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Investors in life sciences firms understand that even if the company succeeds, they may not secure a fair return against the extraordinary costs of discovery research and clinical development during the limited patent term that remains following Food and Drug Administration product approval. Indeed, patents are essential to this operating business model, for without them generic drugs would enter the market immediately, drastically lower prices and eliminate any hope of generating profits that will adequately compensate investors. When generic firms seek FDA approval to market their products in advance of patent-term expiry, the 1984 Hatch-Waxman legislation rightly permits a branded company to immediately sue the generic for infringement. But what about the corollary prerogative to settle this kind of litigation, assuming that it makes good business sense to do so? Last November, I was asked whether this practice ought to be prohibited as anti-competitive when I testified in Washington before the Antitrust Modernization Commission. There is a long history of firms relying on a strong proprietary patent position to preserve a period of continuing market exclusivity, whether accomplished with a lengthy and complex trial or a negotiated settlement, for good reason. Settlements control the expense and management drain associated with litigation, and eliminate the risk of uncertainty for the branded firm. This risk is enormous, and arises the moment that a generic firm files-well in advance of the date on which it can gain FDA approval for actual launch, as allowed under Hatch-Waxman-to market an unpatented copy. Despite this logic, and in the face of contrary rulings from two federal appellate courts on the subject during the past year, the Federal Trade Commission (FTC) continues to oppose any settlement under which branded firms make other than nominal payments (termed “reverse payments”) to generic firms in exchange for any agreed-upon “delay” in the entry of the prospective generic product. Yet the FTC increasingly is isolated in its views. The U.S. Supreme Court recently declined to hear the appeal of a case involving the pharmaceutical company Schering-Plough Corp., in which the 11th U.S. Circuit Court of Appeals rejected the FTC’s argument that settlements effected by payments for product licensing rights were in excess of the fair market value, and thereby constituted illegal payments intended to keep the generic product off the market. Even the U.S. Department of Justice declined to support the FTC. Meanwhile, my company has become the object of some attention as it reached separate agreements with four generic firms that it sued for infringement of its patent covering Provigil, Cephalon’s product for sleep disorders. While this effort involved multiple settlements, there otherwise was nothing unusual (let alone untoward) about our case. The FTC has said that it intends to review the terms of our settlements. Pending legislation In the wake of the Supreme Court decision, the FTC also is petitioning Congress to enact a legislative remedy. Legislation has been introduced in the U.S. Senate by Herbert Kohl, D-Wis., and Charles Schumer, D-N.Y., that would prevent proprietary drug companies from settling litigation with generic firms. While the FTC’s historic mandate to protect consumers understandably leads it to embrace policies that reduce prices for prescription medicines in the short run, the logical extension of these policies threatens to cripple innovation in the pharmaceutical industry and halt further advances in the treatment of illness and disease. Doesn’t this too portend consumer harm? Policymakers should recognize more explicitly the imperative of protecting IP rights in support of innovation, as Congress did when it adopted the Hatch-Waxman legislation. The FTC has to date shown no instinct for doing so. Instead, it relies on two dubious propositions to bolster its stance. First, it casually rejects the longstanding presumption of patent validity set forth in the Patent Act. This presumption gives patent holders the prerogative to structure settlements that allow for generic entry before the date of patent expiry, unless the underlying patent is a sham or was procured by fraudulent means. The FTC effectively dismisses the presumption by suggesting that no such settlement would be necessary if the patent were, in fact, capable of precluding the generic product from coming into the market. This analysis appears to leave no room for a more sophisticated calculus of risk and reward that is readily familiar to litigants embroiled in “bet the company” disputes. Second, the FTC contends that payments made to a generic firm (unless de minimis) are by definition anti-competitive since, in their absence, the settlement of litigation would necessarily require that the branded firm provide additional consideration in the form of earlier generic market entry. Thus courts must find unlawful any settlement involving terms that extend beyond a straightforward compromise on the remaining term of the patent. This view labels all but the most basic form of settlement as illegitimate, without giving meaningful weight to the underlying strength of the intellectual property at issue, the complexity of patent infringement analysis or the legitimate interest in avoiding the uncertainty of litigation. Under the leadership of its chair, Deborah Platt Majoras, the FTC earlier this year announced a series of constructive reforms aimed at streamlining the merger review process that evidenced a fair, balanced approach. The FTC, and Congress, should carefully weigh the broader policy implications of the settlement issue, and recognize the importance of IP in fostering innovation and enhancing consumer welfare over the long term. John E. Osborn is executive vice president and general counsel of Cephalon Inc., a biopharmaceutical company based in Frazer, Pa.

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