Whose Afraid of Authorized Generics

Losing a patent challenge lets a generic competitor grab market share and slash branded profits. Sound scary? Ignoring authorized generics is worse.
Oct 01, 2005

No brand manufacturers plan to market generic versions of their own product, at least not until the patent expires. And why would they? As long as the branded version enjoys patent protection, marketing a cut-rate product would eat away profit margin during the years when a drug makes the most money.

But what happens if a patent is challenged? Under the Hatch-Waxman Act, generic-drug manufacturers that win Paragraph IV challenges are rewarded with 180 days of market exclusivity. For six months, they can sell their own generic version without competition from other generic companies. And during this period, brand manufacturers lose market share as rapidly as they do after patent expiration, when generic competitors flood the market. But there is a way to mitigate these losses, devastating as they are. A brand manufacturer can mount a rear-guard action by launching its own off-brand—an authorized generic—with the cooperation of a generic distributor.

Lifecycles of Generics
Companies hemorrhage profits in the wake of a lost patent challenge. Typically, the generic company will set its price approximately 20 to 30 percent below the brand, and erode the brand's market share by more than 75 percent after the first two months. But by quickly entering the market with its relabeled "brand in a bottle," a manufacturer can use its own generic product to capture a share of the competitor's business, if only at a reduced price. Earning additional revenue on generic products may seem like cold comfort to a company that just lost a profitable patent. But the alternative—even greater losses—is much worse.

In spite of the potential revenue upside—or perhaps reduced revenue downside—many brand companies have been reluctant to enter partnerships with authorized-generics marketers. Many are uncertain about the payoff or simply inexperienced with the generic market. But some wonder whether these partnerships are legal under the Hatch-Waxman Act. After all, the law provides 180 days of exclusivity to reward the generic company that successfully challenges the patent of a brand product. Arguably, allowing for a second generic product has the effect of reducing that incentive.

That is the argument that Teva, Mylan, and the Generic Pharmaceutical Association advanced early in 2004 in citizen petitions to FDA. They asked the agency to ban authorized generics, but FDA declined to get involved at first, claiming that it would not be appropriate to interfere with business arrangements. Teva and Mylan then filed suit against FDA. In Teva v. Crawford, Teva attempted to nullify an authorized-generics contract between Pfizer and its subsidiary Greenstone for generic gabapentin. In June 2005, the District Court of Appeals of the District of Columbia decided against Teva, ruling that nothing in the Hatch-Waxman Act prevented a patent owner from reselling its own product. This decision cleared the legal hurdles for authorized generics under the Hatch-Waxman Act.

Unless generic manufacturers challenge authorized-generic contracts under some other law, Congress is the last resort for companies attacking authorized generics. At this point, Congress could still amend the Hatch-Waxman Act to prevent future authorized-generics contracts. However, changes to the law are extremely unlikely for at least three reasons. First, there have been no calls within Congress to put an end to these agreements. Second, in the Medicare Modernization Act of 2003, Congress passed a significant piece of legislation that amended parts of Hatch-Waxman. Lawmakers have little momentum to revisit the law anytime soon. Third, authorized generics create competition and may help lower drug prices. So arguing for fewer generics is not an appealing political argument. As a result, it seems safe to say that authorized generics are here to stay.

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