FTC Report Shows Increase in Pay-for-Delay Drug Settlements

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Agency report indicates that potentially anti-competitive drug settlements are on the rise.

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A recent Federal Trade Commission (FTC) Report shows that in 2012, large drug companies increased their use of pay-for-delay settlements to keep small competitors out of the market.  In pay-for-delay settlements, drug makers reach patent settlements in which they pay rival companies not to produce generic versions of brand-name drugs for a specified time.  These agreements keep competitors out of the market for an average of 17 months.

Last year, branded and generic drug companies entered 40 potentially pay-for-delay settlements.  Only 28 such agreements were reached in 2011.  The 2012 settlements involved 31 different products, worth a total of $8.3 billion in sales.

Pay-for-delay settlements can be lucrative for both large pharmaceutical companies and their smaller competitors.  Brand name companies keep cheap alternatives out of the market, and generic drug companies can receive a generous amount of money for their cooperation.  However, pay-to-play settlements do not benefit consumers.  Generic drugs are often 90% less expensive than their name-brand equivalents.

A 2010 FTC report estimated that agreements suppressing the production of generic drugs cost consumers $3.5 billion a year.  The Congressional Budget Office has also estimated that laws restricting pay-to-delay settlements could lower the debt over the next ten years by approximately $5 billion.

In addition to 40 potential pay-to-delay settlements, 2012 saw 81 patent agreements that may have restricted a generic company from manufacturing an unbranded alternative without providing compensation.

The report also noted that a number of the 2012 settlements involved “first-filers,” or the first generic drug to challenge a patent.  Twenty-three of the 40 alleged pay-to-delay settlements involved first-filers.  An additional 16 agreements allegedly involved uncompensated restrictions on manufacturing generic drugs.

First-filers play an important role in generating generic drug competition.  Under the Hatch-Waxman Act, when a first-filer commences a legal challenge against a brand’s patent, the FDA cannot approve another generic until six months have passed since the launch of the first-filer.  This absence of competition is designed to encourage generic competitors to enter the market.  However, during the exclusivity period, the company that issued the brand-name drug can put out an authorized generic (AG) to compete with the first-filer.

The entry of a brand company’s AG into the market cuts the first-filer’s revenue during the exclusivity period in half and encourages the first-filer to reach a settlement.  These settlements frequently include a provision in which the brand-name company promises not to launch its own generic drug.

Thus, settlements involving first-filers can also hurt consumers in two ways. They deny consumers access to the first generic alternative.  Additionally, by preventing the brand-name company from launching an AG, they also prevent consumers from benefitting from the price reduction that would occur if both the AG and first filer generic were available.

In addition to harming consumers, the FTC and other commentators have suggested that pay-to-delay settlements are anti-competitive.  The FTC has challenged a number of these agreements in court. This March, the Supreme Court is slated to hear oral arguments in Commission v. Watson Pharmaceuticals, Inc, a case raising the question of the legality of these agreements.