Bayer Joins Merck in Fighting Generic Drugs Case

For more than a decade, drugmakers have battled U.S. Federal Trade Commission accusations that they have colluded to forestall the introduction of dozens of generic medicines, costing buyers as much as $3.5 billion a year.

The fight hits a climax March 25 when the Supreme Court hears arguments on what the FTC calls “pay for delay” patent settlements. Under those accords, the FTC says, a brand-name drugmaker pays a would-be rival to push back the release of a low-cost generic medicine. Drug companies say the deals have the opposite effect, clearing the way for generic competition by resolving patent issues.

The FTC is seeking a ruling that those deals are generally anticompetitive, a decision that could alter the landscape for U.S. drug sales and lead to a wave of suits by wholesalers, retailers and insurers. Bayer AG (BAYN), Merck & Co. (MRK) and Bristol-Myers Squibb Co. (BMY) units already have faced suits, and the agency says 40 more pay-for-delay accords were struck in fiscal 2012 alone.

“I cannot emphasize enough the enormous consequences with respect to this Supreme Court decision,” said Ralph Neas, president of the Generic Pharmaceutical Association, a Washington industry trade group that opposes the FTC campaign.

Photographer: Andrew Harrer/Bloomberg

Former Federal Trade Commission Chairman Jon Leibowitz stepped down last week after making drug-industry settlements his signature issue. Close

Former Federal Trade Commission Chairman Jon Leibowitz stepped down last week after... Read More

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Photographer: Andrew Harrer/Bloomberg

Former Federal Trade Commission Chairman Jon Leibowitz stepped down last week after making drug-industry settlements his signature issue.

The Supreme Court argument is one of two this month that will affect the generic-drug industry. On March 19 the court will weigh limits on patient lawsuits, using the case of a woman awarded $21 million for injuries she incurred after taking a painkiller made by Takeda Pharmaceutical Co. (4502)

Shielding Companies

Patients are seeking a way around a 2011 Supreme Court ruling that shielded generic-drug companies from claims that they failed to warn of possibly dangerous side effects. A federal appeals court said the patient could sue because she was pressing a different legal theory, claiming the drug was so dangerous it shouldn’t have been on the market.

The high court will rule in both cases by June.

The disputed patent settlements are a product of the economics of the pharmaceutical industry, where companies can reap billions of dollars from blockbuster drugs -- and then see those sales plummet the moment a generic alternative appears. The FTC says generic drugs sell for an average of 15 percent of the original price, with the brand-name company losing 90 percent of its market share by unit sales. Generics have saved purchasers $1.1 trillion in the last decade, Neas says.

Pharmaceutical patent settlements typically arise when a generic-drug maker has either secured, or is poised to secure, Food and Drug Administration approval. At that stage, only the brand-name company’s patents stand in the way of generic competition.

Consumers’ Expense

The FTC and its allies say they have no quarrel with settlements that merely set the date for generic entry. They say that type of agreement simply reflects the companies’ assessments of the chances that a court would invalidate the brand-name company’s patent.

A payment is different, they say. If a brand-name drugmaker with $100 million in annual sales can pay a generic rival $20 million to wait an extra year, both companies come out ahead -- at the expense of purchasers, the FTC argues.

“It is a win-win for the pharmaceuticals, and it is a lose-lose for the consumers,” said Jon Leibowitz, who stepped down last week as the FTC’s chairman after making drug-industry settlements his signature issue. “The brands and generics are conspiring to prevent competition, and the consumers are essentially the ones who pay the premium for that.”

A 2010 FTC study found that the accords cost purchasers $3.5 billion a year, a figure the drug industry contests.

The high court case centers on Androgel, a treatment for low testosterone in men that is made by Solvay Pharmaceuticals Inc. Bayer and Merck have both filed briefs backing Solvay.

Long Fight

The court fight has been a long time coming for the FTC. The justices refused to hear the antitrust agency’s arguments in 2006 after President George W. Bush’s Justice Department urged the court to reject an appeal in a case involving Schering- Plough Corp., now part of Merck. The department switched sides on the issue after Barack Obama became president and is now backing the FTC case against the companies.

Drug companies say the government fails to grasp the complexities of settlement talks.

“For the FTC to sit in a little ivory tower and pretend it is that simple is nonsense,” said Paul Bisaro, chief executive officer of Actavis Inc. (ACT) The company, the fourth-largest maker of generic drugs by sales, is also a defendant in the case.

Bisaro says a payment can make the difference between an accord that clears the way for competition and a stalemate that forces a generic-drug company to survive years of patent litigation before going to market.

Lipitor Accord

He points to the agreement that let his company, then known as Watson Pharmaceuticals Inc., start selling a version of Pfizer Inc. (PFE)’s Lipitor cholesterol pill, the world’s best-selling drug, in 2011. The accord meant Watson didn’t have to spend millions of dollars litigating over patents that might have protected Lipitor from competition until 2017.

“If we had lost -- and statistics show we lose 50 percent of the time -- the product would still be protected today,” he said. Bisaro said the Lipitor settlement didn’t involve a “direct payment,” without elaborating.

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

Five Years

The companies say Solvay, which is now part of AbbVie Inc. (ABBV), had a patent that, if backed by the courts, would have protected the drug an additional five years -- until 2020.

“Unless and until a patent is adjudicated invalid or not infringed, good-faith claims about infringement must be assumed true for antitrust purposes,” the AbbVie 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.

Three of the four federal appeals courts to rule on the issue have said the settlements, also known as reverse payments, are generally permissible. That includes the Atlanta-based 11th U.S. Circuit Court of Appeals, which threw out the FTC’s Androgel suit.

Passing Muster

The court said 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.

Leibowitz says that reasoning undermines a federal law, known as the Hatch-Waxman Act, that encourages generic-drug makers to challenge patents and get their products to market as soon as possible. Should the Supreme Court adopt the appeals court’s approach, companies would be emboldened to delay lower- priced medicines even longer, he said.

“The payment wouldn’t go for a few extra years. It would go to the last day of the patent,” Leibowitz said.

Bisaro says it’s the patent, not the payment, that is responsible for delaying generic competition.

“People get stuck on the cute label,” he said, referring to “pay for delay.” “It is the patent that creates the block. The patent, which is lawfully granted by the United States government, is what creates the anticompetitive behavior.”

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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