‘Pay For Delay’ Drug Accords Get U.S. High Court Scrutiny

Photographer: Daniel Acker/Bloomberg

The FTC, backed by the Justice Department, is appealing a ruling that rejected its suit against Solvay Pharmaceuticals Inc., now owned by Abbott Labs, and three generic-drug makers over Androgel, a treatment for low testosterone in men. Close

The FTC, backed by the Justice Department, is appealing a ruling that rejected its suit... Read More

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Photographer: Daniel Acker/Bloomberg

The FTC, backed by the Justice Department, is appealing a ruling that rejected its suit against Solvay Pharmaceuticals Inc., now owned by Abbott Labs, and three generic-drug makers over Androgel, a treatment for low testosterone in men.

The U.S. Supreme Court agreed to take up a multibillion-dollar fight between the drug industry and federal antitrust enforcers, a case that may determine how quickly low-price generic medicines reach the market.

The justices today said they will use a case involving Abbott Laboratories (ABT) to scrutinize the “pay for delay” agreements that the Federal Trade Commission says cost drug buyers $3.5 billion each year. Under those accords, brand-name drugmakers pay other companies to hold off selling generic versions. The pharmaceutical industry says the agreements are legitimate settlements of patent disputes.

Companies have struck more than 100 such deals since 2005. Medicines made by Bayer AG (BAYN), Merck & Co. (MRK), Bristol-Myers Squibb Co. (BMY), Watson Pharmaceuticals Inc. (WPI) and Teva Pharmaceutical Industries Ltd. (TEVA) have all been the focus of court cases as the FTC under Chairman Jon Leibowitz seeks to crack down on the practice.

“This case could determine how an entire industry does business because it would dramatically affect the economics of each decision to introduce a generic drug,” said Ralph Neas, president of the Generic Pharmaceutical Association, a Washington trade group.

Three of the four federal appeals courts to rule on the issue have said the settlements, also known as reverse payments, are generally permissible. Drug companies and antitrust enforcers alike urged the Supreme Court to set a nationwide standard. The court will rule by June.

The FTC, backed by the Justice Department, is appealing a ruling that rejected its suit against Solvay Pharmaceuticals Inc., now owned by Abbott Labs, and three generic-drug makers over Androgel, a treatment for low testosterone in men.

Delaying Competition

The FTC says the price for the drug was poised to fall at least 75 percent in 2007 after the Food and Drug Administration cleared the way for generic competition. Faced with the prospect of losing $125 million in annual profits, Solvay instead paid the three generic-drug makers, including Watson, as much as $42 million a year to delay their competing versions until 2015, the FTC says.

“The agreements made economic sense only as a mechanism for Solvay to pay its nascent generic competitors to delay competing with it,” the FTC said in court papers.

The companies say FDA approval was no guarantee of imminent generic competition because Solvay had a patent that, if backed by the courts, would have protected the drug until 2020. Solvay says it gave up the last five years of that patent protection as part of the agreement.

Less Exclusion

“Solvay agreed to less exclusion than it lawfully and realistically might have obtained in the exercise of its constitutionally protected right to assert its patent reasonably,” the Abbott unit argued in court papers.

The companies say the payments were compensation for services to be provided by the generic-drug makers, including Watson’s marketing of Androgel to urologists.

The case will test the intersection of antitrust principles, which encourage competition, and patent law, which gives innovators a monopoly over their products. That tension is complicated in the drug context because of a federal law that aims to bring generic versions to market quickly.

Under the Hatch-Waxman Act, the company that files the first FDA application to sell a generic drug gets the right to sell it exclusively for six months if it is approved. The FDA filing typically triggers a lawsuit by the brand-name company claiming its patent is being infringed.

Baseless Claims

The FTC and its allies, including 31 states, say those infringement claims are often baseless, making the settlements similarly dubious. The agency says generic-drug makers, at least in the 1990s and early 2000s, won about 75 percent of the patent suits that have been litigated to final judgment.

The FTC says it has less concern about settlements that set a date for generic entry without involving a payment, accords the agency says may simply reflect the prospects of success in the infringement case. A reverse payment, by contrast, “is most naturally understood as consideration for the generic manufacturer’s agreement to delay market entry,” the FTC said.

Prices for generics typically are 20 percent to 30 percent less than the name-brand counterparts, and in some cases are as much as 90 percent cheaper, according to the FTC.

Drug companies say the settlements enhance competition and encourage innovation. The Pharmaceutical Research and Manufacturers of America, which represents brand-name drugmakers, told the justices that companies spend an average of $1.3 billion to create a new drug, counting the cost of failed products.

Investment Incentive

Without strong patent protection -- and broad power to settle cases -- companies would be less willing to make that investment, the Washington-based trade group said in court papers.

The trade association filed its brief in a separate case involving K-Dur, Merck’s treatment for potassium deficiency. In that case, the Philadelphia-based 3rd U.S. Circuit Court of Appeals said drug purchasers could press claims that Schering- Plough, now part of Merck, improperly paid Upsher-Smith Laboratories Inc. $60 million to delay introduction of a generic version of K-Dur in 1997.

“By restricting the ability of innovator companies to manage risk and avoid the costs and uncertainty of litigation, the 3rd Circuit’s rule dramatically diminishes incentives for innovation and product development,” the trade group argued.

Presumed Anticompetitive

In letting the suit against Merck go forward, the 3rd Circuit said courts should start with the presumption that reverse payments are anticompetitive. Accords are permissible only if manufacturers can show the payments serve a purpose other than delayed entry or offer some procompetitive benefit, the appeals court said.

Three other federal appeals courts have taken a less skeptical approach toward reverse payments. In the Androgel case, the Atlanta-based 11th Circuit ruled that, unless the patent litigation is a sham, reverse payment agreements are immune from antitrust attack so long as they stay “within the scope of the exclusionary power of the patent.”

Because the Androgel accord shortened the period of time Solvay potentially could exclude generic competition, it passed antitrust muster, the appeals court said.

The Supreme Court refused to hear an FTC appeal in a reverse payment case involving K-Dur in 2006. At the time, the Justice Department under President George W. Bush was at odds with the FTC on the issue and urged the Supreme Court not to hear the appeal. The Justice Department switched its stance on the issue after President Barack Obama was elected.

Signature Issue

Reverse payment accords have been a signature issue for Leibowitz as FTC chairman. He has pursued a two-pronged strategy, pressing cases in court while urging Congress to pass a law that would limit the deals.

“It’s a high-risk, high-reward case for Leibowitz,” said Keith Hylton, a Boston University law professor who has written several books on antitrust topics. “High risk because most of the courts have rejected the FTC’s position on reverse-payment deals. The most likely outcome is that the Supreme Court will side with the majority of courts rejecting the FTC’s view.”

The case is Federal Trade Commission v. Watson Pharmaceuticals, 12-416.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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