Imagine it’s late afternoon on a weekday, let’s say Friday. You decide to start the weekend a little early and head to a local establishment for an adult beverage or two. You’ve planned well and arrived at that magical time, happy hour, when select drinks can be bought at discounted prices. You venture up to the bar and put in your order, eager to enjoy the drink and bask in the glory of being a savvy money-saving consumer. The bartender hands you your cocktail and the bill, which causes you to freeze for a moment. You’ve been charged full price. You frustratingly ask, "what happened to the happy hour discount?" To which the bartender calmly replies, "all the local bars got together and agreed to abolish happy hour. Sorry about that." You wander back to your seat, drink in hand and wallet lighter than you'd like. This situation is not far off from what’s happening with brand-name and generic pharmaceuticals.
Pay the piper
“When patients demand brand, it’s like insisting on paying full price at happy hour,” said Kyle Weiler, a pharmacist from Phoenix, Arizona [Tweet this quote]. A reverse payment settlement agreement, also known as the more catchy ‘pay-for-delay’, is the pharmaceutical version of charging full prices when happy hour prices are available. It is a legal tactic which some branded drug manufacturers use “to stifle competition from lower-cost generic medicines,” according to the US Federal Trade Commission (FTC) website.
“These drug makers have been able to sidestep competition by offering patent settlements that pay generic companies not to bring lower-cost alternatives to market.” -FTC
In situations involving pay-for-delay, especially for blockbuster drugs with the potential for billions of dollars in annual sales, it’s a win-win for the drug companies. The generic firm wins by avoiding a potentially lengthy and costly patent dispute, and makes a significant chunk of change without having to manufacture a thing. The brand firm wins by keeping any generic competitors out of the market until after the brand patent expires, creating a monopoly where prices stay high and profits more than cover the costs of settling.
The big losers in delayed entry of cheaper generics are those who have to pay up for the more expensive brands. For example, it would be like if the generic versions of Advil, which have the same effectiveness but are half the cost as the brand-name, suddenly weren't available. The resulting universal high price would create a transfer of wealth from consumers to drug manufacturers, with both brand-name and generic firms sharing in the spoils. Altogether, these settlements cost US consumers and taxpayers $3.5 billion in elevated drug prices every year, according to an FTC study.
All for one, and one for all
1984 was a big year for pharmaceuticals. This was the year when the Hatch-Waxman bill, officially the Drug Price Competition and Patent Term Restoration Act, brought landmark changes which made it easier for generic drugs to enter the market. Generics are important because they make medicine affordable for millions of people and help keep down the cost of healthcare.
Before 1984, only about one third of brand name drugs faced competition from generics. Since then, nearly every branded drug has at least one generic competitor which, in certain instances, can account for more than half of the market share, significantly reducing the cost to consumers.
1984 was also the beginning of a pattern typical for the release of major drugs: launch, challenge, sue. This process spawned the pay-for-delay tactic within a decade. Here’s how it goes: a brand-name firm launches a new patented drug on the market; one, or a few, generic firms challenge the brand drug by marketing a competing product; the brand-name firm sues for patent infringement; rinse and repeat.
In an article examining the frequency and evolution of brand-generic settlements, author C. Scott Hemphill brings to light details of nearly all the significant pay-for-delay settlements between 1984 and 2009. By analysing archived press releases, trade publications, financial analyst reports, analyst calls with management, court filings of patent and antitrust litigation, SEC filings, FDA dockets, and FTC reports, Hemphill was able to uncover the terms of these settlements.
According to the aggregated data, there is an upward trend for the sum of the annual sales of the drugs involved in brand-generic settlements, and a transition from purely monetary agreements to more involving terms which include retained exclusivity. Retained exclusivity is also a byproduct of the Hatch-Waxman Act, whereby if several generic firms want to launch competing versions of a brand-drug, the first to submit what is called an Abbreviated New Drug Application (ANDA) may be granted a 180-day exclusive right to market its generic formulation directly against the brand-name. If this ‘first filer’ gets paid upfront to delay and gets to keep its half-a-year head start over other generics when it does finally enter the market, that’s pretty good reason to accept a pay-to-delay settlement.
Of the nine blockbuster (over $1 billion annual sales) drugs identified, eight involved retained exclusivity for first filers. These included Lipitor ($7.2 billion), Nexium ($3.4 billion) and Plavix ($3.4 billion) for which a 180-day market with only two competing firms would be worth hundreds of millions of dollars.
-Walter Savage Landor [Tweet this quote]
On June 17, 2013, four years and four and a half months after the FTC first filed a complaint in the US District Court for the Central District of California, the Supreme Court ruled five to three that profit-sharing deals between drug companies which delay the manufacturing of generic drugs can be challenged as anticompetitive.
In a statement regarding the decision in FTC v. Actavis, Inc., FTC Chairwoman Edith Ramirez said: “The Supreme Court’s decision is a significant victory for American consumers, American taxpayers, and free markets. The Court has made it clear that pay-for-delay agreements between brand and generic drug companies are subject to antitrust scrutiny, and it has rejected the attempt by branded and generic companies to effectively immunize these agreements from the antitrust laws.”
The judicial floodgates may have finally been opened. On April 20, Teva Pharmaceutical agreed to pay $512 million in the first resolution of a pay-for-delay allegation. This resolves nearly a decade of litigation against Cephalon Inc., which Teva acquired in 2011, of allegedly paying $136 million in cash to delay sales of generic versions of its narcolepsy pill Provigil.
Teva was in the headlines again on May 7, when a California appeals court ruled that a $398.1 million payment between Bayer and Barr Pharmaceuticals (now owned by Teva) was antitrust. The 1997 agreement allegedly delayed the release of the generic to Bayer’s Cipro antibiotic until 2003, a period in which Bayer made profits of about $6 billion according to court documents.
Despite the FTC’s prioritisation of going after anticompetitive pharmaceutical agreements and the recent court victories in antitrust settlements, the complex nature of the current pharmaceutical-patent system makes one thing clear: the pattern of drug launch, challenge, and sue isn’t going away anytime soon. And neither is pay-for-delay.
