Specifcally, it threatens competition in the pharmaceutical industry---That kills brand-name innovation

Inter partes review (IPR), a new pathway for challenging patents, is threatening the nature of competition in the pharmaceutical industry, drug innovation, and consumers’ access to life-improving drugs. Since its creation under the America Invents Act (AIA) in 2012,[1] this new administrative proceeding has produced noticeably anti-patent results. Whereas patents challenged in district court are invalidated in less than 40% of cases,[2] and patents challenged in the administrative predecessors of IPR were invalidated in less than one-third of cases, IPRs have resulted in patent invalidations in a shocking 70% of cases.[3] Moreover, the IPR process has been exploited by entities that would never be granted standing in traditional patent litigation—hedge funds betting against a company, then filing an IPR challenge in hopes of crashing the stock and profiting from the bet.[4]

Unfortunately, in recent decisions, courts have recognized the anti-patentee bias of IPR, yet punted to Congress the job of amending the provisions. In Cuozzo Speed Technologies v. Lee (Cuozzo) in June 2016, the U.S. Supreme Court found that an anti-patentee claim construction standard in IPR “increases the possibility that the examiner will find the claim too broad (and deny it),”[5] yet concluded that only Congress could mandate a specific standard.[6] Similarly, in Merck & Cie v. Gnosis in April 2016, the U.S. Court of Appeals for the Federal Circuit determined that an anti-patentee standard of review for IPR decisions “is seemingly inconsistent with the purpose and content of the AIA,”[7] yet decided that “the question is one for Congress.”[8] On the standing issue, the Patent Trial and Appeal Board (PTAB) concluded in 2015 that, under the AIA language created by Congress, hedge funds cannot be excluded from IPR proceedings.[9]

Congress generally intended IPR to improve patent quality by providing a more efficient pathway to challenge patents of dubious quality. Because IPR is available for patents in any industry, for pharmaceutical patents, IPR offers an alternative to the litigation pathway that Congress specifically created over three decades ago in the Hatch-Waxman Act. With Hatch-Waxman, Congress sought to achieve a delicate balance between stimulating innovation from brand companies who hold patents and facilitating market entry from generic companies who challenge the patents. By all accounts, Hatch-Waxman has successfully achieved these goals. Generic drugs now account for 89% of drugs dispensed,[10] yet brand companies still invest significantly in R&D, which accounts for over 90% of the spending on the clinical trials necessary to bring new drugs to market.[11]

Unfortunately, IPR proceedings that culminate in a PTAB trial differ significantly from Hatch-Waxman litigation that occurs in federal district court. The PTAB applies a lower standard of proof for invalidity than do district courts in Hatch-Waxman litigation. It is also easier to meet the standard of proof in a PTAB trial because there is a more lenient claim construction standard and a substantially limited ability to amend patent claims. Moreover, on appeal, PTAB decisions in IPR proceedings are given more deference than lower district court decisions. 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. These inconsistencies have led to the significantly different patent invalidation rates in PTAB trials compared to rates in district court litigation.

It is imperative that Congress reduce the disparities between IPR proceedings and Hatch-Waxman litigation. The high patent invalidation rate in IPR proceedings creates significant uncertainty in pharmaceutical intellectual property rights. Uncertain patent rights will, in turn, lead to less innovation in the pharmaceutical industry. Drug companies will not spend the billions of dollars it typically costs to bring a new drug to market when they cannot be certain if the patents for that drug can withstand IPR proceedings that are clearly stacked against them. And if IPR causes drug innovation to decline, a significant body of research predicts that consumers’ health outcomes will suffer as a result.

This Article proceeds as follows. Section II begins with a general discussion of the pharmaceutical market, explaining the nature of competition between brand and generic drugs and the importance of brand drug innovation. Section III explains the regulatory frameworks that Congress established to balance the interests of brand patent holders with generic patent challengers, focusing on the Hatch-Waxman Act and the Biologics Price Competition and Innovation Act. Section IV describes administrative pathways available for patent challenges; it discusses both IPR’s predecessors and the changes introduced with IPR under the AIA. Section V explains the critical differences between district court litigation in Hatch-Waxman litigation and IPR proceedings that give rise to the pro-challenger bias in IPR. Section VI proposes several reforms that Congress could institute to align IPR with Hatch-Waxman and restore the delicate balance between stimulating innovation and encouraging generic entry. Section VII concludes the Article.

I. Understanding the Pharmaceutical Market

A. The Nature of Competition Between Brand and Generic Drugs

Over the past several decades, the nature of competition in the pharmaceutical industry and the relative market shares of brand and generic companies have changed dramatically. The generic industry exploded after the 1984 Hatch-Waxman Act—discussed in greater detail in Section III—created various regulatory shortcuts and litigation incentives to spur the introduction of generic alternatives to brand name drugs. The generic industry was further assisted by drug substitution laws in every state that allowed, or sometimes required, pharmacists to automatically substitute a generic equivalent drug when a patient presents a prescription for a brand drug. These regulatory changes have allowed generics to capture significant market share from brand companies. As shown in Figure 1, generics’ market share has steadily increased from only 19% of drugs dispensed in 1984 to nearly 89% in 2015.

Shepherd Figure 1

Figure 1: Growth in Generics’ Share of Pharmaceutical Market[12]

The success of generic drugs can be attributed entirely to their lower prices. When a brand drug’s patent expires, generics initially enter the market at a price that is, on average, 50% less than their branded counterpart.[13] As months pass and more generics enter the market, the generic price eventually drops to 80% of the pre-expiry brand drug’s price. Generic companies are able to charge these lower prices while earning substantial profits because they face significantly lower costs than brand drug companies. In contrast to brand companies that spend an average of $2.6 billion on R&D and the FDA approval process, bringing a new generic drug to market costs only $1 to $2 million.[14] In addition, whereas brand companies spend millions of dollars marketing their drugs to physicians and patients,[15] generic companies typically spend very little on marketing. Because generics are automatically substituted for brand prescriptions at the pharmacy, generics can free-ride on the marketing efforts of brand companies and rely on automatic substitution laws for a large chunk of their sales. With these significantly lower costs, generic companies can afford to charge a lower price for their drugs and still earn impressive profits.

A significant number of existing brand drug customers switch to the lower-priced generics as they enter the market, swiftly eroding brand drugs’ market share. As shown in Figure 2, upon market entry, generics now routinely capture over 70% of the brand drug’s market share within only three months of generic entry. In contrast, as recently as 1999, generics captured less than 40% of the market within three months. Within twelve months, generics now capture over 80% of the brand drug’s market share, whereas in 1999, they only captured slightly over 50%.

Shepherd Figure 2

Figure 2: Generic Erosion of Brand Drug Market Share[16]

The expansion of the generic industry has produced significant savings for consumers; in the last decade alone, generic drugs have saved the healthcare system nearly $1.7 trillion dollars.[17] However, it has also raised concerns about brand companies’ ability to develop innovative new drugs. Brand drugs experience a significant drop in sales after generics enter the market and erode brand market share. For instance, in 1984 new brand drugs experienced a 12% decrease in net sales as a result of generic entry (a decrease which took place during the first decade after the enactment of the Hatch-Waxman Act).[18] And the expansion of generic drugs since then has further reduced brand sales. Brand drugs’ average lifetime sales are now lower than they were in the early 1990s.[19] In fact, just two in ten brand drugs now earn profits sufficient to cover the average R&D costs required to bring new drugs to market.[20] Moreover, between 2012 and 2018, it is estimated that brand drug companies will lose almost $150 billion in sales because of patent expirations and generic entry.[21]

B. The Importance of Brand Drug Innovation

Unfortunately, reductions in brand drugs’ profitability limits companies’ ability and incentive to engage in the expensive R&D necessary to develop innovative new products. Drug companies will not spend millions (or potentially billions) of dollars to develop new drugs if they cannot recoup (and earn an acceptable return on) the costs of said development. Moreover, since only 20% of marketed brand drugs will ever earn enough sales to cover their development costs, the sales of these successful drugs must not just recoup their own costs; they must also cover the costs of the other 80% of approved drugs that generate losses for drug makers.[22]

Less R&D spending by brand companies will result in less innovation throughout the pharmaceutical industry. Brand drug companies are largely responsible for pharmaceutical innovation.[23] Since 2000, brand companies have spent over half a trillion dollars on R&D,[24] and they currently account for over 90% of the spending on the clinical trials necessary to bring new drugs to market.[25] Because of this spending, over 550 new drugs have been approved by the FDA since 2000,[26] and another 7,000 are currently in development globally.[27] Yet brand companies’ R&D efforts and innovation are directly tied to their profitability. Numerous studies have found that policies that increase pharmaceutical profitability lead to increases in new clinical trials, new molecular entities, and new drug offerings.[28] Other studies have found that policies that reduce expected profitability lead to decreases in R&D spending.[29] Thus, reductions in brand drug profitability over the long term could very well lead to less R&D and less innovation in the pharmaceutical market.

A reduction in innovation will jeopardize the significant health advances that innovation achieves. Empirical estimates of the benefits of pharmaceutical innovation indicate that each new drug brought to market saves 11,200 life-years each year.[30] Another study finds that the health improvements from each new drug can eliminate $19 billion in lost wages by preventing lost work due to illness.[31] Moreover, because new, effective drugs reduce medical spending on doctor visits, hospitalizations, and other medical procedures, data shows that for every additional dollar spent on new drugs, total medical spending decreases by more than seven dollars.[32] Brand companies, and the profit incentives that motivate them, are largely responsible for pharmaceutical innovation. Thus, actions that reduce brand profitability could have long-term negative effects on consumer health and health care spending.