Supreme Court Rules on Pay-for-Delay Settlements

As drugs become close to losing patent protection, brand manufacturers typically want to extend the exclusivity of their drugs for as long as possible. They spend billions of dollars to develop and market the products, which can generate hundreds of millions or billions of dollars in revenue. When generic versions of the drugs become available, revenues fall, contributing to difficult business conditions.

At the same time, generic companies want to challenge the patents and typically file lawsuits. To avoid the inconvenience and costs associated with prolonged litigation, the brand and generic manufacturers usually settle with pay-for-delay agreements, in which the brand companies pay the generic companies to drop the lawsuits and delay the sale of generics.

After increasing for years, pay-for-delay agreements may soon decline following a Supreme Court ruling on June 17 allowing the Federal Trade Commission (FTC) to sue the companies for the pay-for-delay settlements based on antitrust violations. In a 5 to 3 ruling, the justices overruled a lower court decision and said regulators have expanded powers to block the agreements. The pay-for-delay agreements are not banned, but the FTC now has the right to challenge individual settlements.

The case concerned allegations that Solvay Pharmaceuticals postponed the generic version of AndroGel^® (testosterone gel) in 2006 by striking deals with Watson Pharmaceuticals Inc. and 2 other generic drug manufacturers. Abbott Laboratories acquired Solvay in February 2010, while Watson is now known as Actavis, Inc.

The government and companies disagreed on the costs or savings associated with pay-for-delay. The FTC claims the agreements increase drug prices by $3.5 billion each year, while Paul Bisaro, Actavis chief executive officer, said in a statement that the patent settlements save consumers “billions of dollars.”

“The Supreme Court’s decision is a significant victory for American consumers, American taxpayers, and free markets,” FTC chairwoman Edith Ramirez said in a statement. “The Court has made it clear that pay-for-delay agreements between brand and generic drug companies are subject to antitrust scrutiny, and it has rejected the attempt by branded and generic companies to effectively immunize these agreements from the antitrust laws.”

The FTC released a report in January indicating that there were potentially 40 pay-for-delay settlements in fiscal year 2012, spanning from October 1, 2011, to September 30, 2012. The agreements included 31 brand drugs with annual combined sales of $8.3 billion. Of the 40 settlements, 19 involved the brand drug manufacturer promising not to market an authorized generic to compete with the generic drug for a specified period of time, according to the FTC.

Since 2004, the FTC noted that numbers of pay-for-delay agreements in the past 9 fiscal years were 0, 3, 14, 14, 16, 19, 31, 28, and 40. In a January 2010 FTC report, the agency said FTC investigations and actions against the agreements decreased their use from 1999 through 2004.

Mit Spears, executive vice president of the Pharmaceutical Research and Manufacturers of America (PhRMA), released a statement praising the Supreme Court for rejecting the FTC’s position that the agreements are “presumptively unlawful under the antitrust laws.” However, he added that PhRMA was “disappointed” that the ruling did not provide guidance on how brand and generic manufacturers can settle their disputes without going to court. PhRMA, a trade organization representing biopharmaceutical research and biotechnology companies, believes that litigating patent disputes leads to higher costs for the companies and delays in generic drug availability.

“Unfortunately, the Court’s decision creates a degree of uncertainty that will make it less likely that innovative pharmaceutical and generic companies will be able to settle these disputes in the future,” Mr. Spears said. “This will negatively affect patients and discourage investment in future biomedical research. Intellectual property and the ability to manage patent litigation is critical to research-intensive biopharmaceutical companies that rely on their patents as a major incentive for the research and development necessary to produce the next generation of innovative medicines.”

The Supreme Court’s decision came after the FTC appealed a ruling by the United States Court of Appeals for the Eleventh Circuit that dismissed the challenge against the testosterone gel. The FTC noted in a news release that several courts previously ruled that agencies could not challenge the pay-for-delay settlements based on antitrust grounds.

Mr. Bisaro said Actavis was satisfied that the Supreme Court did not abolish the use of pay-for-delay settlements and added that Actavis will continue to defend the agreements.

“We believe this decision continues to provide for a lawful and legitimate pathway for resolving patent challenge litigation in a manner that is pro competition and beneficial to American consumers,” Mr. Bisaro said. “The Court’s ruling, however, does place an additional and unnecessary administrative burden on our industry.”

Although the ruling did not ban patent settlements, former FTC attorney Lesli Esposito told CNBC that the agency would pursue the agreements on an individual basis. She also predicted numerous lawsuits would be filed challenging the agreements.

“In practical terms, I think we are going to see a lot of continued litigation,” Ms. Esposito, an antitrust and appellate attorney for DLA Piper, said. “I think the FTC is going to continue to challenge these agreements.”

Meanwhile, Sanford Bernstein analyst Ronny Gal said the ruling will create uncertainty in the pharmaceuticals industry, according to CNBC.

 “I think they are going to create a holy mess out of this,” Mr. Gal said. “If I were a patent attorney in the drug world, I would be opening a bottle of champagne right now. It is basically a ‘full-employment of patent attorneys’ decision.”