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The Other Drug War
Daily Journal
While campaigning in summer 2008, President Barack Obama pledged that if he was elected, he would significantly increase government challenges against anticompetitive conduct. Obama identified two specific antitrust proposals he would implement as president. The first proposal was to repeal the exemption from certain federal antitrust laws currently enjoyed by medical malpractice insurers under the McCarran-Ferguson Act. The second was to aggressively challenge settlements between producers of generic and branded drugs that paid generic producers to delay entry into the market.
The settlements between generic and branded producers described for challenge by Obama are often described as "reverse payment settlements." Consider the following scenario. A company producing generic drugs applies to the Food and Drug Administration for approval to sell a generic drug that competes with a branded drug. In the application, the generic producer either claims to not infringe any patents protecting the branded drug or that any applicable patent is invalid. The brand name manufacturer then sues the generic company for patent infringement. The brand name company may decide to settle the case for an agreement by the generic firm to withdraw its FDA application and delay entry in exchange for money and allowing the generic firm to enter the market some time in the future, but typically before the patent has expired. The settlement is called a "reverse payment" because unlike a typical situation where the defendant pays the plaintiff patent holder to dismiss a case, the plaintiff here is making a payment to the defendant generic manufacturer.
The Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act) encouraged generic drug producers to bring lawsuits challenging drug patents by limiting their exposure in patent litigation to just attorney fees. Reverse payment settlements came into vogue in the mid-1990s as a way for branded pharmaceutical companies to confront the increasing number of generic producing companies challenging their patents following Hatch-Waxman.
Critics of reverse payment settlements between generic and branded drug producers claim that the transaction amounts to commercial bribery. Critics argue that generic companies are being paid to delay introducing their competing products to the market, thus allowing brand-name companies to maintain their monopolies in exchange for kickbacks. Supporters of reverse payments argue that the agreements allow both parties to minimize the costs of protracted litigation and allows brand name manufacturers to avoid risking the loss of years of research and development if their patents are defeated.
The Federal Trade Commission agrees with the critics of reverse payment settlements and, since 1999, has challenged many reverse payment settlements in court as per se illegal market division agreements. After FTC challenges, no reverse payment settlements were made from 1999 through 2004. Reverse settlements have seen a resurgence in popularity following 2005 decisions by the 11th Circuit in Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005) and by the 2nd Circuit in In re Tamoxifen Citrate Antitrust Litigation, 429 F. 3d 370 (2d. Cir. 2005). Three reverse payment settlements were made in 2005 to settle patent challenges, seven occurred in 2006, and 16 agreements were struck in 2007.
The Schering-Plough and Tamoxifen Citrate cases were setbacks to the FTC's crusade against reverse payment settlements. In Schering-Plough, the 11th Circuit Court of Appeals rejected the FTC's position that reverse payments were automatically, or "per se," illegal. In that case, Schering-Plough had reached a two-part settlement with ESI Lederle Inc., a generic manufacturer of an extended-release form of potassium chloride that competed with a Schering-Plough product.
In the first part of the settlement agreement, ESI agreed to defer marketing its generic product in exchange for payments in the millions of dollars. In the second, Schering entered into a multimillion-dollar license to market other ESI products. Several years after these agreements were reached, the FTC filed an administrative complaint against the signatories alleging that the agreements were anticompetitive. The commission concluded that the ancillary licensing agreement was a cover to hide the fact that Schering was paying ESI to delay the marketing of the latter's generic potassium chloride product. Moreover, the commission concluded that any settlement beyond a "simple compromise" that resolved litigation costs would constitute an anticompetitive practice.
The 11th Circuit disagreed with the commission's reasoning and held that such payments were a "'reasonable implementation' of the protections afforded by the patent law." Indeed, a contrary ruling would undermine the general policy favoring settlement of litigation, including patent infringement suits. The appellate court also viewed the FTC's "inflexible compromise without-payment theory" as "myopic" and "naïve." According to the 11th Circuit, a blanket prohibition of reverse payment settlements would discourage settlements and force parties to litigate cases to a decision, lest they risk antitrust liability under the FTC's per se rule. Moreover, by reducing settlement options, the FTC's position would in turn "'reduce [a generic's] incentive to challenge patents'" in court.
The 2nd Circuit in Tamoxifen Citrate reached substantially the same conclusion. The 2nd Circuit so ruled, even after recognizing that the brand-name producer's patent was most likely unenforceable and that the generic producer would have successfully challenged the patent. The FTC recently was dealt another setback when the Federal Circuit in In re Ciprofloxacin Hydrochloride Antitrust Litigation, 2008-1097 (Fed. Cir. Oct. 15, 2008) following the 11th and 2nd Circuits, applied the rule of reason to a reverse settlement and held that it was not anticompetitive.
These decisions conflict with In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003), in which the 6th Circuit held reverse payments to be a per se violation of the antitrust laws. The Supreme Court denied certiorari review in Cardizem, Schering-Plough and Tamoxifen Citrate and declined to resolve the circuit split. The Bush administration, in an unusual and widely noticed move, refused to support the FTC's Supreme Court appeal in the Schering-Plough and Tamoxifen Citrate cases.
The FTC's position will find more support from Obama's administration. As a U.S. senator, he agreed that the settlements were preventing Americans from receiving affordable drugs and were raising the cost of health care for Americans. He believes that "competition from generic manufacturers has the potential to reduce these [drug] costs significantly, or at least prevent these costs from ballooning further" and co-sponsored legislation that would make such agreements illegal. Although the Obama administration is barely two months old and most of its energy is devoted to combating the economic crisis, legislative and executive attacks on reverse payment settlements have already started.
On Feb. 5, Sen. Herb Kohl, D-Wis., and Chuck Grassley, R-Iowa, announced a new bill (S. 369) to make illegal agreements under which brand-name pharmaceutical companies pay generic pharmaceutical companies to delay the launch of generic versions of the medications. Kohl and Grassley, who introduced a substantially similar bill in 2007 with then-Sen. Obama, stated, "it's time to stop these drug company pay-for-delay deals that only serve the profits of the companies involved and deny consumers access to affordable generic drugs." Grassley, ranking member of the Senate Finance Committee, added, "In a time when our federal health care programs such as Medicare and Medicaid are facing extraordinary fiscal strains, this wheeling and dealing only delays the entry of lower-priced medicines in the marketplace."
The same week that S. 369 was introduced, the FTC announced the first court challenge of reverse payment settlements during the Obama administration. On Jan. 28, the FTC, in conjunction with California Attorney General Jerry Brown, filed a lawsuit against Solvay Pharmaceuticals in the U.S. District Court for the Central District of California, alleging that its agreements with three generic pharmaceutical companies illegally delayed the launch of lower-cost generic versions of AndroGel, Solvay's hormone replacement therapy. According to the FTC's complaint, each of the generic producers had applied for regulatory approval from the FDA to market generic versions of AndroGel and certified that their products did not infringe Solvay's patent. The FTC accuses Solvay of agreeing to pay the generic companies to abandon their patent challenges and not to bring a generic AndroGel product to market until 2015, although Solvay's patent would not expire until 2020. The case is FTC v. Watson Pharmaceuticals, et. al., CV-09-00598.
Framing the challenge as crucial to lowering medical costs, the FTC's Bureau of Competition Director David P. Wales said of the suit, "at a time of escalating health care costs, these unlawful agreements deny patients the benefit of competition between branded and generic pharmaceuticals and ultimately cost consumers hundreds of millions of dollars a year." Wales added "the evidence in this case will show that [generic producers] Watson and Par agreed to defer their generic entry for nine years, not out of respect for Solvay's patent, but due to the size of Solvay's payments to them." As this issue works its way through the appellate courts, Obama's administration likely will support the FTC's position on any appeal to the U.S. Supreme Court that would resolve the split among the circuits.
Internationally, the winds of change appear to favor supporters of S. 369, the FTC position and Obama. Although the European Commission has not definitively stated that all reverse payments are per se illegal, it has suggested that most agreements delaying entry of generic drugs would run afoul of Article 81 of the EC Treaty, Europe's counterpart to Section One of the Sherman Act that prohibits agreements in restraint of trade. In January 2007, European antitrust officials raided the offices of pharmaceutical companies GlaxoSmithKline, AstraZeneca, Wyeth, Teva Pharmaceutical Industries, Sanofi-Aventis and Pfizer, looking for information about reverse payments. We can likewise expect stepped-up challenges to enforcement of generic settlements by the Department of Justice and the FTC under Obama.
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