Pay-for-Delay Drug Deals Said to Be Target for Rule at FTC

The Federal Trade Commission is considering using its rule-making power to stop so-called pay-for-delay deals between brand-drug manufacturers and makers of generic medicines after failing to get judges or Congress to act, three people familiar with the process said.

FTC Chairman Jon Leibowitz, pushing to abolish these deals, is studying how the agency may prohibit brand-name manufacturers such as Cephalon Inc. and Sanofi Aventis SA from paying generic-drug makers such as Watson Pharmaceuticals Inc. to drop patent lawsuits that might get generics to market faster, the people said. They declined to be identified because the decision-making process isn’t public.

Leibowitz estimated in an interview May 3 that the deals cost consumers about $3.5 billion a year in higher prescription drug prices by slowing the introduction of generics.

“There are few competitive problems that harm consumers as much as the pay-for-delay settlements,” said David Balto, a Washington-based attorney who has represented consumer groups on the issue. “This is an endemic problem that needs a comprehensive solution.”

A rule to block certain patent settlements would be unusual for the FTC because it would involve antitrust rather than consumer protection and it could be made on the agency’s own initiative under its basic statutory authority rather than at Congress’s specific direction, said Bert Foer, president of the American Antitrust Institute in Washington.

Courts, Congress

Efforts by the FTC to challenge the settlements in federal courts have failed and Congress hasn’t moved to outlaw them. The settlement amounts are confidential, Peter Kaplan, an FTC spokesman, said by e-mail.

Generic drugs account for 78 percent of all retail prescriptions in the $307.4 billion-a-year U.S. pharmaceuticals market, according to the IMS Institute for Healthcare Informatics. Consumer spending on generic drugs is growing as patents expire and patients choose lower-cost options, IMS said on its website.

The FTC may try to issue the rule under an expedited procedure it hasn’t often used, the people said. One precedent was in 1971, when the FTC passed a rule that required labeling octane content at the gas pump.

‘Unprecedented’ Effort

“Any potential attempt by the FTC to move forward unilaterally with such a rulemaking would be unprecedented,” said Sean Heather, executive director of the global regulatory cooperation project at the U.S. Chamber of Commerce. “The ‘If you don’t at first succeed try, try, and try again’ approach to policy making by an independent agency isn’t appropriate.”

In recent years, the FTC has slowed its rule-making, partly as a result of procedures, set up under a 1975 law, that Liebowitz has described as “cumbersome.” Final rules under this process take almost seven years on average to implement, said Jeffrey Lubbers, a professor of administrative law at American University in Washington. The FTC hasn’t initiated any new rules under this system since 1980, he added.

The FTC’s move could be controversial after Congress last year shot down an effort by the agency to seek rule-making authority under the faster process.

Options Open

“We are not dismissing any option out of hand,” said Kaplan, who said the agency’s strategy remains focused on fighting the deals in court and pressing for legislation.

Drug company lobbyists say the settlements can benefit consumers when brand-name drugmakers allow generic equivalents to get to market before patents expire.

“Patent settlements have never prevented competition beyond the patent expiry, and generally have resulted in making lower-cost generics available months and even years before patents have expired,” said David Belian, a spokesman for the Generic Pharmaceutical Association, a Washington-based trade group whose members include Mylan Inc. and Anchen Pharmaceuticals Inc.

The FTC doesn’t need a blanket ban against patent settlements as the current system allows legal agreements that don’t hurt competition, said Diane Bieri, executive vice president and general counsel of the Pharmaceutical Research and Manufacturers of America, a Washington-based trade group.

Court View

A rule blocking patent settlements might not hold up in court, said Marc Schildkraut, a lawyer with Dewey & LeBoeuf LLP in Washington and former assistant director of the FTC’s Bureau of Competition. In private practice, Schildkraut successfully defended Schering-Plough Corp. against the agency over patent settlements.

“The question is whether the FTC can trump the courts by doing this,” Schildkraut said. “That’s pretty novel, but will it work? I’m not sure how much traction it will have.”

The commission may await the outcome of several cases over alleged anticompetitive agreements involving Abbott Laboratories’ AndroGel, a testosterone replacement therapy, and Cephalon Inc.’s Provigil, a drug to improve wakefulness, before making a move, the people familiar said. FTC Commissioner Thomas Rosch said in a May 11 speech that he’s “optimistic” about both cases.

U.S. courts, including federal appeals panels in New York, Atlanta and Washington, have upheld settlement agreements as long as they don’t delay generics beyond the expiration of patents.

‘Tough Sell’

“Judges who have been trained to encourage settlements to avoid the costs of litigation now have the FTC trying to tell them they’re wrong,” Schildkraut said. “It’s a tough sell.”

The expedited approach, allowed under the 1975 law if the rule involves competition, is the same as used by agencies such as the Securities and Exchange Commission and the Federal Communications Commission. This process could lead to rulemaking in less than a year, Lubbers said.

Past rules have primarily involved consumer protection issues such as labels on appliances, clothing and food, said the American Antitrust Institute’s Foer.

Some of the agency’s efforts have backfired, notably when the FTC tried to regulate television advertising aimed at children in 1978, spawning an uproar that prompted Congress to shut down the agency for several days. A Washington Post editorial dubbed the FTC the “National Nanny.”

“The result was that many rules didn’t go through after that and the FTC backed away from rule making,” Foer said. “Naturally when you start a rule process, the whole industry jumps on you and cries to Congress.”

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