A Competitive Delay

The Federal Trade Commission (FTC) issued a final report on authorized generic drugs that concludes when pharmaceutical companies introduce an authorized generic version of their brand-name drug, it can reduce both retail and wholesale drug prices.  Consumers benefit from this form of competition between authorized generics and generic drugs.  

But the FTC also said that authorized generics also open the door for anti competitive settlements; brand-name companies may be using the threat of launching an authorized generic, along with cash payments, to induce generic companies to delay bringing their drugs to market in so-called “pay-for-delay” agreements.  The number of these settlements in patent disputes over prescription drugs increased by 60 percent in 2010.

The Hatch-Waxman Act is designed to ease the introduction of generic drugs by, in certain circumstances, granting a 180-day period of marketing exclusivity to the first generic competitor of a brand-name drug, known as a “first-filer.”  During that exclusivity period, no other generic company can receive FDA approval to sell its product.  The FDA has some say in determining what was the first challenge to the brand-name patent.  If a generic is deemed the first challenger and settles with the brand-name company, then any other company that challenges the patent will not receive the 180-day marketing exclusivity.  As a result, there is less incentive for other generics to challenge the patent.

The industry contends the settlements are legal business decisions.

The FTC says they are illegal sweetheart deals that cost consumers $3.5 billion a year.

For instance, two weeks before a trial was to have started on whether a cheaper version of Cipro, one of the world’s most popular antibiotics, infringed on a patent, the case was settled, with Bayer, the alleged victim, agreeing to give Barr, the alleged infringer, payments totaling $398.1 million.  In return, Barr agreed not to market generic Cipro before Bayer’s patent expired.  The 2nd Circuit last year upheld the payment from Bayer to Barr, relying on its 2006 precedent in In re Tamoxifen Citrate Antitrust Litgation that found pay for delay settlements were legal unless “shown to be procured by fraud, or a suit for its enforcement is objectively baseless.”  In 2011, the Supreme Court declined to review the Tamoxifen decision. 

The delays in competition resulting from these agreements are significant.  The FTC report noted that in the 39 settlements between FY 2004 and FY 2010 that contained an explicit agreement by the brand name manufacturer not to launch an authorized generic competitor and a commitment by the first-filing generic to delay entry, generic entry was delayed by an average of 37.9 months past the settlement date.

Prescription drug revenues drop by 50 percent after the first generic company enters the market, then another 80 percent when any company can enter.  This is great for the consumer, not so great for the drug company.

The Pharmaceutical Research and Manufacturers of America, a Washington trade group, said the report proved that brand-name generics help reduce prices and criticized what it perceived as an attack on patent settlements in general.  The Generic Pharmaceutical Association called the study part of a “misguided policy to ban pro-consumer patent litigation settlements.”

The question is whether the benefits of lower costs of generic drugs outweigh the likelihood of delayed entry of generics to the very consumers using the prescription drugs.