Court undermines 'pay for delay' drug deals

Third Circuit Ruling seen as cutting costs to consumers

The Third Circuit Court of Appeals’ recent decision to strike down an agreement under which a brand-name pharmaceutical company compensated a generic competitor to defer entry into the market has brought the legality of these “reverse payment agreements” or “pay-for-delay agreements” back into focus.

Over the past decade, five other federal courts of appeal have addressed the anticompetitive nature of these arrangements under the federal Sherman Antitrust Act. The U.S. Supreme Court has long construed the act to prohibit only unreasonable restraints of trade.

But until the Third Circuit’s ruling, several decisions since 2003 held that these agreements did not violate antitrust law so long as the competition sought to be restrained did not exceed the scope of the brand-name maker’s patent. This “scope of the patent test” was a departure from decisions by courts of appeal in 2001 and 2003. Those courts concluded that such agreements are illegal restraints of trade because they eliminate competition, attempt to allocate market share and preserve monopolistic conditions.

The Third Circuit rejected the scope of the patent test and concluded that the fact-finder must treat payments to delay entry into the market as “prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit.”

How did we get here? Under federal law, the Food and Drug Administration must grant approval to a pharmaceutical company to market a prescription drug. The company must submit a New Drug Application, which includes full investigatory reports showing that the drug is safe and effective for use, a full statement of the composition of the drug, and any issued patents for that drug. The FDA publishes the patented information.

To increase competition, Congress passed the Hatch-Waxman Act in 1984 that allows generic makers to file an Abbreviated New Drug Application, or ANDA. The generic makers may rely on the FDA’s findings of safety and efficiency when considering the patented drug. When a generic maker files this form, the company must certify that the proposed generic drug does not infringe any patents published by the FDA.

Significant consumer costs

Although the generic maker has four options, the antitrust litigation has focused on paragraph IV, in which the generic maker must certify that the brand-name “patent is invalid or will not be infringed by the manufacture, use or sale of the new drug for which the application is submitted.”

As a significant incentive, the first generic maker to submit its ANDA and paragraph IV certification is rewarded with a 180-day exclusivity period. This means that the generic brand has no competition from other generics.

Once the generic maker has filed a paragraph IV certification, the brand-name maker has 45 days to initiate a patent infringement lawsuit. The filing of the suit institutes an automatic stay under which the FDA is prevented from approving the generic drug until the earlier of the lapse of thirty months or the court presiding over the lawsuit determines that the patent is invalid or there is no infringement.

Given the costs and uncertainty of litigation, cases often would be settled. In some instances, the brand-name patent holder would entice the generic maker to drop its lawsuit and refrain from manufacturing the generic option for a set period of time, such as prior to the expiration date of the patent, but not as soon as the generic maker could attain through litigation.

A 2002 Federal Trade Commission study showed that between 1992 and 2002, generic makers prevailed in 73 percent of cases resolved by a court decision. The study also determined that in some cases, the patent holders were compensating generic makers for substantially delaying entry into the market.

Based on the FTC’s recommendation, Congress amended Hatch-Waxman in 2003 and required the brand-name and generic manufacturers to file their settlement agreements with the FTC and the U.S. Department of Justice for antitrust review. Between fiscal years 2004 and 2009, 66 final agreements involved some form of compensation.

The FTC issued a subsequent report in January 2010 finding that settlement payments from brand-name to generic manufacturers are estimated to cost consumers $3.5 billion per year. According to the report, a hypothetical consumer paying $300 per month in brand-name drug costs could be saving $270, or 90 percent, if a generic equivalent were available. The FTC has concluded that these reverse payment agreements delay the entry of a generic equivalent by an additional 17 months versus those agreements that do not include compensation. That costs the hypothetical consumer over that period, according to the FTC’s analysis, an additional $4,590.

The Third Circuit’s recent decision effectively rebalances the scales among the federal courts of appeal over the legality of these types of settlement agreements. It also increases the likelihood that the U.S. Supreme Court finally will decide the issue.

Congress, of course, also could act. But as The New York Times recently reported, a Senate bill prohibiting these payments remains stalled.

Joel T. Emlen, an attorney in the Construction Practice Group of McLane, Graf, Raulerson & Middleton, can be reached at 603-628-1249 or joel.emlen@mclane.com.