Brand/Generic Settlement Reform Will Be Balancing Act For Congress

Development of legislation to address settlements between brand and generic companies will need to ensure that commercial incentives remain for generic firms to challenge patents.

A bill to limit settlements "will have very serious unintended consequences," Barr CEO Bruce Downey said during a Senate Judiciary Committee hearing Jan. 17.

"It will reduce the number of patent cases we bring. It will force us to take each of the cases that are brought to trial and to a fight to the death," he said. "Finally, it will prohibit settlements that shorten the patent life and bring products to market sooner than we otherwise could."

"It's not really the reverse payment that keeps products off the market, it's the patent," Downey said.

The Federal Trade Commission has been seeking to curtail brand/generic settlements that involve "reverse payments" to the ANDA holder in exchange for an agreement to delay launch, but the commission has been thwarted by several court decisions, which found such deals are not per se illegal (¹ (Also see "Brand/Generic Deals Stay In FTC’s Crosshairs As It Seeks Legal Ammunition" - Pink Sheet, 1 May, 2006.), p. 10).

During testimony at the Judiciary Committee hearing, FTC Commissioner Jon Leibowitz noted that the commission is seeking a more definitive case to bring to trial, but is also supporting a legislative remedy that would place a blanket prohibition on reverse payment settlements.

Pharmaceutical Research and Manufacturers of America President Billy Tauzin urged a case-by-case review of settlements instead. He cautioned against changes that would disrupt the Hatch/Waxman balance and used an ink-based example to illustrate the fragility of brand firms' patent situation (see chart: " ² PhRMA's Billy Tauzin® Brand Patented Pens ").

Despite the concerns of brand and generic industries, a legislative push to curtail settlements seems likely.

"The fact that we have scheduled this hearing so early in this new Congress is a sign that solving this problem will be the high priority for this committee that it deserves to be, and that consumers want it to be," Chairman Patrick Leahy (D-Vt.) said.

The tenor of Leahy's effort was evident in the title of the hearing - "Paying Off Generics to Prevent Competition with Brand Name Drugs: Should It Be Prohibited?"

The hearing coincided with the reintroduction of a bill by Sen. Herb Kohl (D-Wisc.) that would prohibit settlements involving payments to generic firms accompanied by delayed launch of ANDAs.

Kohl introduced the legislation last year after the Supreme Court declined to hear an appeal by the FTC, which had sought to block a settlement between Schering-Plough and Upsher-Smith over generics of K-Dur .

The bill (S. 316) contains technical changes from the one introduced in the last Congress designed to ensure that the legislation is referred to the Judiciary Committee instead of the Commerce Committee. Kohl and several other sponsors of the legislation - Leahy, Chuck Grassley (R-Iowa) and Charles Schumer (D-N.Y.) - sit on the Judiciary Committee.

The Need For Cash

Asked why generic firms could not just settle with brand companies for an earlier entry date instead of receiving cash, Downey said this was not possible because "parties generally have a different view of the case in two different respects. One, the strength of the case; and second, the value of the entry of the generic and the cost of entry to the generic from the brand's perspective."

The "collateral" arrangements - "whether it's an R&D arrangement, whether it's buying a product, licensing a patent, these other exchanges of value" - involve assets which "have different value to the two parties, so you are able to bridge the gap you can't bridge on early entry," Downey said.

Leibowitz argued that banning payments would not preclude settlements. "We had a period of time from 2000 to 2004 where the industry believed that all of these deals were illegal, and there were plenty of settlements during that time. ... We don't believe there will be a stoppage of the deals. What you have is sort of a migration from a delayed entry date plus money to a less delayed entry date, and consumers getting the benefit sooner."

Since the judicial rulings against FTC, settlements have increased. An ³ FTC study released at the hearing found that the number of final settlements more than doubled in FY 2006, with most of the growth coming from deals that restricted generic entry.

Judges Could Serve Double Duty

Other senators at the hearing offered alternate ideas for ensuring settlements that favored consumers instead of the "bright line" test in Kohl's legislation, which rules out all payments.

Sen. Arlen Specter (R-Pa.) suggested that when parties reach a settlement, it should be reviewed for potential antitrust violations as part of the end of the litigation.

"A condition of the settlement ought to be for the presiding judge to examine it to see if the settlement does or does not violate the antitrust laws, instead of inviting a later lawsuit where purchasers who want the lower costs come in and sue the parties to the agreement," Specter said.

The judicial review concept was received positively by Downey. "That's something that's standard procedure in securities litigation, class-action litigation to ensure that the members of the class are adequately protected by the settlement."

"I think it would be totally appropriate for those settlements to be presented ... for the court's review. I think that would be an excellent suggestion as an alternative to the proposed legislation."

Consumer Union's Michael Wroblewski expressed skepticism about court review of proposed settlements. In class-action cases, when "the judge is looking to see whether the class action is fair, it's really applying the same law that it has just had the trial on. In this particular instance, you are asking a patent judge who has just been looking at the patent issues to now apply a whole new set of law; they are now going to have to look at antitrust law."

A "Third Way" From Sen. Hatch

Sen. Orrin Hatch (R-Utah) offered a third approach which, instead of reviewing settlements using a bright-line or case-by-case standard, would modify the 180-day generic exclusivity provisions in order to reduce the incentives for settlements.

"The most serious antitrust implications arise from the scenario where a settlement agreement not only prevents a generic company from entering the market, but by virtue of the 180-day exclusivity period, effectively prevents entry by any other generic competitor," Hatch said.

Potential modifications to 180-day exclusivity could be "conditioning exclusivity on the ability of the generic company to mount a successful defense in court," Hatch said. "This would preclude any generic company that enters into a settlement from getting the benefit of the exclusivity period."

The "successful defense" criteria had been FDA's standard for awarding exclusivity before it was struck down in the 1998 Mova case, and the number of applications receiving exclusivity has skyrocketed since then (⁴ (Also see ""First To File" Policy Increases Generics Qualifying For 180-Day Exclusivity" - Pink Sheet, 26 Mar, 2001.), p. 9).

Leibowitz said that modifying the way 180-day exclusivity is awarded is "an interesting idea, but keep in mind that there may still be a huge incentive for the brands to pay the generic to stay out of the market - even if they are paying multiple generics - because of the economics of this industry."

Hatch also noted, "Others have suggested a stronger 'use it or lose it' provision that would ensure forfeiture of the exclusivity period if the first generic to apply for approval does not enter the market within a reasonable period of time."

The 2003 ANDA reforms enacted as part of the Medicare Modernization Act include provisions to allow subsequent generic filers to trigger another firm's 180-day exclusivity. But the law has not worked as intended because courts have refused to allow generic firms to seek declaratory judgments.

However, the Supreme Court's recent decision in the MedImmune v. Genentech case could reset the judicial standard and allow generic firms to bring such cases (⁵ (Also see "Declaratory Judgments For Generic Firms May Be Easier After MedImmune Case" - Pink Sheet, 15 Jan, 2007.), p. 7).

- M. Nielsen Hobbs