Bloomberg News

Drugmaker ‘Pay for Delay’ Accords Questioned by Top Court

March 25, 2013

U.S. Supreme Court justices suggested they will open drugmakers to suits over so-called pay- for-delay agreements, hinting at a ruling that would rewrite the rules governing the release of generic medicines.

Hearing arguments today in Washington, the justices voiced skepticism about the accords, which the Federal Trade Commission says cost buyers as much as $3.5 billion a year. The antitrust agency says brand-name drug companies are paying generic rivals to forestall low-priced versions of popular treatments.

The accords benefit the companies “to the detriment of consumers,” Justice Elena Kagan said.

The FTC says 40 more pay-for-delay accords were struck in fiscal 2012 alone. Bayer AG (BAYN), Merck & Co. (MRK:US) and Bristol-Myers Squibb Co. (BMY:US) units already have faced lawsuits. Companies say the accords are legitimate patent settlements.

Several justices suggested they weren’t comfortable with the FTC’s proposed test to determine whether the accords are anticompetitive. The antitrust agency says courts should start with the presumption that a payment from a brand-name drugmaker to a generic rival is illegal. Justice Stephen Breyer called that test “rigid.”

Justice Anthony Kennedy, often the court’s swing vote, suggested that brand-name drugmakers at least shouldn’t be allowed to pay generic companies more than the generic companies could expect to get by winning patent litigation.

Drug Sales

The disputed settlements are a product of the economics of the pharmaceutical industry, where companies can reap billions of dollars from blockbuster drugs -- and then see those sales plummet the moment a generic alternative appears. The FTC says generic drugs sell for an average of 15 percent of the original price, with the brand-name company losing 90 percent of its market share by unit sales. Generics have saved purchasers $1.1 trillion in the last decade, the industry says.

Pharmaceutical patent settlements typically arise when a generic-drug maker has either secured, or is poised to receive, Food and Drug Administration approval. At that stage, only the brand-name company’s patents stand in the way of generic competition.

The FTC and its allies say they have no quarrel with settlements that merely set the date for generic entry. They say that type of agreement simply reflects the companies’ assessments of the chances that a court would invalidate the brand-name company’s patent.

An Extra Year

A payment is different, they say. If a brand-name drugmaker with $100 million in annual sales can pay a generic rival $20 million to wait an extra year, both companies come out ahead -- at the expense of purchasers, the FTC argues.

A 2010 FTC study found that the accords cost purchasers $3.5 billion a year, a figure the drug industry contests.

The high court case centers on Androgel, a treatment for low testosterone in men that is made by Solvay Pharmaceuticals Inc. The FTC is suing Solvay and three generic-drug companies, including Actavis Inc. (ACT:US)

The FTC says the price for Androgel was poised to fall at least 75 percent in 2007 after the Food and Drug Administration cleared the way for competition. Faced with the prospect of losing $125 million in annual profits, Solvay instead paid the generic-drug makers as much as $42 million a year to delay their competing versions until 2015, the FTC says. At the time, Actavis was known as Watson Pharmaceuticals.

Until 2020

The companies say Solvay, which is now part of AbbVie Inc. (ABBV:US), had a patent that, if backed by the courts, would have protected the drug an additional five years -- until 2020.

The companies say the payments were compensation for services to be provided by the generic-drug makers, including Watson’s marketing of Androgel to urologists.

Three of the four federal appeals courts to rule on the issue have said the settlements, also known as reverse payments, are generally permissible. That includes the Atlanta-based 11th U.S. Circuit Court of Appeals, which threw out the FTC’s Androgel suit.

The court said that, unless the patent litigation is a sham, reverse payment agreements are immune from antitrust attack so long as they stay “within the scope of the exclusionary power of the patent.” Because the Androgel accord shortened the period of time Solvay potentially could exclude generic competition, it passed antitrust muster, the appeals court said.

That reasoning drew little support today at the Supreme Court. Among the eight justices taking part in the case, only Antonin Scalia suggested he agreed with the lower court. Justice Samuel Alito isn’t taking part in the case.

The case, which the court will resolve by June, is Federal Trade Commission v. Watson Pharmaceuticals, 12-416.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net


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