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Supreme Court Tells FTC And Drug Industry To Go To War

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The Supreme Court just issued its ruling in Federal Trade Commission v. Actavis , a case that could have far-reaching effects on the pharmaceutical industry. The ruling can be found here.

The case deals with what has colloquially become known as a pay-to-delay deal. Generics in the U.S. launch via a unique system created by the Hatch-Waxman act of 1984. The first generic company to file for approval from the Food and Drug Administration gets a six month period of exclusivity as the only generic drug. During this time, it can charge a much higher price than it normally would, undercutting the branded drug only slightly. Of course, the maker of the branded drug will sue the generic, claiming its patents are valid. In order to get that juicy six-month exclusivity, the generic company has to win a court case against the big, profitable pharmaceutical company. Essentially, this incentivizes generic drug companies to challenge the patents on drugs to try and turn them from expensive branded medicines to cheaper generics sooner.

Of course, one way for a big pharmaceutical company to deal with this situation is to simply offer a payment to the generic firm. This is because even the highest priced generic will be cheaper than the branded version. The generic company therefore has less to gain than the branded company has to lose. Hatch-Waxman does nothing to make such payments illegal. However, the Federal Trade Commission has successfully argued on anti-trust grounds that these payments are illegal, because they hurt consumers.

But the FTC has said that not only are cash payments not allowed, neither are other cases where the big drug company gives the generic company anything in order to reach a settlement. In the particular case in question, a generic company, now known as Actavis, along with several other companies, had challenged AndroGel, a testosterone supplement made by Solvay , which is now part of AbbVie . Instead, Solvay offered a payment estimated at $186 million and $252 million to Actavis and two other generic firms for not bringing their copies to market. This is a classic pay-to-delay deal.

A lower court had ruled in favor for Actavis in a motion to dismiss, arguing that the deal fell within the scope of the patent and that the court could not force litigation. The Supreme Court has thrown that out. But the Supreme Court also explicitly did not back the FTC's position that these cases can be settled in a "quick look" that assumes the pay-to-delay deals are illegal. Each one must be decided by "the rule of reason," meaning it must be decided in court.

If this were directed only at deals where money changes hands, this wouldn't be a big deal. As Chris Schott, an analyst at J.P. Morgan, notes:

More complex settlements could see more scrutiny but industry has largely moved away from the most aggressive “pay-for-delay” settlements. We note that since the AndroGel settlement in 2006, the industry has shifted away from outright payments from branded manufacturers to generics and instead moved to date certain launches or intangible exchanges of value in conjunction with settlements (exclusive launches, authorized generics and product distribution rights are examples from recent settlements). While majority of these settlement by still be allowed, today’s ruling could open some of these up for FTC review.

Schott says that other forces, including consolidation and globalization, make this a great time to be a generic drug company. But the fact is the FTC has indicated it considers a lot of deals with generic companies to be pay-to-delay. In January, the FTC said that there were 40 deals in 2012 that could be considered pay-to-delay, up from 28 the year before. In a statement at the time, FTC Chairman Jon Leibowitz argued: “More and more brand and generic drug companies are engaging in these sweetheart deals, and consumers continue to pay the price. Until this issue is resolved, we will all suffer the consequences of delayed generic entry – higher prices for consumers, businesses, and the U.S. taxpayer.”

The Supreme Court didn't provide clear guidance as to which deals are OK and which are not. Instead it rang the bell in what could be a prolonged boxing match between the FTC and drug companies.