The Strange Twists and Turns of 'Pay for Delay'

In the arcane world of patent litigation, the term ‘pay for delay’ can be misleading, and as the Washington debate to restrict these deals unfolds, it is becoming apparent that a  ban on such settlements may serve to delay generics even further.  Is the fresh grass of reform really always greener than the well-seeded status quo?

2012 was a record year for patent settlements between branded pharma and generics companies. The Federal Trade Commission highlights that 40 of these deals were so-called ‘pay-for-delay’ settlements in which branded drug companies paid generic drugmakers to delay generic versions of their medicines from entering the US market. However, since these settlements tend to bring generics to market sooner than might otherwise take place with a patent’s expiration, the term ‘pay-for-delay’ is a bit of a misnomer. The Generics Pharmaceutical Association (GPhA) fired back, saying the FTC is “wrong on the facts, wrong on the public policy and wrong on the law.” With the Supreme Court prepared to hear arguments in March for the FTC’s proposed ban on these types of settlements, this issue shows no signs of cooling down.

In the FTC’s release, it cites a 2011 Congressional Budget Office (CBO) study that makes the case that these deals, also known as “reverse payment” settlements cost American consumers $3.5 billion annually and add to the federal budget deficit. GPhA contends that an analysis of the report revealed faulty assumptions by the CBO to support its estimate on costs to consumers. It also makes the assertion that these settlements help consumers save billions of dollars each year by bringing the generics involved in these cases to market sooner than the actual date on which the branded drug’s patent expires.

Regardless of these analyses, generic companies that have challenged branded drug companies have indeed made settlements that result in market entry prior to patent expiry. This is due to most courts applying a “scope of the patent” test that finds any settlement that delays the first-filer for a generic beyond the branded drug’s patent expiration as anti-competitive.

Barr Pharmaceuticals’ generic form of Tamoxfien was allowed to enter the market in 1994 when the patent exclusivity period was slated to expire in 2002. In the case of the AbbVie drug AndroGel, the 11^th federal circuit court of Appeals upheld a ruling that the branded testosterone gel would see its generic competitor enter the market in 2015, five years before the expiration of its patent.

The FTC’s rationale is that these agreements delay competition by forcing generics companies to enter the market later than they would have if they successfully litigated these cases to completion, or as a result of negotiations without any payment involved.  Ralph Neas, CEO of the industry trade association, GPhA, explains, “The assumption here is that that everything will go to term with respect to the litigation and that we’ll win, and that’s just not accurate.  Generics companies only win these cases 48% of the time and it can take years to litigate.” Additionally, since the first generic drugmaker to challenge the patent receives a 180 day exclusivity period in which no other generic may enter the market prior; these settlements may be seen as anti-competitive by restricting other generics from entering the market in tandem. But such an argument only accentuates what many legal observers see as a pressing need to amend the 1984 Hatch-Waxman Act as it relates to the overall incentives provided in the law for generics companies.

As recently as 2008, more branded companies have struck settlement deals that instead offer not to produce an authorized generic [AG] that the branded company produces to compete post-patent. This is good for generics companies, as a study by the Royal Bank of Canada finds that those generics companies who negotiate these types of settlements stand to make three times the revenue than  if an authorized generic were to enter the market at the same time – and, more directly, 3.7 times the profit.

One reason that AGs have been included in settlements of late is that more courts are starting to see any payment from branded companies to generics as anti-competitive, as per FTC concerns. The reversed ruling on Schering-Plough’s K-Dur drug established any private settlement involving payment from the patent holder to the generic as “prima facie evidence of an unreasonable restraint of trade.” This is one example that seems to be spooking pharma into negotiating AG deals that “do not involve the transfer of money but instead grants the first-filer generic a six month exclusivity period and bars the patent owner from the launch of their own generic,” as Glen Engelmann of McDermott explains it. Simply put, since these authorized generics settlements do not involve a direct transfer of money; these settlements may gain a more favorable view by the judiciary.

With the record number of settlements last year and with the Supreme Court now set to weigh in, it’s safe to say there will be more discussion and dispute on this issue. When considering the implications of a ban on patent settlements involving payment, Engelmann noted, “From an objective standpoint, if you try to get more generic drugs on the market, these types of settlements encourage branded companies to bring up the periods of exclusivity in order to achieve certainty. If they can’t get the certainty anymore, they’re probably just going to go to court and try the cases.” The possibility here is that without the safety net of these settlements, more generics could end up losing such cases, with fewer generics brought to market; less onerously, more delays around the market entry of these drugs would occur.  With such scenarios now uppermost in the minds of the key industry players, the question of the moment is what if the devil we know is better than the devil we don’t?