NCPA - National Center for Policy Analysis

FDA Rules Extend Monopolies, Cause Higher Drug Prices

February 7, 2002

The Food and Drug Administration's mission to promote and protect public health has been subverted by a loophole in the Drug Price Competition and Patent Term Restoration (Hatch-Waxman) Act, experts say. The act was designed to promote generic competition while providing financial rewards for innovative firms that develop new drugs.

  • Generic drugs are priced 20 to 80 percent lower than the original, saving the public an estimated $10 billion annually.
  • Most top-selling drugs with expired patents have generic versions, up from 36 percent in 1983.
  • Under Hatch-Waxman, generics were supposed to enter the market after the original lost its 20-year protection - but originator firms have fought it because they lose profits.
  • Because when companies apply for new patents for existing drugs, the FDA accepts them as valid, thus allowing originator firms to extend monopolies more than 2 years.

The public pays a high cost even if the FDA allows a monopoly extension of even a year.

  • It's estimated that between 2000 and 2005 a number of drugs with total annual sales of about $100 billion lose patent protection.
  • Given a one-year delay of a generics' entry - with generics taking 50 percent of market share priced at 75 percent of the originals - the delay costs consumers $2 billion annually.
  • Because the generic drug price continues to fall several years after introduction, $2 billion is a considerable underestimate of the cost of delaying their entry.

Some experts believe the best solution is for the FDA to withdraw from the business of protecting patents and concentrate on ensuring the safety and efficacy of the drugs it approves.

Source: Aidan Hollis (University of Calgary), "Closing the FDA's Orange Book," Regulation, Winter 2001, Cato Institute.


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