When is a patent settlement between drug makers a legitimate deal and not the equivalent of a bribe? This is a question that authorities on both sides of the Atlantic Ocean have been trying to answer for the past few years with varying degrees of success. Despite court rulings and fines, the issue persists, although European regulators appear more optimistic about the extent to which so-called pay-to-delay deals will continue to prove troubling than their American counterparts.

In these deals, a brand-name drugmaker makes a payment to a generic rival in exchange for ending patent litigation and permitting the launch of a copycat medicine at a future date. Also known as reverse settlements, these arrangements emerged as an unintended consequence of the Hatch-Waxman Act that was passed nearly 30 years ago to accelerate access to lower-cost generics. Since then, countless such deals have been struck in the pharma industry.

But pay-to-delay deals have been extremely controversial. The U.S. Federal Trade Commission has maintained the deals are anti-competitive because generic drugmakers are given incentives to file lawsuits against brand-name rivals and then settle for a quick profit, rather than challenge a patent in court. The FTC argues consumers are prevented from obtaining lower-cost drugs sooner than they would otherwise and, consequently, this practice costs Americans about $3.5 billion annually.

For its part, the pharma industry argues that these settlements actually speed lower-cost generics to pharmacy shelves and medicine cabinets, and has warned that outlawing the deals could drastically alter the strategic decisions behind the introduction of many generic drugs. This, in turn, would raise costs to consumers. The issue, though, has divided lower courts in the US for the past few years, which was what prompted the U.S. Supreme Court to review the issue last spring.

In that landmark 5-to-3 ruling, the justices decided that drugmakers can face lawsuits over so-called pay-to-delay patent settlements, but that such deals should not necessarily be assumed to be illegal. The court also noted that the FTC, which had petitioned the court to review two such deals, should have been given an opportunity to prove its antitrust arguments and that patent settlements should not automatically be immune from antitrust claims.

“This court declines to hold that reverse payment settlement agreements are presumptively unlawful. Courts reviewing such agreements should proceed by applying the ‘rule of reason,’ rather than under a ‘quick look’ approach,” Justice Stephen Breyer wrote. “. . . The likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payer’s anticipated future litigation costs, its independence from other services for which it might represent payment and the lack of any other convincing justification.”

As a result of the ruling, which essentially looked to decide the balance between intellectual property rights and anti-trust behavior, some industry watchers have predicted that generic drugmakers could become more aggressive about proceeding with their copycat versions, suggesting consumers may see lower prices on some medicines. At the same time, still more litigation may ensue as retailers, wholesalers and insurers examine the deals for anticompetitive effects.

In any event, the court left the door wide open for these deals to continue, prompting the FTC to vow to pursue alleged antitrust violations. The agency is “studying the court’s decision and assessing how best to protect consumers’ interests in other pay for delay cases,” FTC chairwoman Edith Ramirez said in a statement at the time of the Supreme Court ruling.

True to her word, the agency recently asked a federal judge to accept a friend-of-the-court brief that charges a patent settlement between Wyeth and Teva was problematic, even though a cash payment was not involved. The drugmakers have been arguing that the antitrust analysis cited by the FTC is not required by the Supreme Court ruling and does not apply to their agreement because there was no cash payment exchanged.

And the FTC is also pressing ahead in another case that factored in the Supreme Court ruling. The case dates back to February 2009, when the FTC filed a complaint challenging agreements in which Solvay Pharmaceuticals, which is now part of AbbVie and sells the AndroGel low testosterone treatment, paid three generic drugmakers — including Actavis — to delay launching copycat versions. In 2007, AndroGel generated more than $400 million, according to documents filed by the FTC.

At the same time, legislation has been introduced in Congress to restrict the deals. Toward the end of the year, Rep. Bobby Rush (D-IL), introduced legislation that would declare these agreements to be unlawful. However, the language differs from a pair of Senate bill that were introduced last spring and assume that a deal is illegal if challenged by the FTC, unless there is evidence demonstrating the benefits of the agreement outweigh the anticompetitive effects.

The legislation is only the latest effort by the FTC to convince Congress that pay-to-delay deals need to be reined in. Numerous attempts, in fact, were made in recent years to persuade politicians from both chambers to sponsor bills. Former FTC Commissioner Jon Leibowitz was particularly outspoken against these patent settlements and regularly testified before Congress as part his mission which, until the recent Supreme Court ruling, appeared somewhat Quixotic.

Meanwhile, the pay-to-delay issue has prompted concern in Europe as governments attempt to grapple with rising healthcare costs, spurring regulators to launch numerous investigations that, sometimes, involve office raids in search of documents. Last Jast July, several drugmakers — including Lundbeck, Merck KGgA and Ranbaxy Laboratories — were charged with blocking the entry of generic versions of the best-selling Celexa antidepressant.

The European Commission also charged Servier and several other drugmakers, including Teva, with conspiring to delay a generic version of the Perindopril heart medicine. More recently, a complaint was filed against Johnson & Johnson and the Sandoz generic subsidiary of Novartis for allegedly conspiring to delay the generic introduction of a version of the fentanyl pain patch in the Netherlands. J&J has decided not to appeal.

In fact, the EC believes its stance toward such settlements is reaping rewards. The troublesome pay-to-delay deals accounted for 12 of 183, or 7%, of all patent settlements concluded in 2012, compared with 45 of 207 (22%) of all settlements between 2000 and the first half of 2008. The governmental agency also noted there was a slight increase in patent settlements overall in 2012 compared with 2011 — 125, up from 120.

In discussing the findings, the EC argues that its antitrust actions have not prevented drugmakers from settling patent disputes or prompted them to litigate disputes until the very end. In most cases, drugmakers are able to find solutions that are unproblematic under antitrust rules. Drugmakers “are increasingly aware of the competition concerns that some settlements may raise,” said EC vice president Joaquin Almunia, who is in charge of competition policy.

But will there really be fewer deals or just fewer of the troubling deals that disturb regulators? After the Supreme Court ruling, Ronny Gal of Sanford Bernstein opined that the decision “creates legal ambiguity for any company choosing to use reverse payments as FTC would have the discretion to review each settlement and decide whether to sue under the rule of reason. In fact, as reverse payments are not just money but ‘anything of value,’ essentially any branded-generic agreement will be scrutinized.”

On its face, this would suggest fewer settlements, but that may not be the case. Wrote Gal, “We believe the industry is full of smart lawyers who could structure agreements to avoid visible reverse payments while transferring value between companies (pay for R&D or intellectual property, marketing agreement around the drug in question or others, provision of active pharmaceutical ingredient, agreement on off-shore drug collaboration). If the agreement is important enough for both sides and a reverse payment is needed, we think it will happen.”

Indeed, patent settlements will not disappear. Instead, drugmakers will simply become more circumspect as they craft agreements to settle litigation that affects how generics become available. For instance, after the European Commission filed its complaint against J&J, the drugmaker issued a statement saying it regrets lower generic prices were thwarted and has instituted “policies, and internal awareness and training programs to help prevent these types of situations from happening again.”

What remains to be seen, then, is the extent to which authorities remain vigilant and review settlements. Drugmakers have clearly been put on notice. Now, the real test begins. CP

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Ed Silverman
Contributing Editor

Ed Silverman is a prize-winning journalist who has covered the pharmaceutical industry for The Star-Ledger of New Jersey, one of the nation’s largest daily newspapers, for more than 12 years. Prior to joining The Star-Ledger, Ed spent six years at New York Newsday and previously worked at Investor’s Business Daily. Ed blogs about the drug industry at Pharmalot, at www.pharmalot.com. He can be reached at [email protected].