Generic drugs are supposed to compete with branded pharmaceuticals to drive down prices, but a report from the Federal Trade Commission (PDF) says a spike in legal settlements among drugmakers in 2012 stifled competition and cost Americans an extra $3.5 billion.
The finding comes as the U.S. Supreme Court prepares to hear oral arguments in a “pay for delay” case, FTC v. Watson Pharmaceuticals, in which the government agency says several drugmakers drove up consumer prices for topical testosterone treatments by settling patent challenges for cash payments instead of fighting in court.
The FTC Bureau of Competition on Thursday released its ninth annual report looking at pay-for-delay settlements across the entire drug industry, finding that a record 40 settlements were struck last year between makers of branded and generic drugs. In each of the 40 cases, the makers of generic drugs agreed to drop legal challenges to patents and not launch competing products in exchange for cash payments.
“More and more brand and generic drug companies are engaging in these sweetheart deals, and consumers continue to pay the price,” FTC Chairman Jon Leibowitz said in a news release.
Prices for generic drugs are typically 85% lower than the equivalent brand name pharmaceuticals, the FTC says.
Richard Manning, a partner at consulting firm Bates White who formerly worked at Pfizer and Merck & Co., said the higher prices charged for brand-name drugs serve a valid purpose: encouraging investments in new innovations, which benefits consumers through the development of cutting-edge therapies.
As with all patent law, the trick is balancing legitimate profit-seeking incentives for innovators against the benefit to consumers of lower long-term prices, he said.
With brand-name drugs the equation is complicated by the fact that many of the high-profit years of a 20-year patent are used up during the government approval process, and a typical brand-name drug patent may be good only for 10 to 12 years of sales. That period can shrink further if a generic maker successfully overturns a patent before it expires, stifling the future incentive to create new drugs.
Manning said legal conclusions about whether makers of generics should be allowed to settle out of court in exchange for agreements not to compete should turn on the likelihood of a patent withstanding a challenge. The more likely a patent is to be overturned by a court, the more questions be prompted by decisions to settle such cases, he said.
The Supreme Court will have a chance later this year to bring clarity to the issue following its oral arguments in FTC v. Watson on March 25.
The FTC has been waging a legal battle against a subsidiary of Abbott Laboratories, Solvay Pharmaceuticals, which agreed to pay $42 million to several companies in exchange for agreements to drop legal challenges to Abbott's patent on AndroGel until 2015.
In 2006, Solvay estimated it would lost 90% of its sales of AndroGel within a year of generics hitting the market, cutting annual profits by $125 million, court filings in the case say.
Although the companies—including generics-makers Watson, Paddock Laboratories, and Par Pharmaceuticals—maintain their decisions were legal, they did not oppose FTC's request to have the Supreme Court consider the challenge because they said differing interpretations of federal law had led to split legal reasoning in U.S. circuits.
“I think it will be good to get clarity on what kinds of settlements are acceptable and which are not, but I think it would be unfortunate if all such settlements are ruled out,” Manning said of the future Supreme Court decision on the matter.