Are Drug Companies' “Pay-for-Delay” Tactics Hurting Consumers?

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An October 2011 Federal Trade Commission (FTC) report claimed that in the 2011 fiscal year, pharmaceutical companies struck 28 potential “pay-for-delay” deals, which the agency claims slows the arrival of cheaper, generic drugs to market. The FTC estimates that this practice costs consumers about $3.5 billion a year and Chairman Jon Leibowitz has asked Congress to “fix this problem through the Joint Selection Committee on Deficit Reduction—and save the government and American taxpayers billions of dollars.”

What’s pay-for-delay all about and why should it concern you? Read on.

How Does Pay-for-Delay Work?

A pharmaceutical company that owns the patent for a brand name drug has the exclusive right to market and sell that drug for up to 20 years (although this term is often shortened in practice because of the time it takes companies to actually bring drugs to market). But in what the FTC calls “pay-for-delay tactics,” the brand name drug maker negotiates with the company that wants to put a generic version on the market in order to delay the release of the cheaper drug; that is, the brand name manufacturer pays the generic drug maker to delay releasing the cheaper drug on the market. This then gives the company with the brand name drug more time with less competition.

Why is the FTC Concerned with Pay-for-Delay Settlements?

The FTC frames this issue in terms of fair competition, financial ramifications, and perhaps most importantly, consumer choice. On its website, the FTC decries “these anticompetitive ‘sweetheart’ deals in which a payment is made to the generic competitor keep the generic drug off the market, on average, 17 months longer than deals that don’t include such a payment.”

Because a generic drug can cost as much as 90% less than its brand name equivalent, this can mean a huge cost difference for consumers until the generic drug is released. Moreover, the FTC claims, generic drugs also help keep Medicare and Medicaid expenses in check as well, which means the government also loses money through some pay-for-delay deals.

The FTC has been pushing for better regulation on such practices for over a decade, even bringing lawsuits against companies that have engaged in out-of-court settlements the agency believes violate antitrust laws.

Any Arguments in Favor of Pay-for-Delay and Other Out-of-Court Settlements Between Drug Companies?

However, not everyone agrees that out-of-court patent litigation settlements are delaying the delivery of cheaper, generic drugs to market. Robert Billings, vice president of policy for the Generic Pharmaceutical Association, a Washington trade group, called the FTC’s recent report “garbage.”

“We wish the F.T.C. would just go back to doing the good things they do—they do many good things—and quit lobbying Congress to put a ban on something that is proven to be pro-consumer,” Billings said, as quoted in the New York Times.

Billings gives examples of the generic versions of Lipitor, Plavix and Effexor XR, which he claims will actually come on the market more quickly because of out-of-court settlements between drug companies.

In response, FTC spokesman Peter Kaplan noted that those particular deals weren’t pinpointed by the FTC as objectionable; Kaplan further pointed out that even current proposed legislation wouldn’t outright ban deals between drug companies but would only limit them.

Indeed, the bi-partisan Preserve Access to Affordable Generic Act, which has been passed by the Senate Judiciary Committee but hasn’t yet faced a vote in the full Senate, wouldn’t outlaw such agreements. But it would allow the FTC to bring suit against parties it believes are involved in a settlement it contends has “anticompetitive effects.”

Under the Act, though, such deals would be presumed to be unlawful and require the drug companies involved to prove the contrary. Factors to be considered in a court’s determination would include the length of time remaining before patent expiration compared with the agreed-upon entry date into the market of the generic drug, as well as the amount of money exchanged, among others.

The Congressional Budget Office [PDF] has concluded that the Act’s provisions would increase federal revenue by $800 million and reduce direct spending by government healthcare programs by $4 billion over the 2012-2021 period. And that’s nothing to sneeze at.

For more information on the FTC and its efforts fighting pay-for-delay tactics, see Reporter Resources: Pay-For-Delay in the Pharmaceutical Industry.