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Patent Reform Could Scare Off Investors from Small Biotech

February 03, 2012

The America Invents Act's switch from a first-to-invent to a first-to-file patent claim system favor biotech companies with deep pockets but sets back struggling startups because it forces the latter to put their resources behind patent filings earlier in the R&D process, reports the Daily Journal.

This also means biotech startups with limited funds will have to defend the validity of their patents and bear those legal costs sooner than in the previous first-to-invent system. Venture capitalists could, as a result, end up investing less seed capital in biotech startups than they used to.

Already, investment in startups and novel drug prospects is waning as venture capitalist are wary of medicines and medical devices that require hundreds of millions of dollars to develop and bring though clinical testing and a lengthy US Food and Drug Administration approval process.


Patent Prescriptions

August 2010


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When Viagra's patent expires in March 2012, Pfizer faces the prospect of saying good-bye to more than $1 billion a year in exclusive sales of its impotence drug. But the pharmaceutical giant isn't about to give up its market share without a fight. Last March, Pfizer filed a federal suit to prevent Teva Pharmaceuticals from selling generic Viagra until 2019. The Israeli company, which specializes in making and distributing generic drugs, has received Food and Drug Agency (FDA) approval to start selling its copycat version of the pill as soon as Pfizer's main patent expires (Pfizer Inc. v. Teva Pharmaceuticals USA, Inc., No. 10-128 (E.D. Va. filed Mar. 24, 2010).

According to the lawsuit, Teva's planned release of generic Viagra would infringe one or more claims of Pfizer's patent (No. 6,469,012), which covers Viagra's use for erectile dysfunction. Pfizer claims that the FDA's "Orange Book" lists that patent's expiration date as October 22, 2019, not 2012 as Teva contends.

The Orange Book is the FDA's roster of Approved Drug Products with Therapeutic Equivalence Evaluations. Generic drugs are identical or acceptably bioequivalent to the branded counterpart in dose, strength, route of administration, safety, efficacy, and intended use. The FDA's use of the word identical is very much a legal, not a literal, interpretation.

The U.S. Patent and Trademark Office (USPTO) allows separate patents for a drug's composition and for its method of use in treating a particular medical problem. But experts say such method-of-use protection isn't as strong as an original composition-of-matter patent; hence, Teva's challenge.

It's a collision of interests that typifies the brand-drug-versus-generic battles that have become common in recent years and only promise to intensify. The prize is billions of dollars in prescription drug sales, which keep growing as an aging U.S. population stokes the demand for miracle cures for late-life ailments. And the Drug Price Competition and Patent Term Restoration Act of 1984 - better known as the Hatch-Waxman Act (Pub. L. 98-417) - throws more competition into the mix by letting generic drug makers bring their products to market earlier. Adding a dose of urgency, many blockbuster drugs will soon reach the end of their patent protection. With court battles involved both to protect these patents as well as to invalidate them, there's plenty of intricate work for lawyers.

"The law tries to strike a balance," says Gail Standish, a Winston & Strawn partner in Los Angeles. "There's a need for innovators to make money [to fund] more innovation, and for generics to make drugs more accessible."

But in striking that balance, the Hatch-Waxman Act paved the way for today's running battles over patents and market share. Hatch-Waxman amended the Federal Food, Drug, and Cosmetic Act (21 U.S.C. §§ 301-399b) and the Patent Act (35 U.S.C. §§ 1-376) to encourage the entry of more generics into the market while protecting the patents of drug innovators. It has been the subject of administrative reviews and litigation due to the varying readings of its legislative intent by the courts, the FDA, and the drug industry. Hatch-Waxman has been amended a number of times to close loopholes, and the Medicare Act of 2003 (Pub. L. 108-173) added provisions meant to prevent abuses, such as the misuse of settlements between the branded and generic drug makers. As the drug regulatory agency, the FDA has refined its rules along the way to be consistent with the changes in the statute. Critics see Hatch-Waxman as the trigger for far too many lawsuits, but lawyers in the field say there's more to biotech and pharma litigation than meets the eye.

"Litigation in biotech/pharma is often meant to be used as leverage," says Lisa Haile, a DLA Piper partner in San Diego. Haile is a patent prosecutor and litigator who represents branded drug makers. "Both sides often prefer settlement because trials are very expensive. There are likely more settlements than trials," she observes. And with such a lucrative prescription drug market, it may make more sense for some parties to settle than to fight.

Although branded drugs still dominate the market, with $300 billion in U.S. sales last year, they're steadily losing ground to generics. "Once a generic version of a brand drug comes on the scene, it usually takes over 80 percent of the market," says Juanita Brooks, a principal at Fish & Richardson in San Diego who has defended the patents of several branded drugs.

First to File
Hatch-Waxman gives generic makers such as Teva, Ranbaxy Laboratories, Sandoz, and Dr. Reddy's Laboratories an opening to challenge the patents of popular drugs, or to work around them. Before it was enacted, only 35 percent of top sellers had generic rivals, in part because drug patents were valid for 20 years. Today, 70 percent of all prescriptions in the United States are written for generics, according to IMS Health, a drug industry think tank.

Under current law, generic makers can seek regulatory approval four years after the first approval of the branded drug. The FDA, which approves drugs for marketing in accordance with Hatch-Waxman, must find that the generic version is equivalent to the original and acts in the same manner and as safely in the body. And generic makers who are the first to file for an Abbreviated New Drug Application (ANDA) get 180 days of market exclusivity during which the FDA will not approve any other generic for that drug. (See 21 U.S.C. § 355(j)(iv).) Six months of headway in the market for a popular medicine can prove extremely profitable. This incentive has made generics manufacturers more aggressive in trying to bite off chunks of the branded drugs market.

"The 180-day exclusivity period is when a generic makes the most money," says Jessica Wolff, a partner at Cooley Godward Kronish in San Diego who has represented the makers of both branded and generic drug makers. "After that period, the prices drop due to the entry of other competitors, so being the first to file is key."

To increase the chances of securing first-filer status, a generic maker normally targets promising branded drugs several years in advance. "Once a game plan is crafted, the generic often brings in regulatory counsel to refine the strategy," says Douglas Carsten of the San Diego office of Foley & Lardner. After applying for approval, "it must constantly monitor the FDA list of dates when first applications were accepted - and the FDA only lists dates, not names of filers - and then track back to find out if it made the [first-filer] cut. The important thing is, the generic team must make sure its ANDA application is robust so it doesn't forfeit its 180-day exclusivity."

Paragraph IV Challenge
The generic applicant must demonstrate to the FDA that either: the branded drug is not patented; its patent has expired; the generic wouldn't be sold before the patent's expiration date; or the patent is not valid or would not be infringed by the generic (21 U.S.C. §355(j)(2)(A)(vii)(IV)). If the latter approach - called a Paragraph IV challenge - is successful, the generic can be marketed even before the branded drug's patent ends. But using Paragraph IV triggers the threat of an infringement lawsuit from the branded-drug innovator.

"Branded-drug makers don't automatically sue upon a Paragraph IV filing," says Fish & Richardson's Brooks. "Their counsel will do due diligence to determine if the generic filer has worked around their patents or is really infringing. Suing isn't always the option."

The incentive to sue is great, however, especially if the branded drug is a billion-dollar seller at the peak of its sales, after years of waiting for FDA approval. A Hatch-Waxman provision adds another incentive: Once the patent holder sues for infringement, the FDA must delay approval of the generic challenger for 30 months (21 U.S.C. §355(c)(3)(C)). After that stay, the generic is free to seek FDA approval and start selling. But if the generic goes on sale before the infringement suit has been decided, it may have to pay damages in the event it loses in court. Teva is the most intrepid of such risk-takers, initiating 12 of the total 28 at-risk launches in the past seven years. However, Teva recently lost a jury trial over a claim that it violated Pfizer's acid-reflux drug patent for Protonix (Altana Pharma AG v. Teva Pharmaceuticals, Inc., No. 04-2355 (jury verdict entered April 23, 2010)). Teva is appealing, but analysts say if it doesn't prevail the company could end up paying Pfizer between $300 million and $1 billion.

First-to-file Paragraph IV challenges by generics have steadily increased over the decades since Hatch-Waxman's enactment. And according to RBC Capital, filings have more than doubled over the past three years. Brand-name drugs worth $89 billion in the U.S. market will face generic competition in the next five years, according to IMS Health. Litigation is sure to dog the many patents that are expiring within the next few years, including bestsellers like Pfizer/Esai's Aricept for early symptoms of Alzheimer's disease; Bristol-Myers Squibb and Sanofi-Aventis's blood-thinning drug Plavix; and Johnson & Johnson's broad-spectrum antibiotic Levaquin.

Field of Battle
ANDA approval is the main theater for these drug patent skirmishes, where each side tries to make the process work to its advantage. "Gaming by all parties is amazing and complex," says Winston & Strawn's Standish, who has litigated on behalf of many generics. "And it's not always between innovators and generics companies. It can be who among generics will be first to market."

But Standish thinks that as the statute is written, "innovators do have more openings at their disposal for delaying the entry of generics." Aside from aggressively litigating to preserve or extend the life of a patent by staying the approval of generics, a branded drug maker can:

? sponsor "citizen petitions" to the FDA to withhold ANDA approval, on the basis that the copycat drug isn't safe;

? seek a preliminary injunction against the at-risk launch of a generic rival pending a final court decision on its infringement suit. However, the patentee must show not only that it's likely to win the suit, but also that it would incur irreparable harm if the competing product is released, and that the injunction is in the public's best interest; and

? seek new patents for improvements to the original drug - different delivery methods, reformulated dosages, new pill coatings, etc. - effectively resetting the 20-year clock on the original patent.

This last tactic is referred to as "evergreening" (or, by its detractors, "product hopping"). By evergreening, however, patentees may invite litigation by third parties alleging anticompetitive practices. For example, in January, Abbott Laboratories and Fournier Laboratories paid $22.5 million to settle a lawsuit brought by California and 23 other states. The plaintiffs accused the companies of product-hopping and of filing frivolous patent infringement suits to gain automatic 30-month stays of the FDA's approval of generic versions of the cholesterol drug Tricor (Florida. v. Abbott Laboratories, 2010 WL 171691 (D. Del.) (settlement agreement)).

"There are scores of lawsuits nationwide against drug companies who use various strategies to delay generic availability," says Cheryl Johnson, a deputy attorney general in California who litigated the Tricor case. "These delay schemes cost the states and consumers millions if not billions of dollars each year as they deny us access to affordable drugs."

To head off pressure from generic rivals, a branded drug's maker could convert it into a nonprescription, over-the-counter drug. The company also could resort to licensing a subsidiary or another company to make an "authorized generic" version of its product. Because the authorized generic falls under the patentee's original application, this practice is not inhibited by the 180-day exclusivity given to a competing ANDA first filer.

Unsettling Settlements
Settlement is very common in drug patent litigation. Generics manufacturers tend to be quite open to it. Part of preparing for a generic drug's release is studying the possible legal scenarios-the various components likely to be challenged by patentees, for example. In fact, inviting litigation with an eye to settling it is practically an aspect of a typical generic business model, according to some observers. Many lawsuits, says Standish, end up "in split-patent settlements," where the patent holder lets the generic maker sell its version while the patent is still valid.

The number of settlements in drug patent cases has risen nationally, reaching 54 last year, up 20 percent from the year before. Part of the reason: In the three federal courts where 70 percent of all drug infringement lawsuits were filed-New Jersey, Delaware, and the Southern District of New York-generics companies successfully defended themselves only 36 percent of the time. Plaintiffs obviously prefer these venues for their history of favorable rulings. (Four federal courts-including the Central District of California-have never ruled against generics companies.) The low win rate for generics also explains why more than half of the cases in these courts were settled, according to an RBC Capital Markets Study released in January. Nationwide, settlements occur nearly half of the time.

Reversing Reverse Payments?
And for generics, sometimes winning means settling. Frequently the innovator will agree to handsomely compensate the generic producer for not marketing-or for delaying the release of-an unbranded drug. And because the six-month market exclusivity for an approved generic kicks off not upon approval but at the start of marketing, this sort of arrangement also delays the FDA's approval of any other rival generics standing in the queue to copy the same drug.

Such a setup is called reverse payment, or "pay for delay." Typically, the generic receives millions in cash (and avoids litigation costs), while the patent holder can hold on longer to a lucrative market. Drug companies entered 19 reverse-payment agreements last year, according to a Federal Trade Commission (FTC) report. Such deals kept generics off the market for, on average, nearly 17 months longer than other settlements, the report says, costing consumers an estimated $3.5 billion a year.

Indeed, reverse payments have been a lightning rod for third-party litigation. The FTC, which has long sought legislation to bar such schemes, sued Cephalon for paying competitors more than $200 million not to market a generic form of Provigil, a stay-awake drug for people with a sleeping disease (FTC v. Cephalon, Inc., 551 F. Supp. 2d 21 (D.D.C. 2008)). The commission, along with California's attorney general, also recently lost a case it filed against three generic drug makers for delaying the sale of a generic testosterone-replacement drug (FTC v. Watson Pharmaceuticals, Inc., 611 F. Supp. 2d 1081 (C.D. Cal. 2009)).

In an earlier, well-known case, Bayer AG famously paid a Teva subsidiary $398 million to delay the release of Cipro, a generic version of the branded antibiotic Ciprofloxacin. Later, an assortment of pension and consumer groups filed more than 30 lawsuits against Bayer, contending that the reverse-payment deal violated antitrust laws. The plaintiffs charged that the underlying patents were in question, and that they had paid more for Ciprofloxacin than they should have after its patents expired (In re Ciprofloxacin Hydrochloride Antitrust Litig., 166 F. Supp. 2d 740 (E.D.N.Y. 2001)).

The district court granted summary judgment for the defendants, noting: "[I]t goes without saying that patents have adverse effects on competition. ... However, any adverse effects within the scope of a patent cannot be redressed by antitrust law." (In re Ciprofloxacin Hydrochloride Antitrust Litig., 363 F. Supp. 2d 514, 523 (E.D.N.Y. 2005).) The court ruled that the patent settlement between Bayer and Teva did not run afoul of U.S. patent rules, holding specifically that "non-infringing consumers" had no standing to challenge the validity of a patent (363 F. Supp. 2d at 541).

Appellate rulings on the case were split: The patent ruling was affirmed by the Federal Circuit (544 F. 3d 1323 (Fed. Cir. 2008), cert denied, 129 S. Ct. 2828 (2009)), while the antitrust claims went before the Second Circuit.

Then in April the Second Circuit, finding itself constrained by its own precedent, affirmed the antitrust ruling. A prior decision had upheld reverse-payment settlements in the absence of allegations of "sham litigation" or the "fraudulent procurement of a patent." (See 604 F.3d at 105-106, citing In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 208-12 (2d Cir. 2005).)

But the battle may not be over. The circuit's three-judge panel invited en banc review by the full court because of the "exceptional importance" of the issues. The Department of Justice, in turn, has asked the court for an en banc rehearing, which is pending.

In the meantime, a similar antitrust suit involving reverse payments to Cipro is going forward in California, using the state's Cartwright Act (Cal. Bus. & Prof. Code §§ 16720, 16726). A class of consumers represented by Lieff Cabraser Heimann & Bernstein in San Francisco last month appealed the summary judgment that a San Diego Superior Court granted to defendant Bayer in August 2009, based on the legal standard set forth in the Second Circuit's Tamoxifen decision. Oral argument is expected early next year (In re Cipro Cases I and II, No. D056361 (Cal. Ct. App. (4th Dist., Div. 1)).

Despite uncertainty in the courts, pressure is definitely building against reverse payments, as pension funds, health insurers, and public institutions clamor for cheaper generics. Sooner or later something must give.

Lawsuits over top-selling drugs ramp up as patents expire.

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