Earlier this month, the Biden administration unveiled the executive order entitled “Promoting Competition in the American Economy.” I wrote about it more broadly here. In short, I think the executive order does an excellent job identifying anti-competitive practices that have plagued the United States for too long. Alongside an energetic Federal Trade Commission and DOJustice, the EO delivers a “whole of government” mandate to examine how various departments and agencies can right the ship on competition and anti-competitive conduct.
The executive order covers a lot of ground, but it really shines on intellectual property. It’s worth going line-by-line on the provisions related to this subject.
Generic drug entry
Americans are paying too much for prescription drugs and healthcare services — far more than the prices paid in other countries … too often, patent and other laws have been misused to inhibit or delay — for years and even decades — competition from generic drugs and biosimilars, denying Americans access to lower-cost drugs. [Section 1]
To address persistent and recurrent practices that inhibit competition, the Chair of the FTC, in the Chair’s discretion, is also encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority, as appropriate and consistent with applicable law, in areas such as … unfair anticompetitive conduct or agreements in the prescription drug industries, such as agreements to delay the market entry of generic drugs or biosimilars. [Section 5(h)]
Reverse payment settlement (AKA “pay-for-delay” deals) happen when a generic drug manufacturer challenges patents related to a branded pharmaceutical in the course of filing an abbreviated new drug application (ANDA), potentially resulting in the patents for a drug becoming invalidated. To prevent this competition, the patent owner will pay the generic manufacturer to stay out of the market, avoiding any litigation over the patent challenge. This is rather curious, as patent infringement is usually resolved by the infringer paying the patent owner. Needless to say, this is flagrantly anti-competitive, with real costs to both consumers and the government. One study from last year found that from 2010-2016 delayed entry of generic drugs cost Medicaid alone over $109 million per year.
I look forward to seeing the FTC crack down, and legislation which would enact a flat prohibition on such conduct is an idea worth pursuing.
While pay-for-delay deals are an example of the generic industry splitting monopoly rents with the pharmaceutical industry, there are various roadblocks to generic and biosimilar entry more broadly which the administration’s executive order takes aim at:
[T]o lower the prices of and improve access to prescription drugs and biologics, continue to promote generic drug and biosimilar competition, as contemplated by the Drug Competition Action Plan of 2017 and Biosimilar Action Plan of 2018 of the Food and Drug Administration (FDA), including by:
(a) continuing to clarify and improve the approval framework for generic drugs and biosimilars to make generic drug and biosimilar approval more transparent, efficient, and predictable, including improving and clarifying the standards for interchangeability of biological products;
(b) as authorized by the Advancing Education on Biosimilars Act of 2021 … supporting biosimilar product adoption by providing effective educational materials and communications to improve understanding of biosimilar and interchangeable products among healthcare providers, patients, and caregivers;
(c) to facilitate the development and approval of biosimilar and interchangeable products, continuing to update the FDA’s biologics regulations to clarify existing requirements and procedures related to the review and submission of Biologics License Applications by advancing the “Biologics Regulation Modernization” rulemaking … and
(d) with the Chair of the FTC, identifying and addressing any efforts to impede generic drug and biosimilar competition, including but not limited to false, misleading, or otherwise deceptive statements about generic drug and biosimilar products and their safety or effectiveness; [Section 5(v), emphases added.]
All the patent reform in the world wouldn’t fix the problems associated with regulatory approval for generics and biosimilars, and it’s excellent to see the administration taking initiative on this issue. What I’d like to draw attention to are the bolded sections, which discuss education on the interchangeability of various drugs. At the end of the day, if physicians don’t prescribe a generic or biosimilar, free entry becomes irrelevant. While you hear scandalous stories every now and then about a pharmaceutical representative going above and beyond the call of duty to make sure physicians are “intimately” familiar with their products, the reality is more banal: Physicians stick with what they know and what the experts recommend.
The problem emerges when those experts have a financial interest in recommending their own products over others. Education is a good start (though who educates the educators is the big issue there), and cracking down on nonsense spewed about competitor drugs is just as important.
I would like to note, however, that the executive order mentions “allowing Medicare to negotiate drug prices, by imposing inflation caps, and through other related reforms.” This isn’t directly related to intellectual property, but I’d like to briefly touch on the issue and explain why I’m skeptical of this approach.
As popular as the idea of drug price negotiation is on the left, I believe it’s not the most effective policy to reduce drug prices. Pound-for-pound, generic entry (read: market competition by removing barriers to entry) is the best way to do it. According to the FDA, having a single generic drug manufacturer reduces average manufacturer prices (AMPs) by almost 40%. These savings increase to 54% with two competitors, and up to 95% when there are six or more competitors. Overall, they found that median prices for generics were about 40% of branded pharmaceutical costs. There are problems related to concentration in the generic drug industry, but the evidence for the price-reducing impact of generics is clear and the administration’s proposals to speed up entry are an excellent way to start tackling the drug price problem.
However, a European-style effort to negotiate drug prices could be problematic. Critics of negotiation and drug importation from Canada point out that such nations are able to “free-ride” off the high drug prices that Americans pay to finance drug development. This isn’t necessarily a problem (though it’d be nice if our friends to the north and across the pond would chip in a bit more if it meant reducing U.S. prices), but there is evidence that drug price negotiation in the U.S. doesn’t yield the R&D increase one would expect. From a recent paper published by the National Bureau of Economic Research:
Pharmaceutical innovation policy involves managing a tradeoff between high prices for new products in the short-term and stronger incentives to develop products for the future. Prior research has documented a causal relationship between market size and pharmaceutical research and development (R&D) activities. The existing literature, however, provides no evidence of how this relationship varies across markets. We investigate whether recent expansions in state Medicaid programs caused an increase in R&D. We find no evidence of a response, potentially a result of Medicaid’s low reimbursement for pharmaceuticals, suggesting low(er) price markets may have different dynamics with respect to innovation policy….
The lack of a response to such a change in demand stands in stark contrast to the existing health care economics literature, which has consistently found increases in both R&D activity and new product introductions in response to greater expected demand for pharmaceuticals. Our findings demonstrate that R&D activity does not respond to demand changes in all markets. While Medicaid represents a large market in terms of the number of covered individuals, explicit and implicit government price controls decrease the potential returns for products used by patients in this system. In this way, Medicaid is far more similar to pharmaceutical markets in other developed countries than it is to the privately insured or Medicare Part D market in the United States. As such, the lack of a detectable effect of Medicaid revenues on innovation activity provides some insight into the degree to which revenues earned in non-U.S. markets drive—or more accurately fail to drive—investments in pharmaceutical innovation.
Of course, because the study focuses on increased R&D (i.e., the creation of new drugs) these findings become less relevant when we’re talking about drugs which have either gone generic or are covered by patents which extend legal exclusivity far beyond what is intended by the Patent Act. For newer drugs which represent novel innovations, a demand-side approach with less focus on overall cost but support for consumers is preferable. If we’re talking about generic drugs for which there are few manufacturers or drugs which are still technically on-patent, negotiation or importation is valuable. This requires a case-by-case analysis (and when you add government support for drug development into the mix it becomes even more complicated) but the general rule of thumb should be that the older or less novel the drug, the less we should be concerned about interventions which interfere with the bottom line of pharmaceutical companies.
Right to repair
To address persistent and recurrent practices that inhibit competition, the Chair of the FTC, in the Chair’s discretion, is also encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority, as appropriate and consistent with applicable law, in areas such as…unfair anticompetitive restrictions on third-party repair or self-repair of items, such as the restrictions imposed by powerful manufacturers that prevent farmers from repairing their own equipment. [Section 5(h)]
The Secretary of Defense shall…not later than 180 days after the date of this order, submit a report to the Chair of the White House Competition Council, on a plan for avoiding contract terms in procurement agreements that make it challenging or impossible for the Department of Defense or service members to repair their own equipment, particularly in the field. [Section 5(s)]
Earlier this week, the FTC made good on this provision of the EO by unanimously approving a policy statement announcing it will devote more resources to enforcement of current laws against anti-competitive practices that make independent repair difficult or impossible. This is a very good sign, and while it’s relatively light on details, it’s an affirmation that the FTC is taking the issue seriously and is at the very least putting original-equipment manufacturers on notice.
Earlier this year, the FTC released its report “Nixing the Fix,” which discusses the barriers facing independent repair shops and the costs to consumers associated with anti-competitive practices around the mending of equipment. Those practices include, but are not limited to, those made possible by intellectual property laws like the anti-circumvention provisions of the Digital Millennium Copyright Act and the patenting of components necessary for repair. Right-to-repair isn’t just an IP issue, but the shadow of patents and copyrights over this issue looms large. While a “thin” (sometimes called “libertarian”) version of right-to-repair would involve eliminating IP protections that stand in the way of independent repair, a “thick” (sometimes called “progressive”) version of right-to-repair should justify regulations requiring parts and repair manuals to be made available as essentially a form of the fair, reasonable, and nondiscriminatory (F/RAND) licensing we expect in other industries. Speaking of F/RAND…
Patents and antitrust
To avoid the potential for anti-competitive extension of market power beyond the scope of granted patents, and to protect standard-setting processes from abuse, the Attorney General and the Secretary of Commerce are encouraged to consider whether to revise their position on the intersection of the intellectual property and antitrust laws, including by considering whether to revise the Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments issued jointly by the Department of Justice, the United States Patent and Trademark Office, and the National Institute of Standards and Technology on December 19, 2019. [Section 5(d)]
In late 2019, the Trump administration announced the “New Madison” approach to intellectual property and antitrust. In general, the administration took the view that antitrust theories had no place in IP disputes “where a patent-holder unilaterally attempts to exercise the ‘exclusive Right’ conferred by the U.S. Constitution.” Alleged violations of F/RAND licensing obligations, DOJ argued, do not raise concerns about monopolization.
The 2019 policy statement referenced in the first quotation had cast exclusionary remedies (such as injunctions) as sometimes appropriate in cases related to the infringement of F/RAND-committed patents. They were appropriate in contexts “such as when the potential licensee constructively refuses to engage in a negotiation to determine F/RAND terms.” In other words, in cases where potential licensees use a patented technology, it isn’t necessarily an antitrust issue to issue injunctions preventing further use of that technology even if the technology in question is industry-standard. While injunctive relief should generally be an option in the case of patent infringement (a patent is the right to exclude, after all), the standard to receive injunctive relief shouldn’t be more generous to a patent holder than for anyone else seeking an injunction. If anything, it should be higher.
In the case of F/RAND-committed patents however, the calculus changes dramatically. F/RAND-committed patents are special because they cover technologies determined to be industry-standard, and their owners have agreed to license them in a fair, reasonable, and non-discriminatory manner. If a patent is determined to be essential for the manufacturer of a product or technology to effectively participate in an industry, it’s particularly important for regulators to keep an eye on the licensing practices.
March-in rights
Finally, the administration is looking to undo an 11th-hour policy adopted by the Trump administration related to compulsory licensing via march-in rights under the Bayh-Dole Act, which allowed the U.S. government to take control of patents for inventions it helped to fund. (A compulsory license grants a third party access to a patent without the original patent-holder’s permission.)
The Secretary of Commerce shall … acting through the Director of NIST, consistent with the policies set forth in section 1 of this order, consider not finalizing any provisions on march-in rights and product pricing in the proposed rule “Rights to Federally Funded Inventions and Licensing of Government Owned Inventions,” [Section 5(r)]
The most troubling Trump provision included a revision to the Code of Federal Regulations barring agencies from exercising march-in rights merely because a company was charging too high a price for technology the feds helped create.
This was a bad policy for two reasons. First, as I have discussed previously, while the Bayh-Dole Act does not explicitly mention price as a reason to issue a compulsory license, the statute is relatively flexible in defining which circumstances justify the exercise of march-in rights (e.g., a determination that such licensing is “necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees”). Further, march-in rights may be exercised if a federal agency determines that “action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use,” with practical application defined as:
to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms.
In short, while price is not directly named, it is entirely possible to imagine a circumstance where high prices prevent reasonable access to the invention in question.
I would like to see march-in rights exercised more liberally, and by that I mean exercised at all. The most remarkable thing about the Trump regulation further restricting what would merit the exercise of march-in rights is that it was designed to prevent something which, in the 40-year history of the Bayh-Dole Act, has never happened.
Concluding thoughts
Overall, I am incredibly pleased with the policy agenda the administration has laid out as it relates to intellectual property. Of course, as I mentioned in my general comments on the executive order, there’s no substitute for legislation:
[T]here are clear risks to executive action. A new administration could easily undo or make toothless Biden’s executive order. At worst, you can have an irredeemably Harding-esque executive branch that will not enforce the laws passed by Congress. This is a risk that must be taken seriously, and which only Congress can mitigate if not forestall. The duties of the White House Competition Council include “identify[ing] any potential legislative changes necessary to further the policies set forth” in the executive order, and Congress would do well to consider legislation to complement and buttress the policies included in the EO.
It’s excellent that the White House Competition Council will be tasked with recommending legislation to Congress. There’s no substitute for a statutory fix, not only to make good policies harder to undo but also make it harder for the judiciary to strike down any regulations proliferated or enforcement undertaken without explicit statutory authority. For example, in FTC v. Actavis, the Supreme Court rejected the FTC’s attempt to declare pay-for-delay deals presumptively illegal. This is a relatively easy fix, at least legally speaking.
Beyond the policy specifics, it’s valuable to take in the fact that it’s a new day in America (or at least the White House) when thinking about intellectual property. Between the various provisions of this executive order and the announcement of support for the TRIPS waiver, there’s much for reformers to be excited about.
Photo credit: iStock