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The Food and Drug Administration (FDA) oversees the drug approval process in the U.S. When branded drug companies such as Pfizer or GlaxoSmithKline (also referred to as “manufacturers”), want to get a new drug approved, they must provide data to the FDA showing that the drug is both safe and effective. The manufacturers provide the data in a New Drug Application (NDA) where they place all of the scientific and clinical data, usually from at least two well-controlled clinical studies.If approved, the drug will have two forms of market protection. The first comes in the form of “exclusivity” which is a creation of law. Exclusivity enables the drug product to have exclusive, or monopoly, status in the market for a certain number of years (five years for a new chemical entity and other periods of time for different situations.) Exclusivity means that the FDA cannot legally approve a generic drug application for that product until the exclusivity period expires.An important section of Hatch-Waxman Act actually encourages generic companies to challenge patents. If a generic company is the first to file its Abbreviated New Drug Application (ANDA) with a Paragraph IV certification and prevails in the subsequent lawsuit, that generic company is granted a period of market exclusivity of 180 days.After other generic companies entered the market with their forms of fluoxetine and eroded the price, the company estimated that the sales of its form of fluoxetine decreased to 1% of its total product sales. 4When comparing profit margins generated by the fluoxetine case, it becomes quite obvious why Paragraph IV filings are part of its core business strategy. During the last quarter of 2000, Barr reported Product Sales of $142M and a gross margin (deducting the Costs of Sales and Selling & Administration Costs) of $24M, leaving a gross profit margin of 16.8%.However, during the last quarter of 2001, when it had a monopoly on generic fluoxetine sales, Barr took in $360M in Product Sales. With a gross margin of $103.9M, Barr increase its gross profit margin to 28.7%. 5 Hence, by succeeding with its Paragraph IV challenge, it nearly doubled its gross profit margin.
In 1984, Congress passed The Drug Price Competition and Patent Term Restoration Act that came to be known as the “Hatch-Waxman Act.” The Hatch-Waxman rules created processes and incentives for both branded and generic companies involving challenges to patents.An important section of Hatch-Waxman Act actually encourages generic companies to challenge patents. If a generic company is the first to file its Abbreviated New Drug Application (ANDA) with a Paragraph IV certification and prevails in the subsequent lawsuit, that generic company is granted a period of market exclusivity of 180 days.If approved, the drug will have two forms of market protection. The first comes in the form of “exclusivity” which is a creation of law. Exclusivity enables the drug product to have exclusive, or monopoly, status in the market for a certain number of years (five years for a new chemical entity and other periods of time for different situations.) Exclusivity means that the FDA cannot legally approve a generic drug application for that product until the exclusivity period expires.The manufacturing of generic drugs has been extremely successful at contributing to reduced drug prices and increased medication adherence. A 2019 Center for Drug Evaluation and Research report found that once two generic manufacturers enter the market, prices fall to below half of the brand prices. As more generics enter the market, prices continue to drop up to 95 percent when there are six or more competitors. Following generic entry, more patients are able to remain adherent to their treatment regimens, reducing the mortality associated with cost-related non-adherence. These successes come at a cost to brand drug manufacturers—they no longer have monopoly control over a market, eliminating their ability to set prices far above the actual value of a drug, much less its actual cost of production.