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When Jon Leibowitz became chairman of the Federal Trade Commission this year, one of the first things he did was ask the agency’s economic analysts to take a close look at the pharmaceutical industry phenomenon known as the “reverse-payment” settlement. A number of these deals—under which brand-name drug makers pay manufacturers of potential generic competitors to end patent litigation and stay off the market—have been struck in recent years, and Leibowitz strongly opposes them. Makers of branded and generic drugs say the deals can actually be good for consumers, but Leibowitz sees them as straightforward violations of antitrust law: companies colluding to monopolize, control, and divide up markets.

Leibowitz wanted his economists to tell him what these “sweetheart deals,” as he calls them, cost the public. Their answer: delayed entry of generic drugs into the market adds about $3.5 billion to U.S. consumers’ health care tab per year. It was just the kind of fresh ammunition Leibowitz needed. After winning most of the early rounds in its decade-long campaign against the settlements, the FTC has been on the losing side lately. Three federal appellate courts have ruled that companies that make reverse payments don’t monopolize markets any more than their patents allow.

Despite the losses, the FTC’s 30-lawyer health care division still spends more time investigating and litigating what the agency has dubbed “pay-for-delay” deals than on any other issue. In its latest push, the FTC filed new lawsuits in 2008 and 2009 in a bid to block two large settlements. The hope is to finally win a favorable ruling.

Leibowitz believes that the deals undermine the Hatch-Waxman Act of 1984, which was enacted to protect the value of pharmaceutical patents while opening the door to inexpensive alternatives. The rise of reverse payments, he says, has skewed the role of generic drug makers: “Instead of being the first to come to market with a new generic drug, they want to be the first to be paid off.”

The FTC’s opposition to the deals is based on its interest in how much consumers pay for their medicine. But the conflict also reveals divergent views on the role played by patent rights in spurring innovation. Scott Hemphill, a Columbia Law School associate professor who has studied the deals extensively and advises the FTC on its litigation campaign, says reverse payments are at the heart of what is probably the nation’s biggest unresolved antitrust issue. As Hemphill notes, antitrust law is meant to guarantee consumers the benefits of a competitive marketplace. Patent law limits competition—and keeps prices high—in the name of rewarding innovation. Reverse payments, he says, illuminate the tension between the two like no other issue.

ROOTS OF REVERSE PAYMENTS

Congress designed Hatch-Waxman as a balancing act. The law is supposed to allow big pharmaceutical companies to reap fortunes in monopoly profits on patented drugs while encouraging generic companies to race one another to bring inexpensive copycats to market. Under Hatch-Waxman, the “first filer” of an Abbreviated New Drug Application (ANDA) that qualifies to market a new generic gets a 180-day exclusivity period during which competing generics can’t be sold. (Multiple companies can share the exclusivity period if they file ANDAs on the same day.) Companies able to take advantage of such near-monopolies often make more money in six months than they can over years of competing against multiple generics. That’s because once multiple generics hit the market, prices crash dramatically, with the generics often selling for 10 percent of the cost of the branded drug—sometimes even less. Such fierce competition means tiny profit margins for everyone, including the company that makes the brand-name drug. One way big drugmakers try to stave off that threat is by filing a patent infringement suit against any generic manufacturer that submits an ANDA. Doing this triggers an automatic 30-month stay during which no generic can be launched. It is this litigation that sets the stage for settlement talks.

Most patent lawsuits end in confidential settlements, and Hatch-Waxman suits are no exception. The FTC doesn’t oppose every settlement—not even every settlement that delays the market entry of generic drugs. The agency recognizes that there are sound reasons for companies not to take every case to trial. But about ten years ago, the FTC began to get suspicious when some settlements started to involve payoffs to generic challengers. Had branded drug companies, sensing their patents might be in danger, essentially begun buying more monopoly rights and splitting the proceeds with potential rivals?

Beginning in 1999, the FTC began to challenge settlements it deemed particularly egregious, filing administrative complaints and negotiating consent orders with Abbott Laboratories, Hoechst AG, American Home Products (now known as Wyeth), and Bristol-Myers Squibb Company. Four years later, Congress passed a law that gave the agency access to confidential patent settlements between branded and generic drug companies—a powerful tool to investigate the settlements. As it turned out, the tide had already started to turn against the FTC.

KNOCKED DOWN BY THE COURTS

In 2001 the agency filed a complaint against Schering-Plough Corporation, alleging that the drugmaker had paid $60 million to Upsher-Smith Laboratories, Inc., in 1997 to not launch a generic version of K-Dur 20, a drug used to treat potassium-deficient patients. Schering-Plough argued that the $60 million was actually an “upfront royalty payment” on licenses it had obtained to sell certain Upsher-Smith products, not a quid pro quo payoff to stifle competition. An administrative law judge backed Schering-Plough, but was overruled by FTC commissioners. Defendants can appeal agency decisions to the appellate court of their choice. Schering-Plough chose the U.S. Court of Appeals for the Eleventh Circuit, based in Atlanta.

It proved a smart choice. Not only did the court rule in 2005 that there was nothing wrong with the $60 million payment, the three-judge panel went further. The judges wrote that less competition and higher prices were a natural result of the “permissible monopoly” created by Schering-Plough’s patent. Claiming that “a patent is not a right to exclude, but rather a right to try to exclude,” FTC lawyers asked the U.S. Supreme Court to take the case. They backed their argument with data showing that when pharmaceutical patent challenges were fully litigated, generic makers busted drug patents about three of every four times.

The high court refused to grant cert. Even worse for the FTC, the U.S. Department of Justice wrote a brief that, while acknowledging the “difficult and unsettled” antitrust issues the case raised, opposed the commission’s position.

With the government’s top antitrust regulators divided, and a favorable appellate court decision in hand, drug companies began to settle more patent disputes with cash. The deals that emerged resembled the one crafted by Schering-Plough, with payments wrapped up in exchanges of licenses, contracts for providing drug ingredients, or sales of intellectual property. Under another creative arrangement, branded drugmakers ensured generic companies a 180-day exclusivity period even more lucrative than the usual one by agreeing not to launch their own “authorized generics” as allowed by Hatch-Waxman. “A lot of people learned from that decision,” says Markus Meier, the lawyer who heads up the FTC’s health care unit, referring to the Schering-Plough case. “The agreements have become more complex, making the litigation more complicated.”

As reverse payments spread, the antitrust plaintiffs bar—which sues drugmakers on behalf of big buyers like health plans, unions, and major retailers—joined the fray. Lawyers involved in those suits say they’ve had good results recouping damages for their clients, but they haven’t had any better luck at the appellate level than the FTC. In 2005, for instance, a panel of Second Circuit judges issued a 2-to-1 decision okaying a $21 million payment from AstraZeneca Pharmaceuticals LP to Barr Laboratories, Inc. The settlement ended a dispute over a generic version of AstraZeneca’s breast cancer drug Tamoxifen. The Second Circuit ruled that the deal didn’t extend beyond the drug giant’s patent rights, which the court presumed to be valid and which hadn’t, in any case, been litigated to judgment: “So long as the law encourages settlement,” the court said, “weak patent cases will likely be settled even though such settlements will inevitably protect patent monopolies that are, perhaps, undeserved.”

In another case, Arkansas Carpenters Health and Welfare Fund v. Bayer AG, the Federal Circuit last year shot down plaintiffs who opposed a $398 million payment Bayer made to Barr (now part of Teva Pharmaceutical Industries Ltd.) to end litigation over the antibiotic Cipro. When the plaintiffs asked the Supreme Court to take the case, the FTC filed an amicus brief in support of their position. In June the court denied cert.

Given the combined case law established by three circuits, it is now “almost impossible” for an antitrust plaintiff to win a reverse-payment case, says Michael Keeley, an Axinn, Veltrop & Harkrider attorney who represents drugmakers. “Courts have said, if the settlement is within the scope of the patent, then the plaintiff can’t win. As long as a generic doesn’t agree to a period that extends past the patent, it’s the patent excluding competition, rather than the agreement.”

Columbia’s Hemphill believes that judges are incorrectly treating the patent as a “decisive privilege against competition” that provides full immunity from antitrust laws. He was among 52 professors to sign on to a brief supporting the FTC’s position in the Cipro case. “By letting patent owners buy immunity from competition even with ‘fatally weak’ patents, the Federal Circuit has greatly expanded the patent holders’ rights,” the professors wrote. “A presumption of validity does not entitle a patentee to evade the test of patent litigation, any more than a criminal defendant’s presumption of innocence entitles him to avoid trial.” The FTC’s Meier puts it this way: “It’s not that antitrust law trumps patents, but patents don’t trump antitrust law either.”

Meier’s boss, Leibowitz, joined the FTC in 2004, a year before the Tamoxifen and K-Dur decisions dealt the agency dual reverse-payment setbacks. Appointed to fill a Democratic seat on the bipartisan commission, Leibowitz previously served as chief counsel to U.S. senator Herb Kohl of Wisconsin from 1989 to 2000. During most of that time, he was also a lawyer for various Senate panels, including a four-year stint with the antitrust subcommittee. After leaving Capitol Hill, Leibowitz spent four years as a lobbyist for the Motion Picture Association of America.

It’s not uncommon for Democrats to try to score political points by slamming Big Pharma, but at least on the subject of reverse payments Leibowitz is quick to give generic drug makers an equal share of the blame. “Teva and Barr were masters of the pay-for-delay system,” he says. The companies, he adds, settled patent litigation without reverse payments prior to the FTC’s Schering-Plough loss. Last year, the commission voted to file a lawsuit based on a series of alleged payments that Cephalon, Inc., made to generics over its blockbuster alertness drug Provigil. Leibowitz split with his fellow commissioners by voting to sue the generic companies in question as well as Cephalon. In the end, the commission voted to target Cephalon alone.

Though that vote didn’t go his way, Leibowitz still feels good about the FTC’s prospects in the Provigil case. In its suit, the agency claims the company’s challenged patent—which covers particle size, not the drug itself—”could be easily circumvented.” When competition from four generic companies seemed “imminent,” the FTC claims, Cephalon chose to pay them off rather than face competition. The reason was simple, according to an anecdote contained in the FTC’s suit: In a postsettlement call to investors, Cephalon’s CEO said: “That’s $4 billion in sales that no one expected.”

The Provigil case is being heard in federal district court in Philadelphia, which Leibowitz consider a favorable venue: “The Third Circuit has been very balanced on antitrust issues,” he says. Less promising is the venue for the FTC’s other pending suit-: the Eleventh Circuit, which decided the Schering-Plough case that opened the door to the rise in reverse payments. (The suit wound up there after being transferred out of California over the FTC’s objections.) In that suit, the FTC has moved to block a deal cut between Solvay Pharmaceuticals, Inc., and three generic companies over the testosterone gel AndroGel. In its brief, the FTC attacks the value of Solvay’s formulation patent, noting that the company buried the patent examiner in more than 600 pages of prior art and legal documents, and adding: “Patent examiners are generally expected to process an average of 87 patent applications per year and have time quotas of a total of 19 hours to process each application…. The vast majority of all patent applications are ultimately granted.”

DEALS HAVE DEFENDERS

The restrictions Leibowitz seeks would allow settlements that delay generic entry, but would generally bar a branded drug maker from transferring anything of monetary value to a generic competitor. Industry lawyers say that goes too far. If the only thing to be negotiated is when a generic drug enters the market, these lawyers say, generic companies will hesitate to launch patent challenges in the first place.

“You need to be able to bargain, not simply in one dimension,” says Chris Holding, a Goodwin Procter lawyer with experience advising on pharmaceutical patent settlements. “You usually can’t get agreement on [the date of generic entry], because there’s too much difference.”

One reason that courts approve of the agreements, their defenders say, is that they allow both parties to balance the different risks they bring to the negotiating table. “The problem with [banning reverse payments] is that it shifts all the risk to the generic,” says Bill Zimmerman, a Knobbe Martens Olson & Bear partner who litigates primarily for generic drugmakers. “You have no idea how the market is going to change in the time you’re staying off the market.” If reverse payments get reined in, Zimmerman adds, the result could mean more cases going to trial rather than settling. That would mean less predictable litigation costs, which would lead to fewer ANDA filings, and fewer generic drugs—leaving consumers the ultimate losers.

What the FTC doesn’t consider, Zimmerman and others say, is that while a generic might indeed win a case and bust a patent early, it might also lose. Bruce Downey, Barr’s former chairman and CEO, told Congress two years ago that in both the Cipro and Tamoxifen litigations, his company was able to bring generics to market ahead of patent expiration dates—and that courts eventually upheld the patents when Barr competitors challenged them. In short, Downey told Congress, “these settlements all provided value to the consumer that would not have been achieved if the generics had proceeded to litigate and lose.”

Reverse payments that benefit consumers are the exception, Leibowitz says: “Almost every time money goes from the brand to the generic, overall, it results in delay. I have not come across yet a single piece of advocacy that supports the pharmaceutical industry position that isn’t either from the industry or paid for by it, directly or indirectly.”

Leibowitz knows the FTC is up against an army of drug industry lobbyists. Nonetheless, he has the tone of a man who may soon experience the gratifying feeling of ending a long losing streak. After all, recent shifts in the political winds have given his crusade new life. In July, the Department of Justice filed a brief with the Second Circuit opposing the Cipro deal. Christine Varney, the Justice Department’s antitrust chief, argued in the brief that while there may be some instances in which a payment from a patent holder to a competitor is warranted, the practice should generally be presumed to be unlawful. The Justice brief signals that under the Obama administration, the two chief antitrust enforcement agencies are in sync on the issue.

Beyond the courts, the new political reality of Democrats controlling the White House and Congress makes passage of a law that ends or limits such settlements more likely than ever. Indeed, a bill that would essentially ban reverse payments passed a House committee earlier this year, and could be rolled into whatever broader health-care reform legislation might pass later this year. “We do think we’re closer,” says Leibowitz. “We have a Congress that seems interested in stopping these abusive deals, and we have a president who has spoken out against them.”

Many lawyers recognize how forces are starting to align, and are getting ready for a world in which Leibowitz’s view is the law of the land. Says one, Morrison & Foerster antitrust specialist Jeff Jaeckel: “This has been percolating for a number of years without movement. The political atmosphere is ripe for something to happen.”

 

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