FTC v. Actavis: The Wrong End of the Telescope

On December 8, 2012, the Supreme Court agreed to hear the Federal Trade Commission (FTC) v. Actavis, Inc. case. The court’s grant of certiorari marked the latest chapter in a decade-long effort by the FTC to have the court rule on the festering issue of whether pay-for-delay provisions in patent settlements are legal. Oral hearing was heard on March 25; a decision is expected by June.

Paying generic companies not to bring a cheaper product to market is inherently problematic. We spent over 30 years of our professional lives working for Big Pharma, many as Chief IP Counsels defending patents, and we believe that pay-for-delay provisions are not in the best interests of the research-based industry. But we don’t believe they are presumptively anti-competitive and harmful to the American consumer as the FTC asserts. Rather, we believe their consequences are far more insidious.

More important, we have come to believe that the issue presented to the Supreme Court, regardless of the ultimate ruling, will not fix the underlying problem. The issue that should be addressed by policy makers is whether the current Hatch-Waxman (H-W) system needs revisiting to overcome a clear decline in new drug development.

Passed by Congress in 1984, the act was meant to be a fair compromise between the research-based pharmaceutical companies that invent new drugs and the generic companies that copy them. It looked great on paper but broke down over the years in practice.

In order to be able to sell a drug in the United States, marketing approval must first be obtained from the Food & Drug Administration (FDA). This is a time-consuming and expensive process, taking anywhere from 10-15 years and costing over a billion dollars. Prior to 1984, this was required of generic drugs as well as new ones.

In an effort to get more lower-cost generic drugs to the American consumer, while maintaining incentives for innovation, Senator Orrin Hatch and Representative Henry Waxman negotiated a deal that allowed generic companies to piggy-back on the data submitted by the research-based company. As if this was not enough incentive for the generic companies, H-W added another sweetener. It awarded six months of marketing exclusivity to the first generic company to knock out a drug’s patent, in essence awarding a mega million dollar prize (and in some cases a billion dollar one) to the generic company with the most aggressive and clever legal team. It didn’t take the generics long before they were all trying to get in on the action. While many cases did go to trial, generic companies soon understood that the mere filing of a patent challenge might very well produce a nice settlement reward.

Pay-for-delay provisions in patent settlements foster, and indeed encourage, a plethora of weak, and in many cases, meritless patent challenges. Not all settlement agreements contain pay-for-delay provisions. However, because the research-based company has so much at stake, and the generic, apart from its legal expenses, so little, the risk vs. benefit ratio is significantly skewed against the research-based company. Paying something to protect what belongs to the research-based company (i.e., the patent) often makes financial sense. It would be as if your doctor said you had cancer, but all you had to do to ensure your survival was amputate your little toe. Almost all of us would find ourselves in the operating room.

We believe pay-for-delay provisions hold Big Pharma hostage to the generics’ often not-so-disguised form of blackmail. The only winners in the pay-for-delay scenario are the generic companies and the law firms that represent them.

We think it is time to stop rewarding the player with the least at stake. The generics are dependent on the successes of Big Pharma. And Big Pharma lives with the daunting statistic that only one in every 10,000 drugs ever discovered actually makes it to market, as well as the huge price tag to make that happen. Don’t look to generics to start doing that any time soon.

Ironically, although generics only copy already approved drugs, they sometimes can’t even do that properly. Generics have to be bioequivalent to the branded drug, but in some cases they just don’t work as well. This may be due to different excipients, different manufacturing conditions, or simple oversight. Sometimes they are even dangerous, as is evidenced by a recent recall of a generic product when glass was found in certain lots.

We believe one way to “fix” the current imbalance of interests is to extend the data exclusivity law from its current five-year term to ten–just as it is in Europe and Japan. A ten-year period during which generics could not ride free on the backs of the innovator companies’ health dossiers would ensure a meaningful period in which the innovator could recoup a portion of its research and developmental costs, as well as discourage frivolous and weak patent challenges. This would save millions in legal expenses and allow those wasted resources to be used for research purposes instead, thus directly benefiting all of us.

UPDATE:

Response to post: Traci Medford-Rosow and Peter C. Richardson

Paying generic companies not to bring a cheaper product to market is inherently problematic. As we stated, however, we don’t believe they are presumptively anti-competitive as the FTC asserts. If they have any effect on competition at all, they are slightly pro-competitive.

The reason for this is clear to IP attorneys who have battled generic challenges. Pay-for-delay provisions in patent settlements foster, and indeed encourage, a plethora of weak, and in many cases, meritless patent challenges. While many cases do go to trial, generic companies understand very well that the mere filing of a patent challenge might very well produce a nice settlement reward. While working for Big Pharma, we were once directly asked by the General Counsel of a well-known US generic company, “Aren’t you going to pay my company something to go away?”

So ironically rather than delaying the entry of generic drugs, which should naturally occur at the end of the patent term, the existence of pay-for-delay provisions encourages some generics to take multiple shots on goal in the hope that someone will pay them a nice sum of money to go away for a while. But most pay-for-delay payments are coupled with a reduction in patent term as well, thereby actually resulting in a generic entering the market sooner than it would otherwise, if the patent challenge had never been filed in the first place.

As Judge Richard Posner wrote a decade ago, “A ban on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger’s settlement options.”  Judge Posner is correct. A ban on reverse-payment settlements would indeed reduce the incentive to challenge patents, especially meritless and frivolous ones. ANDAs are routinely filed for every approved drug, most often on the first day possible–immediately upon expiration of the data exclusivity period. If you believe the generics’ side of the story, every single drug patent in the United States is invalid and/or obtained by fraud. This defies credibility and was not contemplated when Hatch-Waxman was enacted.

Accordingly, despite the fact that pay-for-delay clauses may incentivize generics to challenge patents, we do not think they are in the long-term best interest of the American consumer. We believe pay-for-delay provisions hold Big Pharma hostage to the generics’ often not-so-disguised form of blackmail. But the only winners in the pay-for-delay scenario are the generic companies and the law firms that represent them. Certainly not Big Pharma nor the thousands of American workers the industry employs. More important, not the American consumer either. Precious dollars spent defending meritless patent challenges have diverted millions of dollars away from much-needed research and cures for deadly diseases.

Traci Medford-Rosow and Peter C. Richardson are intellectual property attorneys at the law firm of Richardson & Rosow LLC in New York City. The views expressed herein are their own. Traci can be reached at tmr@richardsonrosow.com, and Peter at pcr@richardsonrosow.com.