Generic pharmaceutical regulation in the United States with comparison to Europe: innovation and competition.

• Author: Young, Adam R.

1. INTRODUCTION

   The debate over health care expenditures rages in America. As presidential candidates discussed their plans for revamping the health care system, the United States makes the largest health expenditures in the world, both per capita and as a percentage of gross domestic product. (1) Health care costs constitute an increasing percentage of household expenditures, particularly for the elderly. (2) While health care costs climb, prescription drug costs represent an expanding percentage of the health care budget. (3) Prescription drug prices thus remain a central concern in the health care debate. (4) For many of their prescriptions, Americans purchase generic versions of prescription drugs, certified by the Food and Drug Administration ("FDA") to be sufficient therapeutic substitutes for brand-name versions of the same chemical compound. (5) Economists estimate that Americans save eight to ten billion dollars annually by purchasing generic alternatives to brand-name pharmaceuticals. (6)

   In both the United States and Europe, the pharmaceutical industry has become a unique regulatory animal. Government agencies hold pharmaceutical manufacturers to rigorous evidentiary showings of the quality of their products. In the United States, the FDA requires pharmaceutical manufacturers to document "proof of safety and efficacy." (7) Evidentiary showings necessitate significant pre-market testing expenses; when coupled with research and development costs, they mandate a huge capital investment to produce innovative drugs. To protect this investment and prevent unsafe drugs from entering the market, the FDA maintains an exclusivity system--market protections that insulate brand-name pharmaceuticals from generic competition for a term, typically three or five years.

   The FDA has been criticized for the length of its exclusivity periods, which essentially maintain the large pharmaceutical companies' abilities to sell branded medications at a monopoly price for an extended period of time. Supporters of the current system have suggested that an alternative system would be deleterious to research and safety, permitting pharmaceuticals of unknown effectiveness onto the market. Indeed, the FDA requires a laborious approval process and years of legal wrangling before a generic prescription drug enters the marketplace.

   The European prescription drug regulatory system provides an interesting contrast to the American process. Despite its comprehensive regulatory framework in which a centralized regulatory body mandates drug regulations, the European system does not regulate a single market for pharmaceuticals. (8) Unlike the United States, which lets the open market determine prices, individual European states regulate the prices of pharmaceuticals through single-payer state health systems. (9) But while EU countries set the market prices for pharmaceuticals by setting the amounts their state health systems will pay, the Europeans maintain longer exclusivity protections for innovator pharmaceuticals. Due to the unique subsidization of the European pharmaceutical industry, Europe has been criticized as creating a lack of pricing competence at the Community level, leading to a less robust, less competitive pharmaceuticals market. (10)

2. BACKGROUND OF PHARMACEUTICAL REGULATION IN THE UNITED STATES

   Consciousness-raising during the Progressive Era regarding the poor state of food and drug quality led to the early twentieth century development of federal regulatory bodies and the modern tort system. (11) The 1906 passage of the Federal Food and Drugs Act began the modern era of pharmaceutical regulation in the United States. (12) The Act created the Bureau of Chemistry, the predecessor to the modern FDA, which took its current name in 1930. (13) For the first three decades of its existence, the FDA primarily regulated the labeling of medications, gearing enforcement against product misrepresentation. (14) However, in 1937, a fatal and largely untested new cough syrup, Elixir Sulfanilamide, led to the deaths of over 107 Americans. (15) This nationally publicized tragedy led to the passage of the Food, Drug and Cosmetic Act in 1938, which provided the framework for comprehensive regulation of pharmaceutical production and sales in the United States. (16) This Act and its later amendments create a lengthy regulatory approval process for new drugs to pass before being placed on the market. (17) For a new drug, this process requires FDA approval through a process now called the New Drug Application ("NDA").

   In the United States, private pharmaceutical companies and universities became the primary producers of new chemical entities ("NCEs"). (18) Pharmaceuticals, like any other new product, are eligible for patent protection under American patent law, ensuring a legal remedy against infringement. (19) Patent protection requires that the inventor apply within one year of the new creation entering the public domain; for pharmaceuticals, this means that the manufacturer must apply for patent protection within one year of beginning the FDA regulatory process. (20) Once a new pharmaceutical has been discovered and has gone through pre-clinical trials, the manufacturer must file an investigational NDA with the FDA. (21) Then a series of human testing programs take place in three categories: toxicology, effectiveness, and--finally--human testing on a large patient population. (22) These tests can take as long as four to six years. (23) Having passed that series of testing, the drug manufacturer has to submit a new drug application for review by the FDA, a process which in itself can require additional time. (24) In all, the regulatory process, from product creation to the marketplace, entails laborious and time-consuming testing and regulation.

   The pioneering pharmaceuticals of the 1960s and 1970s were given long exclusivity protection terms; yet, as development time increased, exclusivity periods were decreased. (25) Generic pharmaceuticals present a different regulatory issue--they contain the same active ingredients as pioneer drugs already tested and reviewed by the FDA. (26) However, into the 1980s, manufacturers of generic pharmaceuticals were required to perform the same expensive testing that the pioneer drug makers had already undergone. (27) These barriers perhaps contributed to the public scandals in the 1970s and 1980s of generic manufacturers cutting corners and attempting to bribe FDA officials to gain entry into the market. (28)

   As a result, Congress attempted to level the playing field for generic pharmaceuticals and encourage competition through the Drug Price Competition and Patent Term Restoration Act of 1984 (the "Hatch-Waxman Act"). (29) The Act established a new process for generic drugs to enter the market, the Abbreviated New Drug Application ("ANDA"). (30) Congress intended the Act to "make available more low-cost generic drugs by establishing a generic drug approval procedure for pioneer drugs first approved after 1962." (31) However, with the Hatch-Waxman Act, Congress also sought to balance the ability of competitors to bring cheap generics to the marketplace with the need for companies producing brand-name drugs to research and develop new pharmaceuticals. (32) To accomplish the first objective, the Hatch-Waxman Act's ANDA provided generics with a new approval process, during which generic producers need only prove the equivalency of their generic product to the pioneer drug on which FDA testing and approval had already taken place. (33) This was intended to allow generic manufacturers to avoid the enormous costs inherent in duplicating the NDA process, particularly the expensive data on human subjects. (34) The Act also gave generic manufacturers the opportunity to petition for generic drugs that list different drugs as the active ingredient or have a different dosage or strength, provided that the change does not require a separate review of clinical data. (35) Additionally, Hatch-Waxman aimed to maintain investment in research and development of new innovator pharmaceuticals. (36) To this end, the Act established two new FDA pharmaceutical approval processes: the ANDA and the Section 505(b)(2) application. (37) These approval processes allow manufacturers of equivalent pharmaceuticals, similar but non-equivalent pharmaceuticals, and pharmaceuticals for which significant safety and efficacy testing have been heretofore conducted by third parties to avoid duplicative innovator research and to develop products during innovator exclusivity periods. (38)

   To aid concurrent development of generics, the Hatch-Waxman Amendments also allowed generic manufacturers to use the patented pioneer drug during the patent life to test and develop generics, which might otherwise be patent infringement. (39) Thus, proprietary pioneer drugs and their testing data were made available to generic manufacturers, allowing the manufacturers to put a competitor pharmaceutical on the market sooner.

   However, in accordance with the first goal of maintaining the incentives for research and development, several restrictions on competition were included in the Hatch-Waxman Act. First, pioneer drugs, those with NCEs new to the market, receive a five-year exclusivity period, during which time no ANDA may be submitted. (40) When generic manufacturers wish to market a bioequivalent, the Act requires that producers notify the corresponding pioneer pharmaceutical's patent owners of a possible exclusivity infringement so that the issue may be litigated promptly. (41)

   Once a generic manufacturer files an ANDA, if a patent infringement action is brought within forty-five days after notice of final certification, approval is stayed for thirty months, or until a court decides that the patent is not infringed. (42) If after thirty months no federal court has ruled on the validity of the patent infringement, the generic manufacturer who...