An Antitrust Economist's Perspective on Recent FTC Scrutiny towards Orange Book Patent Listing
In the last year, the Federal Trade Commission (FTC) has taken several actions to challenge patents listed in the Food and Drug Administration's (FDA) Orange Book, including publishing a policy statement regarding its intent to scrutinize improper patent listings as potentially unfair methods of competition, filing Amicus Curiae briefs in private litigation, and issuing warning letters in November 2023 and April 2024 to manufacturers disputing over 400 patents that these manufacturers listed in the Orange Book covering brand-name asthma and COPD inhalers, epinephrine autoinjectors, obesity and type-2 diabetes injectable drugs, and nasal spray drugs.
Below, the development of the Orange Book and the policy balance between ensuring patent protection and encouraging generic competition, the importance of Orange Book patents to brand drug manufacturers, several economic characteristics of drug-device combination products—the focus of the FTC's enforcement actions to date, and the potential economic effects of the FTC's enforcement, are discussed.
The Orange Book and the Balance between Patent Protection and Generic Competition
In the 1970s, states increasingly repealed brand name, anti-substitution laws. At the states’ request for a list of marketed drugs that were approved for safety and efficacy for developing drug formularies, in 1980, the FDA started publishing its list of Approved Drug Products with Therapeutic Equivalence Evaluations (now commonly known as the Orange Book). The Orange Book lists all non-biologic drug products approved by the FDA to be marketed in the United States, and information on their manufacturers, dosages, strengths, doses, routes of administration, and therapeutic equivalencies. The Orange Book serves as a resource and reference guide for health care providers when prescribing medications, and for pharmacists when dispensing medications, because many states require or allow pharmacists to automatically substitute generic products listed in the Orange Book for their equivalent branded drug products.
In 1984, Congress passed the Hatch-Waxman Act to establish abbreviated regulatory pathways for more rapid approval of generic equivalent drugs. Importantly, Hatch-Waxman requires brand drug manufacturers to file with their new drug application (NDA) the number and expiration date of patents that either claim the drug in the application and are a drug substance (active ingredient) patent or are a drug product (formulation or composition) patent or claim a method of using the drug in the application to treat certain medical conditions. After the NDA's approval, the brand manufacturer receives five years of market exclusivity, after which the drug is protected against generic entry only with the patents covering the drug.
Within a year prior to the conclusion of the branded drug's market exclusive period, a generic drug manufacturer can file an abbreviated new drug application (ANDA) that applies for the approval for its generic product relying on the safety and efficacy evidence in the brand drug's NDA, as long as the generic manufacturer scientifically demonstrates that its product performs in the same manner as the branded product. The FDA will not approve this ANDA until the market exclusivity period ends. However, a generic manufacturer filing an ANDA must certify that the unexpired patent(s) listed by the brand manufacturer is/are invalid, unenforceable, or will not be infringed by the generic product (called a Paragraph IV Patent Certification). Such a certification triggers an immediate right for the brand drug manufacturer to sue for infringement, and the FDA automatically grants a 30-month stay of approval of the generic manufacturer's ANDA.
The Importance of Orange Book Patents to Brand Drug Manufacturers
From an economic perspective, due, in part, to laws that automatically switch prescriptions to generics, a branded drug manufacturer can face significant loss of volume shares and profits post generic entry, and the speed and magnitude of its loss can be higher as the number of generic competitors increases. A delay of 30 months to litigate the unexpired Orange Book patents essentially extends the brand drug manufacturer's marketing exclusivity by this amount of time. Additionally, the first ANDA filer, or filers to the extent multiple ANDAs were submitted on the same day, will receive 180 days of generic marketing exclusivity after their ANDA(s) are approved—during this period the FDA will not approve other ANDAs for the drug. That generally means that during the subsequent 180-day period, the branded drug would only be competing with one generic manufacturer(s).
Generic entry can occur before the end of the patent infringement litigation. At the expiration of the 30-month stay, as the suit often still pending, generic manufacturers can receive ANDA approval and launch the product at the risk of infringing a patent and owing damages.
Because of the importance of Orange Book patents, branded drug manufacturers have economic incentives to continue research and development efforts on its marketed drug products to obtain additional patents for innovations and list them in the Orange Book. These follow-up patents may cover aspects of a drug such as its formulation, method of use, or structural modifications of the drug substance which are often referred to as “secondary patents.” Patents covering the drug delivery device for drug-device combination products are sometimes described as “tertiary patents.” As discussed above, the FTC's enforcement actions to date have focused on certain device patents that are listed in the Orange Book.
Economic Characteristics of Competition in Drug-Device Combination Products
Many of the highest-selling drug products are drug/device or biologics/device combination products, a number of which are targets of FTC's recent warning letters. Combination products are defined by the FDA as a product comprised of “two or more regulated components, i.e., drug/device, biologic/device, drug/biologic, or drug/device/biologic,” whether combined or mixed, and produced as a single entity, packaged together in a single package or unit, or packaged separately where both are required to achieve the approved use. The FDA issued industry guidance that specified that any generic version of a device-containing combination product should be qualitatively and quantitatively the same as the branded product device, and that the generic must submit sufficient evidence that patients can use the generic device properly without serious problems or use errors.
The FDA acknowledges that development of generic combination products can be more challenging than typical drug products, largely due to the requirement that the generic substantially duplicate the brand product device, which may be covered by a number of tertiary patents. In addition, the FDA emphasizes that for medical devices, the use of human factors and usability engineering play a key role in maximizing the likelihood that the device will be safe and effective for use by the intended users, for the intended uses, and for the intended use environments. As such, complex drug-device combination products tend to have fewer ANDA generic versions than small molecule drugs that are in capsules or tablets.
Another characteristic of drug-device combination products is that, even after generics are successfully developed and approved for market entry, the branded drug products often face slower generic penetration and retain a higher share of sales than typical drug products. This higher observed brand loyalty and preference for the branded product over its generics may be caused, for example, by patients or others involved in the patients’ care already possessing familiarity and proficiency with the use of the branded product device. As outlined in the FDA's considerations, the proficiency of the targeted user of a drug product device may affect the safety and effectiveness of the treatment. For these reasons, a prescriber may be reluctant to switch patients from the branded product to generics, or patients may request that they be prescribed the branded version.
Lastly, because of the challenges associated with replicating a combination product's medical device to an acceptable degree of specificity to receive an ANDA approval, many manufacturers have chosen to utilize the 505(b)(2) NDA pathway to launch competing products. The 505(b)(2) NDA pathway was also created by the Hatch-Waxman Act and allows a rival manufacturer to rely on published data from marketed drug products as part of its application. Instead of trying to replicate the branded/incumbent drug's device, which are often covered by the branded/incumbent drug manufacturer's device patents, the rival manufacturer can develop its own device utilizing its own patented technology. The 505(b)(2) NDA pathway may allow the rival manufacturer to circumvent brand/incumbent drug manufacturer's Orange Book device patents and offers the additional advantage of market exclusivity for the rival's drug products. However, drugs approved through this pathway often receive a BX-rating—designating the FDA's decision that the data it reviewed are insufficient to determine therapeutic equivalence to the referenced brand/incumbent drug, as opposed to an AB-rating assigned to products that have demonstrated bioequivalence. Products with a BX rating cannot be automatically substituted in many states. The rival manufacturer also likely needs to invest a substantial amount in marketing and promotion to educate and persuade prescribers and patients to switch to its product. Thus, the nature of the competition may more closely resemble that between two branded drug products.
Potential Economic Effects of the FTC Enforcement
Patents have been called a “probabilistic” asset, because neither the patent owner nor the challenger can determine with certainty whether the patent is valid and infringed, without litigating to judgment. Therefore, for branded drug manufacturers, all else equal, claiming more patents that cover a drug and that generics can infringe can make an at-risk launch less attractive and may increase its bargaining power vis-a-vis potential generic entrants. In other words, the reward of listing additional patents in the Orange Book as covering a branded drug product comes at relatively little cost.
However, the relative benefits and costs of listing additional patents may change as the FTC now scrutinizes Orange Book listings to identify those it concludes are potentially anticompetitive. In addition, it may investigate and prosecute these alleged violations under Section 5 of the FTC Act. The FTC's heightened scrutiny, along with recent case law may cause branded drug manufacturers to be more judicious when listing patents, especially device patents, in the Orange Book. For example, the First Circuit recently issued a decision In re Lantus Direct Purchaser Antitrust Litigation finding Sonifi's patent claiming the drive mechanism of the Lantus SoloSTAR insulin pen to be improperly listed because it did not claim the drug for which the NDA was submitted. In fact, four of the ten manufacturers that received warning letters in November last year have delisted patents in response to the FTC's warning letters, and three manufacturers have announced commitments to cap inhaler out-of-pocket costs.
The FDA's actions may dissuade the branded drug manufacturer of drug-device combination products from listing patents in the Orange Book and receiving the benefits of those patents under the Hatch-Waxman Act. It may also reduce the branded drug manufacturer's leverage when negotiating settlements. The combined effect may lower barrier to entry for rival manufacturers to develop generic versions of the branded drug combination product. This may reduce the time it takes for AB-rated generics to enter the market through the ANDA pathway, make it easier for rival manufacturers to compete for prescription share through automatic substitution, and increase the degree of generic competition for drug-device combination products.
Experts
Managing Principal