The makers of branded pharmaceuticals have devised numerous ways to extend patent exclusivity for lucrative products in the United States. In June, the Supreme Court gave the Federal Trade Commission (FTC) clear authority to investigate and prosecute one of them, “pay-for-delay” agreements, but stopped short of making such deals presumptively unlawful restraints of trade. In the case the court decided, a manufacturer of a branded drug, a testosterone replacement patch, paid the maker of the generic to refrain from entering the domestic market with its product.
The more dramatic battles over the timing of a drug’s transition from branded to generic form are being fought in cancer. Cancer is the second-leading cause of death in the United States. Americans spent $157 Billion (B) on cancer care in 2010; $23B or 18 percent of total spending was devoted to oncologics, a 41 percent increase since 2006 and largely paid for by Medicare. Between 2006 and 2011, cancer drugs were the second most commonly litigated generic drug treatment class (70 unique cases), following cholesterol-lowering agents (123 unique cases).
Here, I argue that outsized potential profits, limited competition, and strong demand makes cancer drugs attractive for patent disputes. Several oncologics due for upcoming patent expiration illustrate important opportunities and caveats under current law. The outcomes of these and other cases will have significant consequences for cancer patients and their insurers.
The Economic Incentives For Branded Oncologics To Delay Generic Entry Are Significant
Some prominent recent patent disputes center on the injectable oncologics gemcitabine, oxaliplatin (see here and here), temozolomide (see here and here), and sunitinib. Pemetrexed and dasatinib (an oral drug) have been involved in patent litigation this Fall. Another injectable oncologic (erlotinib) has recently been the subject of a patent extension granted by the Patent and Trademark Office. There has also been a sharp rise in generic entry litigation during this time period, although the prevalence of such cases is not available by therapeutic class.
Patent disputes tend to concentrate on drugs with significant market demand, creating high revenue risk of generic entry for originating branded firms and high revenue reward for generic manufacturer challengers. Branded prices for many novel oncologics are high and growing, exceeding $50,000 or more for the treatment of one patient in a given year. The branded manufacturers of these drugs have enjoyed substantial domestic and global sales. Nevertheless, the contemporary market for producing generic injectable drugs is small compared to that of all prescription drugs. In standard unit volumes, generic injectables are estimated to account for roughly 15 percent of the domestic pharmaceuticals market. (Bank of America Merrill Lynch. Specialty Pharmaceuticals, generic injectables mini-primer. June 4 2013)
The profit margins earned from entry into the production of new generic injectable oncologics are also likely substantial. A recent report by Bank of America suggests profit margins among generic drug manufacturers of specialized physician-administered injectable generic drugs have recently ranged between 30-40 percent. (Bank of America Merrill Lynch “Generic Injectables Mini-Primer”, June 2011, p. 7) Another report estimates the “gross margins in the generic injectables space tend to be around 45-55 percent.” (PiperJaffray. 2012. “Sagent: Neutral. Solid Top-Line Growth, but Margin Outlook Murky; Initiating with a Neutral”, Company Research Note Report, April 19, p. 12 of 34)
The high profit margins among these drugs appear to be related to at least two factors. First, under the Hatch-Waxman Act (1984), if a generic manufacturer successfully challenges the patent of a brand (a Paragraph IV challenge), the entrant has exclusive ANDA marketing privileges for the molecule formulation and strength for 180 days. As an exclusive generic entrant for six months, the successful Paragraph IV challenger can charge prices just under those of the brand.
Cancer drugs have a lower rate of federal district court award favoring branded manufacturers over potential generic entrants compared to drugs in other therapeutic classes. Pannattoni surveyed all so-called “Paragraph IV” patent challenges between 1984 and 2007 (a paragraph IV certification states that the listed patent is invalid or will not be infringed by the generic product). Among the oncologics in her sample (carboplatin, cisplatin, paclitaxel), the district court awarded positive decisions to the branded manufacturer in only one case (carboplatin), suggesting a smaller branded manufacturer success rate compared to that observed over all drugs (47 percent). Sampat and Hemphill suggest the majority of successful patent challenges they surveyed occur in the context of secondary patents.
Second, outsized profits in this market appear to be related to limited generic competition outside the 180 market exclusivity window (if awarded). Writing in 2008, Espicom, the market research firm, noted that: “One of the attractions for generic companies is that the majority of specialty injectables are in niche areas and attract little competition…for specialist companies they offer a reasonable return.” (p 13) That perspective is also voiced by PiperJaffray, an investment analyst research firm, who explain: “…Given that the space is not particularly crowded, we don’t typically see the kind of price destruction that one sees when an oral solid sees multiple generic entrants.” (PiperJaffray 2012)
The small number of tightly overlapped manufacturers specializing in these drugs’ production is likely related to the high costs entailed in their production in establishing and maintaining sterility. There are also gains from production specialization related to economies of scope and scale. Barriers to entry related to the Food and Drug Administration’s ANDA requirements and ongoing enforcement of current Good Manufacturing Practices appear rather modest compared to their profit potential (see here, here, here, here, and here); for oral tablets and capsules, the direct cost of ANDA approval is estimated to range between $1M to $5M. (See chapter 8) The highly concentrated supply of injectable drugs allows existing manufacturers to exercise oligopoly (and sometimes monopoly) power in price setting.
Interestingly, the most litigious generic manufacturers overall have also established specialized expertise in the manufacturing of generic injectables (Teva, Mylan, Novartis, Watson, Par). Many of these manufacturers have substantially increased their commitment to producing specialized generic injectables recently. For example, Teva received 41 abbreviated new drug approvals (ANDAs) for injectables between 2006 and 2011, effectively doubling its production of these drugs.
Therefore, despite the high price tags associated with them, the pursuit of patent litigation and/or pay-for-delay agreements between branded manufacturers of such products and potential generic entrants should be viewed as “value plays.” In the case of Paraplatin (carboplatin), whose patent expired in 2004, monthly branded sales plummeted 71 percent (from $74 Million (M) in April to $21M in December). This decline continued steadily, resulting in sales of roughly $2 million by June 2006, a 97 percent drop from pre-generic figures. Hence the incentive for a branded manufacturer to compensate a potential entrant for staying out of the market is particularly steep in this sector.
Drugs To Watch Closely After The Supreme Court Ruling Illustrate Some Important Patent Challenge Opportunities And Caveats
The June 2013 Supreme Court ruling will likely increase investigation and litigation of generic entry delay tactics among these drugs. One drug to watch closely is Gleevec (imatinib, Novartis), a tyrosine kinase inhibitor (TKI) considered the most successful targeted agent ever developed given its substantial efficacy in treating chronic myelogenous leukemia (CML) and gastrointestinal stromal tumors. 2012 worldwide spending on imatinib amounted to $4.12 B. Although its composition of matter patent is expected to expire in 2015, Novartis has an additional patent covering a variety of imatinib polymorphs that expires in 2018.
The question of what will happen with imatinib’s patent is intriguing for another reason. Novartis manufactures and sells Tasigna (nilotinib), another TKI FDA approved for the treatment of CML. Since its 2008 approval in the United States and the European Union, Tasigna’s worldwide annual sales have increased from $89M to $998M in 2012, accounting for 18 percent of Novartis’ combined 2012 TKI sales. It is possible Novartis has already been or will attempt to cannibalize imatinib’s own market with that of Tasigna’s in advance of imatinib’s patent expiration. This is a phenomenon commonly observed among reformulations of new generation antidepressants in the past two decades, but would be new to contemporary oncology practice.
Another interesting drug to watch is Eli Lilly and Co.’s $3 billion Alimta (pemexetred), a drug used for the first line treatment of advanced non-squamous non-small cell lung cancer. Alimta’s composition of matter patent expires in 2016. Yet, following the conclusion of a trial in Indianapolis Federal court in September 2013, a decision on whether Lilly and Co. will be able to maintain US market exclusivity with Alimta should come as early as 2014. The drug’s use patent, which covers an administration method — first giving the patient doses of folic acid and vitamin B12, then infusing Alimta — goes through 2022. In April 2012, the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit issued important decisions relating to method of use patents. In both matters, the branded pharmaceutical manufacturers were unable to prevent regulatory approval of generic products based on the use patent. The courts’ rulings suggest that once generic entrants are available in the market, branded manufacturers can police their marketing programs for activities that might amount to inducing infringement of the method of use patent(s).
Finally, several prominent oncologics are infused biologics scheduled to experience patent expiration in the next few years, including Herceptin and Rituxan with over $6B in worldwide sales each in 2012. Recently policies have expanded access and accelerated the availability of generic versions of patent-protected Part B drugs, including “biosimilar” products (see here and here). Yet, only small molecule oncologics have the potential for Hatch-Waxman patent litigation at this time.
There Is Likely Considerable Gain By Consumers And Insurers From The Generic Entry Of Oncologics
The FTC estimates that pay-for-delay costs American consumers $3.5B a year across all prescription drugs; yet, I am aware of no estimates by therapeutic class. In theory, the loss of patent protection for these drugs will increase competition among manufacturers and consequently decrease their prices, holding use constant. Therefore, the value to consumers of non-delayed generic entry of these and other oncologics largely depends on the change in price and quantity demanded once entry occurs.
On demand, it is not clear that the common assumption that use will remain constant is justified among oncologics experiencing patent expiration. For paraplatin, overall monthly product use increased after generic entry. While this pattern may not hold for every oncologic experiencing generic entry, demand for many oncologics may be stable or increasing due to cancer prevalence. Therapeutic advance has also converted once deadly cancers to chronic conditions for which patients take oncologics regularly to restrain cancer’s recurrence (including CML, discussed above). In addition, therapeutic obsolescence is less common in oncology than other diseases; contemporary practice commonly employs novel patent-protected therapy in combination with generic drugs. Indeed, recent shortages (see here and here) suggest many generic oncologics remain central to contemporary treatment and the clinical trials enterprise.
On prices, the extent of the decline among these drugs after generic entry and whether and how they impact patients and insurers depends on the formulation of the drug. The majority of spending on all oncologics (77 percent) is on physician-administered drugs covered by insurers’ medical benefits, although evidence suggests this medical benefit share is declining with time. For these drugs, physicians and hospitals purchase them at wholesale acquisition prices and receive reimbursement for their use from patients and insurers. Patient payment for treatment is typically set as a percentage of insurer reimbursement. Consequently, generic entry among these drugs results in declines of wholesale acquisition prices, physician reimbursement, and patient payments.
Reductions in insurer reimbursements and patient payments upon generic entry of physician-administered oncologics are likely to be substantial. In a recent paper coauthored with Peter Bach and Tina Shih, I estimate irinotecan Medicare reimbursement levels ((80 percent * average sales price + 6 percent/mg) declined 85 percent within the year after generic entry (February 2008). Using the same methodology, I estimate that Medicare reimbursement declines for topotecan amounted to 73 percent in the year following generic entry (October 2010) compared to the year preceding entry and docetaxol Medicare reimbursement declines amounted to 46 percent in the year following entry (December 2011) compared to the year preceding entry (Figures 1a, 1b).
Medicare reimbursement declines associated with the generic entry of these drugs (and consequently patient copayments) are lagged by at least 6-months (two full-quarters), while commercial insurer reimbursement and consumer copayments reflect immediate price declines. Although there is controversy regarding whether a shorter than two-quarter lagged ASP price reimbursement is feasible, it could produce significant savings for Medicare and Medicare beneficiaries if implemented. Estimated reimbursement declines among physician-administered oncologics are also generally smaller than those commonly observed among oral solids, likely related to the production costs and concentrated supplier issues noted above.
In contrast, oral oncologics are generally covered under insurers’ pharmacy benefits and are purchased by patients from retail and specialty pharmacies. Generic entry of these drugs results in wholesale acquisition price declines and insurer reimbursement declines that may be substantial. However, patient payments may decline only if insurers set these rates to reflect the drug’s patent status. There are little contemporaneous data on how commercial insurers set patient payments for oral oncologics undergoing patent expiration. This is an important area for future empirical study.
Figure 1a. Medicare ASP reimbursement for topotecan before and after patient expiration ($2012), 2008-2012. Source: Centers for Medicare and Medicaid, 2005-2012 ASP drug pricing files
Figure 1b. Medicare ASP reimbursement for Docetaxel before and after patient expiration ($2012), 2008-2012. Source: Centers for Medicare and Medicaid, 2005-2012 ASP drug pricing files