Feds Eye 'Pay-for-Delay' Deals That Keep Generic Drugs Off the Market

The Hatch-Waxman Act was originally designed to encourage generic drug companies to challenge the patents on name-brand medications, paving the way for cheaper drugs to occasionally enter the market before patents expire. Good, right? But somewhere along the way, the act's initial intent got twisted, leaving us with "pay-for-delay" deals that actually keep cheaper generic drugs off the market. In this arrangement, generics companies that challenge patents held by brand-name drug companies agree to settle by delaying their entry into a market in return for a payment.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% Saying enough is enough, Federal Trade Commission Chairman Jon Leibowitz and key members of Congress are calling for legislation to end the pay-for-delay deals. Such agreements, the FTC said, cost consumers billions of dollars each year and delay market entry of generics by an average of 17 months.

A Profitable Settlement

In pay-for-delay, it is apparently more profitable for generics companies to settle the cases and take the payment rather than compete. It is also certainly more profitable for the drug makers, as generics, on average, sell for 90% less than their branded counterparts.

If you think this sounds anti-competitive and not in the best interest of consumers, you're not alone. The FTC has been trying to curb this practice for years. But the Hatch-Waxman Act, which is apparently responsible for the problem, has made it difficult because of the way it's designed to encourage generic companies to challenge the patents on name-brand drugs. Since in some cases the deals allow generic entrants ahead of the patent expiration date, courts have allowed many settlements the FTC contests as being anti-competitive.

Back in June, the FTC found that pay-for-delay ends up costing consumers $3.5 billion a year -- $1.2 of which is paid by the government -- or $35 billion over the next 10 years. The Generic Pharmaceutical Association estimates generics account for 72% of all prescription dispensed in the U.S. Yet in dollar amount, they account for only about 17% to 22%, according to different estimates. It's not hard to do the math: About 80% of drug spending money goes on some 28% of name-brand medicines.

Little Movement Seen


While reform on the issue appeared to be moving forward six months ago, all that's occurred are renewed calls for legislation that would put an end to these anticompetitive patent settlements. Speaking at a joint press conference on Wednesday, Leibowitz said "pay-for-delay deals are a bad prescription for America: When drug companies agree not to compete, consumers lose."

He urged Congress to adopt a provision as part of the health-care reform bill to stop the practice, stressing the matter is not a partisan issue. The previous commissioner, Republican Thomas Rosch, fully agreed.

To support their claim, an FTC staff study found that over the past six years, the number of agreements with payment and delay has increased from zero in 2004 to a record 19 agreements in 2009 for a total of 66. These settlement have kept generics off the market for an average of 17 months. Most of the agreements reached since 2005 are still in effect, according to the study. And they currently protect at least $20 billion in sales of brand-name drugs from generic competition.

Earlier Access To Meds?


Of course, the pharmaceutical industry -- generic and branded -- says that settlements are a legitimate and even an expedient way to resolve expensive and time-consuming patent litigation. The Generic Pharmaceutical Association states the deals give generic makers the right to enter the market before the patent on a brand-name drug expires, giving consumers earlier access to affordable meds.

Orrin Hatch, the U.S. Senator responsible for the act, also says generics companies wouldn't challenge patents if they were precluded from settling their cases, The New York Times quotes.

As legislators aim to consolidate the two versions of the health-care reform bill, the pay-for-delay issue remains one that needs resolving. While the Senate bill does not include a ban on the practice, the House bill does. Drug companies have already expressed their support of the Senate bill over the House bill.

A Ban Is Proposed

The FTC and the Justice Department have been engaged in litigation to block the deals, so a ban in the health-care bill would simplify the process greatly. The FTC says that although it lost the Schering Plough case when the U.S. Supreme Court declined to hear its appeal in 2004, it continues to press on with litigation, with the most recent pay-for-delay suits being against Cephalon (CEPH) and Solvay Pharmaceuticals.

It's no wonder then that Abbott Laboratories (ABT) prefers to call its recent settlement with Teva Pharmaceuticals Industries (TEVA) to keep a generic version off the market until March 2011 at least "a pure licensing agreement."

And it's not just in the U.S. that this issue is under scrutiny. The Financial Times reports that Europe's competition watchdog has also stepped up its probe on the matter.

Increase your money and finance knowledge from home

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

Introduction to Retirement Funds

Target date funds help you maintain a long term portfolio.

View Course »

Add a Comment

*0 / 3000 Character Maximum