IMPACT OF PATENT SETTLEMENTS ON DRUG COSTS: ESTIMATION OF SAVINGS

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1 Providing key policy setters and decision makers in the global health sector with unique and transformational insights into healthcare dynamics derived from granular analysis of information. IMPACT OF PATENT SETTLEMENTS ON DRUG COSTS: ESTIMATION OF SAVINGS IMS Institute for Healthcare Informatics June Waterview Boulvard, Parsippany, NJ 07054

2 IMPACT OF PATENT SETTLEMENTS ON DRUG COSTS: ESTIMATION OF SAVINGS IMS Institute for Healthcare Informatics June 2013 In 1984, Congress enacted the Hatch-Waxman Act to incentivize the development of less expensive generic pharmaceuticals by encouraging generic drug makers to challenge in court the validity of questionable brandname drug patents. The Act has proven to be an unqualified success relative to its goal, as generic drugs now are used to fill about 85 percent of all prescriptions dispensed in the U.S., saving consumers and the healthcare system nearly $4 billion every week. For the 10-year period , the use of generic prescription drugs in place of their brand-name counterparts saved American consumers and the nation s health care system an estimated $1.07 trillion dollars. It is widely agreed that these results are in part attributable to the resolution of some of the patent suits via out-of-court settlement agreements between the brand and generic company in which the generic drug is allowed to enter a market months or even years before the brand patent term expires. Pharmaceutical patent settlement agreements occur when a generic manufacturer challenges the validity of a brand s patent, and the two companies settle the litigation resulting in the entry of a generic prior to the patent holder s claimed patent expiry date. Both patent holders and challengers reach this agreement based on their respective assessment of the patent s validity and probability of a successful challenge. The purpose of this study is to quantify the impact of patent settlements and early generic market entry on drug costs, measured at the trade price level. For each molecule subject to a patent settlement, the actual sales including generics from the period of generic entry until December 31, 2012 was compared to what sales would have been had all of the volume been sold at the brand price prevailing at the time of generic entry. The difference in these two amounts is considered the amount of savings, or impact on drug costs. APPROACH AND SOURCES The analysis was performed on a set of 33 molecules for which patent settlement agreements were reached between 2005 and 2012, and where measureable savings were identified. i This set of molecules was a subset of 65 settlement agreements for which information was provided to us by the 2 P a g e

3 Generic Pharmaceutical Association. The remaining settlements for which measureable savings were not identified included those where a generic of the form and strength designated in the settlement has not launched, there was insufficient data available to IMS, or the calculated price of the generic was not less than that of the branded product. Volume and sales information was sourced from the IMS National Sales Perspective TM and National Prescription Audit TM, using the specific molecule form and strengths subject to the patent settlement. Patent expiry dates were sourced from the Food and Drug Administration s Orange Book (approved drug products with therapeutic equivalence evaluations) for the relevant patents. Generic entry date was based on IMS National Sales Perspective TM and measured based on the month of first recorded sales. METHODOLOGY For each molecule subject to patent settlement, we calculated savings as follows: 1. The average brand price was calculated for the 12 months prior to generic entry based on retail sales of the brand molecule divided by the retail extended unit prescriptions dispensed. 2. For each month following generic entry, the value of the brand form and strength that was replaced by equivalent generics was calculated based on the average brand price multiplied by the generic retail extended unit prescriptions dispensed. 3. Cost savings were calculated for each month as the value of the brand form and strength that was replaced by equivalent generics less actual retail sales of the generics. 4. Cumulative savings were calculated for each molecule based on the sum of the monthly cost savings from date of generic entry through December 2012 and summed to generate total savings. 5. The Federal Government share of total savings was calculated based on the aggregate share of total retail drug costs in 2011 attributed to Medicaid, Medicare Part D, and other Federal programs including the Department of Defense and Veterans Affairs. ii This amounts to 32.6 percent of the total. 3 P a g e

4 FINDINGS: IMPACT OF PATENT SETTLEMENTS Impact through December 31, Generic pharmaceuticals launched prior to patent expiry as a result of the 33 settlements analyzed, have resulted in a reduction of $25.5 billion in drug costs from 2005 through December 31, Average annual savings per year since 2005 amount to $3.2 billion from these 33 settlements. 3. Savings varied widely by molecule, ranging from $0.1 million to more than $4 billion during the full period and on average, generics had a 64.5 percent share of the molecule s market by the end of The 33 molecules analyzed were introduced an average of 81 months prior to patent expiry date. 5. Almost one third of the estimated savings accrues to the Federal Government or $8.3 billion over the past 8 years. Impact beyond 2012 For those settlements where the patent expiry date is in 2013 or later, ongoing savings will be realized as a result of these settlements. The exact magnitude of these savings cannot be predicted with certainty as they will be impacted by future market dynamics, including the possibility of new competitive products in the therapeutic space, changes in clinical practice affecting the molecule, safety or other regulatory actions, and changes in the price of the generic products. 1. As of the end of 2012, the level of savings from all of the 33 settlements was just over $1 billion per month. 2. Among those molecules providing future savings, the number of remaining months prior to patent expiration ranges widely, but on average amounts to 56 months. 3. On that basis, the remaining savings resulting from the 33 settlements would be $61.7 billion if the level of savings remained at the current level through patent expiry for each molecule. DATA LIMITATIONS 4 P a g e

5 This analysis is subject to limitations of the underlying data sources, including the volume and pricing accuracy of IMS National Sales Perspectives TM and National Prescription Audit TM. Pricing levels are based on a sample of wholesaler invoices and do not reflect off-invoice rebates and discounts. The analysis is also based on patent expiry dates for what are understood to be the relevant patents as listed in the FDA Orange Book. No judgment was made as to the validity of those patents or the probability of success for patent challenges which did not occur as a result of the settlement agreement. No distinction has been made between patent settlements that included some form of consideration from those that did not, as the details of the patent settlements are not publicly available. COMPARISON TO OTHER ESTIMATES OF IMPACT OF PATENT SETTLEMENTS WITH CONSIDERATION Other studies have sought to quantify the impact of patent settlements with consideration, including the Federal Trade Commission (FTC), which in its 2010 study estimated that such settlements cost American consumers $3.5 billion per year - $35 billion over the next 10 years. iii The Congressional Budget Office (CBO) estimated in 2010 that the Federal government would save, on net, $0.9 billion during the period and $2.7 billion during the period. iv A direct comparison of the results of this analysis with the previous estimates of the economic impact of patent settlements published by the FTC and CBO would be difficult, however, since the detailed methodology, specific products, sales estimates and impact assessments have not been disclosed. The 33 settlements analyzed for this report are a subset of those submitted and reviewed by the FTC. Moreover, the FTC and CBO assessments are based solely on a subset of patent settlements that include consideration (often referred to as reverse payments ). This subset of settlements with consideration is approximately percent of all settlements and has remained steady over the past decade. v Without knowing which of the 33 settlements analyzed in this study may have included consideration, it is only possible to model a theoretical comparison with the FTC and CBO assessments by assuming a similar percent ratio. In addition, the FTC assessment is based on a delay in generic entry of 17 months as a result of settlement with consideration. While direct comparisons with these analyses are difficult absent additional information, an arithmetic modeling of the results of patent settlements under different assumptions is possible and is presented here to provide a basis for further consideration. For the 33 molecules studied in this report, 5 P a g e

6 the actual savings through the end of 2012 amounted to $25.5 billion. For the remaining period through the patent expiry date as recorded in the FDA s Orange book, an additional $61.7 billion would be saved if the level of savings continued at the actual level of the last quarter of This, therefore, amounts to $87.2 billion in total savings for these molecules from the date of generic entry until patent expiry date. Addressing Potential Generic Legal Wins A recent analysis of all pharmaceutical patent challenges in the decade found that the generic companies were successful in 48 percent of the cases. vi If this success rate is applied to account for cases that might have been won by the generic manufacturers had a settlement not been achieved, the total savings of $87.2 billion would be discounted to $45.3 billion, assuming the generic entry date would have been the same as the entry date agreed to as part of the settlement. Settlements With Consideration A subset of settlements that include consideration from the patent holder to the generic company is the specific focus of the FTC, and these represent percent of all settlements. If this percentage were applied to the $45.3 billion in savings from cases that the patent holder would have won had a settlement not been reached, the related savings would amount to $11.8 billion to $13.6 billion. Applying a Federal Government s share of 32.6 percent would result in $3.8 billion to $4.4 billion in savings. This arithmetic modeling is not intended to represent in any manner whatsoever what would have happened absent the patent settlement agreements that occurred. However, it is presented to illustrate the magnitude of the potential impact based on the specific and actual cases of 33 settlements that occurred since Further analysis and modeling of outcomes under different scenarios is required, with more specific information of the actual cases documented, in order to advance the understanding of patent settlements and their impact on consumers, payers, and manufacturers. * * * Funding support from the Generic Pharmaceuticals Association is gratefully acknowledged. All analysis and this summary of findings were undertaken independently by the IMS Institute for Healthcare Informatics. 6 P a g e

7 APPENDIX 1 Brand Drug Name Brand M anufacturer Dosage Form Total Savings to 12/31/12 ($ M n) Q Average M onthly Savings ($ M n) M onths from January 2013 to P atent Expiry Estimated Savings January 2013 to P atent Expiry ($ M n) Adderall XR Shire Capsule Allegra Sanofi-Aventis Tablet 4, Allegra D-12 Sanofi-Aventis Tablet Altace King Capsule ,074.6 Biaxin XL Abbott Tablet Cardizem LA Valeant Tablet Combivir GSK Tablet Diastat Valeant Gel Effexor XR Wyeth Capsule 3, ,196.7 Exelon Caps Novartis Capsule Femara Novartis Tablet Femcon Fe Warner Chilcott Tablet Focalin daily Novartis Tablet Imitrex GSK Tablet Keppra UCB Tablet Lamictal GSK Tablet Lipitor Pfizer Tablet 3, ,643.1 Lotrel Novartis Capsule Mirapex BI Tablet ,245.1 Nasacort AQ Sanofi-Aventis Spray OxyContin Purdue Tablet Paxil CR GSK Tablet Pulmicort AstraZeneca Suspension ,272.6 Respules Rythmol SR GSK Capsule Seasonale Teva Tablet Solodyn Medicis Tablet Starlix Novartis Tablet Tricor Abbott Tablet Valtrex GSK Tablet 3, ,572.0 Wellbutrin XL Valeant Tablet 4, ,690.3 Yasmin Bayer Tablet Zantac Syrup GSK Syrup Zithromax Pfizer Tablet 1, , ,724.7 i The Appendix includes the full set of molecules and detailed information related to this analysis. ii Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group iii Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions, An FTC Study, January 2010 iv Congressional Budget Office S. 369: Preserve Access to Affordable Generics Act (Updated Table), June 16, P a g e

8 v Federal Trade Commission v. Actavis, oral argument, March 25, 2013 vi Pharmaceuticals: Analyzing Litigation Success Rates. RBC Capital Markets. January 15, P a g e