Pay-for-Delay Pharma Deals Not Banned

March 24th, 2010 - 11 Comments

The Financial Times reports that “a proposal backed by President Barack Obama that would have banned multibillion-dollar deals between big pharmaceutical companies and their generic rivals was stripped out” of the health care legislation days before it was passed by the House. “The agreements have come under scrutiny from antitrust officials in the United States and Europe because they say the arrangements essentially allow branded drugmakers to pay off potential generic competitors, thereby keeping them out of the market,” according to FT.

Below, Smeal’s Daniel Cahoy, a patent lawyer and associate professor of business law, explains the special circumstances of these deals and why it was a good idea to remove this seemingly logical provision from the legislation:

Among the many provisions added to the health care reform bill was one that seemed eminently sensible and extremely popular: preventing branded pharmaceutical companies from paying generic companies to delay entry into the market.  Yet this provision was excised before the House of Representatives’ historic vote on Sunday.  What possible objection could anyone outside of the pharmaceutical industry have to precluding this behavior, known colloquially as “pay-for-delay”?  In fact, the situation is a bit more nuanced than many news reports suggest.  Even a skeptic of these arrangements might conclude that a total ban is a bad option.

The so-called “pay-for-delay” deals arise in the context of a very narrow and complex set of cases known as ANDA (Abbreviated New Drug Application) litigations. Essentially, generic companies file such cases to obtain the right to market their drugs early by establishing that a branded pharmaceutical company’s blocking patent (or patents) is invalid or not infringed. Commonly, the branded company vigorously opposes these assertions, as early generic entry can cause a significant reduction in expected profits. Unless there is a settlement, a court must sort it out. But this is where the confusion often begins, as ANDA settlements are different than those in most patent cases. Most importantly, the generic company has usually sold no product and would suffer no damages if it lost the case—it would simply be prevented from entering the market before the patent expires. To encourage settlement, the branded company may be compelled to offer the generic company something more than the option of simply walking away. So, reverse payments or some other kind of inverse incentive may be exchanged.

Reverse payments have long been the subject of regulatory scrutiny, as they have the appearance of one company paying another to stay off the market. Since 2003, the Federal Trade Commission requires that companies file information on any such settlement. In 2010, the agency issued a report declaring that reverse payments cost consumers $3.5 billion per year and suggesting that they be treated as presumptively illegal. It advocated legislation that would make them very difficult to arrange. The proposed amendments to the health care reform bill included a provision that mimicked the FTC’s proposal, banning pay-for-delay settlements unless clear and convincing evidence of pro-competitive benefits could be produced. That pleased many who see reverse settlements as necessarily harmful.

However, the proposed legislation was a rather extreme solution to a problem that would best be addressed on a case-by-case basis. It overcompensated for the existence of anticompetitive behavior that exists in some circumstances and could end up eliminating settlements that are actually beneficial to consumers (few as they may be). The ability to settle a litigation can be efficient, particularly in ANDA cases where the costs can be extremely high. Moreover, cases that involve strong patent rights would permit exclusion in the absence of the challenge. Effectively forcing companies to take every action to trial would eliminate these cost savings and delay generic entry when the patent owner is successful.

In the end neither a total ban on reverse settlements nor a rule making them presumptively legal is likely to best serve the public. Courts and the FTC should assess these actions on a case-by-case basis.

Tags: Cahoy, Health Care, Pharmaceuticals, Politics

This entry was posted on Wednesday, March 24th, 2010 at 10:33 am and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

11 Responses to “Pay-for-Delay Pharma Deals Not Banned”

1. Dave says:

   March 25, 2010 at 6:48 am

   From the article: “Courts and the FTC should assess these actions on a case-by-case basis.”

   Meanwhile, lawyers such as the author “Daniel Cahoy, a patent lawyer” will be making money hand over fist litigating on behalf of these companies.

   The bias inherent to this article is pathetic.
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