Pharmaceutical industry defends ‘pay-for-delay’ deals

Brand-name drug companies and their generic rivals spend so much time and money attacking each other — in court, in Congress, and everywhere else lawyers and lobbyists do battle — that when they land on the same side of an issue it’s a good guess that the consumer is getting whacked.

Lately they’ve rolled out the big guns in defense of a practice that looks very much like collusion. And according to the Federal Trade Commission, it costs consumers and government agencies billions of dollars a year.

The practice is known as pay for delay. It’s what happens when a brand-name company with a valuable drug patent pays a generics company to drop a patent challenge. The goal is to delay the arrival of cheap generic alternatives for months or even years.

The brand-name company gets to maintain its monopoly during the interim, but consumers and taxpayer-funded agencies such as Medicare and Medicaid lose out on the cost reductions of as much as 90% they might enjoy by buying generic versions of a blockbuster drug. The generics companies make out by earning money without facing the uncertainties of patent litigation or the bother of actually manufacturing the drug.

The brand and generics makers insist that these deals are consumer-friendly. But the game was given away in 2006 by Frank Baldino, then the chief executive of Cephalon. According to a lawsuit filed by the Federal Trade Commission, Cephalon paid a total of $200 million to several generics companies to get them to drop patent challenges to its narcolepsy drug Provigil. The deals staved off competition from no-name rivals until 2012.

“We were able to get six more years of patent protection,” Baldino crowed publicly. “That’s $4 billion in sales that no one expected.”

“It’s a great business plan if you can get away with it,” FTC Chairman Jon Leibowitz told me. “But it turns the market on its head, because generics earn more money by not competing than they would by entering the marketplace.”

The flowerbed that spawned these deals is the Hatch-Waxman Act of 1984, which was supposed to encourage the entry of cheap generic drugs to rival the expensive patented versions.

Under the law, a company can seek to market a generic product before the patent on the original expires; typically it does so by filing a lawsuit challenging the existing 20-year patent as invalid. As an incentive, the law awards the first generic maker to reach market six months of exclusivity before competing generics can win Food and Drug Administration approval.

The law launched an era of vigorous challenges to weak pharmaceutical patents, with challengers winning 73% of the cases in court, the FTC found in 2002. Big Pharma reacted by offering generics companies incentives to go away.

Sometimes the bait was an agreement to let the generics company enter the field prior to patent expiration, but later than it planned, sometimes it was money, sometimes it was both. So the patent holder would get a few years of comfy monopoly marketing without being hassled, and the generics company would get the long green and a break on the expense of litigation.

C. Scott Hemphill of Columbia Law School has calculated that on average a one-year delay in the entry of a generic version of a drug can cost consumers more than $660 million. He reached that conclusion by analyzing deals involving 51 drugs from 1984 to 2008.

The database included such blockbusters as Lipitor, the anti-clotting agent Plavix, and anti-heartburn drug Nexium — all worth several billions of dollars in annual sales to their exclusive marketers. The purchased delays ranged from one year to 11 years (for Sinemet CR, a Parkinson’s drug marketed by Merck).

The number of pay-for-delay deals has soared in recent years. In fiscal 2010, brand and generic drug makers resolved 113 patent disputes, up from 68 the year before. Of those, at least 31 involved payment to the generics firm, up from 19 the year before.

The FTC’s figures may understate the number of deals involving payment, because the industry is getting more clever at avoiding straight cash payoffs and disguising them as transactions such as licensing, marketing or manufacturing agreements, many of which the agency believes are shams.

“Settlements are becoming more sophisticated,” Hemphill agrees. When suspect deals are made, he says, the burden of proof should be on the companies to justify them. “It should be the drug makers’ jobs to explain why these payments are innocent rather than the government’s job to explain why they’re inherently bad.”

The FTC thought it had eradicated pay-for-delay deals after 1999 through aggressive enforcement, and in 2003 a federal appeals court ruled all such deals illegal. But other appeals courts have greenlighted a few pay-for-delay deals since then, contributing to the surge in their popularity. The FTC is trying to get the issue before the Supreme Court, where it’s “cautiously optimistic” it would win, Leibowitz says. And the agency has opened up a second front in Congress, where it’s pushing a bill that would place the burden of proof on the companies to justify settlements in which money changes hands.(A similar provision got dropped from the healthcare reform bill in last-minute maneuvering.)

The industry maintains restricting such deals would reduce patent challenges. The generics companies need the prospect of payouts to give them more reason to bring these costly and uncertain lawsuits, says Robert Billings, executive director of the Generic Pharmaceutical Assn. The industry also says payments are sometimes needed to level the playing field between big brand-name companies and their little generics competitors.

Brand-name drug companies tend to be bigger than their generic-making cousins, but that’s relative. Israel-based Teva, one of the biggest generics makers, booked $16 billion in sales last year. As it happens, Teva’s also among the most aggressive challengers of brand patents and one of the most settlement-minded companies in the business: According to a database prepared by the Royal Bank of Canada, Teva settled or dropped 57 of the 108 patent challenges it launched over the last decade. It won more than half the cases it pursued to the end.

The FTC’s Leibowitz acknowledges that not all settlements are illegal, or even harmful. He’s not against settlements based on an objective judgment of the strength or weakness of a brand-name patent. But payments amount to a thumb on the scale. “Clearly, these are win-win deals for both companies, “he remarked in a 2009 speech. “But they leave American consumers footing the bill.”

Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.