Reverse Payment Settlement Agreements (Pay for Delay)

The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, was designed to promote cheap generics as well as branded drugs.

The Hatch-Waxman Act grants a period of additional marketing exclusivity to make up for the time a patented pipeline drug remains in development. This extension cannot exceed five years, and it is in addition to the 20 years exclusivity granted by the issuance of a patent. It should be noted that the development of a drug takes about 15 years and about a billion dollars, from the time a patent application filed. It may be worth noting that if a patent application is filed in many countries, it may cost about a million dollars. Thus, the branded may get about 5 years left in patent term and another 5 years of Hatch-Waxman extension, to make up the investment in developing the drug (about 15 years and a billion dollars) and profits to fund another new drug development (another 15 years and a billion dollars). It is no wonder that the pharmaceutical industry is laying off scientists in America and off shoring research and development.

The Hatch-Waxman Act allows generics to win FDA marketing approval by submitting bioequivalence studies (as opposed to clinical data, which is costlier to compile). Manufacturers can bring generic drugs to market through an accelerated approval procedure by the FDA, called Abbreviated New Drug Application (ANDA), if the generic manufacturer asserts that the patent on the branded drug is either invalid or not infringed. Either the first drug to file an ANDA, or the first group of drugs, is granted a 180-day period of exclusivity. Branded drug patents have to be proven invalid or must not have been infringed. As a result of this act, a thriving generic industry flourishes in the US and around the world today. In the past 29 years, companies like Reddy’s, Ranbanxy, Teva etc., became multinational generic companies.

As a result, an ANDA filing invariably involves an infringement law suit, providing an opportunity for the legal litigation community an opportunity to make a buck, which of course, adds on to the cost of both branded and generic drugs, and passed on to the consumer – the patient.

Makers of patented drugs, however, can hold up FDA approval of the generic by filing patent infringement litigation. Those infringement cases are often settled when the branded manufacturer pays large sums, sometimes hundreds of millions of dollars, to the generic manufacturer in return for its agreement not bring the generic to market for several years. In the interim, the branded drug manufacturer can earn substantial profits free from generic competition. These settlements are often referred to as “reverse payments or pay for delay” because they are based on payments by the branded drug manufacturer plaintiff to the generic manufacturer defendant, unlike the more common pattern in which defendants pay plaintiffs to settle litigation.

This has become controversial in recent years, as pharmaceutical companies have used the provision to keep generics off the market by protecting their drugs with additional patents, filing lawsuits to protect the patented drugs, to get the extra market exclusivity, viewed as unfair by some sections of the society. Reverse payment settlement agreements include situations where a patentee settles a patent lawsuit, in an ANDA litigation, by paying the generic challenger to remain off the market for a period, delaying the generic drug availability to the patients. The branded drug makers’ argue that these agreements should be presumptively lawful provided that the exclusion remains within the “scope of the patent” and that other antitrust violations (such as sham litigation or litigating a patent obtained through fraud on the Patent Office) are not implicated.

However, the Supreme Court ruled 5-3 on June 17, 2013 in favor of the Federal Trade Commission in FTC v. Actavis (http://www.supremecourt.gov/opinions/12pdf/12-416_m5n0.pdf), reversing the decision of the Eleventh Circuit Court of Appeals dismissing the FTC’s complaint that a “reverse payment” settlement agreement between an innovator drug maker and generic challengers in ANDA litigation was anticompetitive and violated the antitrust laws. The Court refused to accept the FTC’s position that such agreements are presumptively unlawful, holding that lower courts should apply an antitrust “rule of reason” analysis when evaluating such agreements.

According to the Chief Justice Roberts, the existence of a patent, properly cabined within its proper scope, should be enough to justify a reverse payment settlement of ANDA litigation. Calling the rule of reason “amorphous” the dissent asserts that “settling a patent claim cannot possibly impose unlawful anticompetitive harm if the patent holder is acting within the scope of a valid patent and therefore permitted to do precisely what the antitrust suit claims is unlawful.”

It is expected, hopefully not anticipated by the Court, that the Court’s decision to place a damper on these settlement agreements, because a) innovator patentees will litigate every case to conclusion in order to avoid antitrust scrutiny involving the same or similar infringement and validity questions better settled in ANDA litigation, b) the FTC’s position that transfer of anything of value from the branded drug maker to a generic competitor should also merit antitrust scrutiny, and c) there is no or little advantage for either party in an ANDA lawsuit to settle and thus greater costs that should deter rather than incentive generic challenges.

As a result, the cost of both branded and generic drugs will go up, and passed on to the consumer – the patient.

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