Innovation is doomed --- pressure to reduce prices, increased generic competition and stringent development rules means small companies can’t keep up.

Joanna Shepherd, August 28 2018, “CONSOLIDATION AND INNOVATION IN THE PHARMACEUTICAL INDUSTRY: THE ROLE OF MERGERS AND ACQUISITIONS IN THE CURRENT INNOVATION ECOSYSTEM,” Journal of Healthcare Law and Policy, https://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=1356&context=jhclp

Third, while facing increased competition from generics and pressure to reduce prices from PBMs, drug companies have also experienced significant increases in both the costs of drug development and the risks of product failures. Since the 1962 Amendments to the Federal Food, Drug, and Cosmetic Act, the FDA has continued to increase the requirements for new drug approvals. For example, whereas clinical trials in the 1970s typically enrolled only 2,000 patients, trials in the 1990s regularly enrolled over 5,000 patients.31 Similarly, the costs of recruiting patients, the length of the clinical trial period, and the number and complexity of clinical tests used in clinical trials have increased over time.32 These more stringent requirements, along with the more complex science associated with specialized medications, have significantly increased the costs of drug development and FDA approval and in turn lengthened the time to market, driving up the cost of investment. The most current estimates indicate that it now costs approximately $2.6 billion to develop and bring each new drug to market.33 Those costs were estimated to be only $179 million in the 1970s, 34 $413 million in the 1980s,35 and $900 million in the 1990s and early 2000s.36 In contrast, it costs generic manufacturers only one to two million dollars to bring a drug to market.37 Moreover, only about ten percent of brand drugs that begin clinical trials are eventually approved by the FDA. The most recent study to track FDA approval rates found that the approval rate varied by trial phase: phase I had a 64.5% success rate, phase II had a 32.4% success rate, phase III had a 60.1% success rate, and the FDA approved 83.2% of applications that passed phase III.38 Ultimately, of 100 drugs that begin Phase I trials, only ten drugs will eventually be approved.39 Thus, despite dramatic increases in research and development (R&D) spending, drug approval rates have increased little in recent decades.40 Even after FDA approval, pharmaceutical manufacturers increasingly face patent challenges that reduce the likelihood that drugs will achieve commercial success. Hatch-Waxman actively incentivizes generic companies to challenge the validity of brand-name patents by creating a pathway for such challenges and by offering a lucrative incentive to the first generic manufacturer that files a challenge claiming that the brand patent is either invalid or will not be infringed by the new generic (known as a Paragraph IV challenge).41 If the generic company wins or settles the patent litigation, it receives a 180-day exclusivity period during which the FDA will not approve any other generic versions of the drug, a period in which the first generic can earn substantial profits.42 Paragraph IV challenges have exploded in recent years; whereas only 9 percent of drugs facing generic entry in 1995 were challenged, 81 percent of drugs facing generic entry in 2012 were challenged.43 Moreover, Paragraph IV challenges are occurring earlier in the life of brand drugs. Drugs entering the market as generics in 1995 faced their first challenge 18.7 years after original launch.44 By comparison, drugs entering the market as generics in 2012 saw only 6.9 years between market launch and the first Paragraph IV challenge.45 These challenges threaten a drug’s commercial success and cost pharmaceutical companies significant legal fees.46 Moreover, the Leahy-Smith America Invents Act in 2012 gave generics a new administrative venue to challenge patents, the inter partes review (IPR).47 In contrast to Hatch-Waxman litigation that occurs in federal district court, IPR proceedings culminate in a trial before the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office. IPR was expected to offer a more efficient and less costly alternative to Hatch-Waxman’s litigation pathway, but important differences between PTAB trials and district court litigation create significant advantages for generic patent challengers.48 The PTAB applies a lower standard of proof for invalidity than do district courts in Hatch-Waxman litigation.49 It is also easier to meet the standard50 of proof in a PTAB trial because there is a more lenient claim construction standard and a substantially limited ability to amend patent claims.51 Moreover, on appeal, PTAB decisions in IPR proceedings are given more deference than district court decisions.52 Finally, while patent challengers in district court must establish sufficient Article III standing, IPR proceedings do not have a standing requirement, allowing any member of the public other than the patent owner to initiate an IPR challenge.53 These advantages for patent challengers have led to significantly different patent invalidation rates in PTAB trials compared to rates in district court litigation. 54 Whereas patents challenged in district court are invalidated in less than 40%55 of cases, IPRs have resulted in patent invalidations in a shocking 70% of cases. 56 The intensifying competition from generics, expanding power of PBMs, escalating R&D costs, and increasing risk of patent challenges mean that many new pharmaceuticals will never attain commercial success. Even for the 10 percent of drugs that receive FDA approval, only 20 percent will ever earn enough revenue to cover the growing R&D costs. 57 Moreover, the likelihood that a drug will become profitable has decreased over time as both the risk of failure and the costs of development have increased.58 The average lifetime revenues for new drugs are lower now than at any point in the last 25 years.59 These shocks have put many pharmaceutical firms under significant economic stress, motivating consolidation as a means to streamline costs and provide new sources of revenue.