block settlements where evidence indicates consumers would be harmed by higher prices. The vast majority of settlements are pro-competitive, however, because most of the challenged patents would be upheld in court. After all, every one of them was already deemed valid by the U.S. Patent and Trademark Office, making them difficult to overturn.

More than half of the drug patent cases that make it all the way to a court decision fail. And there is no evidence that settled cases would have been more likely to result in patent invalidation. In the handful of cases where the FTC succeeded in blocking a settlement and forcing the litigation to go forward, courts more often upheld the patents than ruled them invalid.

There is one important difference between cases that go to trial and those that settle, however. Settlements always result in a generic product reaching the market before the patent’s expiration. Consequently, banning settlements altogether and forcing these cases into court would prolong the amount of time the typical brand drug enjoys a monopoly with no generic competition.

That’s why federal courts have rejected most of the FTC’s efforts to block these settlements. In one decision, U.S. Seventh Circuit Judge Richard Posner wrote that “a ban on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger’s settlement options.” He suggested that it was the proposed ban, not settlements, “that might well be thought anticompetitive.”

Even the Supreme Court has rejected several opportunities to rule these settlements anticompetitive, declining to hear one such challenge as recently as last month.

The rationale for banning reverse payment settlements seems to be that if both the brand and generic firms are benefiting, someone must be getting screwed. But if the FTC and President Obama get their way, that someone would be you, along with your fellow taxpayers and consumers. The same could be said for Obama’s other proposal, a reduction in the market exclusivity period for brand name biotech drugs from 12 years to seven.

As part of the ObamaCare legislation enacted last year, Congress created a mechanism for the Food and Drug Administration to approve generic versions of specialized biotech medicines called biologics. In recognition that biologics are far more costly to develop than conventional drugs, and that it takes innovators longer to recoup their research expenses, the law gives brand biotechs a 12-year exclusive marketing period before the FDA may approve generic competitors.

Now, just one year after that bargain was struck by Congress, Obama wants to upset the careful balance between quicker access on the one hand and incentives for innovation on the other in order to exploit the promise of cheaper generics. But here too, alleged savings are more theoretical than real.

White House officials are claiming an expected $2.3 billion in savings over the coming decade from shortening the exclusivity period. But in the long run, making it harder for biotechnology firms to recover their massive investments in new treatment options could jeopardize patient care and lead to higher health care costs by cutting off an important source of medical innovation.

The approval pathway for generic biologics, if implemented appropriately, could eventually save taxpayers billions of dollars. But all the projected savings are back-loaded in the ten-year budget window because the FDA is still several years away from implementing the legislation and turning the legal language into a practical route to generic approval. And much of the savings typically associated with generic knock-offs could be eroded if FDA requires excessive clinical testing for copycat biologics no matter how quickly they get to market.

The potential risk to one of America’s most innovative industries seems a high price to pay for a proposal that could not possibly help to reduce federal spending in the near term. Taxpayers and patients would be better served by expediting the FDA’s implementation and streamlining the potentially burdensome hurdles for generic approval that are built into the legislation.

President Obama recently wrote that “vibrant entrepreneurialism is the key to our continued global leadership and the success of our people.” The added burdens on brand and generic medicines are no prescription for a healthy economy.