Branded Drugs and Generics: Reverse Payment Settlement Agreements

By Jonathan J. Darrow

Earlier this week the Supreme Court heard oral arguments in FTC v. Actavis, in which the Federal Trade Commission is asserting that it is impermissible for a brand name drug company to pay a generic drug company to stay out of the market. Normally, such collusive behavior would constitute a clear violation of antitrust laws, because it reduces competition and thereby has the potential to raise prices to the detriment of consumers. But a complication arises in the case of branded and generic drugs because a patent is involved, giving the patent holder the lawful right to exclude competitors from the marketplace.

In a typical “reverse payment” case, the scenario unfolds as follows: First, the branded company enters the market with a new drug product that is covered by a patent. Some time later, but before the expiration of the patent, a generic drug company seeks to market a generic version of a drug, asserting that the patent is either invalid or not infringed (the assertion takes the form of a Paragraph IV certification, named for the section of the U.S. statute under which the certification arises, see 21 U.S.C. 355(j)(2)(A)(vii)(IV)).  Rather than litigate the case to completion, however, the two firms settle, with the patent holder agreeing to pay the generic company to stay off the market until some future date, such as the date that the patent is set to expire. The “monopoly” profits are thus shared between the two companies, to the detriment of consumers.

Defenders of reverse payment settlements argue that such agreements should be legal so long as they are “within the scope of the patent,” that is, so long as the restrictive agreement does not extend beyond the patent expiration date (see, e.g., Edward Stewart, Skepticism from the Court in Drug Case, N.Y. Times, Mar. 25, 2013).  The fundamental weakness of this argument—and what the N.Y. Times article does not mention—is that many drug patents (73% according to a 2002 government report (see page vi)) turn out to be invalid, not infringed, or otherwise insufficient when litigated in court. If many drug patents would be invalid or not infringed if litigated to conclusion, then the actual “scope of the patent” would be less than its nominal term would suggest, and the high cost borne by consumers would be greater than the patent law contemplates.

The New York Times article also does not mention another important consideration that weighs in the opposite direction from the “weak patent” issue, namely, that more than one generic company may seek to market a generic version of a product prior to patent expiration.  Therefore, even if the brand name company settles with one firm, others may yet challenge the monopoly, and serial settlements with multiple generic firms would be costly.  The initial reverse payment settlement, in other words, is not the end of the story.  While the presence of multiple potential challengers may not be a complete solution, it does mean that there is at least some degree of downward market pressure on price.

Of course, if one is really concerned about price, then the real question to ask is why are so many people buying AndroGel (testosterone), the drug at issue in FTC v. Actavis, when so many other companies already make such an incredible variety of testosterone-based drug products (see the FDA listing of these drugs)? That, however, is a story for another time.

Jonathan Darrow

Jonathan Darrow

Dr. Jonathan J. Darrow is a an Assistant Professor at Harvard Medical School and the Program on Regulation, Therapeutics, and Law (PORTAL) at Brigham & Women's Hospital. He received his research doctorate (SJD) in pharmaceutical policy from Harvard University, where he completed an LLM program in intellectual property (waived), as well as degrees in genetics (BS), law (JD), and business (MBA) from Cornell University, Duke University, and Boston College. After qualifying for the California and Patent bars in 2001 and 2002, Dr. Darrow served as a senior law clerk at the U.S. Court of Appeals for the Federal Circuit, worked in private law practice at Cooley LLP and Wiley Rein LLP, taught on the faculties of four universities and for the World Intellectual Property Organization, authored several law textbooks, supported the intellectual property divisions of WHO and WTO, lectured widely on issues of FDA regulation, and published numerous articles on issues such as expanded access, the breakthrough therapy designation, competition policy, pharmaceutical patenting, gene therapies, drug efficacy, biological products, therapeutic vaccines, and expedited development and approval programs. He is an author of several textbooks, including Cyberlaw: Management & Entrepreneurship (Cengage 2012; Aspen 2015), The Legal and Ethical Environment of Business (Aspen 2014 and Wolters-Kluwer 2d ed. 2018), and Business Law and Management for Entrepreneurs (Edward Elgar, forthcoming). He has lectured widely on issues of FDA regulation, and published numerous articles on issues such as expanded access, the breakthrough therapy designation, competition policy, pharmaceutical patenting, gene therapies, drug efficacy, biological products, therapeutic vaccines, and expedited development and approval programs.

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