WILL THE INFLATION REDUCTION ACT SPELL THE END OF HATCH-WAXMAN LITIGATION?

The Inflation Reduction Act of 2022 (IRA) has received a lot of attention concerning its potential effect on everything from IRS funding to clean energy. But one aspect of the IRA that has caused much discussion among pharmaceutical companies is the “Price Negotiation Program.” Under this program, drugs approved under new drug applications (NDAs), including “small molecule” (chemically synthesized) drugs, are eligible for selection for “negotiation” (i.e., price setting) seven years after initial FDA approval, with the applicable price going into effect 23 months later – leading to a presumptive nine-year price exclusivity window for NDA products. Small molecule drugs have made up roughly 70% to 75% of annual FDA drug approvals over the last decade. See “An Analysis of FDA Drug Approvals from the Perspective of Molecules,” 27(3) Molecules, 1075 (Feb 2022), Beatriz G. de la Torre, The Pharmaceutical Industry in 2021.

If a drug is selected for price setting, it is all-but-guaranteed to decrease in price, with statutorily prescribed ceiling prices as little as 40% of the drug’s non-federal average manufacturer price. Moreover, the Centers for Medicare and Medicaid Services, the organization tasked with negotiating these prices, has indicated its interest in “negotiating” below these ceiling prices.

It remains to be seen whether, and to what extent, the Price Negotiation Program will affect the Hatch-Waxman Act of 1984. In brief, the Hatch-Waxman Act is a statutory scheme designed to enable approval of generic drugs and facilitate resolution of any patent disputes concerning a given new drug before FDA approves generic versions of that drug. The scheme was calculated to balance the public interest in encouraging the innovation that brings a new drug to market with the public interest in eventually having lower-cost generic versions of that drug. This patent litigation resulting from this statutory scheme, colloquially known as “Hatch-Waxman litigation,” has been a standard part of drug-life-cycle planning for decades.

By issuing a presumptive nine-year price-exclusivity window for NDA products, the Price Negotiation Program seems poised to change the incentives for how brand and generic drug manufacturers will approach small molecule drug development, and by extension, the Hatch-Waxman litigation process. Though widespread effects on particular drugs might not be felt for several years, pharmaceutical companies are already expressing reduced interest in conventional small molecule drug development after the IRA. The Pharmaceutical Research and Manufacturers of America® completed a survey after the IRA passed, where 63% of its trade group member organizations reported they “expect to shift R&D investment focus away from small molecule medicines.” “WTAS: Inflation Reduction Act already impacting R&D decisions,” PhRMA.org (Jan. 17, 2023), Nicole Longo.

Further, the same survey showed that 95% of their members reported that they “expect to develop fewer new uses for medicines because of the limited time available before being subject to government price setting.” Id. If these expectations materialize, the Price Negotiation Program would reduce long-term interest in small-molecule innovation, which in turn could reduce Hatch-Waxman litigation on the fifteen- to twenty-year time frame. The exact extent of this reduction, however, is too difficult to predict at this time.

The Price Negotiation Program may also impact how Hatch-Waxman litigation is settled. Selection into the Price Negotiation Program will focus on “single source” drugs, which includes drugs for which there is no generic competition. While it is premature to predict how the Price Negotiation Program will impact Hatch-Waxman settlements, both branded and generic companies are aware that the Program could significantly change their respective settlement strategies.

Thus, at least so far, the answer to whether the Price Negotiation Program will be the end of Hatch-Waxman litigation is: not yet. While it seems clear that the Price Negotiation Program certainly will have an effect, it is too early to tell how much of an impact it will have on Hatch-Waxman litigation.

Alexa Hansen is a partner at Covington & Burling LLP.