Hatch-Waxman Drug Patent Law Meets Middle Age – and Taxpayers Can Celebrate

Few other public policy debates seem as intense and unremitting than how best to ensure access to affordable prescription medications. In Washington and in state capitals, politicians of both parties are offering a variety of proposals that they claim will keep drug prices down and maintain research into new cures, among them allowing re-importation of pharmaceuticals from abroad, linking government reimbursements for certain Medicare patients to an international index, or even requiring price-disclosure in advertising. These types of command-and-control schemes bode ill for taxpayers, because they undermine a uniquely American legal and regulatory framework that not only supports breakthroughs in pharmaceutical research but also widespread adoption of less expensive generics. They also overlook the importance of constantly evaluating the principles behind a 1984 law that made so much of this framework possible: the landmark “Drug Price Competition and Patent Term Restoration Act of 1984”, authored by Senator Orrin Hatch (R-UT) and Representative Henry Waxman (D-CA).

Costly innovator drugs have been shown to reduce other expenses in government health programs over the long term, such as surgeries or long hospital stays.  On the other hand, generics deliver massive savings over the nearer term to those same programs as well. No other country in the world can boast of such a successful policy environment that both encourages discoveries to reach patients (nearly 90 percent of newly launched drugs worldwide are available here) and controls costs (over 90 percent of prescriptions written in the U.S. are for generics). And the Hatch-Waxman law has had a great deal to do with this success. 

As Hatch-Waxman approaches its 35thyear, now is a good time to review why it was written in the first place. An NTU publication from 2002 entitled “Stealing Innovation” provides historical context. The authors Bill Orzechowski and Robert C. Walker observed:

In other sectors, new inventions are often protected through alternative means, such as trade secrets, ‘being first,’ and adaptation obstacles for competitors. In the aircraft industry, for example, new products are ‘protected by the inherent difficulty and high cost of reverse-engineering complex, multi-component systems. In the semiconductor industry, where imitation costs are low, returns to new technology are garnered through quick market penetration supported by a steep learning curve.’[i]

The problem for innovators in the pharmaceutical industry is that copiers find the learning curve to be shallow and the fixed costs to be low (since they paid for none of the initial development).… Economist Edwin Mansfield found that the drug industry relied on patents more than any other sector. His survey determined that without patent protection, 65 percent of pharmaceutical innovations would not have been introduced, a level more than twice as high as the second most patent-sensitive industry (chemicals).[ii]

Hatch-Waxman was written not only with these challenges in mind, but also to compensate for the government’s own regulatory roadblocks. Orzechowski and Walker pointed out that “[b]efore the FDA’s powers over drug development were enhanced in 1962, the average drug faced a mere 7 months of regulatory scrutiny prior to approval. As layers have been added to the process, the time to approval has steadily grown, hitting 8.9 years for the period 1990-1996.”[iii]Today, despite very recent accelerations in the process, the average total approval time from application with the FDA to actual prescriptions made available is now more than 10 years

Rather than attempt to legislate massive changes to the FDA’s approval rules, Hatch-Waxman strengthened pharmaceutical patent protections to offset the normally useful patent life that is lost by government-mandated delays in approving an application, completing trials, etc. But according to the authors of the NTU analysis, the law also 

provided a great boost to the generic drug industry. Prior to the 1984 law, generic companies would have to go through expensive clinical testing to get clearance for their drugs. The law greatly reduced these costs by enabling generic firms to show that their drug is simply ‘bioequivalent’ to the innovator drug, i.e., the active ingredient is absorbed by the body at about the same rate and extent.

Hatch-Waxman likewise broke with established patent law by allowing generic companies to obtain the proprietary data of the innovator firm’s drug after 5 years of market life. This special Abbreviated New Drug Approval (ANDA) process allows a generic drug company to launch its copy the day the patent expires. Prior to the ANDA process, generics appeared on average about 3 years after patent expiration.[iv]

These generic-friendly provisions exist for no other industry. U.S. patent law prevents firms from makingusing, or selling a patented product. As its provisions clearly state, Hatch-Waxman eliminates the first two of these restrictions for pharmaceuticals…

To be certain, the past 35 years of Hatch-Waxman have not been without controversy or tension among competing policy priorities. Generic companies have accused brand manufacturers of slowing the ANDA process with legalistic maneuverings to extend patent protections far beyond what the architects of Hatch-Waxman intended. For their part, brand companies have accused generic manufacturers of attempting to exploit multiple patent-challenge remedies not envisioned by the 1984 law. It is the latter concern that recently gave impetus to the “Hatch-Waxman Integrity Act” sponsored by Senator Thom Tillis (R-NC) and Rep. Bill Flores (R-TX). Their bill would require a generic company challenging a patent to choose one of two paths: the traditional Hatch-Waxman mechanisms that include ANDA or a streamlined process called inter partesreview, in which litigation is cheaper and faster but without ANDA’s regulatory advantages. The sponsors of the bill, a previous version of which was authored by Senator Hatch himself, contend that generic companies should get only one bite at the patent challenge process. Generic firms, however, also point to reform proposals that would keep the Hatch-Waxman playing field level, among them repeal of a federal Medicaid pricing penalty that can effectively compel them to give away their products at a loss.

The battles over intellectual property in drug development are being waged on many fronts, including not only the Tillis-Flores bill but also trade pacts such as the U.S. Mexico Canada Agreement intended to replace NAFTA. Regardless of their stance on any one bill, rule, or proposed trade agreement, public officials would all do well to remember the elegant balance in pharmaceutical development that Hatch-Waxman helped to create, for the ultimate benefit of taxpayers: no other country on earth has nurtured a more hospitable climate of intermediate and long-term health cost savings, all while improving lives everywhere. Proposals to keep nurturing this environment, which are inevitable as technologies emerge and experience accumulates, must be considered holistically and fairly. 

[i]Nelson, Richard R. "Institutions Supporting Technical Advance in Industry." The American Economic Review 76, no. 2 (1986): 186-89. http://www.jstor.org/stable/1818761.

[ii]For more information see, for example, Mansfield E. “Patents and Innovation: An Empirical Study.” Management Sci 1986: 32:2; and Iain Cockburn and Genia Long, “The Importance of Patents to Innovation: Updated Cross-industry Comparisons with Biopharmaceuticals,” Expert Opinion on Therapeutic Patents, Vol. 25, 2015, Issue 7, https://www.tandfonline.com/doi/full/10.1517/13543776.2015.1040762.

[iii]Tabarrok, Alexander. “Assessing the FDA via the Anomaly of Off-Label Drug Prescribing,” The Independent Review, Summer 2000 (Vol. V, No. 1), p. 5, https://www.independent.org/pdf/tir/tir_05_1_tabarrok.pdf

[iv]U.S. Congressional Budget Office (CBO), How Increased Competition from Generic Drugs Has Affected Prices and Returns in the Pharmaceutical Industry, (Washington, DC: Congressional Budget Office, July 1998), pp 38-43, https://www.cbo.gov/publication/10938