Bloomberg News

Schering-Plough’s K-Dur Pay-for-Delay Ruling Reversed

July 16, 2012

Merck & Co. (MRK:US)’s Schering-Plough unit must face a challenge to its agreement with competitors to keep generic versions of its drug K-Dur off the market, an appeals court ruled, reversing a lower-court antitrust decision.

Wholesalers and pharmacies sued Schering-Plough beginning in 2001 over allegedly unlawful agreements to delay the entry into the market of generic versions of K-Dur, a treatment for low blood levels of potassium. Consumers incurred extra costs of more than $100 million because of the deals, according to the plaintiffs.

A lower court ruled in favor of the company in 2010. The federal appeals court in Philadelphia overturned that decision today and asked the lower court to reconsider its ruling.

“This is a landmark decision that clarifies why these pay- for-delay deals violate mainstream antitrust law,” said David Balto, a Washington-based antitrust attorney who represents consumer groups opposed to such agreements. “The decision will finally reverse the past decade of misguided decisions that have cost consumers billions in higher drug prices.”

“We are disappointed with today’s ruling,” Ron Rogers, a spokesman for Whitehouse Station, New Jersey-based Merck, said in an e-mailed statement. “We are reviewing the decision and will consider all our options.”

Merck bought (MRK:US) Schering-Plough in 2009.

Appeals Panels

Federal appeals panels in New York, Atlanta and Washington have upheld such agreements as long as they don’t delay generic drugs beyond the expiration of the underlying patents. The U.S. Federal Trade Commission has campaigned to block the deals, which are sometimes reached on the eve of patent trials, saying they cost consumers about $3.5 billion a year in higher prescription drug prices.

“We cannot agree with those courts that apply the scope of the patent test,” the Philadelphia panel said in its opinion. “In our view, that test improperly restricts the application of antitrust law.”

“The Third Circuit Court of Appeals seems to have gotten it just right: These sweetheart deals are presumptively anticompetitive,” said FTC Chairman Jon Leibowitz in a statement. “It’s time for the pharmaceutical companies to return to the side of consumers.”

Supreme Court

Leibowitz has said he was hoping there would be conflicting decisions among the circuit courts, making it more likely that the U.S. Supreme Court would review the issue.

The agreements, also known as reverse payments, permit the sharing of “monopoly rents” between would-be competitors without any assurance that the underlying patent is valid, the appeals panel said.

The appeals court directed the lower court to apply an analysis based on “the economic realities of the reverse payment settlement rather than the labels applied by the settling parties.”

In a statement, Ralph G. Neas, president and chief executive officer of the Washington-based Generic Pharmaceutical Association, called the decision “inconsistent” with other federal court rulings.

Potential Deals

“Pro-consumer patent settlements have never prevented competition beyond a patent’s expiration,” he said. “Indeed, they have resulted in making lower-cost generics available months and even years before patents have expired, saving consumers billions of dollars.”

Drug companies completed 28 potential deals to delay generics in the fiscal year that ended Sept. 30, according to the FTC. That’s just under the record of 31 such agreements in the previous fiscal year, the FTC said.

Prices for generics typically are 20 percent to 30 percent less than the name-brand counterparts, and in some cases are as much as 90 percent cheaper, according to the FTC.

Brand-name and generic-drug makers have said the deals protect patent holders’ rights while lowering legal costs.

“The plaintiffs still have a tough row to hoe because it is public policy to encourage settlement of legal disputes, including patent disputes,” Erik Gordon, a business professor at the University of Michigan, said in an e-mail. “It’s a tricky area very much driven by the facts of each particular case because there can be an antitrust violation or no violation whatsoever in circumstances that at first glance appear to be the same.”

The case is In re K-Dur Antitrust Litigation, 10-2077, 10-2078, 10-2079, U.S. Court of Appeals for the Third Circuit (Philadelphia).

To contact the reporters on this story: Sophia Pearson in Philadelphia at spearson3@bloomberg.net; Jeff Bliss in Washington at jbliss@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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