By Chris Borges
Intellectual property (IP) rights secured through patents facilitate the introduction of dozens of new brand-name drugs and hundreds of generic drugs annually in the United States. However, proposals advanced by the Biden administration have mistakenly singled out patents as the cause of high drug prices, potentially harming the dense networks of cooperation across a complex network of firms, researchers, and investors that are built on secure property rights and are needed to bring new life enhancing products to market.
In 2023 and 2024, the Federal Trade Commission (FTC) challenged over 400 patents listed in the Orange Book, a catalog of all nonbiologic drugs approved by the Food and Drug Administration (FDA). The FTC claims these challenged patents are improperly listed, and that removing them from the Orange Book will accelerate the entry of generic drugs into the market, thereby boosting competition and lowering drug prices.
By eroding the value and stability of patent rights in this system, the FTC is undermining the incentives that drive the United States’ world-leading pharmaceutical industry. U.S. firms filed nearly 38 percent of global biotechnology patents from 2015–2020, bolstering the U.S. biotech industry’s position over those of competitors such as China, the European Union, Japan, and the United Kingdom. Endangerments to the patent system place the U.S. biopharmaceutical industry at a competitive disadvantage globally, especially as sweeping regulatory reforms and injections of capital are propelling China’s biopharmaceutical industry forward at an unprecedented pace. This presents a long-term challenge to U.S. dominance in the industry.
To advance policies that secure the future of a leading U.S. innovative industry, it is important in this instance to gain a deeper understanding of what generic drugs are, what the FTC is challenging in the Orange Book, and what impact this might have on U.S. innovation and international competitiveness.
Q1: What is a generic drug?
When a company, university, or government lab creates a lead compound for a new potential drug, they often apply for IP protections, such as patents, to gain a period of exclusivity over their invention. This period of exclusivity is an essential incentive for the investment needed to turn the promising lead into a new drug that is approved by regulatory authorities and available to the medical community. Developing a new drug and completing the FDA’s approval process can cost the innovator billions of dollars and take over a decade to complete. The process is highly risky as well: the FDA only approves about 12 percent of drugs that enter clinical trials. Thus, when a firm successfully develops a new, safe, and effective drug, it relies on the exclusivity provided by secure IP rights to recoup its investment and, ideally, fund research into more new innovative drugs. Without this period of exclusivity, innovator firms would have little incentive to invest the capital required to bring new drugs to market.
Eventually, however, the IP protections expire, and generic drugs, or drugs that are equivalent to the already approved innovator drug (known as the “brand-name drug”), can enter the market. Brufen, for example, is the brand-name version of Ibuprofen, an anti-inflammatory drug first discovered and patented in 1961 by researchers at Boots Pure Drug Company. After Boots’s patents expired in the 1980s, dozens of generic competitors such as Advil and Motrin entered the market. From a medical perspective, a generic drug is chemically and therapeutically the same as its reference brand-name drug, allowing the generic drug to serve as a substitute.
Because generic drug makers did not invest in the expensive research, development, and clinical trials process, generic drugs are typically much cheaper than their reference brand-name drug—as much as 85 percent cheaper, per the FDA. Consequently, the market for brand-name drugs frequently collapses upon market entry of generics, underscoring the importance of the period of exclusivity for the innovator to recoup its investment.
Q2: How common are generic drugs?
Generic drugs are common in the United States. The FDA has approved over 32,000 generic drugs, which comprise an estimated 91 percent of all U.S. prescriptions and save patients and payors hundreds of billions of dollars annually. Pharmacists are empowered (and in some states, required) to substitute generics for the branded drug, while formulary management for insured individuals often incentivizes generic drug substitution.
But generic drugs were not always so prevalent. In the 1980s, generic drugs filled less than 20 percent of prescriptions, and few generic drugs entered the marketplace after brand-name drug patents expired. At the time, the FDA approval process for generic drugs was cumbersome. Although the reference brand-name drug passed the FDA’s lengthy and expensive approval process, generic drugs were often required to undergo the same rigorous trials. Further, owners of the brand-name drug’s IP rights could sue generic drug makers for patent infringement during clinical trials, meaning generic drugmakers could not begin the protracted approval process until those IP rights expired.
It was not until Congress passed the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, that generic drugs became common. Hatch-Waxman aimed to balance innovation with access and affordability, by providing incentives to pharmaceutical companies to research and develop new drugs while creating a more efficient process for the FDA to approve generic drugs.
Hatch-Waxman streamlined the generic drug approval process by creating a new type of drug approval application: an Abbreviated New Drug Application (ANDA). Drug makers can file ANDAs if their generic drug is bioequivalent to the approved brand-name drug, meaning the two medications share the same active ingredient and the same rate and extent of absorption. If so, the generic drug maker can utilize the safety and efficacy data of the approved drug instead of going through clinical trials. Hatch-Waxman also created a “safe harbor” provision that shields potential generic drug applicants from patent infringement lawsuits until they submit their ANDA. This provides the generic manufacturer with protection while they run bioequivalence studies and develop manufacturing processes, enabling them to quickly begin selling the generic drug once the IP rights covering the brand-name drug expire.
Q3: What is the Orange Book?
A central component of the ANDA process is the Approved Drug Products with Therapeutic Equivalence Evaluations list, commonly known as the “Orange Book” due to the color of its cover page. The Orange Book lists all nonbiologic drug products approved by the FDA on the basis of safety and effectiveness, along with approved generic versions and any IP rights associated with the drug or its method of use. Critically, the FDA maintains the Orange Book, yet only holds a “ministerial” role over the listed IP information. The FDA insists that it lacks the expertise to evaluate the IP rights claimed in the Orange Book, and thus simply lists the patent information submitted by drug companies without independently verifying its accuracy or appropriateness.
When filing an ANDA, the applicant must account for any patents listed alongside the reference brand-name drug in the Orange Book. Applicants can specify that the patents 1) are expired, in which case the ANDA can move forward, 2) are valid and active, in which case ANDA approval must wait until the patents expire, or 3) are invalid or inapplicable. If the applicant claims the patents are invalid or inapplicable, the patent owner can file a patent infringement lawsuit, which automatically prevents the FDA from approving the ANDA for 30 months or until the lawsuit is settled. This is known as the “30-month stay,” and is intended to allow the parties sufficient time to resolve their patent dispute before the generic drug enters the market.
Q4: What is the FTC asserting about the Orange Book?
In 2023 and 2024, the FTC has disputed the accuracy or relevance of over 400 patents listed in the Orange Book on the grounds that they cover neither the drug in question nor a method of using it. The FTC asserts that companies are exploiting the FDA’s ministerial role over the Orange Book to list inappropriate patents, thereby discouraging the entry of generic competitors and benefitting from the automatic 30-month stay. (Even if an Orange Book patent is inappropriately listed, the ANDA process still requires that the FDA forego approval of the generic drug for 30-months, or until this determination is made in court.)
Through these disputes, the agency seeks the removal of the patents from the Orange Book, or the certification by the manufacturer that the listings comply with applicable statutory and regulatory requirements under penalty of perjury.
Q5: What impact have the FTC’s challenges had on drug prices?
The FTC’s challenges have had a minimal impact on drug prices to date, and most of the challenged patents remain in the Orange Book. The FTC has only announced one investigation into several Orange Book patents held by Israeli firm Teva Pharmaceuticals, for which it has not brought any enforcement actions. Otherwise, three pharmaceutical companies, GlaxoSmithKline, Glaxo Group, and Kaléo Inc., voluntarily delisted several patents while maintaining others in the Orange Book. None of the FTC’s patent listing disputes are currently logged in the FDA’s Orange Book dispute database.
Should the FTC’s disputes prove successful, however, there is evidence suggesting that they will have a muted impact on generic drug market entry, and therefore drug prices. The Hatch-Waxman Act incentivizes generic drug makers to challenge Orange Book patents by providing a 180-day period of exclusivity to the first generic firm that challenges each patent. For popular brand name drugs, this incentive can be worth hundreds of millions of dollars. Thus, Orange Book patents are already frequently challenged by generic firms, with higher selling drugs facing more challenges. There is little indication that improperly listed patents are not already facing challenges, making the FTC’s challenges redundant, at best.
Furthermore, several studies suggest that the FTC’s underlying assumptions about Orange Book patents are incorrect. The FTC asserts that brand-name drug makers are exploiting the Orange Book to delay generic drug market entry via the 30-month stay provision, suggesting that the 30-month stay is preventing the FDA from approving otherwise-ready generic drugs. However, a 2021 study found a median of 3.2 years between the expiration of the 30-month stay and FDA generic drug approval, undermining the FTC’s argument. If the 30-month stay were indeed delaying generic drug approval, many generic drugs would be approved shortly after the stay expires.
Indeed, the relationship between Orange Book patents and generic drug market entry is complex. A different 2021 study that reviewed all Orange Book entries found that 32 percent of listed drugs without active patent protection did not have a generic version, while 28 percent of listed drugs with active patent protection nonetheless had an approved generic version. The authors of the latter study concluded that “even valid patents do not necessarily block competition,” and cheaper generic drugs do not consistently enter the market after patents expire. Thus, even if the challenged patents are removed from the Orange Book, generic competitors might not enter the market for some time.
Q6: How might the FTC’s challenges impact pharmaceutical innovation?
The Orange Book is a key component of the complex innovation ecosystem that produces dozens of new brand-name drugs and hundreds of generic drugs annually in the United States. This innovation ecosystem relies on secure IP rights that facilitate collaboration with others to bring new ideas to the marketplace and incentivize this effort by allowing IP owners to gain financially from their innovation for a limited period. It is this second feature of patents advocates seeking to lower drug prices take issue with. But an assault on patents may damage the features of the innovation system that make possible the investment and collaboration needed to produce innovative drugs that improve well-being. Less investment in innovative drug development may also impact the generic drug ecosystem by reducing the flow of drugs available for generics to copy.
In this instance, the FTC is pursuing a course with potentially detrimental effects and uncertain benefits, while the United States ignores simpler and less disruptive options. For instance, improperly listed Orange Book patents may largely stem from uncertainty in the law rather than bad faith attempts at gamesmanship. The pharmaceutical industry has repeatedly requested the FDA clarify Orange Book patent inclusion criteria over the last several decades, yet the FDA has failed to provide further guidance despite multiple public comment solicitations and a study by the Government Accountability Office. Even IP scholars sympathetic to the FTC’s argument question the effectiveness of the agency’s approach, proposing instead to evaluate patents before they are listed in the Orange Book. This alternative could better provide firms with the consistency and certainty they need to make investment decisions, whereas the FTC’s approach of attacking patents after firms have already invested billions of dollars creates tremendous risk and uncertainty which may disincentivize investment.
Christopher Borges is a program manager and associate fellow with the Economics Program and Scholl Chair for International Business at the Center for Strategic and International Studies in Washington, D.C.
This piece was originally published on December 4th with the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington, D.C.
