Paragraph Four Explained

An important section of Hatch-Waxman Act actually encourages generic companies to challenge patents.  If a generic company is the first to file its Abbreviated New Drug Application (ANDA) with a Paragraph IV certification and prevails in the subsequent lawsuit, that generic company is granted a period of market exclusivity of 180 days.

The 180-day exclusivity incentive can be significant for a generic company as it would be the only generic version on the market.   So, it can price its product slightly below the branded version for six months, take market share from the branded product, and maintain its price point before other generics enter the market and erode the price and segment margins.   The additional profit for a generic firm can be enormous if the product it challenges is a so-called blockbuster or megabrand.
The following example best shows how this works and why a generic company would go through this process.

Generic company Barr Laboratories identified Lilly's Prozac®(fluoxetine) as a product with a large market potential and a patent position that could be challenged.   In 1996, Barr filed its ANDA with a Paragraph IV certification, claiming that its version of fluoxetine did not infringe on the Lilly patents or that the patents were unenforceable.

After five years of litigation, on August 9, 2000, the Court of Appeals vacated a lower court decision, ruling in favor of Barr and invalidating one of the patents for Prozac.   After the compound patent expired and a pediatric exclusivity expired Prozac on August 2, 2001, Barr launched its generic form of the 20mg strength of fluoxetine which alone took 65% of the Prozac share in the first two months after it launched. 1

Figure 1 (Source: IMS Health NPA Plus )

This graph shows the dramatic uptake of generic fluoxetine. Within the first month of the introduction of the Barr form of fluoxetine, Prozac lost 46% of its total prescriptions.2 By the end of the six month time period of exclusivity for Barr, Prozac had lost 82% of its prescriptions to the generic form and held onto only 16% of the Prozac/fluoxetine market. 3The Hatch-Waxman incentives enabled Barr to successfully challenge the fluoxetine patent and reap the economic benefits of its own exclusivity period. In the eleven months after launch, the sales of Barr's generic fluoxetine reached $367.5M which accounted for 31% of the company's total product sales.  

After other generic companies entered the market with their forms of fluoxetine and eroded the price, the company estimated that the sales of its form of fluoxetine decreased to 1% of its total product sales. 4When comparing profit margins generated by the fluoxetine case, it becomes quite obvious why Paragraph IV filings are part of its core business strategy.   During the last quarter of 2000, Barr reported Product Sales of $142M and a gross margin (deducting the Costs of Sales and Selling & Administration Costs) of $24M, leaving a gross profit margin of 16.8%.However, during the last quarter of 2001, when it had a monopoly on generic fluoxetine sales, Barr took in $360M in Product Sales.   With a gross margin of $103.9M, Barr increase its gross profit margin to 28.7%. 5  Hence, by succeeding with its Paragraph IV challenge, it nearly doubled its gross profit margin.

In addition, Barr also had a dramatic increase in its stock price.   During the month of July 2001, when the favorable Court decision was rendered, Barr's stock price was at a low of $66.00.   By the end of the month, it had spiked to $89.38, realizing a gain of over 35%.

The successful Barr challenge of Prozac is often-cited as the case which first created a great deal of interest for ANDA filers to challenge patents under a PIV certification. Over time, this proved to be true. While this example is somewhat old and historic, the principles remain the same --- being 'first-to-file" ANDA is a powerful financial incentive and generic erosion of brand sales became even more pronounced since this case.

1 Drug Digest

2,3 IMS Health, NPA Plus

4,5 Barr SEC 10-K filing for period ending December 31, 2001

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