Evergreening: The High Price of Regulatory Loopholes

Re-aligned incentives and improved oversight by the FDA would benefit patients

The high cost of prescription drugs in the US has been a persistent problem. Compared to the average of other OECD countries, in 2018 the US paid 2.56 times more for prescription drugs in general and 3.44 times as much for brand names, but less for generic drugs at only 0.84 times as much. While there are many facets to the discussion of reducing pharmaceutical prices, this raises the question of whether overall drug spending can be reduced by getting more drugs into the generic category, where competition produces comparatively low prices.

US drug prices are rising fast. In 2020, half of the drugs covered by Medicare rose faster than inflation. One of the primary drivers of high US drug prices is brand name drugs, in particular “on patent” drugs and drugs receiving other regulatory protections against competition. When generic versions of drugs come out in the US, they are much cheaper even compared to other OECD nations. Pharmaceutical prices drop dramatically due to market competition once generics are allowed. Politicians regularly debate how to lower name-brand prices. Less addressed is how long a name-brand drug receives regulatory protections, which can be used by originators of a drug to delay generics from entering the market, delay competition after generics enter the market, and delay the introduction of useful medical advances.

One of the obstacles limiting the entry of generics, or their ability to compete, in many cases, is “evergreening,” or the use of regulatory authority to obtain exclusivity for a new product based on a known molecule that is not a clinical improvement over the prior versions. Evergreening is the process of extending a company’s control of the market for a drug (often to a lesser degree than it had originally) by gaining additional regulatory exclusivities through patents or FDA regulatory exclusivities for a drug for new versions, use codes, or patient populations. Pharmaceutical companies frequently continue researching applications of a molecule. Extended regulatory exclusivity may be granted for innovations that are unambiguously beneficial, such as extended release versions of a drug; however, critics have argued that exclusivities are also sometimes granted for “trivial reasons.”

Patents are not the only kind of regulatory exclusivity that can be granted. The FDA grants multiple types of regulatory exclusivity that vary in length from half a year to seven years of market protection. Like the patent system, these exist to incentivize further development of a chemical into more effective, safer, or more easily adhered-to versions of the original drug. But how much change is enough to justify a separate patent or FDA-specific regulatory exclusivities? And to what degree are pharmaceutical companies taking advantage of this system?

Extensions of regulatory exclusivity for prior drugs out-number new medicines receiving exclusivity. According to a 2018 study from the Journal of Law and the Biosciences, from 2005 to 2015, 40% of drugs on the market received new regulatory exclusivities. On average, 77.62% of regulatory exclusivities added each year were for previous drugs, including 77.55% of all patents. Of the top 100 selling drugs, 70% received a new exclusivity, and 50% received more than one. The study found that the rate of obtaining regulatory exclusivity for pre-existing medicines rose during the study period overall and in particular for patents, orphan drugs, new patient populations, and new use codes. Interestingly, pediatric exclusivities decreased.

Simply looking at increases may reflect the current landscape of the medical industry, in so far as it may be more productive to develop current drugs over new ones, given the costs and benefits of each at a particular time. However, the internal pattern of the increases in regulatory exclusivities matches with the number of years the producer will benefit from the exclusivity, implying that evergreening incentives are at play. According to the study above, the largest increases in regulatory exclusivities were for Orphan Drugs, which also provide the longest protections that the FDA grants at 7 years, while pediatric exclusivity provides only six months and decreased in use. Other exclusivities that increased in use are also lengthier than pediatric exclusivity, such as separate patent protections.

There is even more evidence for the incentive story to explain the delay of clearly beneficial improvements to the market. One common strategy of pharmaceutical producers is to release a modified version of a previous medicine just before the first patent expires. By releasing a more clinically desirable version, they can maintain market dominance in a particular chemical. Part of this strategy is to release an explicitly better version of the drug, so let us grant that extended regulatory exclusivity is warranted in that case. Even under this assumption, the improved medicine’s release has been delayed years to better maintain market dominance, which is clearly not socially optimal when it could have benefited patients years earlier. Even in cases where we can recognize a benefit of the new formulation of a drug, the current regulatory system incentivizes delaying the availability of that drug to optimize market share at the expense of societal benefit. This could even stack upon itself, causing further improvements upon the improvements to be delayed in release as well.

The 2018 Journal of Law and Biosciences study referenced above lays out several other methods used for extending the regulatory protections on a drug including new dosage schedules, formulations, or combinations. The big problem in mitigating abuse of the system is determining what constitutes a significant enough change to warrant extra regulatory exclusivities. The line between evergreening and innovation can be difficult to draw, and there are some improvements such as time-release or long-lasting formulas that can be beneficial for patient adherence if nothing else. But for each of the ways to alter a drug, there are degrees of change and improvement that may or may not warrant additional protection.

An additional proposed method of evergreening in the paper was the withdrawal of the prior version of a drug when the new one is released, but this is as difficult to discern as evergreening. Once generics and a company’s own new version enter the market for the original molecule, the originator’s investment in the original version may not be profitable anymore, or they may be trying to drive patients away from the old version to their new one. Without a detailed knowledge of the business in question it is difficult to tell.

The patent system and FDA exclusivities provide the tools and incentives not just for innovation in goods and services, but also to game the system for changes that maintain market control even when not providing the innovation these systems are intended to incentivize.

There are several potential avenues for regulatory reform to address inappropriate extensions of regulatory exclusivity. The simplest change would be to only address the delay of useful innovations to maintain market dominance. For obvious improvements such as extended-release versions, the delay in the introduction can be removed by allowing the extension to begin at the end of the first patent, regardless of the date that the improved product is introduced. This would remove the incentive to delay introduction of improvements. Additionally, the system could reduce the extension period over time such that introducing improvements early grants a greater extension to incentivize quicker introduction to the market.

The suggestions above address the issue of delayed introduction of legitimate improvements, but what about the more egregious forms of evergreening? FDA could begin by increasing the scrutiny and reporting requirements for increased efficacy, safety, or adherence, as well as for decreased adverse events. Similarly, FDA needs to put more scrutiny into applications for existing drugs when applied to orphan drugs, new patient populations, new indications, and new codes without significant reformulation.

Lastly, FDA should consider the lengths of exclusivity granted to its longer programs and consider revising the durations. While the intentions of a program like Orphan Drug Exclusivity are noble in their goals, so long as regulatory protections exist, they provide incentives to game the system and lock in control of a market in small segments. Many of the externalities of innovation justify exclusivity for systems like Orphan Drug Exclusivity, but without scrutiny that system can become ripe for manipulation.