FTC Can Challenge Generic Drug Deals
June 18, 2013

Supreme Court Says Government Can Challenge ‘Pay For Delay’ Generic Drug Deals

redOrbit Staff & Wire Reports - Your Universe Online

Profit-sharing arrangements between generic and brand name drug companies that preserve patents and prevent competition are not inherently legal, and can be challenged as anti-competitive, the US Supreme Court ruled on Monday.

These “pay for delay” deals arise when a generic drug company settles with a brand name drug maker over a questionable patent. For example, a drug company may obtain a new patent for 20 years by slightly changing the formula for a drug, or the way in which it is administered to a patient. In these cases, a generic rival may sue, seeking a ruling that the extended patent is invalid. These cases often result in a settlement in which the brand-name maker agrees to pay its competitor to delay selling a generic for several years. While such deals financially benefit both the brand name and generic drug maker, consumers end up paying the cost through higher prices.

The Federal Trade Commission has long fought these arrangements, saying they delay lower-cost medicines from reaching the market and cost consumers billions of dollars.

But in a 5-3 vote with Justice Samuel Alito recused, the court declined the FTC´s request to declare the arrangements illegal in all cases. Rather, the government must apply a "rule of reason" and challenge each deal individually, the Court said in a majority decision written by Justice Stephen Breyer.

The "pay for delay" settlement "simply keeps prices at patentee-set levels, potentially producing the full patent-related $500 million monopoly return while dividing that return between the challenged patentee and the patent challenger,” Justice Breyer said.

"The patentee and the challenger gain“¦the consumer loses" he said.

In a dissenting opinion, Chief Justice John Roberts said the Supreme Court never has held that a competitor's decision not to challenge a patent violates antitrust law, and that a settlement between two drug makers in which money is exchanged for abandoning a legal claim is routine.

"In doing so, they put an end to litigation that had been dragging on for three years," Roberts said.

"Ordinarily, we would think this is a good thing."

“Pay for delay” deals are the result of a nearly 30-year-old federal law that sought to get generic drugs on the market as quickly as possible. In the absence of a settlement, generic drug makers must win their patent lawsuits outright. If they lose, the patent runs its full course — usually taking about 20 years.

The case leading to Monday´s ruling involved the topical drug AndroGel, which raises testosterone levels in men. To ward off three generic drug companies that were challenging its patent, brand-name drug maker Solvay Pharmaceutical had agreed to pay generic drug makers Actavis Inc., Paddock Laboratories Inc., now part of Perrigo Co, and Par Pharmaceutical Cos. $31 million to $42 million annually through 2015, at which point they could enter the market with generic versions of the gel, the FTC argued.

The commission said such deals give generic drug makers an incentive to sue and settle for a quick profit, rather than challenge the patent in court and win.

Brand-name drug makers argued that without such settlements, millions of dollars would be wasted in litigation costs. Furthermore, when generics lose patent challenges, the lower-cost drugs, which can be as much as 85 percent less expensive, remain off the market even longer, or until the brand name drug´s exclusive patent expires.

Generic drug makers said they only win about half their cases, and that when they lose consumers do too.

Until now, federal courts have typically declared “pay for delay” settlements legal, particularly because they replace patents that by their nature are anti-competitive. Drug makers and other companies rely on patents to recover their sizeable investments in product development. On average, it takes about $1.3 billion and between 10 and 15 years to bring a drug to market.

The FTC was joined in the current case by a coalition of 36 states, which argued the deals should be subject to challenge.

"Today's ruling is a victory for millions of Americans who depend on generic drugs to treat illness and pain," said New York Attorney General Eric Schneiderman according to USA Today reporter Richard Wolf.

"Pay for delay drug settlements should receive serious scrutiny because they are frequently anti-competitive, unlawful, and harmful to health-care consumers across the country."

The Generic Pharmaceutical Association (GPhA), the nation´s leading trade association for manufacturers and distributors of generic prescription drugs, generally praised the court´s decision, but said it could lower the number of patent challenges brought by generic manufacturers because it will add to their administrative burden.

“We are pleased that the Court clearly recognized that settlements require a case-by-case assessment. In establishing the ℠rule of reason,´ and leaving the decision to lower courts, the ruling continues to provide a lawful pathway for companies to resolve disputes through settlements,” Ralph Neas, President and CEO of the GPhA, told Reuters reporters Lawrence Hurley and Diane Bartz.

“This preserves all options for generic manufacturers to bring lower-cost generic medicines to patients as soon as possible.”

The number of "pay for delay" has grown dramatically in recent years, from just three in 2005 to 40 last year.

Monday´s ruling leaves billions of dollars at stake, and will likely increase future litigation.

"The winners here are the trial lawyers," said Jeffery Cross, an antitrust expert Freeborn & Peters LLP, in an interview with Reuters.

"There will still be reverse payment settlements. ... However, the parties will be more savvy to avoid 'unexplained' large reverse payments that suggest that the patent is not that valid."

It has yet to be seen how many future “pay for delay” deals will be deemed legal under “rule of reason.” The dissenting Justices called such a threshold amorphous, and argued that patents represent exceptions to antitrust laws.

"The Court, however, departs from this approach, and would instead use antitrust law's amorphous 'rule of reason' to inquire into the anticompetitive effects of such settlements,” Justice Roberts wrote.

“This novel approach is without support in any statute, and will discourage the settlement of patent litigation.”

In carving out this new approach, "the majority today departs from the settled approach separating patent and antitrust law, weakens the protections afforded to innovators by patents, frustrates the public policy in favor of settling, and likely undermines the very policy it seeks to promote by forcing generics who step into the litigation ring to do so without the prospect of cash settlements," Roberts concluded according to MedPageToday.

"I would keep things as they were and not subject basic questions of patent law to an unbounded inquiry under antitrust law."

The case is Federal Trade Commission v. Watson Pharmaceuticals Inc. et al, U.S. Supreme Court, No. 12-416.