The U.S. Federal Trade Commission recently issued a report again criticizing the role that authorized generic drugs sometimes play in patent infringement settlements between branded pharmaceutical manufacturers and their generic counterparts. The August 31, 2011, report, titled Authorized Generic Drugs: Short-Term Effects and Long-Term Impact, concludes a 5-year study by the agency into the effect of authorized generics on pharmaceutical competition. It demonstrates once again that, despite losses in the courts, the agency has no plans to soften its stance against so-called "reverse payment" patent litigation settlements. This report arrives as legislation that would restrict such settlements is once again before Congress.
An authorized generic is a branded drug maker's own generic
version of its patented drug that is marketed either directly by
the branded firm or by its licensee. Branded drug companies often
release authorized generics when faced with entry by a generic
competitor. Although the Hatch-Waxman Act was designed to
encourage generic drug competition, in part by granting a 180-day
period of marketing exclusivity to the first generic competitor of
a branded drug to file an Abbreviated New Drug Application
("ANDA"), the courts have held that the Act does not
preclude the branded manufacturer from introducing an authorized
generic version of the drug during the exclusivity period.
(The reason is that the exclusivity provision only bars the FDA
from approving another generic ANDA for 180 days. In
contrast, the authorized generic enters under the authority of the
original new drug application ("NDA"), by which the
branded drug is sold.)
The FTC study focused on the effect that authorized generics have
on generic competition. The report makes four basic
findings:
- Competition from authorized generics during the 180-day marketing exclusivity period results in lower retail and wholesale drug prices. According to the report, retail prices are four-to-eight percent lower, and wholesale prices are seven-to-fourteen percent lower when an authorized generic is available during the exclusivity window.
- Introduction of an authorized generic during the exclusivity period has a significant effect on revenues of the generic firm, both during the period and beyond. When an authorized generic is available, revenues of the generic firm drop between 40 and 52 percent during the 180-day exclusivity period and between 53 and 62 percent during the 30 months after the exclusivity period ends.
- While lower expected profits due to the potential presence of an authorized generic could affect a generic company's incentive to enter the market early by challenging the branded manufacturer's patents, generic companies continue to bring patent challenges for most drugs even when authorized generics are present.
- A branded manufacturer's commitment not to launch an authorized generic version of its drug as part of a patent infringement settlement can be a form of compensation to a generic manufacturer for agreeing to delay entry beyond the date on which the parties otherwise may have agreed, a practice the FTC contends causes substantial consumer harm.
Critics of authorized generics contend that they inhibit
competition by reducing the reward provided by the 180-day
exclusivity period, thus creating a disincentive for generic firms
to challenge the branded manufacturer's patents. This,
they say, is counter to the very purposes of the Hatch Waxman Act
– although as noted the courts have disagreed that the
Act precludes such entry. These critics also claim that this
result harms competition in the long run, because fewer challenges
means that fewer patents will be struck down, and fewer generics
will enter the market early. Although the FTC's second
finding supports the view that the first-filer's profits will
suffer, the first finding makes it clear that lower prices result
from the presence of a second rival (the authorized generic).
Thus, it is difficult to argue that the disincentive results from
reduced competition that might implicate the antitrust
laws.
The third and fourth findings are particularly interesting.
The FTC's third finding asserts that, while the introduction of
an authorized generic has a dramatic effect on a generic firm's
revenues, it does not appear to inhibit generic patent challenges
in a manner that the FTC deems significant. The extent to
which such patent challenges are fewer than they otherwise would
have been, however, is unknown.
The fourth finding goes directly to the FTC's longstanding
stance against so-called "reverse payment" or "pay
for delay" settlements. The agency has for years
contended that patent infringement settlements by which a generic
manufacturer agrees to delay its entry into the market and receives
payment from the branded manufacturer violate the antitrust
laws. Although numerous courts have upheld such arrangements
against antitrust challenge, the Commission continues to
investigate them and sometimes challenge them in litigation.
The finding that a branded firm's commitment to refrain from
introducing an authorized generic may be merely another form of
compensation to the generic company is, according to the FTC,
doubly troubling. In a press release issued with the report
FTC Chairman Jon Leibowitz stated:
The clearest and most disturbing finding is that some brand companies may be using the threat of launching an authorized generic as a powerful inducement for generic companies to delay bringing their drugs to market. When companies employ this tactic it is a double whammy for consumers. Consumers have to pay the higher brand prices while the generic delays its entry and, once generic entry does occur, consumers pay higher prices without the benefit of competition from the authorized generic.
Critics of the FTC's position argue that reverse payment
settlements are legitimate mechanisms for dispute resolution that
cannot harm competition unless the settlement excludes competition
beyond the scope of a valid patent. The courts have
overwhelmingly agreed. The critics also point out two
weaknesses in the FTC's antipathy toward agreements not to
enter with an authorized generic: (1) if settlements with cash
payments are legal, it does not matter what form the
"compensation" takes, and (2) an agreement not to enter
with an authorized generic is indistinguishable in competitive
terms from an agreement to provide a wholly exclusive license,
which is commonplace and generally considered to be within the
patentee's rights.
Clients considering patent settlements in general, and
pharmaceutical settlements in particular, should keep two points in
mind: First, it appears that almost no one uses actual cash
in Hatch-Waxman settlements anymore. All such settlements are
filed with the FTC, and the threat of a burdensome and expensive
FTC investigation has caused the use of actual payments (except for
small amounts designated as legal expenses) to disappear.
Second, settlements in which the branded company agrees not
to enter with an authorized generic do continue to occur with some
regularity, even though the FTC has publicly criticized them.
We know of no instance in which the FTC has challenged a settlement
based on such a clause.
In sum, the FTC report seems to convert the concern expressed by
Congress over a branded company's entry with an authorized
generic into a concern over a branded company's promise not to
enter with an authorized generic. Indeed, when the
"Interim" version of this report was issued in July 2009,
Commissioner Rosch criticized the "reverse payments"
section because "[n]o member of Congress has asked the
Commission to address the impact of an agreement that provides that
an AG will not compete." He concluded that "to the
extent that [reverse payment] settlements cause consumers harm, the
report does not (because it cannot) show that AG competition is the
cause of that harm." (Concurring Statement of
Commissioner J. Thomas Rosch on the Release of the Commission's
Interim Report on Authorized Generics, available at here.)
It may be that the report's timing and emphasis has a different
purpose. Over the years various attempts have been made to
legislate against such "reverse payment" settlements,
thus far without success. The FTC report comes in time for
yet another round of proposed legislation. The Preserve
Access to Affordable Generics Act (S.27) would make most reverse
payments presumptively unlawful. The legislation was
introduced in January by Senator Kohl (D-WI), and was reported out
of the Senate Judiciary Committee in July. Proponents of the
legislation, including the FTC, will no doubt use the latest report
to argue for its passage.
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