On Aug. 16, 2022, President Biden made headlines by signing the Inflation Reduction Act of 2022 (IRA) into law. The act includes several initiatives targeted toward curbing inflation. One such initiative aims to lower prescription drug prices by allowing the Centers for Medicare & Medicaid Services (CMS)—the division within the Department of Health and Human Services (HHS) that administers the Medicare program—to negotiate a "maximum fair price" (MFP) for a certain number of drug products annually.

In light of this significant change, some have predicted that the IRA will have sweeping effects on the health care industry, including shifting priorities in the context of research and development. There is reason to believe the IRA may also meaningfully impact pharmaceutical patent litigation, potentially altering strategy and limiting the potential amount of damages that are recoverable in some cases.

Prescription Drug Pricing Reform Under the IRA

Under the negotiated prescription drug pricing provisions of the IRA, the CMS will annually select a number of high-expenditure drugs covered by Medicare for negotiation. The program will kick start in the fall of 2023 with the selection of ten drugs for negotiation—a number that will increase, for two years, to 15 drugs annually, before plateauing at 20 drugs annually. For the first two years, the program will focus on drugs that are covered by Medicare, Part D, after which it will expand to also include drugs covered by Medicare, Part B.

Selection of Negotiation-Eligible Products

While some pharmaceutical products are eligible for the price negotiation provisions of the IRA, others are beyond its reach. Drugs that are not covered by Medicare, Part B or Part D, for example, are not subject to the price negotiation provisions. Also excluded are products with orphan drug status for one rare disease or condition, products with low overall Medicare expenditures, and products derived from human whole blood or plasma.

Further, drugs that classify as "small biotech drugs"—defined by the statute as having total expenditures under either applicable Medicare provision that are (1) less than 1% of the expenditures for all covered drugs, but (2) more than 80% of the expenditures for drugs by the same manufacturer—are exempt for the first three years of the program, i.e., not eligible until 2029.

Only qualifying "single source" drugs—i.e., approved products for which there is no generic or biosimilar, not including any authorized generic, on the market and that meet certain other criteria—are eligible to be selected for negotiation. Those other criteria include the amount of time that has passed since the drug obtained FDA approval.

Specifically, small-molecule products are not eligible for selection until at least seven years after approval, whereas biologic products are not eligible for selection until at least 11 years post-approval. In this regard, the program is designed to focus on drugs that have enjoyed a continued period of market exclusivity.

Notably, the IRA includes a "special" provision to delay selection and negotiation for biologic products for which market entry by a biosimilar product is imminent. Specifically, if the CMS determines that there is a "high likelihood" a biosimilar product will be licensed and marketed within two years—i.e., that an application has been accepted for review or approved by the FDA and there is "clear and convincing" evidence that the biosimilar product will be approved and marketed within that timeframe—it can delay selection of the reference biologic for price negotiation for up to two years. Only the biosimilar manufacturer can request this delay and it cannot be solicited in any way by the manufacturer of the reference biologic.

Eligible drugs will be selected for the negotiation process based on their total Medicare expenditures under the applicable Medicare provisions. The CMS will use data from the most recent 12-month period available to rank negotiation-eligible drugs, with the drugs having the highest total expenditures reflecting the highest priority for selection.

Negotiating a Maximum Fair Price (MFP)

The negotiation process begins—almost two years before the negotiated price becomes effective—with the CMS publishing a list of drugs that have been selected for negotiation. The manufacturer of a selected drug has one month to agree to participate and promptly submit any information requested by the CMS, such as information on the non-Federal average manufacturer price (nFAMP), or potentially face severe penalties. See Compliance & Enforcement below.

Three months later, the CMS will provide its proposal for the initial MFP. The manufacturer can either agree or present a counterproposal, triggering several months of continued discussion between the manufacturer and the CMS. This approximately nine-month process concludes with the CMS publishing the finalized negotiated price.

This price will only apply to Medicare beneficiaries, although it is unclear how the negotiated price will affect the drug prices for all other beneficiaries. For example, in large drug classes with multiple branded competitors on the market, Pharmacy Benefit Managers may attempt to use the negotiated price for one of those drugs in discussions relating to formulary placement to apply bargaining pressure to its manufacturer.

The IRA identifies a number of factors the CMS will consider in evaluating the MFP for a selected drug, including:

" Research and development costs and the extent to which they have been recovered by the manufacturer.

" Current unit costs for production and distribution.

" Whether the manufacturer previously received Federal financial support for discovery and development.

" Data on pending and approved patent applications, exclusivities, and applications or approvals before FDA.

" Information regarding existing therapeutic alternatives, including costs, comparative efficacies, the extent to which the selected drug represents a therapeutic advance over those alternatives, and the extent to which the selected drug addresses unmet medical needs not adequately addressed by those alternatives.

However, there is limited guidance on how these factors will be applied to inform the appropriate MFP and how much weight they will be given.

Further, although described as a negotiation, the IRA sets forth a general ceiling that the MFP may not exceed. Generally, the initial MFP negotiated for a selected may not exceed the lower of (1) the existing pricing for the prior calendar year under Medicare, Part B or D, and (2) a percentage of the nFAMP available for the drug in 2021 or the first full year after market entry, if later—adjusted for inflation based on the consumer price index.

Except for vaccines, the percentage of the nFAMP used to calculate the ceiling MFP for the drug under part (2) varies based on the amount of time since the drug received FDA approval. "Short-monopoly drugs" (< 12 years since approval) and vaccines have the highest ceiling at 75% of the nFAMP. The ceilings for "extended-monopoly" drugs (12-16 years since approval) and "long-monopoly" drugs (>16 years since approval) are 65% and 40% of the nFAMP, respectively.

Compliance & Enforcement

The IRA provides CMS with broad authority to enforce its provisions and there are severe penalties for non-compliance. Any manufacturer that declines to enter negotiations will be forced to withdraw all of its products from coverage under Medicare and Medicaid or else face a quickly escalating excise tax. Manufacturers that agree to negotiate but fail to comply with the terms of the agreement are also subject to significant monetary penalties—e.g., up to $1 million per day of non-compliance.

Potential Impact on Pharmaceutical Patent Litigation

The drug pricing reform measures implemented through the IRA will likely impact pharmaceutical patent infringement litigation in several ways. If the patent holder has its own embodying product that is selected for pricing negotiation under the IRA either before or during the litigation, any related communications may be relevant, discoverable, and as detailed below potentially material to the validity and enforceability of the patents that are at issue.

In "brand vs. brand" litigations involving competing pharmaceutical innovators as well as litigations arising under the Hatch-Waxman Act or Biologics Price Competition and Innovation Act (BPCIA) where there is an "at-risk" launch of a generic or biosimilar, the mere possibility of such selection may limit the amount of damages that are recoverable. And, where the risk of selection is particularly acute, the patent holder might have financial incentives to facilitate entry of a competitor's product as a means of avoiding the IRA's negotiated pricing scheme.

Coordination & Discovery

Based on the factors the IRA directs CMS to consider in evaluating the MFP, the subject matter of those negotiations may overlap with issues that arise in the context of litigation involving patents covering the same product. For example, information shared between the manufacturer and CMS regarding the purported "therapeutic advance" of the drug relative to existing alternatives and "unmet medical needs" not adequately addressed by those alternatives may be relevant to the novelty and non-obviousness of those patents covering the product or its use.

Information regarding other pending applications or approvals may also become relevant, for example, in the context of procedural matters. Thus, for products that have or may be selected by CMS for negotiation, manufacturers should treat all related communications—internal or external—as though they may become discoverable in pending or ensuing litigation.

The potential for discovery into communications regarding the negotiated drug price exists regardless of whether the litigation arises under the Hatch-Waxman Act, the BPCIA, or is a "brand v. brand" scenario. Generally speaking, this concern is highest for drugs with large Medicare expenditures that are closest to being eligible for selection by CMS.

However, while the possibility for selection before or during patent infringement litigation may seem more remote in other cases, any circumstances that delay initiation or resolution of the litigation will inherently increase the likelihood that the post-approval window of ineligibility expires. For example, if a first generic or biosimilar applicant files its application later than the earliest date permitted under the regulatory framework, which has frequently been the case with biosimilar applicants, the reference product will remain a "single source" drug for longer and could become eligible for selection. In fact, to date, the majority of BPCIA litigation has extended beyond the 11-year mark at which the reference product would become negotiation eligible.

The patented product will also remain a "single source" drug for longer if that litigation against a first generic or biosimilar applicant is stayed or succeeds in preventing that first applicant from launching. In the context of Hatch-Waxman litigation, if an NDA holder does not bring suit within 45 days of its receipt of the Paragraph IV Notice Letter from the generic applicant and instead brings suit much later in time, the reference product may remain as a "single source" drug unless the generic obtains approval and launches in the interim.

These scenarios and others would increase the possibility that negotiations with CMS occur before or during litigation, opening the door for related discovery. And that possibility would further increase if there is follow on litigation against other generic or biosimilar applicants.

Additionally, in cases where damages are at issue, information regarding the existing therapeutic alternatives and research and development costs recovered by the manufacturer that is submitted to CMS in the context of the negotiation may also be relevant. This may occur in Hatch-Waxman or BPCIA litigations involving a generic or biosimilar that launches "at-risk," in a scenario where the selection and negotiation occurred prior to the "at-risk" launch.

It is also likely to be more universal in "brand vs. brand" litigation, where the alleged infringer can—and typically does—market its product commercially before and/or during the pendency of the litigation. Not only does the alleged infringer's launch of its product create exposure to potential damages if held liable for infringement but, where that product is not a generic or biosimilar, it also does nothing to disrupt the patented product's status as a "single source" drug that is eligible for negotiation.

Further, manufacturers whose products are selected by CMS for negotiation should exercise care to ensure that the evidence supplied to CMS in support of its desired MFP aligns with arguments made to the USPTO in past or continuing patent prosecution. This may be of concern if, for example, the manufacturer is prosecuting child patent applications during the course of the negotiations with MFP.

However, it is by no means limited to situations where both processes are moving forward concurrently. Regardless of which record is created first, any inconsistency between the manufacturer's positions before CMS and the USPTO may put the manufacturer at risk of (1) significant fines for knowingly submitting false information to CMS or (2) having the patent(s) held unenforceable in litigation for inequitable conduct or unclean hands. It will, thus, be important for patent prosecution counsel, litigation counsel, and regulatory counsel to coordinate to ensure consistency across all channels.

Damages for Patent Infringement

In both "brand vs. brand" litigations as well as litigations against a generic or biosimilar applicant whose product has been approved and is commercially marketed, the IRA may decrease the recoverable monetary damages. However, as explained below, the potential impact differs depending on which type of product—i.e., brand or generic/biosimilar—is accused of infringement.

In Hatch-Waxman or BPCIA litigation, if there is an "at-risk" launch of a generic or biosimilar product, an otherwise eligible reference product will immediately become ineligible for selection under the IRA. If the generic or biosimilar is later found to infringe and the reference manufacturer seeks damages for infringing sales, the change in eligibility under the IRA may impact the availability and/or amount of past lost profits.

To recover lost profits, a patentee must establish, inter alia, that it would have earned those profits "but for" the infringement. However, in this scenario, the inquiry is blurred by the fact that the reference product may have been selected for price negotiations in such a hypothetical world where there was no "at-risk" launch.

This further complicates the lost profits calculation, as the accused infringer could argue that but for its presence on the market, the branded product would not have been as profitable, i.e., the branded product would likely have been subject to the IRA—meaning it would have been sold at a lower, negotiated price under Medicare, and potentially even at lower non-Medicare prices. The amount of past lost profit damages available to the reference manufacturer in this scenario may thus be reduced, potentially significantly.

The implications for "brand vs. brand" litigations, which typically relate to biologics and have risen in frequency over the past decade, are different. Unlike the "at-risk" launch of a generic or biosimilar, the defendant's commercial marketing of its own product has no impact on the eligibility of the patent holder's product for selection. However, as a result, the continued possibility that the patent holder's product may be selected for negotiation may impact the availability or amount of future lost profits damages that are recoverable.

Future lost profits are more difficult to recover than past lost profits and must be proven beyond speculation. See, e.g., Oiness v. Walgreen Co., 88 F.3d 1025 (Fed. Cir. 1996). Although the IRA defines which products are eligible for negotiation based on the amount of time since approval and other characteristics, including total expenditures, predicting which products will be selected for negotiation and when may nonetheless be difficult.

This poses an issue where the patent protection for a product extends beyond the date the product will become eligible for negotiation—a distinct possibility in "brand vs. brand" cases involving damages claims. In this context, attempts to forecast future profits and pricing effects will necessarily involve guesswork about the drug price offered to Medicare patients and, as discussed above, potentially the price offered to non-Medicare patients.

Courts may be asked to consider whether a future lost profits award can be sustained in light of this additional layer of speculation. In the interim, a more prudent approach for pharmaceutical patent owners may be to exclude any units to be sold under Medicare, Part B or Part D, from their calculations of future lost profits.

Settlement Incentives

More holistically, some have hypothesized that the IRA may encourage earlier settlement of infringement litigation, particularly where the risk of being selected for price negotiation is particularly acute or where dictated as a matter of economics. Depending on the specific financial considerations at play, there may be economic incentives for the branded manufacturer to assist generic or biosimilar applicants in obtaining regulatory approval.

Branded manufacturers with a drug at risk of being selected by the CMS for negotiations may also be inclined to provide generic or biosimilar defendants with an exclusive license to sell and market the drug in order to avoid selection. However, for biologics, if the branded manufacturer wishes to preserve the possibility of delaying selection based on imminent biosimilar approval, the license may not place any limitations on sales of the biosimilar.

Due to the scrutiny such tactics are likely to draw from governmental agencies such as the FTC and DOJ, branded manufacturers should proceed with caution and only after seeking appropriate counsel.

Ongoing Conversation Between FDA & USPTO

The IRA is not the only piece of legislation that could impact drug prices and the pharmaceutical industry at large. In July 2021, President Biden outlined a plan to reduce the cost of prescription drugs in an Executive Order on Promoting Competition in the American Economy.

Following this announcement, the FDA and PTO have engaged in discussions to prevent patenting what the PTO describes as "incremental, obvious changes to existing drugs that do not qualify for patent protection." The FDA and PTO are discussing initiatives that will aim to lower drug prices by preventing companies from blocking generic competition through "trivial" changes to drug products.

It is unclear how these initiatives will work in practice and how they will interact with the current legal standards of patentability such as obviousness. Although these discussions are still at a preliminary stage, they signal that more changes may be on the horizon for the pharmaceutical industry.

Originally Published by Bloomberg Law

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