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Pay-for-delay in play
July 2011
by Lori Lesko  |  Email the author


WASHINGTON, D.C.—In an attempt to stop Big Pharma from making "pay-to-delay" deals, the Federal Trade Commission (FTC) has filed an amicus curiae brief before the U.S. Court of Appeals for the Third Circuit in support of class-action plaintiffs who have challenged the legality of patent settlements between branded and generic manufacturers of the high blood pressure medication K-Dur 20.  
Delaying the release of generics is financially lucrative for drugmakers, but hurts consumers to the tune of $3.5 billion a year, the FTC contends. In support of the plaintiff consumers, the FTC's brief, filed May 18, asks the Third Circuit to overturn a lower court's decision holding that settlements between the patent holder, Schering-Plough Corp., and the "infringers," Upsher Smith and ESI, did not violate antitrust laws.  
"Both branded and generic companies thus have strong incentives to enter into exclusion-payment settlements, which allow them to share a continuing stream of monopoly profits while depriving the public of the benefits of early generic entry," the FTC brief states. Schering marketed K-Dur 20, a potassium supplement used to treat high blood pressure. The active ingredient of K-Dur 20 was not patentable, but Schering held a patent on the drug's time-release formulation until September 2006.
In 1995, both Upsher and ESI filed for certifications seeking approval for generic versions of K-Dur 20. Schering sued them both. In 1997, on the eve of trial, Schering entered into a settlement with Upsher, agreeing to pay Upsher $60 million, and Upsher agreed to abandon its challenge and forgo entry until 2001.  
Upsher also agreed to grant Schering a bundle of licenses for which Schering would make conventional milestone and royalty payments. In 1998, Schering also entered into an agreement with ESI. A portion of this settlement covered a side deal, but Schering separately agreed to pay ESI up to $15 million in exchange for ESI agreeing not to market its generic version of K-Dur until January 2004.
In 2003, the FTC held that Schering's agreements with Upsher and ESI violated Section 5 of the FTC Act, but the Eleventh Circuit Court set aside that decision. In this case, purchasers of K-Dur 20 allege that Schering's settlement agreements with Upsher and ESI violated the Sherman Act, and the district court granted the defendants' motions for summary judgment.  
The district court concluded that, absent a showing that the patent infringement suit was "objectively baseless," there could be no antitrust challenge unless the settlement restrained competition beyond "the scope of Schering's patent."  
The court deemed the agreements "well within" the patent's scope because the entry dates that the parties agreed to were before the patent expired, and no products other than the generic products at issue in the litigation were delayed by the agreements.
The FTC's brief states that the appellate court should reverse the district court's ruling and remand it for reconsideration because the district court's decision would allow branded companies to pay generic companies to stay out of the market until patent expiration. It argues that the district court's approach conflicts not only with basic antitrust principles, but also with patent law and the policies of the Hatch-Waxman Act, which Congress enacted to encourage competition by generic drugmakers.  
The FTC brief states that pay-for-delay deals are increasing and already cost consumers billions of dollars a year, and urges the Third Circuit to resolve the issue by holding that pay-for-delay settlements are "presumptively illegal and that they will be condemned unless the companies can show that their agreements do not harm competition. "  
The FTC recently released a report stating that 31 pay-for-delay deals occurred in fiscal year 2010, a 63 percent increase from fiscal year 2009. The deals reached in the last year involved 22 different brand-name meds with combined annual U.S. sales of about $9.3 billion.
FTC spokesman Peter J. Kaplan tells ddn, "The FTC continues to challenge these blatantly anti-competitive pay-for-delay deals in court. We are not dismissing any option out of hand. We continue to recommend that Congress pass legislation to stop this practice, which costs consumers, on average, $3.5 billion a year."  
While news reports indicate the FTC is looking into using its own rulemaking power to stop the practice, Kaplan says nothing has changed. The FTC will continue its two-pronged approach of filing briefs in court and urging new legislation in Congress, he says.
However, it appears the FTC is outmatched. FTC Chairman Jon Leibowitz recently told Bloomberg that there are 1,330 registered pharmaceutical lobbyists in Washington, D.C., alone, compared to the FTC's "terrific Congressional staff … with six people on it." Yet Leibowitz remains optimistic, concluding, "At the end of the day, Congress or the Supreme Court is going to stop this pernicious practice."  
In the meantime, as patents expire, consumer spending on generic drugs is growing, accounting for 78 percent of all retail prescriptions in the $307.4 billion-a-year U.S. pharmaceuticals market, according to the IMS Institute for Healthcare Informatics.
Big Pharma contends the deals can actually benefit consumers when brand-name pharmaceuticals allow generic drugs to get to market before patents expire.  
Diane Bieri, executive vice president and general counsel of the Pharmaceutical Research and Manufacturers of America, a Washington-based trade group, says the FTC does not need to protect consumers by banning these kind of patent settlements since the system doesn't hurt competition. In fact, without the pay-to-delay practice, the generic brands may not be available to consumers for years, she says.
On May 3, the Generic Pharmaceutical Association (GphA) issued a press release, stating the FTC "is continuing to perpetuate the myth that procompetitive, proconsumer patent settlements are harmful to consumers—an unsubstantiated position that has repeatedly failed to receive support in both Congress and the courts.
"Patent settlements have never prevented competition beyond the patent expiry, and generally have resulted in making lower-cost generics available months and even years before patents have expired," GphA continued. "And it is important to note that the FTC already has the authority to review and reject any patent settlement that it deems to be unlawful."
Generic pharmaceuticals fill 75 percent of the prescriptions dispensed in the United States, but consume just 22 percent of the total drug spending, according to the GphA. U.S. courts, including federal appeals panels in New York, Atlanta and Washington, have upheld settlement agreements as long as they don't delay generics beyond the expiration of patents.
But the FTC isn't buying it.  
Testifying before Congress in 2009, FTC Bureau of Competition Director Richard Feinstein said, "Since this issue first arose in 1998, every single member of the Commission, past and present—whether Democrat, Republican or Independent—has supported the FTC's challenges to anticompetitive 'pay-for-delay' deals. The threat that these agreements pose to our nation's healthcare system is a matter of pressing national concern."  
The Third Circuit is expected to hear oral arguments in the Schering case as early as this fall.
Code: E071122



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