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Drug-Makers Paying Off Competitors To Keep Cheap Generics Off Market

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Over the last few years, drug-makers have embraced a startlingly simple tactic for fending off competition from generic brands: paying them off. In a nutshell, the company that holds the patent on a profitable drug strikes a deal with the maker of the cheaper generic brand: you hold off on marketing your generic for several years, and in return, we'll give you a share of our profits on the drug.

The vehicle for these deals is patent litigation. When a generic drug is approved to come to market, the maker of the more expensive name-brand drug sues the generic for patent infringement. But instead of a conventional settlement, in which the generic pays the patent-holder to settle the claim that it infringed the patent, the payment goes the other way: the patent-holder pays the maker of the generic, in exchange for a pledge to delay bringing the generic to market. That suggests the patent-holder fears its patent wouldn't hold up in court, as many don't. And it runs counter to the intent of the Hatch-Waxman Act of 1984, which sought to speed the path of generics to market, and to provide a legal framework for these cases.

So common have these deals become lately that they've been given a name: pay-for-delay. The approach -- a textbook anti-competitive tactic -- is worth billions to drug-makers, because it essentially allows them to buy more protection than their patent confers.

That was made more or less explicit by Frank Baldino, the CEO of Cephalon, which makes the sleep-disorder drug Provigil. In a 2006 interview, Baldino trumpeted recent deals with four generic drug-makers that kept generic versions of Provigil off the market until 2012, declaring: "We were able to get six more years of patent protection. That's $4 billion in sales that no one expected."

But pay-for-delay doesn't work out nearly so well for consumers. Generics are sometimes priced as much as 80 or 90 percent cheaper than the name brands. For instance, the cholesterol drug Zocor costs $164 a month, while a generic version costs just $12 a month. Pay-for-delay deals will cost consumers an extra $35 billion over the next decade, by keeping those cheaper generics off the market, according to a recent Federal Trade Commission study. And it's the uninsured, who pay out-of-pocket for drugs, that disproportionately pay those costs.

Part of the blame lies with the Bush administration. A series of court rulings in 2004 made pay-for-delay much more common, with the result that in 2006 and 2007, nearly half of all deals between generic brand-name drug-makers involved a payment to the generic maker in exchange for a promise to stay out of the marketplace, according to the FTC study. On several occasions, the Bush Justice Department declined to weigh in on the side of consumers by urging the Supreme Court to clarify the law, as it could easily have done.

Lately, the FTC, led on the issue by Chairman Jon Leibowitz, has made ending pay-for-delay a priority, filing suit to block several such deals, including one struck by Solvay Pharmaceuticals, which makes a testosterone replacement drug worth about $400 million a year. The ultimate goal is to get a ruling from the Supreme Court declaring the deals illegal under existing antitrust law.

But congressional action would be a surer solution. "It really makes sense for Congress to tell judiciary: this is the way you should interpret our laws," said Leibowitz in an interview. So the commission is working to get legislation incorporated into the health-care reform bill that would tweak Hatch-Waxman Act to explicitly ban pay-for-delay.

The fate of that effort is uncertain. The pharmaceutical industry has almost 1700 registered lobbyists in Washington, according to the Center for Responsive Politics. And the issue has accomplished the rare feat of uniting the name-brands and the generics, who usually are on opposite sides but both benefit significantly from pay-for-delay. Republicans have largely backed their industry allies, though Chuck Grassley and Susan Collins both supported the bill -- sponsored by Sen. Herb Kohl (D-WI) -- in the Senate Judiciary committee. The White House -- despite its well-publicized deal with PhRMA -- is said to be supportive, but has a host of other pressing priorities for the health-care bill.

Still, Leibowitz is optimistic. "It's the kind of issue that the more sunlight you place on it, the more people just sort of get it," he said.

Whether enough members of Congress will get it remains to be seen. But if they do, they'd be striking a real blow -- not just a rhetorical one -- for the principle of free-market competition that we all claim to believe in.

Late Update: PhRMA send along a lengthy statement explaining its opposition to congressional action on the issue. Argues the drug lobby:

Patent settlements between brand-name and generics companies can resolve expensive patent disputes to help foster innovation and improve access to medicines so that patients can live healthier, more productive lives.

Law and public policy have always favored settlements, including patent settlements. PhRMA continues to believe that legislation that would impose a blanket ban on certain types of patent settlements or otherwise prevent them could decrease the value of patents and reduce incentives for future innovation of new medicines. This is also unnecessary because the Federal Trade Commission (FTC) and others already have the authority to review and evaluate any patent settlement agreement between a brand name company and a generic company. The courts and enforcement agencies like the FTC are in the best position to review these settlements on a case-by-case basis to ensure that they are not harmful to competition. By imposing a general ban or imposing harsh disincentives, pending legislation would effectively remove the decision-making process from this appropriate venue.

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