FTC Disapproves of "Pay-for-Delay" Drug Deals

    By Kevin E. Noonan --

Last month, the Federal Trade Commission released a report about so-called "pay for delay" arrangements, agreements between branded pharmaceutical companies and generic drug companies that delay entry of generic versions of branded drugs.  The FTC's position is clear from the title of the Report:  "Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions."

The Report, by FTC staffers from the Bureau of Competition, Bureau of Economics, and Office of Policy Planning, describes these agreements as "win-win" for the companies, by permitting brand-name drug prices to stay high while giving generic companies a share of the high profits generated by an extension of the time during which the brand-name drug has no competition.  In the marketplace, the Report notes that generic prices can be as much as 90% lower than brand-name drug prices, designating delay in generic entry as a loss for consumers.  The Report notes that the FTC had "deterred" the use of such agreements between April 1999 and 2004, buttressed by a decision by a regional Court of Appeals that these agreements were per se illegal.  In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003).  However, a decision by the Federal Circuit, In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008), and other Courts of Appeal, Schering-Plough Corp. v. Fed. Trade Comm'n, 402 F.3d 1056 (11th Cir. 2005); see also In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006), have "misapplied the antitrust laws" by upholding this type of agreement.  As a consequence, "pay-for-delay" agreements between branded and generic drug companies have "re-emerged."

As a result, generic drug entry is delayed for on average 17 months and pay-for-delay agreements "protect at least $20 billion in sales of brand-name pharmaceuticals from generic competition."  The Report estimates that the "cost to American consumers [is] $3.5 billion per year."  The nature of these agreements is public information under the terms of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, 42 U.S.C. § 1395w-101 (2009) note (section 110), 21 U.S.C. § 355 (2009) note (sections 1111-1118), 21 U.S.C. § 355(j)(5) (2009) (section 1102)), which require all such agreements to be filed with the FTC.

A previous FTC study showed that generic drug companies prevailed in ANDA litigation against brand-name drug companies 73% of the time between 1992 and 2002.  Generic Drug Entry Prior to Patent Expiration: An FTC Study, Exec. Summary at viii (July 2002).  This statistic provides the incentives for brand-name companies to pursue these types of agreements.

Turning to statistics, the Report notes that there have been 66 agreements that "involved some sort of compensation" for delayed entry between FY 2004-2009, and that in the same time period, ANDA litigation was settled in 152 instances without pay-for-delay agreements.  Of the 66 agreements involving delayed generic entry, 51 of them (77%) were between the brand-name pharmaceutical company and the first ANDA filer.  These data were significant, because (as the Report notes) "[s]ettlements with first-filer generics can prevent all generic entry" (emphasis in original), since the generic company to first file an ANDA has a 180–day exclusivity period to which it is entitled under the Hatch-Waxman Act.  Thus, delaying market entry for the first ANDA filer prevents any subsequent ANDA filer from entering the market until the first filer has utilized the 180-day exclusivity period.

These agreements do not all involve direct cash payments to the generics companies, however.  Other arrangements described in the Report include an agreement from the brand-name pharmaceutical company not to introduce an "authorized generic," i.e., a generic version of the drug made by the brand-name company, which are not excluded by the 180-day exclusivity period awarded to the first to file an ANDA.  These types of agreements were included in about 25% of the "pay-for-delay" agreements discussed in the Report.

The Report also presents details regarding how the various estimates were determined (including average length of no competition against brand-name drugs, the annual costs to consumers (with an embedded estimate on the average savings to consumers from generic drug entry), the likelihood of settlements containing such pay-for-delay provisions, and the sales volume for drugs where settlements containing such provisions (the latter two categories admittedly being highly speculative).  Indeed, the Report contains alternative estimates with higher ($7.5 billion) and lower ($0.6 billion) amounts of consumer costs, depending on initial assumptions.

The Report recommends that, in the absence of consistent treatment by the Courts of Appeal or a decision by the Supreme Court, Congress needs to effect a legislative remedy.  In the interim, the FTC is pursuing additional remedies in two lawsuits, Fed. Trade Comm'n v. Cephalon, No. 08-cv-2141-RBS (E.D. Pa.), and Fed. Trade Comm'n v. Watson, No. 09-cv-00598 (N.D. GA).  Possible legislative measures recommended by the Commission (but not contained in the Report) include forfeiture of the 180-day exclusivity period for any first ANDA filer that enters into a "pay-for-delay" agreement with a branded drug company or outright bans as proposed in bills introduced in both Houses of Congress (H.R. 1706 and S. 369 or S. 1135).  None of these bills have been voted on in either chamber, however, and their fate is (at present) bound up with the stalled healthcare reform bill.

Comments

[EG]

Kevin,

This is unfortunately one time where I agree with the FTC. (Normally, I find the FTC obnoxious and ridiculous in what they go after in the patent arena.) But the practice the FTC is going after speaks volumes about the "mess" that Hatch-Waxman is.

[Kevin E. Noonan]

Dear EG:

I'm thinking of doing a follow-up on the bases the CAFC and 2d Cir used in ruling that such arrangements are not per se illegal. Then I will be able to let you know whether I agree with you.

Thanks for the comment.

[6]

The government looking down upon corruption? WHAT? HOW CAN THIS BE? THINK OF THE JOBS THAT WOULD BE LOST IF WE GOT RID OF CORRUPTION!!!!!!!!!

[Kevin E. Noonan]

Kinda cynical, 6. You work for the government - are you implying the Office is corrupt (be careful how you answer that question)?

[6]

I think you missed the point of my post Kev. It was to say that this pay for delay nonsense is corruption, and that it is the corporations doing it. That doesn't implicate the gov in corruption, so far as I can see. Furthermore I then implied that the government was looking down upon this kind of corruption. I then expressed mock surprise at the gov doing so since I don't have a good opinion of them cracking down on corruption well enough. Then I noted sarcastically that there would be horrible job loss if we were to get rid of corruption. Just think of how many people get put out of work when a mafia ring is busted! Thousands I'll bet! Entire communities devastated!

Though don't get me wrong, it is a proven fact that some of the government is corrupt. Wasn't a mayor of some big city just brought up on bribery a few years back? And some lady was funneling funds from the PTO to some pastor not a year ago. Look also to the recent extension of copyright terms. Corruption dear sir.

Don't even get me started on those senators that got busted a few years back. Dear jebus.

I have to say though that it is my experience that the PTO is remarkably corruption free in so far as those kinds of things go and as far as I can see.

Remember Kev, I don't work for the office, I'm a homeless guy on the side of I-95.

[Matthew Avery]

A better solution would be to revise the 180-day exclusivity forfeiture provisions. A generic company that settles should forfeit the exclusivity period and it should role over to the next ANDA filer.

[Gena777]

Pay-for-delay agreements appear to constitute an abuse of the patent law system. I agree that it is a conundrum best addressed by Congress. However, I'm not certain on the constitutionality of an outright ban, unless the antitrust argument holds up.
http://www.GeneralPatent.com

[Randy Huggins]

Thanks as always for writing, Marilyn, but actually I DID mean the FDA, not the FTC. In order for a patent to be officially linked to a drug, so that the generic manufacturer has to take it into account, it must be listed in the FDA's "Orange Book." The FDA if it had the backbone could refuse to list a lot of the minor, subsidiary patents in their book right now and that would end a lot of the problem. The authors of the article I review suggest an administrative appeal, whereby a generic manufacturer could challenge a patent's listing in the Orange Book without having to go to court.

Randy Huggins
Pharmaspider.com