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News & Press: Public Policy Statements

Healthcare Reform Could Make the Patient Sicker

Thursday, September 15, 2011  
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By Brian P. O’Shaughnessy

Much of our national attention is now focused on health care reform. As the bill lumbers toward a vote, lawmakers are tacking on one appendage after another. Unfortunately, one of these add-ons will increase, rather than decrease, the cost of health care by limiting the ability of generic and branded pharmaceutical companies to work together to settle disputes and bring more affordable drugs to market.

Several political factors are responsible. For one, the recent economic meltdown and the near death of companies "too big to fail" have prompted a call for better antitrust enforcement. At the same time, some say our patent system is outdated, and needs to be fixed. Those objectives have been bundled together in the health care legislation. But in fixing one we damage the other, and nothing comes out as planned. It's no surprise when one uses health care legislation to modify antitrust law to fix the patent system. Under attack is the practice of settling lawsuits over patented drugs. Both generic and branded pharmaceutical companies agree: the proposed cure will only make the patient sicker.

Those three topics are complicated enough on their own. What's more, they each have their own objectives. For example, health care legislation aims to improve access and reduce cost. Low-cost pharmaceuticals are an important part of the formula, and this has become an end in itself. While laudable, it highlights the tension between cheap drugs now and a robust pipeline of new drugs for the future.

Despite considerable safeguards, our patent system occasionally issues invalid patents. Invalid patents are costly. They artificially inflate prices without improving the state of the art. The Hatch-Waxman Act rids the system of invalid patents by providing an incentive to challenge patents in court. The incentive is a 180-day exclusivity period for the challenger during which its only competitor is the patentee. The challenger can charge as much for the drug as the patentee, but without the research and development investment, and thereby reap huge profit. Thus, we remedy errors in the patent system with the same incentive: exclusivity.

But challenging a pharmaceutical patent is expensive. Each side will spend at least $5 million. Sometimes, a seemingly good case is not so good. Both sides want to reduce risk, cut their losses, and move on. The money saved will be used to challenge other questionable patents or in the search for new drugs. Either way, the public benefits.

When this happens, the two sides will often settle the case under a license agreement. The terms of such license agreements vary. The generic challenger might agree to sell the patented drug in return for royalty payments to the patent owner; or the generic challenger might take a license to another valuable patented drug unrelated to the challenged patent. Both options work to the benefit of the respective parties, as well as the consumer.

The use of license agreements is an essential tool in sustaining an innovative market-based economy. Among other things, it permits companies with different skill sets to work together and share their intellectual property to maximize their respective competencies. This works to everyone's benefit by bringing new and improved products more efficiently to market. For example, through licensing, a research-intensive enterprise can team up with one having a global sales and distribution capability. Through a license agreement they agree to share the resulting profit, and the public enjoys the benefit of a new product.

The Federal Trade Commission (FTC) and the Department of Justice (DOJ) agree that licensing is a highly beneficial economic activity. In a joint report, they pronounced that intellectual property licensing is pro-competitive; and that licensing contributes to an efficiency-enhancing integration of economic activity.

It is no less so within the pharmaceutical industry. Under the Hatch Waxman regime, a potentially invalid patent gets tested. It may be that the parties decide the patent does not warrant further scrutiny, and they enter into a license agreement that exposes one or more patented drugs to the benefits of competition in advance of patent expiration. This is a win-win-win result.

Despite the acknowledged benefits of such license agreements, the pending health care legislation carries a provision that would make all such settlement agreements illegal as anticompetitive and a violation of antitrust law. This goes too far, and is a grave disservice to both the generic and branded pharmaceutical industry, and to the public at large. Legislators considering the pending health care legislation should demand that provision be removed.

Such settlement agreements have resulted in many products being made available to the American consumer at reduced cost, generating tens of billions of dollars in savings. This pro-competitive result has been consistently acknowledged as a proper use of patent law, and one that should be promoted, rather than prohibited, by our antitrust laws. The Licensing Executives Society, USA & Canada, Inc. (LES USA & Canada) supports the use of licensing to bring just such economic benefits to the consumer.

It is true that agreements in settlement of patent litigation have the potential for abuse. The so called "pay for delay" agreements pay the challenger to drop the lawsuit and go away. These are particularly suspect when the payment exceeds what the challenger could hope to recoup during its period of Hatch Waxman exclusivity. However, those agreements are now consistently condemned, and as a result are rare if not nonexistent. This shows that there are measured and prudent approaches to eliminating anti-competitive agreements.

Our courts are well equipped to assess the anti-competitive effect of agreements and to declare them illegal under current law. It would be appropriate and far less disruptive to permit the law to develop on a case-by-case basis under existing law. Alternatively, carefully tailored legislation might reasonably give authority to either the FTC or DOJ, or to the court in which the patent litigation is pending, to review and approve proposed settlement agreements. Under either approach, an evolutionary, rather than revolutionary, process unfolds giving greater predictability to the industry and greater efficiencies for the benefit of the consumer.

Brian P. O’Shaughnessy is a Trustee of the Licensing Executives Society, USA & Canada, Inc., and Chair of its Committee on Public Policy and Legislation. He is also a shareholder at Buchanan Ingersoll & Rooney, PC, and Chair of its Chemical Patent Practice Group. He can be reached at brian.oshaughnessy@bipc.com or 703-836-6620.