U.S. Supreme Court Expands Antitrust Liability for Reverse-Payment Arrangements Between Drugmakers

Author:  David Lehmann
Institution:  Brandeis University
Date:  November, 2013

On a quantitative scale, hormones are miniscule bursts of chemicals in the bloodstream. Nonetheless, they impact a broad cross-section of life that encompasses sex, eating, sleeping, and countless other bodily functions. They also, it turns out, intersect with the law. Recently, Androgel, a synthetic form of the male hormone testosterone, utilized to treat patients with low testosterone, became a hot topic of conversation in the legal sphere. How did such a treatment become the topic at hand in a Supreme Court case? The back-story ultimately serves as one example of many amidst a growing practice in the pharmaceutical industry - one that has come under fire from both the Federal Trade Commission (FTC) and groups that include health insurance companies and hospitals.  

In 2003, Solvay, a drug manufacturer based in Brussels, Belgium with a subsidiary in Houston, Texas, secured a patent for Androgel until 2020. Two years later, the drug proved a major source of revenue.  In 2005 alone. Androgel generated North American sales of a whopping $303.5 million. Meanwhile, two generic drug companies, Watson Pharmaceuticals and Par Pharmaceuticals, attempted to work around the Androgel patent in order to release their own versions of the drug onto the market at a lower price. By 2006, Watson had secured Food and Drug Administration (FDA) approval for its new drug. Cognizant of the encroaching competition and the drop in price that would result, Solvay decided to play its pay-to-delay card in order to stop the generic drug makers from selling their products on time.

Pay-to-delay stems from a provision of the Hatch-Waxman Act of 1984. It was conceived to encourage competition within the pharmaceutical industry during the 1980’s. The provision remarks that the first generic drug maker to successfully invalidate the patent of a brand name drug or to prove that a generic product would not infringe on a brand name’s patent would get exclusive rights to market its product for the first 180 days after the invalidation. Brand name drug makers work around this threat of competition by settling with generic firms that pose a challenge to brand name patents. This is an especially convenient strategy for the reason that, despite settling with the brand-name drugmaker, the generic company still reserves its 180-day market exclusivity, thereby precluding other generic brands from marketing their drugs during that time period. However, these additional competitors often settle with the brand name company as well, making the market exclusivity issue irrelevant. Recent numbers indicate that this trend is on the upswing: FTC reported that the number of pay-for-delay deals shot up from 19 in 2009, to 31 in 2010 and as high as 40 in 2012.

From the time when Solvay employed the pay-for-delay tactic in 2006, it has been paying its generic competitors, including Actavis Inc., around $30 million annually. These settlements will keep generics off the market until 2015; five years before the Androgel patent expires – a small amount of time relative to the nine years generic companies would have had if they were able to launch their products back in 2006 as originally planned. As part of its settlements, Solvay has stipulated the generic firms promote Androgel to primary care physicians and urologists, the specialties that encompass most patients with testosterone problems. Solvay benefitted from this arrangement because it would not face external competition until 2015, while, at the same time, generic companies could collect more money from the settlement payments than they would have if they relied on sales of their drugs alone. For the companies, at least, this appeared to be a win-win situation.

In spite of all this, the calm of settling began to fade in 2009 when the Presidential administration in Washington changed hands. Whereas President Bush’s administration viewed such settlements as legal, President Obama’s FTC ramped up its efforts to curb or effectively halt these kinds of agreements.Less than a month after Obama’s inauguration, the FTC filed a case with the United States District Court for the Central District of California against Solvay and the generic firms that had settled (officially known as “FTC vs. Actavis”). Acting FTC Bureau of Competition Director David P. Wales remarked, “At a time of escalating healthcare costs, these unlawful agreements deny patients the benefit of competition between branded and generic pharmaceuticals and ultimately cost consumers hundreds of millions of dollars a year.” To further reinforce this stance, the FTC released a report in 2010 entitled “Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions.”

This notion of consumers as losers in the pay-to-delay settlements serves as the basis for arguments of many who support the FTC’s quest to end the practice of pay-to-delay. Certain numbers have become central to these opinions. Jon Leibowitz, the FTC Chairman in June 2009 when the suit was filed, noted that banning these settlements could save consumers an estimated $3.5 billion. A Boston Globe editorial published in March this year highlighted that “[b]rand-name drugs accounted for only 18 percent of total prescriptions written by doctors in 2011 but 73 percent of the roughly $320 billion spent on medicines in the United States that year, according to research firm IMS Health.”

Nevertheless, while people use numbers to try and paint a clear picture of whom the pay-to-delay settlements benefit and whom they hurt, those arguing in favor of maintaining the practice contest those statistics. The latter group includes Ralph G. Neas, the president and CEO of the Generic Pharmaceutical Association. In a piece for The Hill blog, Neas describes pay-to-delay as “pro-innovation, pro-consumer and pro-competition.” He posits that restricting drug companies’ abilities to settle would result in “protracted litigation,” which would ultimately hamper competition by discouraging generic brands from going through the purported hassle of challenging patents. Moreover, a statistic that opponents of pay-to-delay often use – that patent challengers win approximately three-quarters of their cases – is, according to Neas, “based on faulty decade-old information” and that the number is actually closer to half. This means that half of patent challenges would fail, requiring generic companies to wait until the patent’s expiration to go forward in producing generics. Addressing the concerns of those who perceive pay-to-delay as a legal means of reinforcing a monopoly, Neas assures that all cases fall within the FTC and Department of Justice’s jurisdiction and, as such, can be reviewed by those bodies if they suspect monopoly-type activity.

The Supreme Court has fallen somewhere in the middle of these stances. In its 5-3 ruling on June 17, the majority noted that pay-for-delay might not always be lawful. “Thus,” according to an interview with Mitchell Wong, a patent lawyer who specializes in the life sciences, “for the first time, Actavis opened the door for drugmakers to incur liability for pay-for-delay arrangements.” Still, The Court majority opinion emphasizes its refusal “to hold that reverse payment settlement agreements are presumptively unlawful.” This translates into a legal environment wherein pharmaceutical companies will find themselves on thinner ice than before. One byproduct of the ruling, Wong points out, demonstrates this new situation: in the event that a company does get sued by the FTC for pay-for-delay, “it could no longer rely on a quick dismissal at the outset, and. could face a potentially expensive discovery process.”  On behalf of the dissenting justices, Justice Roberts warned, in his opinion, that this new take on drug patent litigation “likely undermines the very policy it seeks to promote by forcing generics who step into the litigation ring to do so without the prospect of cash settlements.” It’s a statement that echoes the aforementioned sentiments of Ralph G. Neas.

Since the ruling has only existed for a few months, any assessment of its impact at this point is speculative at best. Whatever the case, though, this ruling will not serve as a final say on the matter. In April, for instance, the insurance company for a Pennsylvania union, Local 1776 of the United Food and Commercial Workers, filed a class-action lawsuit against Warner Chilcott, Watson Laboratories, and Lupin for a pay-for-delay deal that prevented generic versions of Warner’s Loestrin 24 Fe, a female hormone drug, from entering the market. Meanwhile, the companies involved still adhere to the party line that pay-for-delay ultimately benefits consumers. This is one of several similar cases. Though coming at it from different angles, it seems that the opinions of opposing parties in this argument overlap when it comes to the ultimate goal of serving the consumer in the best way possible. Right now, then, given the new framework established by the Supreme Court, the involvement of federal courts in articulating the antitrust implications of pay-for-delay arrangements is likely to grow.