Generic drug entry.
Under provisions of the Hatch-Waxman Act, the first generic drug applicant to file with the Food and Drug Administration gets 180 days of exclusivity after entry before other generic manufacturers may enter the market--a sort of "mini patent period" for the first generic. The intention of the provision is to provide additional incentive for generic drug companies to challenge weak patents rather than just wait for patent expiration.
An unanticipated response to this provision has been contracts between the manufacturers of patented drugs and generic drug manufacturers, whereby the generic firm that wins the first-to-file right agrees to delay entry in exchange for a payment from the patent holder. Under the law, even with the agreement, the generic company still retains the 180-day exclusivity right when it finally does enter the market. As a result, the intention of the provision is violated and society loses out because the price premium received by the generic firm over those 180 days does not reflect lost consumer surplus. Entry, in effect, has public good characteristics and a private contract not to enter reduces social welfare.
In the early years of implementing Hatch-Waxman, the FDA awarded 180-day exclusivity only if a client successfully ended a patent early through a successful lawsuit. Exclusivity was awarded only three times between 1984 and 1998, when the Supreme Court ruled against the FDA's "end the patent" rule.
The authors of this working paper argue that reform should hearken back to the original FDA rule. Congress should amend the law so that 180-day exclusivity should come only for actual entry, rather than just the first application to the FDA.
PETER VAN DOREN is editor of Regulation and senior fellow at the Cato Institute.