Oct 25

“Pay-for-delay” Deals – Anticompetitive or Appropriate & Reasonable Settlements?

Tags: , ,

This morning the FTC released a staff report that purports to assess the number of “pay-for-delay” deals entered into by brand and generic drug companies during the fiscal year 2011 (October 1, 2010 to September 30, 2011). The press release that accompanies the report concludes that business deals made between brand and generic companies continue an “anticompetitive trend” and delay consumers’ access to lower-cost generic drugs. But the staff report and the accompanying press release lack the analysis to support this conclusion.

In fact, there is little basis for this sweeping conclusion.

The so-called “pay-for-delay” deals referenced by the FTC are settlement agreements entered into by brand and generic pharmaceutical drug companies to resolve patent disputes between the companies.  According to the FTC, out of 156 patent dispute settlements, 28 (18%) contain compensation to the generic manufacturer and a restriction on the generic manufacturer’s ability to market its product. The majority of the settlements (100 or 64%) contain some restriction on the generic manufacturer’s ability to market its product but contain no explicit compensation. Twenty-eight of the settlements have no restrictions on entry.

The FTC staff report provides no further analysis of these settlements.  It does not say whether any of the generic drugs at issue did violate the brand company’s patent, in which case a settlement preventing the generic from coming to market during the life of the patent would seem to be entirely reasonable and appropriate. It does not say if the restriction on entry is during the life of the patent at issue (a timespan that may be reasonable and appropriate) or if the restriction on entry extends longer than the life of the patent at issue (a timespan that may be anticompetitive). The report does not say how long any of the restrictions are for and whether some of the restrictions may allow the generic to come to market before the life of the patent has run. In short, the FTC staff report does not provide any basis to determine whether these agreements are, in fact, anticompetitive.

Merely labeling all settlements between a brand and a generic drug company that places any restrictions on market entry of the generic drug as “anticompetive” is simply posturing and name-calling. It also shows little understanding for this nation’s patent laws, drug development or jurisprudence.

Role of patent law in drug development

Patent rights spur innovation. Brand pharmaceutical companies invest hundreds of millions of dollars in research and development in drug development based on the assurance that if they develop a new, safe and effective drug, they will be able to recoup the costs of that investment plus a healthy profit. If brand pharmaceutical companies are not allowed to protect their patent rights, they will have much less incentive to invest in research and development of new drugs.

Generic drug companies have much lower research and development costs. They are allowed to reverse engineer the brand pharmaceutical’s products and come to market with very similar products. They are allowed, and are encouraged, to ride the coattails of the brand companies’ research and marketing initiatives.

Without brand pharmaceutical companies, there would be no new drug treatments on the market. The generic drug companies merely follow the brand.

Because of their business model, generic drug companies are able to provide their products at a substantially decreased cost than brand drug companies. But the generic companies still make healthy profits on their drug products.

Patent Infringement Suits

The Hatch-Waxman Act provides a framework to encourage generic drug companies to bring their similar products to market before the expiration of the brand company’s patent. The generic company is allowed to reverse engineer the brand company’s drug product and attempt to develop a product that does not infringe on the brand company’s product.

Under the Act, the generic company must provide the brand company with notice of its new product and the brand company is allowed to challenge whether the generic product infringes on the brand drug. The courts then determine whether there is patent infringement.

So-called “pay for delay” settlements

The settlements discussed by the FTC staff report are settlements of these patent infringement suits. The settlements are a natural consequence of the litigation framework set out in the Hatch-Waxman Act. To avoid the uncertainty of a court decision, which might find infringement, the parties must have reached a compromise and have settled their claims.

It makes sense that some of these settlements should include better terms for the brand product and some should include better terms for the generic product. The relative strength of the parties’ claims are likely different in each case.

To know whether any one of these settlements is anticompetitive, one would need to know whether the proposed generic infringed the brand’s patent. If the generic drug would be infringing on the brand’s patent, then it could not come to market any sooner than the running of the patent. In some cases, the settlement may allow the generic to come to market sooner than it would have if the patent had been upheld.

The fact that some compensation has been provided to the generic company in some of the settlements is not a red-flag of anticompetitive conduct; it is a red-herring. Again, the FTC report does not say how long the generic has been kept off of the market (for a period greater than, less than or equal to the life of the patent) or provide any analysis of the relative strength of the parties’ positions. Settlement of a lawsuit that allows a brand company to protect its patent rights should not be considered wrong simply because generic companies provide drugs at lower costs. But that seems to be the argument that FTC Chairman Jon Leibowitz is making.

Cost to consumers?

The supposed lower costs of generics needs to be considered in light of the benefits that brand companies provide. I’m not an economist but I suspect that some of the costs of promoting generic drug companies at the expense of brand drug companies are not always counted.

For instance, the FTC press release includes a chart showing that the “pay for delay” settlements are projected to cost Americans $35 billion over the next 10 years. Really? $35 billion? What is the basis for this number? The FTC staff report does not say.

But there are at least a few reasons to question the calculation.  First, it is likely that a court would have found in favor of the brand companies on the patent infringement claims at least some of the time. Second, in calculating the cost of the delay, one must consider how long the generic is being kept off of the market that is greater than it would have been under the existing patent laws. Third, the consequence of no “pay for delay” settlements would not necessarily be faster access to generic drugs.  If drug companies are not allowed to enter these types of settlements, they are more likely to continue their fight in the courtroom.