FTC Drug Meddling Would Needlessly Push Pharmaceutical Costs Higher

Four of every five pharmaceutical prescriptions today are filled with a generic drug. That sounds like a big number, but the Federal Trade Commission (FTC) thinks it is too small and wants to do something about it. For over a decade, the agency has tried to use antitrust laws to crack down on business arrangements known as “reverse-payment patent settlements,” in which brand manufacturers pay generic competitors to drop patent challenges that could speed generic drugs to market. But a ban on settlements would threaten brand and generic firms alike, and result in higher, not lower, drug prices.

On Monday, March 25, the U.S. Supreme Court will hear oral argument in Federal Trade Commission v. Actavis, in which the agency claims reverse payment settlements are anticompetitive because the parties are colluding to delay competition for more expensive brand drugs. In this case, Solvay Pharmaceuticals paid two generic firms tens of millions of dollars each for agreeing not to challenge Solvay’s patent on the testosterone replacement drug AndroGel for a period of ten years.

The 1984 Hatch-Waxman Act gives generic producers a financial incentive to challenge potentially weak drug patents in court, with the expectation that successful challenges will lower drug prices by accelerating the entry of generics on the market. The law has been a boon for consumers, generating hundreds of patent challenges, increased competition, and a 60 percent average price reduction for drugs with generic competitors.

There’s only one problem: Even strong patents are often the subject of litigation. Thus, when faced with the uncertainty of patent litigation, brand manufacturers sometimes offer to settle, paying challengers to drop the suit and letting generic manufacturers sell their products a few years before the patents expire.

Critics call the practice “pay-for-delay” because overturning patents would get generics to market sooner still. They claim the parties to reverse payments settlements illegally collude to prolong the branded drugs’ monopoly and share in the ill-gotten gains.

The FTC already has authority under antitrust laws to block settlements where evidence indicates consumers would be harmed by higher prices. And, since 2002, federal law has required that any such settlement be reported to the FTC for review. The agency has challenged dozens of these cases in court, almost invariably losing because most settlements are found to be pro-competitive.

Every one of the patents challenged in these cases was deemed valid by the U.S. Patent and Trademark Office. Of the cases that have made it all the way to a court decision, slightly more than half affirmed the patent’s validity. And despite the FTC’s claims to the contrary, there is no evidence that settled cases would have been more likely to result in patent invalidation. In the handful of cases where the FTC succeeded in blocking a settlement and forcing the litigation to go forward, courts more often upheld the patents than overturned them.

In the Eleventh Circuit Appeals Court decision being challenged in FTC v. Actavis, the court unanimously rejected the agency’s claim that a brand manufacturer’s willingness to settle is evidence that the patent was likely to fail. “When hundreds of millions of dollars of lost profits are at stake, even a patentee confident in the validity of its patent might pay a potential infringer a substantial sum in settlement,” said the court. “A party likely to win might not want to play the odds for the same reason that one likely to survive a game of Russian roulette might not want to take a turn.”

There is one important difference between cases that go to trial and those that are settled, however. As part of a settlement agreement, a brand manufacturer almost always agrees to let the generic product come to market before the patent’s expiration. In the Actavis case, generic versions of AndroGel could be sold five years before the patent expired. But fewer than half of fully litigated cases result in early entry by the generic. Banning settlements would force every case into court, prolonging the average time during which brand drugs enjoy a monopoly. That’s why, with few exceptions, federal courts have rejected FTC attempts to make reverse-payment settlements presumptively unlawful restraints of trade.

In a 2003 case, Seventh Circuit Judge Richard Posner wrote that “a ban on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger’s settlement options.” Posner argued it was a ban on settlements, not the settlements themselves, “that might well be thought anticompetitive.” The Supreme Court Justices would do well to keep that in mind as they ponder this case.