Pharmaceutical Patent Challenges and Their Implications for Innovation and Generic Competition

The 1984 Hatch-Waxman Act was designed to encourage intensive generic drug price competition while at the same time preserving sufficient patent exclusivity to create incentives for R&D.  Hatch-Waxman lengthened the effective patent life of innovative pharmaceuticals but also made generic entry easier and incentivized generic companies to challenge the patents covering approved drugs (so-called “Paragraph IV” challenges) by awarding a potentially lucrative 180-day period of generic exclusivity to the generic firm who successfully challenges the patent.

Some have suggested the balance sought by Hatch-Waxman is threatened by a wave of Paragraph IV patent challenges to branded drugs.  In particular, they argue, generic firms have focused on a new business model that is built around prospecting in patent challenges.  Even when the odds of winning are low, the expected payoff of a challenge to a leading pharmaceutical product can be substantial, thus generic firms may indiscriminately challenge the patents of a large number of branded products in the hopes of winning some of these lawsuits. 

Others contend that the increase in Paragraph IV challenges is a response to an “evergreening” strategy by branded pharmaceutical companies and these challenges merely act to weed out the increasing number of weak patents issued to pharmaceutical companies, thereby maintaining the length of market exclusivity pharmaceutical firms have always been allowed. 

We have assembled a unique data set that includes detailed information on all new molecular entities (NMEs) approved by the FDA from 1994 to 2006.  For each of these drugs we have collected information about whether the patents protecting the drug have been subject to a Paragraph IV challenge.  In addition we use IMS data to quantify the sales of each of these drugs and collect a variety of other measures of the importance and innovativeness of each drug.  We have also collected information on the strength of each of the patents protecting each drug.  These data will shed light on the alternative hypothesis of whether patent challenges are driven by prospecting behavior on the part of generic firms or a response by generics to an evergreening strategy on the part of innovator firms. 

For the challenged drugs with the highest sales, we have collected detailed information on the outcomes of their Paragraph IV challenges from various public sources, including litigation-related court filings.  Although the frequency and timing of patent challenges has been studied, there has been relatively little investigation to date on the outcomes of the challenges.  Our data set will allow us to examine settlement rates, document generic success rates broken down by patent type, and determine the average length of patent exclusivity lost due to Paragraph IV challenges and how it has changed over time.  These analyses will inform the question of whether Paragraph IV challenges pose a threat to pharmaceutical innovation, an important policy consideration that affects industry players as well as consumers.  Preliminary results suggest that the expected patent life of large selling pharmaceutical drugs has been significantly impacted by patent challenges and litigation.