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The economics of irreparable harm in pharmaceutical patent litigationCORNERSTONE RESEARCH FINANCIAL AND ECONOMIC CONSULTING AND EXPERT TESTIMONY The Economics of Irreparable Harm in Pharmaceutical Patent Litigation Rahul Guha, Cornerstone ResearchMaria Salgado, Cornerstone Research TABLE OF CONTENTS The Hatch-Waxman Act greatly simplifies the process of obtaining FDA approval for a generic drug. Under the Act, a generic company need only file an Abbreviated New Drug Application (ANDA) to show that the generic drug is bio- equivalent to the compound at issue. With bioequivalence established, the generic company can forgo clinical testing of its drug for safety and efficacy. Instead, the generic maker can refer to the clinical data that the branded drug developer Under the Paragraph IV provision of the Act, a generic company can attempt to launch a generic drug prior to the expiration of the branded drug's patent(s) either by challenging the validity of an extant patent on a branded drug or claiming non-infringement of the patent.4 The patent holder then has 45 days to file a patent infringement suit, which prevents the generic from launching for the next 30 months.5 The 30-month stay holds unless a decision is made in the patent suit or the court orders a different period for the stay. However, if the branded The Drug Price Competition and Patent Term Restoration Act drug company reaches the end of the 30-month stay and the of 1984,1 also known as the Hatch-Waxman Act, allows generic patent infringement suit still is not resolved, the generic products to launch (following U.S. Food and Drug Administra- company may choose to launch at-risk if it has FDA approval— tion [FDA] approval) while the patent(s) on the equivalent that is, before the patent suit is resolved. The first filer(s) of a branded drug are in litigation. Such a launch is called at-risk Paragraph IV certification obtains 180 days of exclusivity because of the possibility that, at trial, the court finds the during which no other company can launch a generic version generic drug infringes on the branded drug's patents. Branded of the branded drug at issue.6 companies often seek a preliminary injunction to prevent the generic from launching at-risk. To obtain such an injunction, The branded drug company may seek a preliminary injunction the branded company must establish that it would suffer to prevent the generic from launching at-risk. To obtain this irreparable harm due to the generic's at-risk entry—that is, the injunctive relief, the branded drug company must establish: harm is irreversible and the branded company cannot be ful y 1. A reasonable likelihood of success on the merits of its compensated by a monetary damages award if it ultimately pre- vailed at trial.2 This paper discusses the economic rationale for 2. Irreparable harm if the injunction is not granted; the different possible sources of irreparable harm that courts 3. That the balance of hardships is on the branded drug; and consider, such as reductions in research and development 4. That the injunction has a favorable impact on the public (R&D), loss of share to therapeutic competitors, loss of good- will, and negative impacts on employment and manufacturing facilities.
The Economics of Irreparable Harm in Pharmaceutical Patent Litigation Page 2 When branded drug companies seek preliminary injunctions to purchasers with the same fixed dollar amount for the branded prevent at-risk generic entry, the required economic analysis of drug and its generic equivalent,17 purchasers have a strong irreparable harm focuses on whether it is possible to quantify incentive to choose the cheaper generic. And private health- with precision the impact of a particular generic launch (in care plans use similar schemes to provide physicians with which case the branded company could be compensated by a incentives to reduce drug purchase costs.18 monetary award).8 Of course, the branded drug company could attempt to stem While in the past companies could rely on a demonstration losses in prescriptions by reducing the price of its product.19 of success on the merits for a presumption of irreparable However, even if such a move could avert some losses in the harm, the Supreme Court's rulings in eBay v. MercExchange number of the branded drug's prescriptions, cutting prices and Winter v. Natural Resources Defense Council challenged the would most likely reduce revenues. The branded drug com- presumption of irreparable harm. Further, these cases changed pany could also attempt to stem losses in prescriptions by the standard for injunctive relief from showing a "possibility" of launching a brand-authorized generic. Brand-authorized irreparable harm to showing a "likelihood" of irreparable harm. generics, however, allow branded companies to recover only That has made it even more crucial now to fully understand some of the lost revenues, for two reasons. First, the brand- the potential arguments for demonstrating irreparable harm. authorized generic captures only part of the generic prescrip-tions. For example, approximately 16 months after the launch DIRECT IMPACT OF GENERIC ENTRY ON BRANDED DRUG of generic Paxil, the total generic share of prescriptions was approximately 85 percent, of which the authorized generic Studies have found that branded drugs lose a majority of their captured roughly half.20 Second, the price of the brand- sales to the generic equivalent upon generic entry—over authorized generic is lower than the price of the branded 75 percent in the first three months and over 80 percent in the drug. In the first year following the launch of generic Paxil, the first six months.9 Indeed, the generic share of total prescriptions authorized generic price was higher than the average inde- had increased to 74.5 percent by 2009.10 This leads to a loss in pendent generic price, but after the first year, the prices of the revenues for the branded drug company upon generic entry.11 authorized generic and independent generics were approxi-mately 50 percent of brand-name Paxil.21 There are many factors that encourage patients to use generic drugs. For example, third party payors (TPPs) such as Medicare POSSIBLE SOURCES OF IRREPARABLE HARM ARISING FROM Part D, private insurers, and pharmacy benefit managers AT-RISK GENERIC ENTRY (PBMs) charge lower copayments for generic as opposed to branded purchases.12 Pharmacists have strong financial incen- Reduced revenues for the branded drug overall are amenable tives to switch patients to the generic because they generally to reasonably precise quantification. However, several forms of earn higher margins on the sale of generic drugs than on harm are difficult to quantify with precision, and courts have branded versions.13 In most states, this switch may be executed considered them irreparable. These potential sources of irrepa- by pharmacists without consulting patients and doctors, unless rable harm include: a doctor has indicated in writing on the prescription that it • Reductions in overall R&D budgets must be dispensed as written.14 Patients without insurance • Curtailments in brand-specific R&D and marketing investments coverage for the drug—as well as patients that face coinsur- • Loss in share within therapeutic category ance payments for their drug purchases—have incentives to • Formulary displacement purchase generics because they are typically priced at least • Lost goodwill 25 percent below the branded version of the drug.15 These savings can be seen in the average pharmaceutical treatment Reductions in Overall R&D Budgets cost for major therapy areas, which falls by an average of The dramatic revenue losses for the branded drug manufac- 27.5 percent one year after generic entry, and 35.1 percent turer typically reduce the company's R&D budget because two years after generic entry.16 these companies tend to fund R&D with internal financing Generic drugs that are dispensed by healthcare providers are sources, such as cash flow and profits, as opposed to external also encouraged over their branded equivalents. For example, financing sources, such as equity. As shown by Professor Henry under Medicare Part B, the purchaser's reimbursement for Grabowski of Duke University and the late John Vernon, for- a specialty drug is fixed at the same amount, regardless of merly a professor at Duke University, internal financing sources whether a generic or brand is being dispensed. This amount is are important contributors to pharmaceutical firms' research 106 percent of the volume-weighted average sales price intensities, which are the ratio of R&D expenditures to sales.22 (ASP) for the drug molecule—that is, the branded drug and its Professor Vernon has also shown that for every dollar decrease generic equivalent. Because these policies reimburse in cash flow, R&D investment decreases by about 22 cents.23 The Economics of Irreparable Harm in Pharmaceutical Patent Litigation Page 3 These constraints on R&D funding arise for several reasons, Branded companies promote their products to physicians and including the lack of collateral for capital used in R&D and the patients. In so doing, they provide information to physicians difficulty of monitoring the firm's behavior due to the uncertain and patients regarding the drug benefits, and remind physi- nature of R&D. Borrowers also know more than lenders do cians and patients about the drug's characteristics.30 Following about the likelihood that their R&D investments will succeed. at-risk entry, the branded drug company has a strong incen- This information asymmetry makes external funding more tive to reduce promotional expenditures for its product due costly or not available at all.24 As Professor Bronwyn Hall of the to these same free-riding issues. Any additional prescriptions University of California, Berkeley, states, "Investors have more these promotional efforts generate are likely to be filled by the difficulty distinguishing good projects from bad when the cheaper generic drug. However, if the branded company has projects are long-term R&D investments than when they are recently obtained FDA approval for use of that drug in a new more short-term or low-risk projects."25 indication, reduced promotional expenditures can prevent It is difficult to precisely quantify the impact of forgone R&D physicians and patients from learning about a potentially help- on a branded drug company and the patients who could ful new therapeutic alternative. Economic logic indicates that have benefitted from the research findings. In large part, this it is difficult to precisely estimate how physicians and patients quantification issue arises because the drug development would have behaved if they had known about the drug's new process is lengthy, risky, and highly uncertain. In fact, the FDA indication. Similarly, it is not straightforward to quantify the estimates that no more than five "in 5,000 tested compounds benefits that patients would receive if their physicians had pass… preclinical trials and are proposed for clinical studies."26 prescribed the new treatment option. As a result, the losses to Moreover, more than three-quarters of all drugs that enter the branded drug company and its potential patients should clinical testing ultimately fail to receive marketing approval in the United States. Even for drugs that receive such marketing approval, the process is lengthy. For the average approved Loss in Share within Therapeutic Category drug, the time from the start of clinical testing to marketing Pharmacies are not allowed to substitute between different approval is over seven years.27 Consistent with the notion that branded products unless a physician authorizes it. As a result, drug development is a highly uncertain process, a number of competition between branded products differs substantially drugs that face a significant threat of termination during clini- from competition between brands and their generic equiva- cal trials but instead survive later prove to be blockbusters.28 lents. Instead of competing on the prices charged to pharma- Moreover, it is very difficult to precisely estimate the harm that cies and wholesalers, therapeutic competition involves con- cancelation of a research project can have on a branded drug vincing physicians and patients about the benefits of the drug company that is in an R&D race. This is because the U.S. patent through promotions. It also involves competing for business system provides all rewards associated with an innovation to from TPPs or their PBMs.31 Promotions by branded companies the first inventor. As a result, a branded drug company that provide physicians and patients with information about the falls behind in an R&D race stands to forgo significant—but drugs' characteristics. highly uncertain—profits if it falls behind rivals in researching Branded drugs typically reduce or eliminate promotional a drug that subsequently succeeds.29 expenditures upon experiencing generic entry because generic drugs typically benefit from branded promotions. With Curtailments in Brand-Specific R&D and Marketing branded promotional expenditures declining on an absolute basis, the branded drug can suffer a reduction in its share of Following at-risk generic entry, a branded drug company has voice within its therapeutic category.32 The lower share of voice a strong incentive not to pursue R&D that is specific to the can cause a reduction in the prescriptions for the branded branded drug at issue. This is because any prescriptions gener- drug compared to other drugs in its therapeutic category.33 ated by the results of this R&D are likely to be filled by the Due to this effect, generic entry often causes a decline in the cheaper generic drug. Because of the generic entrant's ability total prescriptions for the brand and generic drug combined. to free ride off the branded drug company's R&D investments, However, measuring the harm that the branded drug suffers the branded drug company often delays or curtails R&D efforts due to its diminished share of voice is inherently difficult; it specific to that drug. In so doing, however, the branded drug requires calculating sales that the branded drug loses to each company forgoes potentially valuable commercial opportuni- rival drug in a market that is evolving over time. Given the lack ties associated with the development of new indications for of precision inherent in such a calculation, these losses may the drug at issue. In addition, a reduction in drug-specific R&D also be irreparable.
can bring significant and irreparable harm to patients who could have benefitted from the findings of planned trials for additional indications.
The Economics of Irreparable Harm in Pharmaceutical Patent Litigation Page 4 Formulary Displacement Formulary displacement is another potential cause of Generic entry can also cause the branded drug at issue to suffer irreparable harm to branded drug makers whose products a loss in patient goodwill, even if it prevails in its patent infringe- are dispensed by pharmacies. Formularies are lists of drugs ment suit. This is because patients now have to pay more for the compiled by TPPs, which establish the copayments for pre- same drug, because the generic is no longer available. These scription drugs dispensed by pharmacists. Important drivers losses in patient goodwill and sales are inherently difficult to of the demand for prescription drugs, formularies often have quantify, making them another source of irreparable harm aris- three tiers. Tier 1 is typically reserved for generic drugs, Tier ing from generic entry. Although loss of goodwill is more diffi- 2 for preferred branded drugs, and Tier 3 for non-preferred cult to establish than the sources of irreparable harm previously branded drugs. In tiered formularies, the higher the tier, the discussed, it can be important in certain circumstances.
higher the copayment is. Thus, generic drugs usually have the In the case of drugs dispensed by pharmacists, insured lowest copayments, preferred branded drugs have intermediate patients are likely to face higher copayments once the generic copayments, and non-preferred branded drugs have the is withdrawn. As a result, when the branded drug's generic highest copayments.34 equivalent is no longer available, patients who had been using Because of the relatively favorable copayment in Tier 2, that generic equivalent may switch to using other generics— branded drug makers seek to maintain this status on formular- rather than the branded drug—in order to maintain low ies. However, when a TPP can provide a generic version of the branded drug at issue on its formulary, the TPP has less reason In the case of specialty drugs that physicians administer, there to maintain the branded version on Tier 2. Aware of TPP incen- is also a significant prospect of lost payor goodwill. This is tives, the drug's branded competitors often intensify their because the Medicare Part B reimbursement scheme that efforts to displace a Tier 2 branded drug when that branded often applies to such drugs produces reimbursement prices drug faces generic entry. Rival companies' displacement that are close to generic levels once the generic has been avail- efforts typically take the form of offering increased rebates able to consumers for six to nine months. Thus, if the branded and product discounts to relevant TPPs. Of course, TPPs may specialty drug is priced significantly above the Medicare Part also unilaterally decide to move the branded drug to a higher B reimbursement price at the time of generic withdrawal, tier or off the formulary entirely.35 providers who purchase it receive reimbursements that are When a branded drug loses its Tier 2 status, it is highly uncer- substantially less than their actual cost. Not surprisingly, tain whether a subsequent restoration to Tier 2 would happen physicians (and branded drug companies) would prefer to in the event of generic withdrawal because the economic con- avoid this situation, which is referred to as being "under water." ditions that prevailed when the branded drug was originally Because losses in patient goodwill are intangible in nature, placed on Tier 2 may no longer exist by the time the generic and the switching of former patients from the branded drug to is withdrawn. For example, new or existing competitors could generic products is impossible to quantify with precision, both take over the Tier 2 formulary position, complicating any effects may be considered irreparable harm to the branded negotiations to restore the branded drug on Tier 2. Economic drug company.
analysis therefore suggests that the harm arising from formu-lary displacement should be considered irreparable.36 Other Sources of Irreparable Harm In the case of physician-administered drugs, if the maker of a At-risk generic entry can also have other impacts that can generic withdraws the drug from the market, the reimburse- irreparably harm the branded drug company, its employees, and ment amount continues to be based on the volume-weighted associated educational efforts and patient assistance programs. ASP of the brand and the generic, due to the two-quarter lag in First, reductions in the branded drug company's R&D budget, as reimbursement rates. If, upon generic withdrawal, the price of well as the abandonment of planned research related to the pat- the branded drug is at its pre-generic launch level, the reim- ented drug, could spur an exodus of talent from the company. bursement amount will likely not cover the cost of the drug. With the branded drug company having fewer products and This will either cause the provider to switch to a therapeutic clinical trials to design and run, many research scientists and alternative, or cause the branded company to lower the price of clinicians may seek employment at other companies, including the brand. In this case, the branded company will only be able competitors, in order to stay active in their specialty areas. As to raise the drug price in very small, infrequent increments.
a result, the branded drug company would likely suffer a long-term negative impact. Because that negative impact would be extremely difficult to estimate with precision, economic analysis indicates that it should be irreparable. The Economics of Irreparable Harm in Pharmaceutical Patent Litigation Page 5 The launch of a generic drug could also lead the branded drug PRIOR COURT DECISIONS ON PRELIMINARY INJUNCTIONS company to scale back its manufacturing operations and lay AND THEIR FINDINGS WITH RESPECT TO IRREPARABLE HARM off employees in manufacturing, packaging, marketing, and While in the past some courts have held that there should be a quality control. For example, Wyeth, which faced unexpected presumption of irreparable harm when the branded drug com- generic competition for both Protonix and Effexor in late 2007 pany plaintiff has established a reasonable likelihood of success and early 2008, announced 5,000 potential job cuts in January on the merits, many also cite the factors discussed above as 2008.38 Similarly, the unexpected launch of a generic version of additional support for the presumption of irreparable harm. OxyContin resulted in a loss of more than 1,800 jobs at Purdue The table below reviews accepted arguments for irreparable Pharma.39 The negative impact of these layoffs on the branded harm findings in nine recent cases in which the district courts drug company itself, as well as its employees, may be difficult granted preliminary injunctions to branded drug companies. to quantify with precision and therefore irreparable.
This list is not intended to be exhaustive but merely illustrative Finally, branded drug companies often budget discretionary of recent court findings in which plaintiffs have prevailed on funds to educational grants, patient assistance programs, and other activities that could be imperiled by at-risk generic entry. While courts have accepted the aforementioned sources of Faced with a significant reduction in its revenues, the branded irreparable harm, this does not occur in every instance. On the drug company would have strong incentives to cut these and contrary, whether courts sustain findings of irreparable harm other discretionary expenditures. Such cuts would have an depends on the economic and factual issues of the case. adverse impact on the branded drug company's academic partners, as well as indigent or uninsured patients. Again, it can be very difficult to precisely quantify the impact of these cutbacks on affected parties, creating another source of irrepa-rable harm.
Accepted Arguments for Irreparable Harm
Purdue Pharma v. Roxane, Boehringer Ingelheim - Lost Research Opportunities Pharmacia & Upjohn v. Ranbaxy - Lost Research Opportunities Warner-Lambert v. Teva - Lost Right to Exclusion Sanofi v. Apotex - Formulary Displacement - Lost Research Opportunities - Lost Market Share Abbott v. Sandoz Eisai v. Teva - Lost Research Opportunities - Formulary Displacement Eli Lilly v. Teva - Lost Research Opportunities - Weakened Relationships with Physicians - Lost Market Share King v. Corepharma - Formulary Displacement - Maximum Al owable Cost Pricing - Lost Market Share Research Foundation of State University of New York v. Mylan - Lost Research Opportunities - Weakened Brand Awareness Table 1. Prior Court Decisions on Preliminary Injunctions and Their Findings with Respect to Irreparable Harm
The Economics of Irreparable Harm in Pharmaceutical Patent Litigation Page 6 10. Ernst R. Berndt and Murray Aitken, "Brand Loyalty, Generic Entry 1. Drug Price Competition and Patent Term Restoration Act of 1984, Pub. and Price Competition in Pharmaceuticals in the Quarter Century L. No. 98-417, 98 Stat. 1589 (the "Hatch-Waxman Act" or the "Act").
after the 1984 Waxman-Hatch Legislation" (NBER Working Paper No. 16431, Cambridge, MA, October 2010). The generic share started at 2. According to the U.S. Court of Appeals for the Federal Circuit, "The 18.6 percent in 1984, and rose to 56.4 percent by 2004. The sharp nature of the patent grant [thus] weighs against holding that mon- increase from 2004 to 2009 resulted not only from a number of etary damages will always suffice to make the patentee whole, for "blockbuster" drugs (such as Pravachol, Zoloft, and Allegra losing the principal value of a patent is its statutory right to exclude. H.H. patent protection, but also from the implementation of the 2006 Robertson Co. v. United Steel Deck Inc., 820 F.2d 384, 390 (Fed. Cir. Medicare Part D benefit.
1987). Similarly, in Hybritech Inc. v. Abbott Laboratories, 849 F.2d 1446, 1451 (Fed. Cir. 1987), the court opined, the "patent statute 11. Although these are not examples of at-risk generic entry, they do provides injunctive relief to preserve the legal interests of the illustrate the fact that generic launches cause the pioneer company parties against future infringement which may have market effects to lose a significant share of its revenues.
never fully compensable in money." 12. See, e.g., John Richardson, "PBMs: The Basics and an Industry Over- 3. Due to the ease and limited expense associated with bioequiva- view," The Health Strategies Consultancy LLC (June 26, 2003), http:// lence testing, the costs associated with filing an ANDA are minimal. For example, a 2005 study estimates that it typically costs less than 13. See, e.g., Atanu T. Saha et al., "Generic Competition in the U.S. $1 million to perform the processing work to get a generic drug Pharmaceutical Industry," International Journal of the Economics of to a point where it can be approved by the FDA. David Reiffen Business, 13, no. 1 (February 2006): 15–38. and Michael R. Ward, "Generic Drug Industry Dynamics," Review of 14. See, e.g., "Survey of Pharmacy Law," National Association of Boards Economics and Statistics, 87, no. 1 (2005): 37–49. In contrast, the of Pharmacy (2006).
average U.S. new drug introduction cost over $800 million in 2000, 15. See, e.g., Atanu T. Saha et al., "Generic Competition in the U.S. including both pre- and post-approval R&D. Given the fact that Pharmaceutical Industry," International Journal of the Economics R&D costs historically have been observed to grow faster than the of Business, 13, no. 1 (February 2006): 15–38. Note that coinsur- rate of inflation, it is reasonable to expect that current expendi- ance requires the insured to assume a percentage of the cost of tures could surpass $1 billion. See, e.g., Joseph A. DiMasi, Ronald covered services. In contrast, copayments require the insured to W. Hansen, and Henry G. Grabowski, "The Price of Innovation: New pay a flat fee for covered services, for example, $5 per prescription Estimates of Drug Development Costs," Journal of Health Economics, drug. Unlike coinsurance, it does not vary with the cost of service. 22 (2003): 151–185: Joseph A. DiMasi and Henry G. Grabowski, "The Cost of Biopharmaceutical R&D: Is Biotech Different?" Managerial 16. Ernst R. Berndt and Murray Aitken, "Brand Loyalty, Generic Entry and Decision Economics, 28 (2007): 469–479. and Price Competition in Pharmaceuticals in the Quarter Century after the 1984 Waxman-Hatch Legislation" (NBER Working Paper 4. See "Authorized Generics: An Interim Report," Federal Trade Com- No. 16431, Cambridge, MA, October 2010). The statistics reflect mission Report (June 2009): 2, http:// the weighted (by the number of extended units of drugs used) average across nine major therapeutic classes, which accounted 5. According to the Act, the branded drug company can sue the for approximately 18 percent of total prescriptions in the United generic company after 45 days have passed; however, in this situa- States in 2005.
tion, the automatic 30-month stay does not apply.
17. ASP is defined by the Act as a "manufacturer's sales of a drug to all 6. See "Authorized Generics: An Interim Report," Federal Trade Com- purchasers in the United States in a calendar quarter divided by mission Report (June 2009): 2, http:// the total number of units of the drug sold by the manufacturer in that same quarter. The ASP is net of any price concessions such as 7. See Amazon.com Inc. v. Barnes and Noble.com Inc., 239 F.3d volume discounts, prompt pay discounts, and cash discounts; free 1343, 1350 (Fed. Cir. 2001). The balance of hardship test focuses goods contingent on purchase requirements; chargebacks; and on whether the patent holder will lose more from the claimed rebates other than those obtained through the Medicaid drug infringement than an accused infringer will gain. The public inter- rebate program." See also Daniel R. Levinson, "Monitoring Medi- est standard focuses on whether there is some critical public inter- care Part B Drug Prices: A Comparison of Average Sales Price to est that would be injured by the grant of preliminary relief, given Average Manufacturer Prices," Department of Health and Human the public interest in competition. Services, Office of the Inspector General (April 2006), http:// 8. See, e.g., Sanofi-Synthelabo v. Apotex Inc., 488 F.Supp.2d 317 , which notes that the (S.D.N.Y. 2006); Opinion & Order, Eisai Co. v. Teva Pharmaceuticals Medicare Part B reimbursement methodology took effect in 2005.
USA, Civ. No. 05-5727 (HAA) (ES) (D.N.J. Mar. 28, 2008).
18. See, e.g., Patrick Mullen, "The Arrival of Average Sales Price," Bio- 9. Henry Grabowski, "Are the Economics of Pharmaceutical Research technology Healthcare (June 2007): 48–53 at 48, 50. See also and Development Changing? Productivity, Patents and Political C. Daniel Mullins et al., "Health Plans' Strategies for Managing Out- Pressures," Pharmacoeconomics, 22, supp. 2 (2004): 15–24. See also patient Specialty Pharmaceuticals," Health Affairs, 25, no. 5 (2006): John Hudson, "Generic Take-up in the Pharmaceutical Market Fol- 1337; "Commercial Payers Are Starting to Use Medicare's Average lowing Patent Expiry: A Multi-Country Study," International Review of Sales Price," Specialty Pharmaceutical News, (March 2006).
Law and Economics, 20 (2000): 205–221; Atanu T. Saha et al., "Generic 19. Here price is defined as net of rebates offered to TPPs. Competition in the US Pharmaceutical Industry," International Jour- 20. Ernst R. Berndt et al., "Authorized Generic Drugs, Price Competi- nal of the Economics of Business 13, no. 1 (February 2006): 15–38.
tion, and Consumers' Welfare," Health Affairs, 26, no. 3 (2007): 790–799.
The Economics of Irreparable Harm in Pharmaceutical Patent Litigation Page 7 21. Ibid. However, these two factors may be partially offset by the fact 35. Some formularies may reserve Tier 2 only for branded drugs that that authorized generic entry may result in a delay in indepen- do not have generic equivalents. See, e.g., Letter from Federal dent generic entry, due to generic drug manufacturers not want- Trade Commission Staff to Virginia Delegate Terry G. Kilgore ing to compete with other generics.
(October 2, 2006), p. 4, fn. 17, .
22. Henry Grabowski and John A. Vernon, "The Determinants of Phar- 36. Of course, the branded drug company could reduce its price to maceutical Research and Development Expenditures," Journal of TPPs in order to mitigate this loss of formulary position; such reduc- Evolutionary Economics, 10 (2000): 201–215. tions are typically offered in the form of rebates and discounts. 23. John A. Vernon, "Pharmaceutical R&D Investment and Cash Flows: However, the ability of branded drugs to regain price concessions An Instrumental Variables Approach to Testing for Capital Market after the withdrawal of the generic is also unknown and highly Imperfections," Journal of Pharmaceutical Finance, Economics and uncertain. Thus, the price erosion caused by at-risk generic entry Policy, 13, no. 4 (2004): 3–17.
could continue after the issuance of an injunction, and the result-ing damages may be difficult to ascertain and thus irreparable 24. Ibid., 13.
37. Academic research has shown that a consumer perceives a loss 25. Bronwyn H. Hall, "The Financing of Research and Development," or gain based on the difference between the actual price paid Oxford Review of Economics Policy, 18, no. 1 (2002): 38.
and his or her reference price, where the reference price could 26. "FDA and the Drug Development Process: How the Agency reflect the last price paid by the consumer or the consumer's Ensures That Drugs Are Safe and Effective," Food and Drug Admin- expectation of the product price. Consumers who reap the gain istration, Publication No. FS 02-5 (February 2002). of reduced copayments for a generic could subsequently per- 27. Joseph A. DiMasi, Ronald W. Hansen, and Henry G. Grabowski, "The ceive a loss with the departure of the generic, due to increased Price of Innovation: New Estimates of Drug Development Costs," copayments. There is a significant academic literature indicat- Journal of Health Economics, 22, no. 2 (March 2003): 151–185.
ing that consumers assign greater weight to a loss (due to price 28. For example, Mevacor, a Merck product, suffered a "near-fatal set- increase) than to a gain of the same magnitude. See, e.g., Daniel back" in 1980 when clinical trials were cancelled because of safety D. Kahneman and Amos Tversky, "Prospect Theory: An Analysis issues that arose in animal trials for a similar compound. After its of Decision under Risk," Econometrica, 47, no. 2 (March 1979): approval in 1987 by the FDA, however, Mevacor had higher sales 263–92. Hence, the change in copayments discussed above can than any other prescription medicine in the United States in its lead to a loss of goodwill. first 12 months. Mevacor and its successor Zocor are responsible 38. "Wyeth Says It May Cut 10% of Jobs," New York Times, January 26, for billions of dollars in revenue for Merck. "Case 10: Merck(A): Mevacor," University of Michigan case study, 39. Julie Fishman-Lapin, "A Diversifying Purdue Pharma Hopes to Regain Control Drug," Stamford Advocate, March 4, 2006.
29. See, e.g., William Robinson et al., "First-Mover Advantages from Pioneering New Markets: A Survey of Empirical Evidence," Review of Industrial Organization, 9 (1994): 5; Ian Cockburn and Rebecca R. Henderson, "Racing to Invest? The Dynamics of Competition in Ethical Drug Discovery," Journal of Economics & Management Strategy, 3, no. 3 (September 1994): 481–519.
30. See, e.g., Keith B. Leffler, "Persuasion or Information? The Econom- ics of Prescription Drug Advertising," Journal of Law and Econom-ics, 24, no. 1 (1981): 45–74; Ernst R. Berndt et al., "Information, Marketing, and Pricing in the U.S. Antiulcer Drug Market," Ameri-can Economic Review, 85, no. 2 (1995): 100–105; Mark A. Hurwitz and Richard E. Caves, "Persuasion or Information? Promotion and the Shares of Brand Name and Generic Pharmaceuticals," Journal of Law and Economics, 31, no. 2 (1988): 299–320.
31. PBMs have emerged as the main overseers of the prescription drug plans of employers and managed care organizations. PBMs have developed various strategies for controlling prescription drug con-sumption. These strategies include formularies, three-tier copay-ment schemes, drug utilization reviews, and rebates from drug manufacturers or suppliers.
32. Because generic drug companies typically do not engage in mar- keting, this reduction in marketing expenditures will not be offset by additional marketing expenditures from the generic. 33. If new drugs are launched after generic entry, the branded drug may lose prescriptions to these new drugs as well. 34. See, e.g., John Richardson, "PBMs: The Basics and an Indus- try Overview," The Health Strategies Consultancy LLC (June The views expressed herein are solely those of the authors, who are 26, 2003), 20, http:// responsible for the contents of this report, and do not necessarily represent the views of Cornerstone Research.
2013 by Cornerstone Research, Inc. All rights reserved.
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