Why pay-to-delay arrangements can actually be good for consumers, too
Almost exactly two years after a Supreme Court decision, FTC v. Actavis, opened the door for more aggressive Federal Trade Commission (FTC) lawsuits against pharma companies accused of using of pay-to-delay tactics, the FTC has finally reached an agreement with Teva Pharmaceuticals in an ongoing pay-to-delay lawsuit. Under the agreement, which is being heralded as “a landmark deal,” Teva will pay a $1.2 billion fine to settle allegations that its Cephalon unit illegally manipulated the market to prevent entry of generic Provigil (modafinil) by setting up an elaborate pay-to-delay deal.
Although the FTC has actively been suing companies for pay-to-delay behavior since 2001, and policing patent-settlement deals to uncover pay-to-delay tactics, this is the first time that the FTC has ever levied a fine in order to recover money on behalf of purchasers.
In this case, the $1.2 billion will be put into a fund and paid out to drug wholesalers, pharmacies, and insurers, who purchased brand-name Provigil because they did not have access to a generic modafinil option. Note that this fine is in addition to a $512 million settlement which Teva reached with several retail pharmacy chains in May.
This groundbreaking settlement is based on an ongoing saga that dates back to a 2008 lawsuit in which the FTC charged Cephalon (which was purchased by Teva in March 2011) for attempting to protect Provigil from generic competition by striking a series of agreements between late 2005 and early 2006 with three generic manufacturers, including Teva, Mylan, and Ranbaxy Labs. The goal was to ensure that branded Provigil would enjoy protection from generic competition until 2012.
The side deals in question included Cephalon paying its would-be competitors to supply pharmaceutical ingredients, develop products, and license intellectual property. FTC officials estimated the total value of the overall deal to be about $300 million.
According to the FTC, the stakes are much bigger than a one-time $300 million deal. In fact, the commission estimates that pay-to-delay deals cost American consumers roughly $3.5 billion per year. Also, it’s hard to miss the ethical overtones implicit in the FTC’s messages to the public about the outcome of this case. In a press release issued on May 28 by the FTC on their Web site, Edith Ramirez, Chairwoman of the FTC, said, “Today’s landmark settlement is an important step in the FTC’s ongoing effort to protect consumers from anticompetitive pay-to-delay settlements, which burden patients, American businesses and taxpayers with billions of dollars in higher prescription drug costs. Requiring wrongdoers to give up their ill-gotten gains is an important deterrent.”
The Cephalon-Provigil case is a classic example of a pay-to-delay deal. Technically, such arrangements involve a brand-name drug manufacturer offering either cash, some other type of deal that has financial value, or a combination of both to a generic-drug manufacturer. In exchange, the generic-drug manufacturer agrees to delay the introduction of lower-cost generic medications. These payments—in which brand companies pay generic companies to change their marketing timelines—are known as reverse payments.
The value of patent settlements
It should be noted that although the FTC has set a precedent with this case, patent settlements between brand-name companies and generic companies are not illegal. In fact, under Hatch-Waxman, Paragraph IV Certification is an option that generic manufacturers can use when they apply for an abbreviated new drug application (ANDA).
A byproduct of filing this certification is that the generic manufacturer declares that the patent for the pioneer drug is either invalid, not infringed, or unenforceable. At that point, there is a 45-day window in which the branded manufacturer (the NDA holder) can file suit.
What happens next? At best, there will be some type of patent settlement between the companies, in which both companies gain benefits, while consumers gain access to a new generic option earlier than otherwise expected. At worse, patent litigation drags on, becoming expensive and ultimately delaying introduction of the generic drug in question.
During these types of patent litigation battles, generic companies lose in court about half the time, which compromises their ability to introduce a generic competitor into the marketplace prior to patent expiry. In contrast, an independent study from RBC Capital Markets has shown that in 76% of patent settlement cases between branded and generic companies, generic versions of the pioneer drug are introduced an average of five years before the patent expiration date.
One example involves generic Lipitor (atorvastatin), which came to market six years before the brand patent expired—all because of a patent settlement. According to data from IMS, the projected cost-savings associated with early entry of generic Lipitor will hit $22 billion by 2017.
Patent settlements enhance the generic marketplace
According to the Generic Pharmaceutical Association (GPhA), settlements are not presumptively illegal. In fact, patent settlements "bring more choices and more savings to millions of Americans." In a 2008 blog post published on The Hill, Ralph Neas, President and CEO of GPhA, noted emphatically that "the FTC and Department of Justice (DOJ) already have the tools they need to ensure settlements are competitive. The law requires generic and brand companies to submit all patent settlement data to the FTC and the DOJ within 10 days of settlement. If the FTC or DOJ believe that the terms of the agreement are anticompetitive, the law allows them to bring suit."
So while the outcome of the Cephalon pay-to-delay case involving Provigil represents a change in the patent-settlement landscape with respect to the ability of the FTC to not only win these cases, but to attach fines, the tools are in place to take steps to use patent settlements wisely. And in fact, without the existence of this payment mechanism, the generic drug industry, which accounts for 84% of all prescriptions in the U.S., would not be nearly as robust.
In the final analysis, generic competition and innovation is supported by robust patent-settlement activity, as well as FTC and other types of regulatory oversight.