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Pay for delay: Right or wrong?
February 2012
by D’vorah Graeser, GAI  |  Email the author
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In the pharmaceutical industry, that hypercompetitive business with astronomical costs, market exclusivity is of paramount importance. And drug manufacturers will do almost anything keep hold of that precious resource.  
 
With market pressures from generic drug manufacturers at an all-time high, firms have turned to what's known as "pay for delay," a stalling tactic employed by originator pharmaceutical manufacturers to maintain market share after a pharmaceutical patent has expired or has been found to be invalid in court.  
 
The general idea is that the originator and patent holder pays a third party to delay competition from a generic equivalent of the pharmaceutical in question. The third party may be a generic manufacturer, particularly in court cases in which the generic manufacturer has challenged the originator's patent. Sometimes, the third party is a pharmaceutical benefits management (PBM) company, in which case, the payment may be made to induce the PBM company to continue to favor the originator's version of the drug over that of a generic competitor.  
 
Pay for delay is highly controversial and has spawned multiple government investigations and even lawsuits. The Federal Trade Commission (FTC), for example, on its website devoted to "reporter resources," states unequivocally that "consumers lose when branded drug manufacturers use illegal tactics to keep generic alternatives off the market." The website continues that such "illegal" tactics involve "pay[ing] off the makers of competing drugs to withhold their products from the market."
 
However, are pay-for-delay tactics actually illegal? The Supreme Court refused to hear the appeal of the FTC in a pay-for-delay case involving Schering Plough in 2001, and while many such cases are currently wending their way through the court system, few have resulted in a definitive ruling against such tactics. One 2006 case, involving the contraceptive Ovcon by the originator Warner Chilcott, resulted in a settlement when the originator agreed to drop an agreement with Barr, a generic manufacturer, that would have prevented Barr from marketing a generic version of Ovcon. Currently, there are no court cases brought by the FTC involving the second type of pay-for-delay tactics, in which the originator pays the PBM company to continue to favor the originator's version of the drug over that of a generic competitor.
 
To determine whether any pay-for-delay tactics are illegal, it is important to note that companies are generally constrained in their commercial behavior by anti-monopoly laws. Blatant collusion between companies to fix prices is not permitted; for example, Perrigo Co. and Alpharma Inc. were accused in 2004 of colluding to effectively fix prices for over-the-counter store-brand children's liquid Ibuprofen, which is clearly illegal. A settlement was reached in this case, requiring the companies to pay illegally obtained profits from the alleged price-fixing deal.  
 
Less blatant than collusion, mergers can also be problematic. For example, the FTC either blocks or places restrictions on mergers between two companies that would result in the new company having monopoly power in the market. Pharmaceutical companies are not immune from such requirements. For example, proposed mergers between Pfizer Inc. and Wyeth, Schering-Plough Corp. and Merck & Co. Inc. and CSL Ltd. and Cerberus-Plasma Holdings LLC all resulted in objections by the FTC due to monopoly concerns. The first two mergers proceeded after it was agreed that the merged company would divest parts of itself; the last merger failed, due to these concerns. Thus, in general, monopoly behavior by pharmaceutical companies is not permitted.
 
Patents, however, are one area in which a monopoly is permitted, but with limitations. For example, patents have a defined lifetime (most recently 20 years from the date of filing of the patent application, barring any extensions). Still, even with this monopoly right, there are limitations. "Tying," or forcing the purchase of products or services not covered by a patent in order to be able to purchase a patented product, is illegal in some circumstances. Sandoz Pharmaceuticals Corp. fell afoul of this law when attempting to tie purchase distribution and patient-monitoring services with purchase of clozapine, its (then) patent-protected schizophrenia drug; the FTC considered this tying arrangement to be an abuse of the patent monopoly. Furthermore, although a patent owner may license the patent, the terms may be considered illegal if they involve tying, price-fixing and so forth. Attempts to fix resale prices of a patented product through a license are also not legal. Thus, even patent law does not permit a patent owner to have an unrestrained monopoly on a product or even on terms for licensing the patent.  
 
Despite these robust antitrust laws, the FTC frequently loses in court on pay-for-delay issues—and any of its successes have come through settlements. This failure to curtail the practice is at least partly due to the lack of explicit language in the law governing these arrangements. The Hatch-Waxman law, which governs generic drugs, does not explicitly forbid pay for delay. The FTC has been trying to induce Congress to support laws that do explicitly forbid pay for delay, although no bills have passed both the House and the Senate. 
 
Thus, the FTC must rely on more general antitrust law to block such arrangements—with relatively limited success to date.  While the above forms of pay-for-delay arrangements have not consistently been found to be illegal, the newest form, involving PBM companies such as Medco, involve an even murkier area of the law. There is no law that explicitly prevents this behavior, yet it clearly results in the enrichment of the originator manufacturer at the expense of insurance companies, consumers or both. The deal between Pfizer and Medco for Lipitor, in which Medco agrees to supply patients with brand-name Lipitor even if a generic version has been prescribed, does not directly hurt the consumer, as the copay/deductible is not increased. However, insurance companies, employers and the U.S. government (as an insurer) will all pay more money—straight into the pockets of Pfizer and Medco, as the latter receives a "rebate" for such prescriptions. Is such a "rebate" illegal? Is it even a rebate—or is it a bribe, as asserted by the website "Public Citizen"?  
 
These questions are not trivial, since bribes and kickbacks are clearly illegal, while rebates are not necessarily illegal. For example, it's illegal for a pharmaceutical company to bribe a doctor to prescribe its drug for Medicare patients. A pharmaceutical company that engages in this behavior may be the subject of a qui tam, or whistleblower lawsuit, seeking to claw back the resulting illegal profits. In 2010, Kos Pharmaceuticals, a subsidiary of Abbott Laboratories, agreed to pay more than $41 million in a settlement of lawsuits for alleged kickbacks to doctors who prescribed its drugs Advicor and Niaspan. The language of the Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)) is not limited to prohibiting kickbacks to doctors, but instead blocks such kickbacks to any entity involved in referrals to particular service or product providers when such providers are paid by Medicare/Medicaid (more generally referred in the statute as "federal healthcare programs").  
 
The arrangement could also potentially be challenged under laws preventing price-fixing as previously described. Various pharmaceutical chains, associations and providers of pharmacy network services have been pursued by the FTC for various forms of price fixing, collusion, illegal boycott and other anticompetitive behavior. Yet it is possible that none of the laws that could potentially be applied clearly block the Pfizer/Medco arrangement, as the two entities are not competitors. Pfizer is not attempting to abuse patent monopoly power, the deal does not specifically fix the price of the drug and Medco is not the sole player in the PBM market; it's not even the largest of the three major competitors in this area (although the proposed purchase of Medco by Express Scripts, another of the three competitors, would make the merged company the single largest player in the PBM area).   
 
Clearly, all parties in the healthcare system would benefit from clear laws in this area or, barring new laws, from a decisive court case that would delineate permitted agreements and arrangements in this area. At the moment, only the originator pharmaceutical companies and those with which they reach an agreement, such as generic drug companies and PBMs, are benefiting from the lack of legal clarity. The Hatch-Waxman Act clearly sought a balance between the rights of pharmaceutical originators and generic manufacturers, to ultimately provide the best benefits to consumers—both by encouraging (and protecting) pharmaceutical innovation and by opening up the area of pharmaceuticals to competition after patent expiry. However, pay to delay threatens this balance, not only by providing additional months or even years of an effective pharmaceutical originator dominant market position (if not outright monopoly), but also by introducing uncertainty into the ability of generic manufacturers to enter the market.   
 
After all, with a pay-for-delay arrangement, generic manufacturers may not be able to sell their products if no one will buy them. Consumers, insurers, employers and the federal government would also benefit from clarity in this area. Even originator pharmaceutical manufacturers would benefit from a clear and consistent legal environment, as they would not be under threat of potential lawsuits or investigations by the federal government or other bodies.  
 
Dr. D'vorah Graeser is the founder and CEO of Graeser Associates International (GAI), an international healthcare intellectual property firm. Dr. Graeser has been a U.S. patent agent for more than 15 years and has extensive experience and expertise in the biomedical field.

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