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Executive Summary

The ANDA/patent restoration bill is a watershed event culminating a 10-year cycle of Hill investigations into the prices and profits of the U.S. brandname drug industry. Seen in a historical perspective, the Waxman-Hatch bill approved by the House on Sept. 6 is the progeny of the Nelson and Kennedy Senate hearings which began in the early 1970's. Those hearings helped to create the public pressure for the ANDA side of the legislation. The bill in its final form also contains concepts closely related to the aborted Drug Reform Act of 1979. Sen. Hatch's Aug. 9 compromise amendments which will grant five-year marketing exclusivity periods for all new chemical entities developed in the future is directly derivative of the exclusivity provisions in the 1979 bill which faltered in Congress. As an outgrowth of a 10-year cycle of Hill hearings, the Waxman-Hatch bill probably signals the beginning of a cooling off period for the drug industry on Capitol Hill. With a new law designed to lower the prices on products approved in the 1962-1982 period, it will be hard to arouse much Capitol Hill interest in the Rx pricing issue in the next several years. The Washington Post front-page headline on Sept. 7 announcing House action accurately reflects the public packaging of the bill. The Post headline declared, "DRUG BILL APPROVED BY HOUSE: Huge Savings Seen For Consumers In Generics Measures." That type of publicity could quickly erase the drug industry's reputation as an artifically protected, high-profit consumer product segment. Bill Recognizes Marketing Exclusivity In Real World: Seven Years For New Entities The next cycle of Hill hearings directly in the Rx area is likely to focus less on industry pricing and more on FDA oversight -- especially on the agency's ability to implement the generic approvals called for by the ANDA part of the Waxman-Hatch bill. Similarly, there could develop in the next several years more pressure on the govt. to take advantage of the generic drug approvals as a third-party buyer. If Health Care Financing Administration (HCFA) lags in changing reimbursement rates to keep up with FDA generic approvals, that could be a fertile area for Hill investigation. The brandname segment has already staked out the NDA approval process as one of its key primary policy issues for the next several years. The patent restoration and NDA exclusivity sections of the bill could make it slightly more difficult for the industry to find Hill allies to push for oversight hearings in that area. With brandname firms guaranteed at least five years of marketing exclusivity, it may be hard to find someone to push the issue of FDA efficiency on the Hill in the manner that Rep. Scheuer did in 1980-81. The Rx segment and FDA, of course, will continue to be vulnerable to Hill oversight hearings on any safety related issue associated with side effects on a major drug. While the availability of generic copies of the off-patent drugs approved by FDA during the period 1962-1982 will draw the greatest attention from the lay press and financial community in the short run, the marketing exclusivity segments of the bill have the potential to become the dominant factor in drug competition through the beginning of the next century. Through the five-year guaranteed exclusivity for new chemical entities and the five-year patent restoration, research-intensive firms will be assured in the future of a significant period of protection. The five-year prohibition against FDA approval of ANDAs for new chemical entities in the future is being interpreted by many drug industry observers as a de facto seven-year grant of exclusivity when the realities of developing and approving a generic copy are taken into consideration. That seven-year de facto protection matches the seven-year exclusivity figure considered in the 1979 drug law reform debate. It also appears to reflect the reality of brandname competition during the last eight-to-ten years. SmithKline's Tagamet, for example, got seven years of a virtual monopoly in the ulcer segment before the first major brandname competitor was able to make inroads into the new drug class. With guaranteed protection from generic copies for five years, the Tagamet type of monopoly is now written into law for major research breakthroughs. ANDA-Availability Of Many High Volume Products Could Lead To Consolidation In Generics Segment For the generic industry, the ANDA part of the bill may mark a coming of age. A number of generic firms have already proven themselves to be successful financial operations and several of the public ones have won strong promoters in the investment community. The easier access to the large group of 1962-1982 products is certain to supplement those initial gains. However, the larger potential of big products such as propranolol, triamterene & hydro-chlorothiazide, and diazepam could begin to favor those generic mfrs. with larger capital resources and the capability for larger marketing and distribution efforts. As the Medical Device Amendments of 1976 accelerated consolidation within that segment of health product manufacturing and marketing, the Waxman-Hatch bill may similarly touch off a period of mergers and acquisitions in the generic drug business. Those mergers could be vertical as well as horizontal. Revco has already broken ground in the area of chain diversification into generic manufacturing. Although the F-Ferol incident has recently highlighted the risks to chains in manufacturing, in-house production of generics is not impossible to conceive for some of the chains approaching natl. distribution capability. Among a half-dozen of the brandname companies which have generic lines, one pertinent question for the future will be how to organize those divisions. They have been weak sisters for the most part of the brandname business, but with the ANDA bill they could become substantial entities on their own. At least one brand company has indicated increased interest in the generic business. Squibb told its annual meeting in April: "We, ourselves, also intend to put more emphasis on marketing pharmaceuticals that come off patent" ("The Pink Sheet" May 14, T&G-5).

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