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Focus On Generic Drugs

Hatch Waxman Act: the basics

The Hatch-Waxman Act is a federal law enacted in 1984 to achieve two objectives: (1) increase the ability of generic drug manufacturers to offer consumers lower cost copies of off-patent prescription medicines, and (2) spur the discovery and development of new, innovative pharmaceuticals by research-based companies.

Its full name is the Drug Price Competition and Patent Term Restoration Act of 1984 (P.L. 98-417), but hardly anyone calls it that. Since it was enacted, the act has been commonly referred to by the names of its principal authors, Senator Orrin Hatch (R-UT) and Representative Henry Waxman (D-CA). The law includes amendments to the Food, Drug, and Cosmetic Act as well as the federal patent statute.

How has the Act encouraged both the growth of the generic drug industry and innovation in new drug therapies?

First, Hatch-Waxman has made it easier, less costly and quicker for generic manufacturers to get copies of brand name drugs on the market following patent expiration. Here is how:

The Act lets generic manufacturers reference in their FDA applications the innovator companies' drug safety and effectiveness data, instead of having to do clinical testing themselves.

Generic manufacturers simply have to show that their products are bioequivalent to the brand name drug. Demonstrating that is much less costly than proving safety and efficacy.

Hatch-Waxman allows generic manufacturers to begin clinical tests before the patent on the innovator drug expires. In an exception to patent law, the law permits a generic company to have early access to the research-based company's data (which would ordinarily be patent infringement) for the purpose of developing generic medicines.

Congress also provided generics an incentive to contest the validity of a patent protecting a brand name drug. Successful challengers of the patent are given an exclusive right to market the generic copy for 180 days.

With respect to the second goal, the law has helped spur the discovery and development of new medicines. Research-based companies are given the opportunity to restore some of the patent life lost during the lengthy clinical testing and regulatory review process required by the FDA.

Complex issues

Hatch-Waxman deals with a range of complex issues of science, medicine and intellectual property as they relate to a highly competitive industry. To understand the essence of the law, it helps to start at the beginning of the drug development process.

Long before a new medicine receives FDA approval and is introduced on the market, a lot has already happened. First, scientists at a research-based pharmaceutical company spent up to 15 years testing the new drug at a cost of hundreds of millions of dollars. Early on in the R&D process, the company obtained a patent on the promising drug candidate. The final step was proving to FDA that the new drug is safe and effective. In total, as many as eight to 12 years of the original patent life are often used up by the testing and regulatory process.

When the patent eventually expires, any drug manufacturer is free to market "generic" versions of the brand name product. Before 1984, a generic drug company interested in marketing a copy had to prove the safety and efficacy of its product, just as the brand name company did. There were few takers because the cost of clinical trials was (and still is) prohibitively expensive. Hatch-Waxman changed that, and much more.

Title 1: streamlined approval process

Hatch-Waxman makes it easier, less costly and quicker for generic drug companies to obtain FDA approval for their products. For brand name drugs that have been on the market for at least five years, which is most of them, an Abbreviated New Drug Application (ANDA) process makes it possible for generic manufacturers to place their lower-priced copies on the market as soon as the patents on the brand name drugs expire.

Under the law, a generic manufacturer no longer has to conduct costly clinical trials or show that its product is safe and effective. Instead, it can point to the data that was compiled, at considerable expense, by the original research-based manufacturer to establish the safety and effectiveness of the brand name drug.

Generic manufacturers do have to show that their products are bioequivalent to the brand name drugs. However, demonstrating that is much less costly than proving safety and efficacy.

To further speed generic approvals, Hatch-Waxman allows a generic manufacturer to begin clinical tests before the patent on the innovator drug expires. In a significant departure from traditional patent law, the Act permits a generic company to have early access to the research-based company's data (ordinarily, a patent infringement) for the purpose of developing generic medicines.

Congress also sought to increase the number of generic drugs by providing incentives in the Act for generic companies to challenge the validity of patents on brand name drugs. Successful challengers get a head start on the competition. More precisely, generic companies that successfully challenge a patent in court can market their product for 180 days without competition from any other generic manufacturer.

Title 2: promoting new medicine discovery

Title II does not extend the life of a patent. Rather, it restores some of the patent life lost as a result of clinical trials and regulatory review.

Congress's rationale

The basis for patent restoration for pharmaceuticals is simple; federal law says that new drugs can't be marketed until they're proven safe and effective - and that takes years.

No other product requires such a pre-market clearance.
Congress had two goals here. First, it wanted to encourage the discovery of innovative medicines.

Second, Congress felt it necessary to strike a balance with Title I. Specifically, the law, in return for eliminating certain patent and trade-secret protections to accommodate generic applications, established a process by which research-based companies could qualify for restoration of some of the patent life lost during pre-market testing and approval required by FDA.

For research-based drug companies that qualify, this provision gives them more time to recover the high costs of research and clinical trials incurred in the development of new medicines, thereby creating incentives for additional R&D. What does "more time" mean? The qualifications to the patent restoration provision are complicated, making it impossible to say there is a simple rule of thumb, although the following can be observed:

Even accounting for patent restorations, drugs introduced in the 1990's with restoration enjoyed an average effective patent life of less than 11.5 years - substantially less than the 18.5 years enjoyed by inventors of other products. Patent restorations are limited. For one thing, the Act restores only part of the time that is lost to testing and regulatory review, as follows:

For every day the drug company spends on clinical trials prior to FDA review, it can get back only half-a-day in patent life.

However, Congress provides for day-for-day restoration of the period during which FDA reviewed the New Drug Application.

Furthermore, there are overall limits on the amount of time that can be restored, as follows:

  1. The effective patent life of a drug cannot exceed 14 years, regardless of how much time was lost to clinical testing and review.
  2. The total time restored is limited to no more than 5 years (even if more than 5 years was lost to drug development and review).

Hatch-Waxman's successes

In a number of ways, the law has been a clear success. Since 1984, there has been enormous growth in the generic drug industry, as well as the discovery and development of many new life-saving and life-enhancing medicines by research-based companies.

Hatch-Waxman has unquestionably created a vibrant generic drug industry; as intended by Congress, generics now virtually own the off-patent drug market.

Title I of the Act has helped reduce drug prices for off-patent drugs and increased the generic industry's market share from 19 percent in 1983 to nearly 50 percent of the U.S. prescription drug market today. Generics control the lion's share of the market for major off-patent drugs.

Before Hatch-Waxman, it took three to five years for generics to enter the market after the patent on a brand name drug expired; today, generics typically enter the market immediately upon patent expiration. Prior to the law, 35 percent of top-selling drugs had generic competitors after their patent expired; today, almost all do.

One further indication of the strength of the generic industry is the impact on sales of brand name drugs once generics hit the market. In most cases, sales of brand name drugs drop as much as 75 percent within weeks of the generic version being introduced into the marketplace.

For their part, research-based pharmaceutical companies have increased their R&D spending from $3.6 billion in 1984 to over $26 billion in 2000, and they remain the source of virtually all of the new drugs approved by FDA.

Source: Pharmaceutical and Research Manufacturers of America

Posted: August 2002

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