JAMA Forum: Supreme Court Decision on “Pay-for-Delay” Case Will Speed Marketing of Generic Drugs and Save Consumers and Taxpayers Billions

By Lawrence Gostin, JD on July 22, 2013

Lawrence Gostin, JD

On June 7, 2013, the Supreme Court decided that the courts can hear suits against pharmaceutical patent holders who pay generic manufacturers not to produce a generic version of a brand-name drug until after the patent term expires. Under these “pay-for-delay” or “reverse settlement” agreements, payment flows from the brand-name drug company to the generic competitor that is challenging the patent.
The origins of the case date back to the Drug Price Competition and Patent Term Restoration Act of 1984, which permits a generic manufacturer to file an Abbreviated New Drug Application specifying that the generic product has the same “active ingredients” as the approved brand-name drug and is “biologically equivalent” to it. To increase price competition and lower pharmaceutical costs to consumers, the Hatch-Waxman Act granted the first generic manufacturer that successfully challenges a patent (such as a patent that covers a particular formulation of a drug rather than the active ingredient itself) an exclusive right to sell the generic drug for 180 days, as well as the roughly 30-month period that subsequent manufacturers would be required to wait before receiving US Food and Drug Administration (FDA) approval for their own generic version of the drug. The act also requires the parties to a patent dispute to report settlement terms to the Federal Trade Commission (FTC). The act therefore seeks to facilitate the marketing of generic drugs, reducing health care costs.
The Case Against Pay-for-Delay
In FTC v Actavis, Solvay Pharmaceuticals (subsequently acquired by Abbott Laboratories) obtained a patent for its brand-name drug AndroGel (a daily testosterone replacement therapy). As noted in an earlier ruling by the US Court of Appeals for the Eleventh Circuit, the patent for the active ingredient, a synthetic testosterone, had already expired decades earlier; Solvay’s patent was for the particular gel formulation of the synthetic hormone. Actavis then filed an FDA application to market a generic form of AndroGel, certifying that its product did not infringe the patent. Although it received FDA approval, Actavis entered into an agreement with Solvay to not bring its generic product to market for a number of years in exchange for millions of dollars. The FTC sued, alleging that the companies violated antitrust law when Actavis agreed to refrain from launching its low-cost generic and to share in Solvay’s large monopoly profits.
Justice Breyer, writing for the Court, said that such reverse settlements cause “concern” because they can have significant anticompetitive effects. First, pay-for-delay keeps prices at the level set by the patent holder, dividing the benefit between the 2 parties while the consumer loses. Second, the brand-name company has considerable power to cause harm to consumers, illustrated by the size of the financial inducement to generic manufacturers. Third, there are other ways to settle litigation disputes without artificially keeping drug prices high.
The Court ruled that reverse settlement agreements were not “presumptively unlawful” (unlawful on their face), as the FTC had claimed. Rather, courts should scrutinize these agreements under a “rule of reason,” which states that the agreements must be considered in the context of their possible benefits for consumers.
Justices Roberts, Scalia, and Thomas dissented, saying that litigation to block pay-for-delay deals would discourage the settlement of patent litigation. The dissenters felt that the settlement of disputes reduces costs and burdens on the parties. (Justice Alito recused himself from the case.)
Implications of the Decision
The Supreme Court’s decision on FTC v Actavis will require companies to have an independent business reason for pay-for-delay. These deals can no longer be purely an arrangement to share in the profits, depriving consumers and taxpayers of the benefits derived from lower drug costs. Future cases will probably rest on the size of the payment—whether the amount of the settlement is clearly a financial inducement not to market a generic drug. The parties to the settlement will also have to show that the payment was for something other than delaying market entry. Most current reverse payment agreements would not be lawful under these standards.
Actavis will probably save consumers more money than any other case before the Supreme Court this past term. Pharmaceutical sales reportedly totaled $320 billion in 2011, and although brand-name drugs represented 18% of total prescriptions that year, they accounted for 73% of consumer spending. Generics typically cost about 15% of the brand-name price and cause the company with the brand-name drug to rapidly lose up to 90% of its market share. By extending monopoly power and sharing the profits, reverse settlement agreements cost consumers and taxpayers an estimated $3.5 billion each year.
The Court’s decision will make it considerably harder for companies with patents for brand-name drugs to block market entry for generic drugs. It gives consumer groups, drug retailers, wholesalers, and insurance companies a clear pathway to legally challenge reverse payment settlement agreements. Given that 75% of cases in which a patent is challenged in court are decided in favor of the generic company, brand-name companies will find it hard to maintain monopoly pricing. Going forward, it is likely that cheaper generic brands will likely enter the market much sooner—a major win for consumers, but smaller profits for companies that produce brand-name drugs.

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About the author: Lawrence O. Gostin, JD, is University Professor and Faculty Director, O’Neill Institute for National and Global Health Law, Georgetown University Law Center, and Director of the World Health Organization Collaborating Center on Public Health Law and Human Rights.
About The JAMA Forum: JAMA has assembled a team of leading scholars, including health economists, health policy experts, and legal scholars, to provide expert commentary and insight into news that involves the intersection of health policy and politics, economics, and the law. Each JAMA Forum entry expresses the opinions of the author but does not necessarily reflect the views or opinions of JAMA, the editorial staff, or the American Medical Association. More information is available here and here.