Collusive Payments

The Federal Trade Commission startled the policy community last month by announcing that some makers of generic drugs are once again being paid to drop patent challenges to brand-name drugs

FTC released an analysis on this practice, and FTC Commissioner Jonathan D. Leibowitz gave a speech on the topic on April 24 to the In-House Counsel's Forum on Pharmaceutical Antitrust, an advisory group for lawyers dealing with antitrust issues regarding pharmaceutical products, in Philadelphia. "Exclusionary payments are back," he said, and they are slowing the introduction of generic drugs in the U.S. market. These payments result in consumers paying brand-name prices for certain drugs over a longer time than they otherwise would.

From the late 1990s, when FTC successfully challenged collusive payments as illegal restraints of trade, no such payments were made, Leibowitz said. Now, however, courts are again allowing them. Three exclusion payment agreements were made in fiscal 2005 to settle patent challenges, and seven have occurred so far in fiscal 2006.

The payments usually involve the following scenario: A generic drug company applies to the Food & Drug Administration, asking the agency to approve a generic product. In the application, the company says it does not infringe on any of the brand-name firm's patents or states that one of the patents is invalid. The brand-name firm then files suit against the generics company, claiming patent infringement. If the brand-name company fears that it may lose the suit, it may decide to settle the case by paying the generics firm to delay marketing its product for several years.

In 2005, the commission received notices of the three agreements under which both the brand and generics company received compensation. "The brand [firm], in each case, received a royalty in exchange for granting the [generics company] a license to the patent at issue in the litigation," the FTC report says. The compensation to the generics company took different forms, it continues. Two of the three settlements included side deals for other products unrelated to the alleged infringing product. In one agreement, the brand-name firm allowed the generics company to copromote the branded product in exchange for royalties on the product's total sales.

FTC challenged the legality of two of the settlements and lost in federal district court last year. FTC has appealed one of these cases to the Supreme Court.

In these settlements, the length of the delay for the generic drug to enter the market depended on the market size of the branded product. For products with annual sales exceeding $150 million, the agreed entry date for the generic was 30 to 100 months after settlement. For products with sales under $150 million, the delay was four to 10 months.

These exclusion payments can be profitable for both the brand-name and generics firms, Leibowitz said. The brand-name company is often better off making an exclusion payment and maintaining its monopoly for a longer period, he explained.

For example, Plavix, a widely used blood thinner with annual U.S. sales of $3.8 billion, is manufactured by Bristol-Myers Squibb and Sanofi-Aventis. The generic drug company Apotex had applied to enter the market with its generic version of the drug, clopidogrel bisulfate. Bristol-Myers Squibb and Sanofi-Aventis settled patent litigation in March over this drug with Apotex. In the settlement, Apotex received compensation and agreed not to enter the Plavix market until February 2011. When the settlement was announced, the stock prices of all three companies involved rose, but consumers lost hundreds of millions of dollars in annual savings, Leibowitz said.

In a case involving tamoxifen, AstraZeneca, which markets the drug under the brand-name Nolvadex, paid Barr, the generics firm, $21 million in 2005 to keep its generic form of tamoxifen off the market until the tamoxifen patent's expiration date, even if some of AstraZeneca's patents might no longer be valid. The U.S. Court of Appeals for the 2nd Circuit affirmed the District Court for the Eastern District of New York's dismissal of FTC's complaint over this case just this past December.

Furthermore, Leibowitz said, brand-name firms are not stopping with the first generics firm that attempts to enter the market. "They are settling with most or all subsequent filers (those who apply to FDA for approval of a generic drug) to guarantee no generic entry by anyone until a certain date, one that's usually near patent expiration," he explained.

In one case, "Cephalon, the brand manufacturer of Provigil, a sleep disorder medication that garnered more than $500 million in sales in 2005, settled pending claims with four potential generic entrants in recent months," Leibowitz said. Each generics firm agreed to stay out of the market until October 2011, and in exchange, the four companies will receive a total payment of $136 million.

One reason for patent disputes is that many patents are listed inappropriately in FDA's Orange Book, which is the electronic listing of all approved drugs and the patents on those drugs that supposedly meet the agency's listing criteria. Only the patents included in the book can be used to confer market exclusivity of a drug. Under the federal rule for Orange Book listings, the patent must relate to one of the following criteria: formulation and composition, the active ingredient, or method of use. Process patents—those concerning the method of manufacturing the product—are not listable, says Christopher-Paul Milne, assistant director of the Tufts Center for the Study of Drug Development.

Many patent disputes arise because, when a brand-name company submits a patent to FDA for listing in the Orange Book, FDA includes the patent without checking to see if it fulfills the required listing criteria, Milne says. FDA considers "its role in listing patents in the Orange Book to be purely ministerial—that is, merely accepting whatever patents companies say they have without any due diligence as to their validity," Milne says. "Some of these patents when challenged in court were, in fact, found to be invalid."

In 1984, Congress passed the Hatch-Waxman Amendment to the Federal Food, Drug & Cosmetic Act, which was supposed to enhance competition, not collusion, between generic and brand-name drug manufacturers, Leibowitz said. Hatch-Waxman extends the life of patent protection while streamlining the procedures for bringing generic drugs to market. Since its passage, generics sales have grown from 14% to 52% of the market.

"Recent appellate decisions that sanction [exclusionary payments] are threatening the core of Hatch-Waxman," Leibowitz concluded. "If the Supreme Court or Congress doesn't reverse this trend, the result could be a substantial increase in drug costs."

Leibowitz also urged Congress to examine whether the huge number of citizen petitions that are filed over drug applications is becoming part of the problem. Every citizen or corporation has the constitutional right to file a petition to the federal government, in this case to alert FDA to potential safety problems while a generic drug is undergoing approval. A generic drug's entry into the market can be delayed while FDA evaluates the petitions. But the cost of filing an improper petition is far less than the value of even a brief delay in a generic drug's entry, he said.

The Generic Pharmaceuticals Association has no comment on Leibowitz' speech or the FTC report. The Pharmaceutical Research & Manufacturers of America will not comment on specific cases involving member companies. It says, however, "We generally support any company's ability to settle all types of expensive and distracting lawsuits." Doing so allows companies to stay focused on making sure that patients receive the medicines they need, PhRMA notes.