Amidst all the news about various Supreme Court decisions there is one that ought not be overlooked for its impact both on public health and healthcare reform—FTC v. Actavis. Today the Court decided, by a vote of five to three, that Big Pharma companies can be sued over deals with generic companies to not bring generic drugs to market. In so deciding, the Court endorsed the idea that Big Pharma companies with weak patents on their drugs may not pay off other companies that want to make cheaper generic versions to not do so. This practice, known as pay-for-delay, has run rampant in the pharmaceutical industry over the last two decades costing American consumers billions and restricting access to cheaper versions of drugs.
In FTC v. Actavis, the Federal Trade Commission had alleged a pay-for-delay arrangement between Solvay Pharmaceuticals and Actavis that was intended to keep Actavis from producing a generic version of Solvay’s blockbuster AndroGel testosterone drug. A lower court—the Eleventh Circuit Court of Appeals—dismissed the FTC’s complaint. Now the Supreme Court has reversed that dismissal.
The Supreme Court keeps coming out with major opinions in the biotech/pharma area, with today seeing a major blow to reverse-payment settlements wherein brand-name pharma companies pay generic companies to delay their entry into the market. This type of settlement shows the opposite pattern to that in most patent litigation, where the accused infringer (here, the generic drugmaker) usually pays the patent-holder, rather than the patent-holder paying the infringe, and is a result of the dynamics of generic drug market entry created by the Hatch-Waxman Act. Since reverse-payment settlements result in the generic agreeing to stay out of the market in return for payment from the patent-holding brand name company, they look like antitrust violations – the question is whether the involvement of a patent (which creates a monopoly) means the settlements are acceptable under antitrust law.
Today, the Supreme Court came down on the side of protecting competition and sticking with traditional antitrust doctrines. The Court didn’t go so far as to say that all reverse settlements are presumptive unlawful, instead requirings courts to apply a “rule of reason.” But the Court firmly rejected the idea that a reverse payment settlement is immune from attack as long as it falls within the nominal scope of the patent. The Court also noted that a large reverse settlement payment may itself provide evidence of a patent’s weakness, avoiding the need for a full determination of patent validity in the context of the antitrust action. The opinion is here.
Prof. Einer Elhauge and Alex Krueger wrote about the economics of this question last year; their article can be found here.
As Jonathan Darrow notes below, on Monday, the Supreme Court heard oral arguments in Federal Trade Commission (FTC) v. Actavis, the “pay for delay” case questioning whether or not reverse payment settlements in Hatch-Waxman litigation should be presumptively anticompetitive, a question on which the Circuit Courts are divided. This particular case involves Solvay Chemicals Inc., whose patent on AndroGel cream, a synthetic testosterone formulation (set to expire in 2020) was challenged by three generic pharmaceutical companies that filed ANDA applications in 2003 for generic version of AndroGel (which is 1/6 the cost of the branded version). Following a 30-month stay triggered by Solvay’s subsequent infringement lawsuit, the FDA approved the generic version of Androgel in 2006, at which point the generic companies’ motion for summary judgment on the validity of Solvay’s patent was ready for decision. Instead of risking the judgment, the parties settled, with the generic companies agreeing to stay out of the market until 2015 in return for an estimated $186 – 252 million from Solvay over the course of six years. The FTC, expressing concern that consumers would ultimately bear the costs of delayed generic entry, unsuccessfully challenged this settlement as presumptively unlawful restraints of trade. The Eleventh Circuit affirmed the District Court’s decision in 2012, which rejected the FTC’s approach in favor of a “scope of the patent” test. Several months later, though, the Third Circuit reached the opposite verdict in a similar case, accepting the FTC’s position that reverse payment settlements are presumptively unlawful agreements not to compete. The Supreme Court granted cert to resolve this conflict.
I found a couple features of yesterday’s oral arguments particularly striking. First was Justice Breyer’s statement that he thought one of the four briefed scenarios in which a reverse payment settlement may rebut an anticompetitive presumption was “neutral”:
JUSTIC BREYER: [B]the person’s already in the market thinks that the next year or two or three years is worth $100 million a year, and the person who’s suing thinks it’s worth 30 million a year. And so he says, hey, I have a great idea, I’ll give him the 30 million and keep the 70. And — and that, I don’t see why that’s anticompetitive if that’s what’s going on.
What most seems to fascinate Stewart, and what Brill emphasizes, is an insight that is old hat to health law types: the market for health care is just plain screwy. Brill explains that health care consumers “have no choice in what you’re buying, you have no idea what you’re buying, you have no idea what the price is, even when you get the bill you have no idea what it says.” The starting point for the article was Brill’s observation that in all the debate over the last few years about health care, “we seem to jump right to the issue of who should pay the bills, blowing right past what should be the first question: Why exactly are the bills so high?” Continue reading →
An earlier post discussed the equivocal efficacy of Propecia (finasteride) as a baldness remedy, ending with the provocative assertion that, efficacy aside, “there is little reason for anyone ever to buy or consume Propecia (finasteride), or any doctor ever to prescribe it, since a much cheaper and identical chemical sold under the trade name Proscar (finasteride), is available.” This post continues the discussion, addressing one small component of the rising cost of healthcare—the cost of finasteride. It explores why consumers pay as much as $240 for a bottle of Propecia (finasteride) when a $9 bottle of an equivalent, FDA-approved supply of the identical chemical is readily and legally available at nearby stores.
In the exorbitantly priced landscape of prescription drugs, there is at least one low-cost oasis: Wal*Mart. Though some find reason to criticize the discount store, few would disapprove of the dozens of prescription medications Wal*Mart offers for an unbeatable $4 for a 30-day supply. Cost-sensitive consumers can purchase everything from blood thinners to antidepressants to antibiotics at this price, while a 90-day supply is only $10 (and this price includes shipping to your doorstep). A handful of drugs that cannot be sold at $4 per month sell for a still-modest $9. For the 300 or so drugs on Wal*Mart’s list, this means there is no longer a need for $10 co-pays or snowy treks to the pharmacy in 15 degree weather. That’s right: the Wal*Mart total price is less than most insurance company co-pays. Finally, a major industry player seems to have put effective downward pressure on prescription drug prices. Continue reading →
In my final post on reverse settlements I want to offer three thoughts that are more directly related to the legal question of how to treat reverse settlements under antitrust law.
First, it strikes me as odd that we scrutinize reverse settlements of Paragraph IV challenges differently than settlements of patent suits of non-drug, even non-health products. As Einer acknowledges in his Texas Law Review piece, nearly all patent litigation affects market structure and thus both the level of competition and the amount of consumer welfare (Elhauge and Krueger 2012). In each of those cases, because the public is not party to the litigation, settlements between patent holders and alleged infringers will – in theory and perhaps in practice – tend to hurt consumers. (The monopoly-duopoly wedge that gives rise to the problem of reverse settlements is by no means unique to the drug market.) Yet my patent law colleagues tell me there is no systematic review of non-drug patent settlements as is being urged of drug settlements in the FTC v. Watson case. It seems that under the FTC view, drug patents would be treated more harshly than other patents. I am not sure why that should be the case under antitrust law.
Second, the critical question in the antitrust litigation is the baseline against which reverse settlements are judged. Reverse settlements are only problematic under antitrust law if they extend patent duration or scope beyond some baseline. Should that baseline be expected duration with full litigation and no settlement – as critics of reverse settlements urge – or something else? For expected litigation to be the baseline, one has to assume that Hatch-Waxman modifies patent law and that patent duration after litigation is what is now required. I am not sure these assumptions are appropriate.
In this third post on reverse settlements, I examine whether traditional legal standards for judging whether a drug patent is valid captures the social value from a drug patent. This is important because the FTC takes the position that reverse settlements extend the expected life of a drug company’s patent as compared to litigation over patent validity under traditional legal standards for judging patent validity. I conclude that those standards may seriously undervalue the social benefit of drug patents, even invalid ones. First, patent validity standards do not appreciate that all drug patents – valid or not – are necessary to compensate drug companies for conducting clinical trials, which are half the cost of all R&D and are socially valuable even if the drug patent is not valid. Second, profits from a drug patent – even if the patent is invalid – sustains research on a large number of other drug patents – which may be valid. That cross-subsidization suggests a branded drug company ought be judged on their portfolio of patents, not on individual patents. Traditional patent validity standards fail to do that.
To be clear, I understand that patent law standards for validity are not perfect, and I do not expect them to be. What I suggest is that there is a worse fit between patent validity standards in the pharmaceutical industry than in other industries. This is relevant for antitrust analysis because, if patent validity standards undervalue drug patents, then eliminating reverse settlements undervalues them even further since these settlements putatively extend the expected patent life of drug patents.
Let me begin with my first substantive claim: all drug patents, whether valid or not, are socially useful. All drug patents encourage production of useful public goods, specifically information about whether a drug works. The main reason is that, unlike patents for other products, a patent for a drug is obtained before research on the drug is completed. Specifically, drug companies obtain patents on molecules after lab and animal testing, but before clinical test, i.e., testing on humans. Yet human testing is roughly half the cost of all drug R&D (DiMasi, Hansen, & Grabowski, 2003). Moreover, the results from clinical trials, which are made public as part of the drug approval process, are a public good. Once a drug is shown to be effective, everyone knows whether the molecule is medically valuable. If a company did not have a patent that could prevent other companies from producing that molecule, it would never conduct the trial in the first place!