Pay-for-delay in play

WASHINGTON, D.C.—In an attempt to stop Big Pharma frommaking "pay-to-delay" deals, the Federal Trade Commission (FTC) has filed an amicuscuriae brief before the U.S. Court ofAppeals for the Third Circuit in support of class-action plaintiffs who havechallenged the legality of patent settlements between branded and genericmanufacturers of the high blood pressure medication K-Dur 20.

Delaying the release of generics is financially lucrativefor drugmakers, but hurts consumers to the tune of $3.5 billion a year, the FTCcontends. In support of the plaintiff consumers, the FTC's brief, filed May 18,asks the Third Circuit to overturn a lower court's decision holding thatsettlements between the patent holder, Schering-Plough Corp., and the"infringers," Upsher Smith and ESI, did not violate antitrust laws.

"Both branded and generic companies thus have strongincentives to enter into exclusion-payment settlements, which allow them toshare a continuing stream of monopoly profits while depriving the public of thebenefits of early generic entry," the FTC brief states.Schering marketed K-Dur 20, a potassium supplement used totreat high blood pressure. The active ingredient of K-Dur 20 was notpatentable, but Schering held a patent on the drug's time-release formulationuntil September 2006.

In 1995, both Upsher and ESI filed for certificationsseeking approval for generic versions of K-Dur 20. Schering sued them both. In1997, on the eve of trial, Schering entered into a settlement with Upsher,agreeing to pay Upsher $60 million, and Upsher agreed to abandon its challengeand forgo entry until 2001.

Upsher also agreed to grant Schering a bundle of licensesfor which Schering would make conventional milestone and royalty payments. In1998, Schering also entered into an agreement with ESI. A portion of thissettlement covered a side deal, but Schering separately agreed to pay ESI up to$15 million in exchange for ESI agreeing not to market its generic version ofK-Dur until January 2004.

In 2003, the FTC held that Schering's agreements with Upsherand ESI violated Section 5 of the FTC Act, but the Eleventh Circuit Court setaside that decision.

In this case, purchasers of K-Dur 20 allege that Schering'ssettlement agreements with Upsher and ESI violated the Sherman Act, and thedistrict court granted the defendants' motions for summary judgment.

The district court concluded that, absent a showing that thepatent infringement suit was "objectively baseless," there could be noantitrust challenge unless the settlement restrained competition beyond "thescope of Schering's patent."

The court deemed the agreements "well within" the patent'sscope because the entry dates that the parties agreed to were before the patentexpired, and no products other than the generic products at issue in thelitigation were delayed by the agreements.

The FTC's brief states that the appellate court shouldreverse the district court's ruling and remand it for reconsideration becausethe district court's decision would allow branded companies to pay genericcompanies to stay out of the market until patent expiration. It argues that thedistrict court's approach conflicts not only with basic antitrust principles,but also with patent law and the policies of the Hatch-Waxman Act, whichCongress enacted to encourage competition by generic drugmakers.

The FTC brief states that pay-for-delay deals are increasingand already cost consumers billions of dollars a year, and urges the ThirdCircuit to resolve the issue by holding that pay-for-delay settlements are"presumptively illegal and that they will be condemned unless the companies canshow that their agreements do not harm competition."

The FTC recently released a report stating that 31pay-for-delay deals occurred in fiscal year 2010, a 63 percent increase fromfiscal year 2009. The deals reached in the last year involved 22 differentbrand-name meds with combined annual U.S. sales of about $9.3 billion.

FTC spokesman Peter J. Kaplan tells ddn, "The FTC continues to challenge these blatantlyanti-competitive pay-for-delay deals in court. We are not dismissing any optionout of hand. We continue to recommend that Congress pass legislation to stopthis practice, which costs consumers, on average, $3.5 billion a year."

While news reports indicate the FTC is looking into usingits own rulemaking power to stop the practice, Kaplan says nothing has changed.The FTC will continue its two-pronged approach of filing briefs in court andurging new legislation in Congress, he says.

However, it appears the FTC is outmatched. FTC Chairman JonLeibowitz recently told Bloomberg thatthere are 1,330 registered pharmaceutical lobbyists in Washington, D.C., alone,compared to the FTC's "terrific Congressional staff … with six people on it."

Yet Leibowitz remains optimistic, concluding, "At the end ofthe day, Congress or the Supreme Court is going to stop this perniciouspractice."

In the meantime, as patents expire, consumer spending ongeneric drugs is growing, accounting for 78 percent of all retail prescriptionsin the $307.4 billion-a-year U.S. pharmaceuticals market, according to the IMSInstitute for Healthcare Informatics.Big Pharma contends the deals can actually benefit consumerswhen brand-name pharmaceuticals allow generic drugs to get to market beforepatents expire.

Diane Bieri, executive vice president and general counsel ofthe Pharmaceutical Research and Manufacturers of America, a Washington-basedtrade group, says the FTC does not need to protect consumers by banning thesekind of patent settlements since the system doesn't hurt competition. In fact,without the pay-to-delay practice, the generic brands may not be available toconsumers for years, she says.

On May 3, the Generic Pharmaceutical Association (GphA)issued a press release, stating the FTC "is continuing to perpetuate the myththat procompetitive, proconsumer patent settlements are harmful to consumers—anunsubstantiated position that has repeatedly failed to receive support in bothCongress and the courts.

"Patent settlements have never prevented competition beyondthe patent expiry, and generally have resulted in making lower-cost genericsavailable months and even years before patents have expired," GphA continued."And it is important to note that the FTC already has the authority to reviewand reject any patent settlement that it deems to be unlawful."

Generic pharmaceuticals fill 75 percent of the prescriptionsdispensed in the United States, but consume just 22 percent of the total drugspending, according to the GphA.

U.S. courts, including federal appeals panels in New York,Atlanta and Washington, have upheld settlement agreements as long as they don'tdelay generics beyond the expiration of patents.

But the FTC isn't buying it.

Testifying before Congress in 2009, FTC Bureau ofCompetition Director Richard Feinstein said, "Since this issue first arose in1998, every single member of the Commission, past and present—whether Democrat,Republican or Independent—has supported the FTC's challenges to anticompetitive'pay-for-delay' deals. The threat that these agreements pose to our nation'shealthcare system is a matter of pressing national concern."

The Third Circuit is expected to hear oral arguments in theSchering case as early as this fall.