FTC vows to challenge pay-for-delay court settlements

WASHINGTON, D.C.—One week after the U.S. Supreme Courtdecision in FTC v. Actavis Inc., whichheld that "pay-for-delay" settlements between brand and generic drugmanufacturers may violate antitrust laws, the Federal Trade Commission (FTC)vowed in subcommittee to continue challenging these high court decisions thatsome say border on the illegal.

In the wake of the July 17 controversial court decision, theSenate Judiciary Committee's Subcommittee on Antitrust, Competition Policy andConsumer Rights held a hearing to take comments on whether the Senate should gobeyond the Supreme Court's Actavis rulingand consider legislation creating a presumption that all these settlements areinvalid and should be banned outright.

The Supreme Court ruled that under the "scope-of-the-patent"test, "absent sham (patent) litigation or fraud in obtaining the patent, areverse [pay-for-delay] payment settlement is immune from antitrust attack solong as its anticompetitive effects fall within the scope of the exclusionarypotential of the patent." The court further ruled that pay-for-delay agreementsare appropriately subject to "rule-of-reason" scrutiny, the standard applied tomost antitrust actions, under which the court considers evidence that theagreement harms consumers.

Under the Hatch-Waxman Act, a generic drug manufacturer mustfile an abbreviated new drug application (ANDA) with the U.S. Food and DrugAdministration (FDA) in order to introduce a generic version of a branded drug.The act then allows the brand drug manufacturer, when it is protected by apatent, to file a patent infringement suit against the generic manufacturer whofiled the ANDA.

The problem with these pay-for-delay settlements is that thebrand manufacturer pays its potential generic competitor to abandon a patentchallenge and delay entering the market with a lower-cost generic product. The"relevant competitive harm," according to the Supreme Court in Actavis, is that these agreements will allow the brandmanufacturer to "prevent the risk of competition" by splitting monopoly profitswith the generic applicant.

Edith Ramirez, chairwoman of the FTC, testified that thecourt's decision confirms that these settlements harm competition andconsumers, promising that the FTC will continue to aggressively prosecute theseanticompetitive agreements. She stated her belief that passage of Senate Bill214 would help the FTC by allowing it to begin its prosecution with apresumption of invalidity, which would reduce FTC time and effort by puttingthe burden on the brand and generic drug manufacturers to rebut thepresumption.

However, Diane E. Bieri, partner at Arnold & Porter LLP,appearing before the subcommittee on behalf of the Pharmaceutical Research andManufacturers of America (PhRMA), testified that S. 214's presumption ofinvalidity is unnecessary and inconsistent with long-standing principles ofantitrust and patent law. The concept of a presumption of illegality forcertain types of patent settlements ignores the statutory directive that allpatents "shall be presumed valid," Bieri testified.

"An issued patent is presumed valid until it is adjudicatedotherwise," she added. "As the Supreme Court recently recognized, in the faceof similar arguments in a different context, neither allegations of 'bad' or'weak' patents, nor purported flaws in the patent system, justify adoption of alegal standard that ignores the Congressional intent of the presumption ofpatent validity. Quite simply, the Hatch-Waxman Act was intended to givegeneric drug companies the incentive to challenge patents, which it clearlydoes. The Supreme Court's decision in Actavis permits an antitrust review of each and every settlement using thetraditional antitrust analysis of the rule of reason announced almost a centuryago in Chicago Board of Trade.There is no need to replace this approach with an industry-specific presumptionof illegality that would further undermine the value of patents."

Committee Chairman Sen. Amy Klobuchar, D-Minn., seemedinterested in gaining support for an outright ban of these pay-for-delayagreements, rather than the mere presumption of invalidity contained in S. 214.The commission also pledged to pursue pay-for-delay matters currently inlitigation, monitor private lawsuits regarding any such deals, investigatepending pay-for-delay accords, examine new settlements and investigate thosethat raise anti-competitive concerns.

However, the sheer numbers of pay-for-delay deals are on therise as the stakes get higher. The FTC had argued before the court thatSolvay's pharmaceutical unit, which was acquired by AbbVie in 2010, agreed topay as much as $30 million annually to Actavis' Watson Pharmaceuticals unit,Paddock Laboratories and Par Pharmaceuticals to delay generic competition forthe testosterone replacement therapy AndroGel until 2015. While the decisionpermitted lawsuits against companies involved in pay-for-delay deals, theSupreme Court declined the FTC's request to declare them illegal.

A second case, in which the FTC alleged Teva's Cephalon unitpaid four drugmakers to postpone the introduction of generic versions of theinsomnia drug Provigil (modafinil), was put on hold until the Supreme Courtrendered its decision.

In 2012, the number of potentially anticompetitive patentdispute settlements between branded and generic drug companies increasedsignificantly compared with those in 2011, jumping from 28 to 40, according toa new FTC staff report. The study also found that in nearly half of thesesettlements, branded firms may have used the promise that they would notdevelop or market an authorized generic (AG) as a payment to stall generic drugfirms from marketing a competing product.

The FTC staff report found that drug companies made 40potential pay-for-delay deals in 2012. The figure is significantly higher thanlast year's total of 28 deals, and is the highest of any year since the FTCbegan collecting data in 2003. Overall, the agreements reached in the latestfiscal year involved 31 different brand-name pharmaceutical products withcombined annual U.S. sales of more than $8.3 billion, the FTC reports.

Of the 40 final settlements that potentially involvepay-for-delay, FTC staff found that 19 involved agreements by the branded firmnot to market an AG product that would compete with the generic company'sproduct. Such "no-AG" promises are valuable to generic firms, as theysignificantly reduce the level of competition the new generic entrant willface, allowing the generic firm to secure greater market share and extracthigher prices from consumers.

"Sadly, this year's report makes it clear that the problemof pay-for-delay is getting worse, not better," said FTC Chairman JonLeibowitz. "More and more brand and generic drug companies are engaging inthese sweetheart deals, and consumers continue to pay the price. Until thisissue is resolved, we will all suffer the consequences of delayed genericentry—higher prices for consumers, businesses and the U.S. taxpayer."

Generic drugs are the key to making medicines affordable formillions of American consumers, and help hold down costs for taxpayer-fundedhealth programs such as Medicare and Medicaid, the FTC reports. Prices forgeneric drugs are typically 85 percent less than brand-name drugs.

In recent years, certain brand-name companies have paidgeneric firms to settle their patent challenges and, in turn, delay theintroduction of lower-cost medicines. The FTC staff study has found that patentsettlements that include a payment delay generic entry by 17 months longer, onaverage, than those that do not include some form of payment.

By delaying the entry of cheaper generics, pay-for-delaydeals cost Americans $3.5 billion annually, the FTC reports.