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Limits Sought On ‘Pay For Delay’ Deals

Drugmakers say patent settlements create savings for health care system

by Glenn Hess
September 13, 2010 | A version of this story appeared in Volume 88, Issue 37

Credit: Shutterstock
FTC says “pay for delay” deals in the drug industry cost U.S. consumers $3.5 billion per year in unnecessarily high prescription prices.
Credit: Shutterstock
FTC says “pay for delay” deals in the drug industry cost U.S. consumers $3.5 billion per year in unnecessarily high prescription prices.

The Obama Administration is urging Congress to pass legislation that it says will save American consumers billions of dollars per year in prescription drug costs by speeding the market entry of lower priced generic alternatives. But the pharmaceutical industry insists that the proposal would actually end up costing consumers money.

The controversy is over an arrangement that critics have dubbed “pay for delay,” in which brand-name pharmaceutical companies settle patent disputes by paying generic drug manufacturers to delay the launch of cheaper competing medications. The practice results not only in windfalls for both companies, but also in higher drug prices for consumers, Federal Trade Commission (FTC) Chairman Jonathan D. Leibowitz has told Congress. Given that generic drugs can cost as much as 90% less than their brand-name counterparts, FTC estimates that the cost of these delays is at least $3.5 billion in lost savings per year.

The commission, which shares antitrust authority with the Justice Department, has waged a years-long campaign against such exclusion payment settlements, contending that they are anticompetitive and amount to collusion. The House of Representatives passed a bill in July to severely restrict the practice, and the Senate is considering similar legislation.

Two appellate court decisions handed down in 2005 upheld agreements reached by Schering-Plough and AstraZeneca with generics manufacturers. Since then, lucrative settlements between generic and branded drug makers have become increasingly common.

Pharmaceutical companies entered into a record 21 patent litigation settlements involving compensation during the first nine months of fiscal 2010, according to FTC data. That number was up from the 19 deals made in all of 2009, and only three in 2005.

According to a January 2010 FTC report, settlements that involved compensation for generic drug makers delayed entrance of generics by 17 months longer than settlements that didn’t involve such payments.

“The numbers paint a bleak picture,” Leibowitz told the House Judiciary Subcommittee on Courts & Competition Policy at a July 27 hearing. “It’s almost an epidemic, and left untreated, these types of settlements will continue to insulate more and more drugs from competition.”

Leibowitz pointed out that “every single FTC commissioner, going back through the Bush and Clinton Administrations, has supported stopping these unconscionable agreements.” However, the Justice Department under the Administration of George W. Bush did not share FTC’s view that the deals violate federal antitrust laws.

The department altered its position last year after President Barack Obama took office. Christine Varney, the department’s assistant attorney general for antitrust, testified during her confirmation hearing in March 2009 that drug companies should be forced to explain why the agreements do not impose an unreasonable restraint on competition.

Both sectors of the pharmaceutical industry have lobbied aggressively against efforts to stop the agreements. They argue that the deals are pro-competition because they usually allow generic drugs to enter the market months or even years before a branded company’s patent expires while removing the cost and uncertainty of protracted litigation.

“Basic economics shows us that this can help increase competition between brand-name and generics companies, lower costs for American consumers, and increase access and choice for patients,” says Ken Johnson, senior vice president of the Pharmaceutical Research & Manufacturers of America (PhRMA), a trade group that represents the brand-name drug industry.

Legislation that would impose a blanket ban on patent settlements involving compensation is also unnecessary, Johnson argues, because FTC and the courts already have the authority to review and evaluate any agreement between a brand-name company and a generics competitor. “The courts and enforcement agencies like FTC are in the best position to review these settlements on a case-by-case basis to ensure that they are not harmful to competition,” he says.

The Generic Pharmaceutical Association (GPhA,) which represents the generic drug industry, calls FTC’s position “misguided” and says it ignores certain facts. “Over the past 10 years, patent settlements have enabled dozens of first-time generics to come to market many months before patents on the counterpart brand drugs expired,” according to a statement from the group.

For instance, settlement of the patent suit involving GlaxoSmithKline’s antiepileptic medication Lamictal allowed the generic version to come to market three months prior to brand patent expiration, saving patients more than $190 million during the early launch period, GPhA says.

The trade group also argues that settlements have never resulted in delaying generic drug market entry past patent expiration. It notes that a report from investment bank RBC Capital Markets concludes that of the 37 new generic drug launches expected in 2010 and 2011, 24 of them will launch prior to patent expiration because of settlements.

In 1984, Congress passed a law informally known as the Hatch-Waxman Act in part to encourage greater access to lower priced drug products. Among other things, the law allows a generics manufacturer to challenge the patent covering a brand company’s product before its expiration by certifying in an application to the Food & Drug Administration that its equivalent generic medication does not infringe the brand patent or that the patent is invalid.

Typically, brand-name pharmaceutical companies challenge the generics firm’s declaration, and litigation ensues. If the generics company wins the challenge, the brand-name manufacturer loses its remaining market exclusivity for that product. But winning drug patent litigation is a 50-50 proposition at best for generics companies. An analysis of 370 resolved drug patent suits from 2000 through 2009 by GPhA revealed that generics firms were successful in 48% of the cases that went to trial.

Given the costs and uncertainty of patent litigation, the firms frequently settle their dispute before a final court decision. Many challenges are settled when the brand-name company provides cash to the generics manufacturer in exchange for an agreement to keep its equivalent medication off the market until a later date.

The arrangements allow brand-name companies to continue to profit from their drug’s exclusivity while generic drug makers are compensated for abandoning patent challenges that could lead to early market entry for their products.

The pay-for-delay issue surfaced during the long health care reform debate, given the potential savings to consumers and to the government as a major purchaser of drugs. Drug industry lobbyists squashed the attempt to address the issue in that legislation. But House Democratic leaders put the matter back on the table this summer.

Under a provision slipped into the Supplemental Appropriations Act of 2010 (H.R. 4899), a drug patent settlement that involves compensation for delaying generic drug market entry would be presumed to be illegal unless the drug companies involved can prove that the agreement does not inhibit competition. The legislation gives drug companies 30 days to appeal an FTC ruling on any deal.

The nonpartisan Congressional Budget Office (CBO) estimates that the restriction on patent dispute settlements would save the government $2.4 billion over 10 years by reducing the cost of drugs purchased through Medicare, Medicaid, and other government programs.

Credit: Courtesy of Herb Kohl
Credit: Courtesy of Herb Kohl

“This provision is in the interest of the American consumer, who should have the benefit of competition and lower prices,” House Energy & Commerce Committee Chairman Henry A. Waxman (D-Calif.) said during debate on the bill, which the House passed on July 1.

Meanwhile, the Senate Appropriations Committee has attached a nearly identical amendment to its proposed 2011 Financial Services & General Government Appropriations bill (S. 3677). The provision restricting exclusion payment settlements is championed by Sen. Herb Kohl (D-Wis.) and is based on a bill (S. 369) he introduced in February 2009.

Credit: Courtesy of Arlen Specter
Credit: Courtesy of Arlen Specter

Before approving S. 3677 on July 29, the committee narrowly rejected an attempt by Sen. Arlen Specter (D-Pa.) to strip the amendment that would give FTC the power it seeks to restrict patent settlements. Specter argued that it is “sufficient to have the settlements subject to court approval without the FTC intervening.”

But Kohl pointed out that the cost of brand-name drugs rose nearly 10% last year while the cost of generic drugs fell by nearly the same amount. “At this time of spiraling health care costs, we cannot turn a blind eye to these anticompetitive backroom deals that deny consumers access to affordable generic drugs,” he declared. The full Senate will vote on the appropriations measure later this year.

Drugmakers are fighting back. A new PhRMA-commissioned study claims that the CBO forecast is “flawed and likely substantially overestimates the budgetary savings” that would result from the proposed ban on “reverse payment” patent dispute settlements.

The study also asserts that “under many circumstances, reverse-payment patent settlements between branded and generics manufacturers can benefit competition and consumers, particularly by averting continued litigation that may well delay generic entry substantially.”

The analysis was conducted by several economists, including Jonathan Orszag, a member of former President Bill Clinton’s National Economic Council.

GPhA says members of Congress need “to accept the fact that a ban on patent settlements is bad public policy because it would cost consumers and reduce competition.”


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