Recent Hatch-Waxman Scholarship Suggests Patent Settlement and Product Hopping Create a “Lethal Combination”; Another Article Proposes a “Smith Barney Approach” to 180-Day Exclusivity

March 15, 2011

By Kurt R. Karst –      

Each year, thousands – indeed, tens of thousands – of pages are written concerning the Hatch-Waxman Amendments.  As we were clearing out our in-box this past weekend, we came across two scholarly articles from some Hatch-Waxman “regulars” that we think merit a read-through by our FDA Law Blog readers (not that we agree or disagree with the views expressed in the articles). 

The first article – published in the University of Florida Law Review – comes to us from Michael A. Carrier, a professor at the Rutgers University School of Law-Camden, and is titled “A Real-World Analysis of Pharmaceutical Settlements: The Missing Dimension of Product Hopping.”  Professor Carrier, an opponent of patent settlement agreements (or what opponents call “pay-for-delay” or “reverse payment” agreements), explores the intersection of patent settlement agreements and so-called “product hopping.”  Federal Trade Commission (“FTC”) Commissioner Rosch recently defined “product hopping” in a speech (pages 14-17) as the practice of “introducing new patented products with minor or no substantive improvements in the hopes of preventing substitution to lower-priced generics.”  One example of product hopping, also known as “evergreening,” “line extension,” or “product switching,”  is when a company switches the market, usually around the time generic competition is expected, from one dosage form to another.

According to Professor Carrier, patent settlement agreements and product hopping create a “lethal combination” that “erects a significant roadblock to pharmaceutical competition.”  Specifically:

For a settlement that prevents patent challenges for a period of time – even if less than the duration of the patent – gives the brand firm the space in which it can comfortably switch the market to the new product.  By the time, years later, when the generic enters, the market will have already been switched to the new product.  As a result, the generic firm, which can no longer take advantage of state drug product selection laws, fails to provide meaningful competition.

Although we are certainly not antitrust or patent settlement experts, it seems to us that one way generic drug companies can and do attempt to shield themselves from the potential effects of product hopping (or at least dampen its potential effects) is to include in agreements provisions that create a trigger to early marketing based on some market erosion target. 

The second article that caught our eye is a working paper co-authored by Columbia Law School Professor C. Scott Hemphill and Stanford Law School Professor Mark A. Lemley.  Titled “Earning Exclusivity: Generic Drug Incentives and the Hatch-Waxman Act,” the article, like the Carrier article, discusses patent settlement agreements and product hopping, but suggests an  overhaul to the 180-day generic drug marketing exclusivity incentive created by the Hatch-Waxman Amendments (and significantly modified by the Medicare Modernization Act) that reminded us of those 1980’s Smith Barney commercials with the legendary John Houseman – “We make money the old-fashioned way.  We earn it.”

According to Professors Hemphill and Lemley, the original intent of creating the 180-day exclusivity incentive – i.e., to encourage generic drug companies “to challenge weak patents and enter the market earlier, lowering prices and benefiting consumers” – has been “hijacked.”  Today, they argue, 180-day exclusivity “is a tool that encourages weak challenges to patents in the hopes of prompting settlement, and leads generic firms to settle even strong challenges for delayed entry in exchange for keeping their exclusivity.” 

As an alternative that harkens back to and is inspired by FDA’s old “successful defense” prerequisite to 180-day exclusivity that the D.C. Circuit struck down in the late 1990s finding it inconsistent with the statute (see e.g., Mova Pharm. Corp. v. Shalala, 140 F.3d 1060 (D.C. Cir. 1998)), Professors Hemphill and Lemley argue that “first-filing generic drug companies should be entitled to 180 days of exclusivity only if they successfully defeat the patent owner, for example, by invalidating the patent or by proving that they did not infringe that patent.”   Under their approach, “if the generic firm files a Paragraph IV certification, is sued, and wins the suit, it receives the [180-day exclusivity] bounty.  If the generic firm instead loses the suit, it loses the exclusivity.  Nor can it receive the bounty if it settles for delayed entry.”  The professors “suggest that this change could be implemented without any legislative action, for example, by the FDA in interpreting the Hatch-Waxman Act, and by the [FTC] in its enforcement of the FTC Act.” 

The Hemphill/Lemley earned exclusivity proposal is interesting, and if seriously considered, will certainly garner some criticism from those who think the current system created by the MMA is adequate with some tweaks, such as addressing the circumstances under which 180-day exclusivity is forfeited if an ANDA sponsor fails to obtain timely tentative approval.