CBO Says Bill Targeting ‘Pay-For-Delay’ Agreements on Generics Could Save Taxpayers Billions

Senator Charles Grassley (R-IA) and Senator Herb Kohl (D-WI) announced November 8, 2011, that the Congressional Budget Office (CBO) had scored their bill to ban pay-for-delay agreements (S. 27) as saving the federal government $4.8 billion over ten years. Citing the cost savings, the Senators called for the Joint Select Committee on Deficit Reduction to include the proposal as part of any final deficit reduction package.

CBO anticipates that enacting the Preserve Access to Affordable Generic Drugs Act (S. 27) would accelerate the availability of lower-priced generic drugs and generate $4.785 billion in budget savings between fiscal years 2012 and 2021. CBO also estimates that earlier entry of generic drugs affected by the bill would reduce total drug expenditures in the U.S. by roughly $11 billion over the decade.

The bill would deter “pay-for-delay” settlements in which brand name drug companies settle patent disputes by paying generic drug manufacturers in exchange for the promise of delaying the release of the generic version into the market. Under the legislation, these agreements would be presumed illegal and the Federal Trade Commission (FTC) would be provided heightened authority to scrutinize the agreements.

Last month, Kohl and Grassley sent a letter urging the Joint Select Committee on Deficit Reduction to include the bill as part of its budget-cutting effort. “In these settlements, brand name pharmaceutical companies pay millions of dollars in cash or other valuable consideration to generic drug companies to settle drug patent litigation, in return for the generic drug company agreeing to withhold marketing its generic drug until the end, or shortly before, the expiration of the patent.”

“These pay for delay settlements deprive consumers of years of generic drug competition, while enriching both the generic drug company and the brand name manufacturer, which maintains a monopoly on the drug. However, consumers lose by paying substantially higher prices and the government loses by paying substantially higher drug reimbursement payments under Medicare and other federal health programs,” the senators said in the letter.

In the late 1990s, the FTC challenged several pay-for-delay agreements as being anti-competitive and shortly thereafter, the use of agreements declined, according to Kohl. From 2000-2004, patent cases continued to settle, but the settlements did not include payments to generic drug manufacturers.

Since 2005, three Circuit Courts of Appeals decisions have rejected these antitrust challenges, and held that the rights of patent holders make virtually any patent settlement permissible, even anti-competitive settlements, “trumping antitrust law.” These precedents have made it very difficult for the FTC to successfully challenge these pay-for-delay settlements. “Our legislation would ensure that these anticompetitive pay-for-delay agreements are properly subject to antitrust scrutiny,” Kohl said.

Last month, the FTC released a staff report that found that drug companies entered into 28 potential pay-for-delay agreements in FY 2011, nearly matching the previous fiscal year’s record of 31 deals. Overall, the agreements reached in the latest fiscal year involved 25 different brand-name pharmaceutical products with combined annual U.S. sales of more than $9 billion, according to the FTC. In a statement, FTC Chairman Jon Leibowitz also called on the supercommittee to ban pay-to-delay agreements.

The agency has had difficulty persuading courts that pay for delay is illegal. In March, the U.S. Supreme Court let stand a decision from the U.S. Court of Appeals for the Second Circuit that found a pay for delay deal between Bayer AG and Barr Pharmaceuticals (now owned by Teva Pharmaceuticals) to drop a patent lawsuit over the antibiotic Cipro did not violate antitrust laws. The FTC also lost a case in the 11th Circuit challenging a pay for delay deal between Schering-Plough Corp., Upsher-Smith Laboratories and American Home Products Corp. involving the high blood pressure medication K-Dur 20.
In July, the Senate Judiciary Committee favorably reported the bill (S. 27). The Obama Administration actively lobbied in favor of the measure, and President Obama included a similar provision in his 2012 budget outline.

During consideration of the bill, Senator Kohl said the legislation is needed to “prevent one of the most egregious tactics used to keep generic drugs off the market.” Voting against the bill, Senator Orrin Hatch (R-UT) told the committee that S. 27 would create a “high burden of proof” that would “deter patent challenges in the future” and “give unprecedented authority to unelected Washington bureaucrats.” Although Hatch said he understood the desire to “curtail abuses,” S. 27 would create “expensive delays,” “discourage innovation,” and hurt the very people it was intended to help.

The Generic Pharmaceutical Association opposes the legislation. In a September 21, 2011 letter to the super committee, the GPhA said that patent challenges and settlements actually accelerate the introduction of competition into the pharmaceutical market. “Banning patent settlements is anti-consumer because these settlements guarantee early market entry,” the group said. Only a small number patent challenges have involved litigation settlements between the brand and generic companies. “While it seems counterintuitive, the fact is that patent settlements have…brought more affordable products to market sooner than otherwise would have been possible,” the GPhA said in a statement.

The association pointed out that the FTC and the Department of Justice already have the authority to review and reject any patent settlement. The Pharmaceutical Research and Manufacturers of America agrees. PhRMA President John Castellani has said that restricting such settlements, “which already are subject to review by the Federal Trade Commission and the Department of Justice” could “keep generics from being available to patients for years.”