Patent Absurdity

Ending a drug company scam

"You do not have the right to keep generic drugs off the market for frivolous reasons," President George Bush declared on Monday as he announced his administration's new effort to bust up complicated legal schemes devised to do just that. Drug manufacturers have been using loopholes in the 1984 Hatch-Waxman Act—which is aimed at promoting cheaper alternatives to brand name pharmaceuticals whose patents have expired—to prevent competition.

It's no wonder that brand name drug makers are worried. In 1984, when the law was passed, only 19 percent of prescriptions were for generic drugs; today the figure is 47 percent. That means patients have saved a lot of money. Generic drugs are just as effective as their brand name equivalents, and typically cost one-third as much.

The Hatch-Waxman Act, which aims to reduce the cost of drug patents while maintaining their benefits, reflects the balance that the Framers tried to strike in Article 1, Section 8 of the U.S. Constitution. The Framers gave Congress the power "to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." This clause embodies a brilliant insight into the problem of rewarding people for the creation of what today is called intellectual property.

Tangible property—things like real estate, financial assets, and personal possessions—are by their nature scarce; they can be owned and used by only one or a few people at a time. Markets have no problem encouraging the creation of tangible items such as food, clothes, housing, and cars. Market prices tell producers how much to produce and allocate the output to consumers based on their ability and willingness to pay.

By contrast, there is no inherent scarcity in intellectual property. Any number of people can use the same blueprints for a dynamo, design for a car, formula for a drug, or script for a movie once it is created. In this case, market prices cannot simultaneously tell inventors how much to invent and allocate the new knowledge among consumers.

For centuries, inventors who wanted to profit from their inventions had to guard them as trade secrets. Such secrets were handed down through families or guilds, a practice that slowed the diffusion of new technologies and the rate of technological progress.

Patents are a solution to the problem of trade secrets. In essence, patents are a bribe to inventors: To obtain a 20-year government monopoly on the use of their inventions, they must disclose the details to the rest of us. Patents create an artificial scarcity so that markets can generate prices that both encourage production of new inventions and allocate them to consumers.

The patent system is also a parallel to the peer review publication system in science. Scientific discoverers must publish first and publish enough details so that others can reproduce their experiments. Their reward is the admiration of their colleagues and access to more research money. Similarly, inventors must file for a patent first and publish enough details so that others can reproduce their inventions. Their reward is fame and fortune.

After patents expire, the inventions are in the public domain, meaning that anyone may produce and sell them. Given the dizzying rate of technological progress we've seen in the last few decades, a 20-year monopoly seems to be about right to encourage investment in research and development.

But in recent years, major pharmaceutical companies have gotten greedy. Instead of being satisfied with their 20-year monopolies on new drugs, they have tried to prevent competing manufacturers from using their recipes to make cheaper versions of their drugs.

One approach is to apply for a secondary patent on drugs whose recipes are about to enter the public domain, citing a new formulation, a new pill form, or new packaging. When a generic drug maker tries to bring its version of a brand name drug to market, the original manufacturer sues under the Hatch-Waxman Act, which provides for an automatic 30-month delay while a court sorts out the "new" patent issues. Last summer the Federal Trade Commission (FTC) highlighted several cases in which pharmaceutical companies have brought serial lawsuits, prompting a succession of 30-month delays.

A particularly egregious example of how this works is the ploy used by the Anglo-Swedish pharmaceutical company AstraZeneca to thwart the introduction of generic versions of its blockbuster anti-heartburn medication Prilosec, the patent for which expired a year ago. AstraZeneca, attempting to extend its monopoly, filed a new patent claim describing how Prilosec could be sprinkled on applesauce for use by patients who have trouble swallowing pills. Under Food and Drug Administration (FDA) rules, this meant that would-be generic competitors would have to prove that their versions would behave the same way when sprinkled on applesauce. Overcoming this hurdle will require more testing and cause more delays, preventing patients who can swallow pills from getting cheaper drugs.

The result of such tactics, as President Bush noted Monday, is that "these delays have gone on, in some cases, for 37 months or 53 months or 65 months." Considering that every month that AstraZeneca can maintain its monopoly on Prilosec earns it $250 million, the urge to scam the system is irresistible.

A second loophole in the Hatch-Waxman Act gives the first company to notify the FDA that it intends to produce a particular generic drug 180 days of exclusive access to the market. This provision is meant to create an extra incentive to begin seeking FDA approval as early as possible, since a producer will typically earn most of its profits on a generic version in that 180-day period. But once a generic drug company has been awarded its 180-day exclusivity by the FDA, it can wait as long as it likes before putting its generic version in drugstores. Consequently, there have been cases in which brand name pharmaceutical companies have bought off generic manufacturers, giving them tens of millions of dollars to delay introduction of their competing products. The upshot is that the brand name company can still charge its monopoly prices, while the generic drug maker can make a tidy profit without producing anything. The only losers in such arrangements are patients.

The public and Congress are beginning to feel that they are being taken for a ride by the shortsighted shenanigans of the brand name pharmaceutical companies. This growing perception could well threaten the stability of the intellectual property system through which the drug companies have prospered.

President Bush is telling the brand name drug companies that a deal's a deal. For the last 18 years, those companies surely have made their investment decisions with the understanding that any patents they obtained would run for only 20 years. Trying to extend the monopolies breaks the original deal.

In response, Bush has proposed an FDA rule that would limit brand name drug companies' challenges to generic manufacturers to a single 30-month stay. He would also limit patent infringement claims to those that are central to the biological effectiveness of the drug. Bush's proposed rule doesn't address the problem of brand name companies that bribe generic manufacturers not to produce cheaper versions of their drugs, deals the FTC says should be illegal. Still, Bush's proposal is a step in the right direction that will protect not only the interests of consumers but the long-term interests of drug companies.