Brand-Generic "Pay-For-Delay" Settlements Jump 63% In FY 2010

As a proportion of total settlements reported to FTC, however, the ones involving compensation to the generic firm remained the same.

Despite the Federal Trade Commission's fierce objections to brand-generic settlements that involve compensation, the practice is thriving. The commission reports that in fiscal year 2010 there were 31 such deals, a 63% increase from the previous year's tally of 19.

Brand and generic companies are required to submit settlements of their patent disputes to the FTC under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. During FY 2010 the commission received 113 final resolutions. Of these, 66 restricted generic entry but contained no explicit compensation.

The 31 deals that included brand compensation to generics and restriction on generic entry involved 22 different branded pharmaceutical products with combined annual U.S. sales of approximately $9.3 billion.

It is unclear that the increase in the number of settlements that FTC finds troubling necessarily reflects a growing confidence by industry that it can make those kinds of deals, however. The proportion of settlements that FTC doesn't like - the ones it labels "potential pay for delay"- actually peeked at 50% in FY 2007, when 14 of the 28 fell into the category.

The 31 settlements that FTC deemed objectionable from FY 2010 is basically the same percentage (28%) that were deemed objectionable in FY 2009, when FTC found problems with 19 out of 68. The stats on potential pay for delays involving first filers show a similar proportionality, with 15 in FY 2009 and 25 in FY 2010.

The increase in the number of settlements of concern to FTC seems to be a function of the increasing number of settlements overall - and that may be a function of the patent cliff and a growing number of generic challenges, not a shifting corporate attitude on dealmaking.

Rhetoric on the issue remains strong regardless of how you look at the numbers. "Collusive deals to keep generics off the market are already costing consumers and taxpayers $3.5 billion a year in higher drug prices," FTC Chairman Jon Leibowitz said in a release. "The increasing number of these deals is a win-win proposition for the pharmaceutical industry, but a lose-lose for everyone else."

The Generic Pharmaceutical Association objected to the commission's characterization of these agreements. "The FTC is continuing to perpetuate the myth that pro-competitive, pro-consumer patent settlements are harmful to consumers - an unsubstantiated position that has repeatedly failed to receive support in both Congress and the courts," the association said in a release.

Indeed, there does not appear to be any possibility of action on settlement legislation during this session of Congress, though the issue continues to have broad resonance (Also see "Lipitor Generics Problem Illustrates Need For Hatch-Waxman Reform, Academics Say" - Pink Sheet, 26 Apr, 2011.).

FTC Objects To Deals With Declining Royalty Structure

FTC staff on May 3 issued a two-page overview of the agreements filed with the commission and the Department of Justice during FY 2010. The commission will submit a detailed report to Congress later in the year.

The commission was critical of three settlements that included a declining royalty structure in which the generic manufacturer's obligation to pay royalties is reduced or eliminated if the brand launches an authorized generic.

"Such a provision may achieve the same effect as an explicit agreement by the brand not to compete with an authorized generic and, thus, could be characterized as potentially involving pay-for-delay," the FTC stated.

The commission noted that 36 of the agreements involve generics ineligible for 180-day exclusivity that accepted restrictions on entry in exchange for the ability to market their product for some period prior to patent expiration. In 32 of these agreements, the settlement took place with or following the brand's settlement with a first filer.

The number of potential "pay-for-delay" deals has risen steadily since 2005 when there were three such settlements, but the jump this year was significant. The increase comes as the commission has failed in litigation to outlaw these deals.

The FTC is continuing to press forward, however. Its most recent case against Cephalon Inc. concerning agreements to delay marketing of generic Provigil (modafinil) is pending in the Eastern District of Pennsylvania. Cephalon recently tried to get the source material of two FTC studies on brand-generic settlements but the court rejected its request (Also see "Cephalon Loses Bid To Get FTC Documents On Brand-Generic Reverse Settlements" - Pink Sheet, 3 Mar, 2011.).

-Brenda Sandburg ([email protected])