Clearing the Thicket: Restoring the Market for Lower Price Drugs
The United States leads the world in pharmaceutical innovation, with research and development expenditures of over $103 billion in 2024. It also has the world’s largest generic drug market. Yet, at the same time, Americans pay some of the highest costs for prescription drugs, leaving many patients struggling to cover the costs of medication. In fact, a recent survey found that 43 percent of adult Americans have skipped doses, cut pills in half, or failed to have prescriptions filled due to excessive out-of-pocket expenses. On average, drug prices in the United States are 278 percent of the same drugs prescribed in other Organisation for Economic Co-operation and Development (OECD) nations. The high price of prescription drugs adds fuel to the affordability debate, and the Trump administration has issued two executive orders and established TrumpRx.gov in an attempt to bring prices down.
Yet at a more fundamental level, patent policies that define and shape the pharmaceutical market continue to make it difficult to reduce prices. Drug pricing policies should encourage innovation while fostering a robust follow-on market for lower-cost generic alternatives. But increasingly, brand manufacturers are weaponizing patents to limit competition and delay entry rather than spur invention.
Artificially high drug prices are not a symptom of market failure. They are the result of strategic gamesmanship and manipulation of government-created barriers to entry by brand-name pharmaceutical companies. Reform requires revisiting the laws governing the patent system to ensure it functions as intended, rewarding genuine innovation rather than simply protecting monopoly rents.
This piece, the first of a series, examines strategies used by brand manufacturers to extend market exclusivity, including evergreening, product hopping, and patent thickets, as well as the Eliminating Thickets to Increase Competition (ETHIC) Act, which was recently introduced to address these abuses. A second installment will turn to serial patent litigation, a related but distinct problem in the structural design of the Hatch-Waxman Act that the ETHIC Act alone cannot solve.
Patents and Innovation
The U.S. Constitution empowered Congress to create a patent system to “Promote Science and the useful Arts.” Ideally, patents create incentives to invent by providing a period of market exclusivity that allows inventors an opportunity to recoup the costs of invention. This is especially true when invention and innovation require significant investments in research and development, such as in the pharmaceutical industry, where the cost of bringing a drug to market averages $879.3 million. High-quality patents can be an effective policy tool to promote invention and investment in drug development. But increasingly, patents are being used for monetization rather than innovation, with patent holders using the law to extend exclusivity and entrench monopoly power.
From an economic perspective, patents are a deviation from a perfectly competitive market. But because patents can induce invention, lawmakers accept the temporary departure from marginal cost pricing, along with the associated deadweight loss. In exchange, incentives to allocate resources to invention and innovation increase, accompanied by public disclosure of the invention that expands society’s knowledge base and opens the door for new competitors once the patent expires. But this grand bargain breaks down when patent holders game the patent process and deploy legal tactics to extend the duration of their market power. For the pharmaceuticals, this translates to higher prices for patients and taxpayers and increased costs for public-health programs.
The Hatch-Waxman Act and the Creation of the Generic Drug Industry
To understand how patent gamesmanship deters the entry of lower-cost generic drugs, it is important to understand the framework enacted by Congress to promote competition in the pharmaceutical industry. The Drug Price Competition and Patent Term Restoration Act of 1984, more commonly known as the Hatch-Waxman Act, launched the modern generic drug industry in the United States. It was a compromise that provided brand pharmaceutical manufacturers a new period of exclusivity while also restoring patent time lost during the Food and Drug Administration (FDA) approval process. In exchange, the nascent generic drug industry received an abbreviated new-drug approval pathway to fast-track generic drug development by allowing manufacturers to demonstrate bioequivalence with a branded drug.
Rather than requiring costly new clinical trials, generic manufacturers could rely on the safety and efficacy data from the brand manufacturer’s initial studies. The Hatch-Waxman Act also requires the FDA to provide a publicly available list of approved drug products. The Orange Book serves this purpose and lists all patents that brand manufacturers may assert against an infringing generic provider. Based on the patents listed and their expiry dates, generic manufacturers evaluate which potential new drugs to develop and submit for FDA approval.
The changes sparked a major transformation in the prescription drug market. Before Hatch-Waxman, generic drugs had a 13 percent market share, and only 35 percent of the top-selling drugs that had come off patent had a generic counterpart. Today, generic drugs fill 90 percent of all prescriptions in the United States while accounting for only 12 percent of prescription drug spending. Overall, generics generated $467 billion in savings in 2024 and over $3.7 trillion in savings over the last decade. Generic entry worked as intended, generating significant price reductions, with studies finding that prices fall by 15 percent to 40 percent when there are 3 to 5 generics in the marketplace, and by 60 percent to 90 percent when there are 10 or more generic competitors.
Biologics and the Next Generation
The Hatch-Waxman Act launched the generic market for small-molecule drugs over 40 years ago. Beginning in the late 20th century, however, biologics emerged as powerful new therapies derived from living cells and tissues, proteins, and nucleic acids. Biologics differ significantly from the small-molecule drugs governed by the Hatch-Waxman Act. They are more complex and capable of more targeted treatments, and they underpin advances in gene therapy, vaccines, and cancer immunotherapy, among many other applications.
Overall, biologics hold the promise of exciting new treatments for a wide range of currently untreatable medical problems. But, because of their complexity and differences from small-molecule drugs, biologics fall outside the legal framework established by the Hatch-Waxman Act. Approving biosimilars—the generic version of biologics—required the creation of a new regulatory pathway to establish biosimilarity rather than bioequivalence with the FDA-approved reference drug. Unlike generic drugs, which can be produced as exact copies, reference biologic drugs are complex and made from living tissue, making bioequivalence impossible. Biosimilarity is defined by the FDA as being “highly similar” to a biologic it has already approved. Congress provided this pathway when it passed the Biologics Price Competition and Innovation Act of 2009 (BPCIA) as part of the Affordable Care Act. Like the Hatch-Waxman Act, the BPCIA attempts to balance innovation by brand manufacturers with the competitive entry of lower-cost biosimilars.
More specifically, the BPCIA provides 12 years of market exclusivity for reference biologics while creating an abbreviated new drug approval pathway for biosimilar manufacturers to demonstrate biosimilarity or interchangeability with the FDA-approved reference product. Importantly, unlike small-molecule drugs, there is no Orange Book that lists all relevant patents a biologic manufacturer will defend. Instead, BPCIA created a “patent dance” in which the biosimilar applicant and the brand manufacturer exchange information to narrow the scope of the patents being challenged. The extended exclusivity period and the opacity of the patent dance pose significant challenges for biosimilar entry compared to the relative transparency of Hatch-Waxman for small-molecule generics. This creates new opportunities for strategic patenting to deter entry and limit competition as described below.
Out of the Lab and Into the Courts
With statutory pathways now in place to expand the market for generics, brand manufacturers responded with new tactics and legal maneuvers to extend their market exclusivity and delay entry, particularly for blockbuster drugs, which generate more than $1 billion in annual sales. Consider Humira, a popular medication for treating inflammatory conditions such as rheumatoid arthritis, Crohn’s disease, and ulcerative colitis. Once the world’s best-selling drug, Humira generated $16 billion in net revenues from U.S. sales alone in 2020. With this sales volume, even a one-month extension of exclusivity can generate $1.33 billion in net revenues. Consequently, brand pharmaceutical companies have strong rational incentives to extend market exclusivity. Three practices in particular have been key to delaying generic entry: patent thickets, evergreening, and product hopping (often deployed together).
Patent thickets are a “dense web of overlapping intellectual property rights” that make it challenging for generic manufacturers to enter the market. Brand companies build patent thickets by surrounding a drug’s primary patent on the core active ingredient with a wall of secondary patents that pose a legal hurdle for potential generic competitors. The experience with Humira is a prime example of how patent thickets work. Its manufacturer, AbbVie, built a wall of 132 patents around the drug, extending its market exclusivity and delaying biosimilar competitors in the United States until 2023, five years after biosimilars arrived in Europe. Patent thickets are particularly problematic with biologics, where the absence of an Orange Book and the complexity of the underlying products make it difficult for generic challengers to even know in advance which patents will be asserted by brand companies.
Evergreening extends a brand’s market exclusivity through new patents, often on non-therapeutic modifications such as dosages, packaging, delivery systems, or manufacturing processes. Such secondary patents can be minor modifications that are vulnerable to invalidation, but nonetheless, they can effectively deter entry. For example, when the pharmaceutical company Abbot faced the loss of exclusivity on its cholesterol drug Tricor-1 67mg, 134mg, and 200mg capsules, it released new formulations of 54mg, 160mg, and 200mg tablet formulations that showed no demonstrable incremental benefit but prevented generic substitution under state substitution rules. The continued use of the branded version was estimated to cost the healthcare system roughly $700 million annually.
Product hopping is a tactic that combines evergreening with a marketing campaign to switch prescribers and patients to a reformulated version of a drug, typically when a drug nears the end of its market exclusivity. Often, accessibility and availability of the older version is restricted as the brand attempts to switch patients to the new version. In many instances, there is little clinical difference between the old and new versions of the drug, yet substantial economic gains can be achieved by transitioning to a new version with additional market exclusivity. AstraZeneca’s product hop from Prilosec (omeprazole) to Nexium (esomeprazole) provides a classic example. Nexium launched with a $500 million ad campaign supporting the product hop, despite questions about its clinical advantages. In fact, Nexium was simply one of the two mirror-image enantiomers that comprise the original Prilosec molecule, with studies finding little difference in efficacy between the two.
Ultimately, these tactics impose significant costs on consumers and the health care system. Artificially extending market exclusivity continues monopoly prices and increases deadweight losses for innovations that have already been rewarded. At the same time, these practices distort capital allocation in the pharmaceutical industry, skewing it away from innovation at the frontier and toward maintaining and extending existing drug portfolios.
The ETHIC Act: A Targeted Fix for Patent Thickets
In response to concerns about patent thickets and strategic patenting that aim to deter entry rather than foster innovation, the ETHIC Act has been introduced in both the House and the Senate. The legislation is a narrow fix that would limit the number of patents a brand manufacturer can assert in an infringement action brought by a generic or biosimilar manufacturer. More specifically, the legislation targets patent thickets by restricting a patent holder to asserting only one patent per “patent group” when challenged by a generic or biosimilar, where a patent group is defined as a set of patents linked by terminal disclaimers.
Terminal disclaimers are unique to American patent law and are used to overcome “obvious-type double patenting” rejections by patent examiners. A patent seen as an obvious variant of an existing patent risks rejection because it may be viewed as an attempt to extend the exclusivity of the original patent. This risk is overcome by agreeing that the new patent will expire along with the original patent. To do this, the brand manufacturer links the newer patent to the original patent with a terminal disclaimer when submitted to the United States Patent and Trademark Office (USPTO) for examination. Many patents can be terminally disclaimed to an earlier patent, forming what the ETHIC Act defines as a “patent group.” For example, in addition to the patent on the active ingredient of a drug, manufacturers can file multiple secondary patents on features such as dosage, delivery system, or formulations, but if they are terminally disclaimed, they will all expire with the original patent.
While terminally disclaimed patents do not extend the duration of the patent monopoly, they add to the thicket of patents that brand manufacturers can assert against potential generic or biosimilar manufacturers. For example, in Humira’s thicket of 132 patents around the primary patent on adalimumab, researchers found that 80 percent of these were duplicative patents linked by terminal disclaimers. As a result, biosimilar competitors to Humira only entered the U.S. market in 2023, five years after they were available in Europe. The ETHIC Act would limit these practices to encourage greater competition by biosimilars and generics. Importantly, the act still allows a brand manufacturer to protect its primary patents, but it limits the ability to continue litigation with less innovative follow-on patents. Critics may object that multiple patents can legitimately protect genuinely distinct innovations and that restricting a brand manufacturer to asserting a single patent threatens genuine innovations. But as defined by the ETHIC Act, a “patent group” avoids this specific problem. By defining patent groups through terminal disclaimers, the act affects only those patents that the brand manufacturer has conceded are not patentably distinct from an earlier patent and require a terminal disclaimer to overcome an obviousness-type double patenting rejection. Patents covering truly separate inventions are not terminally disclaimed and remain fully assertable.
Conclusion
Patent policy matters. More than 500 small-molecule drugs are expected to lose patent protection by 2034, with potential cost savings of $300 billion. Realizing those savings, however, depends on the market entry of generics and biosimilars. Evergreening, product hopping, and patent thickets have impeded that entry, which the ETHIC Act addresses by limiting the use of terminal disclaimers to build patent thickets. Yet even if the ETHIC Act becomes law, structural weaknesses in the Hatch-Waxman Act itself can also keep generic firms off the market. The next piece in this series examines these challenges, as well as structural reforms to mitigate litigation-related delays.