Another Senseless Attack on Pay-to-Delay

A Federal Trade Commission report on so-called pay-to-delay drug patent settlements that was released this month has given new life to congressional efforts to ban the deals in which brand manufacturers pay potential generic competitors to drop patent challenges. A CBO analysis suggested that a ban could save federal health programs $2.68 billion over 10 years by getting cheaper generics to market sooner. And Democrats are pushing the deficit reduction super committee to include the ban in its proposals. In practice, though, a ban could actually delay the introduction of more generic drugs than it would accelerate, resulting in higher drug prices.

Current law provides incentives for generic producers to challenge potentially weak drug patents in court. But when faced with the uncertainty of patent litigation, brand manufacturers sometimes offer to settle the lawsuits by paying the challengers to drop the litigation. The patents remain in place that way. But as part of the settlements, the brand manufacturers usually agree to let the generics on the market a few years before the patents in question expire.

The FTC hates these deals and calls them anti-competitive because successful patent challenges would get generics to market sooner still. But that assumes that the majority of patent challenges would actually succeed, which isn't borne out by the data. Just over half of the drug patent cases that make it all the way to a court decision fail. And there is no evidence that settled cases would have been more likely to result in patent invalidation.

The FTC already has authority under existing antitrust laws to block patent settlements where evidence indicates consumers would be harmed by higher prices. But the agency loses many of those cases because the evidence isn't on their side. And, in the handful of cases where the FTC succeeded in blocking a settlement and forcing the litigation to go forward, courts more often upheld the patents than ruled them invalid.

As it turns out, settlements almost always result in a generic product reaching the market before the patent's expiration -- something a ban could not deliver. So, banning settlements altogether and forcing these cases into court would prolong the amount of time the typical brand drug enjoys a monopoly with no generic competition. That's why federal courts have so far refused the FTC's pleas to make these settlements per se illegal. In one decision, U.S. Seventh Circuit Judge Richard Posner wrote that "a ban on reverse-payment settlements would reduce the incentive to challenge patents by reducing the challenger's settlement options." He suggested that it was the proposed ban, not settlements, "that might well be thought anticompetitive."

Collusion between competing firms in any industry often raises red flags that suggest anticompetitive, anti-consumer behavior. But at least in these pay-to-delay cases, cooperation among brand and generic firms does seem to promote overall consumer welfare.

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