Senate Bill Would Prevent Reverse Pharma Payments

The Patent Docs are reporting that on February 3, 2009, Senator Herb Kohl (D-WI) introduced legislation into the Senate titled the Preserve Access to Affordable Generics Act, which would prohibit brand name drug companies from compensating generic drug makers for delaying the entry of generic drugs into the market.  This bill is in response to a lawsuit initiated by the FTC in which Solvay Pharmaceuticals, Inc. paid generic drug makers Watson Pharmaceuticals, Inc. and Par Pharmaceutical Companies, Inc. to delay generic competition to Solvay’s branded testosterone-replacement drug AndroGel, a prescription pharmaceutical with annual sales of more than $400 million. 

In a press release Senator Kohl said:

It’s time to stop these drug company pay-for-delay deals that only serve the profits of the companies involved and deny consumers access to affordable generic drugs. With this legislation, we can end a practice seriously impeding generic drug competition — competition that could save American families and taxpayers billions of dollars in health care costs.

The press release went on to say:

According to a recent study by Pharmaceutical Care Management Association (PCMA), health plans and consumers could save $26.4 billion over the next five years by using the generic versions of 14 popular drugs that are scheduled to lose their patent protections before 2010.

It is, of course, disingenuous of Senator Kohl to throw out the fact that $26.4 billion will be saved by using generics over the next 5 years to sway public opinion in favor of his bill.  This bill will have no impact on this $26.4 billion in savings, which will occur simply because popular brand name drugs are coming off patent.  So lets not get carried away with the propaganda, and actually look what the bill may accomplish on its own regardless of patents expiring over the next 12 to 18 months, which will happen anyway.

This Sentate bill, if passed, would amend the Hatch-Waxman Act and put an end to a loophole that allows pharmaceutical companies to settle patent disputes with generic drug manufacturers, pay the generics money and then insulate themselves from generic competition.  While this may sound like the pharmaceutical companies are abusing the process and generic drug companies are the victims, think again.  The generic drug companies have every incentive in the world under Hatch-Waxman to challenge the patents held by pharmaceutical companies, but they reap a tremendous reward when they challenge the patents and then ultimately back off due to a settlement of the dispute.  So while those in Congress may believe that enacting such legislation will result in generics getting into the market more quickly, that may well not be the case at all.

Anyone familiar with the 1984 Hatch-Waxman Amendments to the Drug Price Competition and Patent Term Restoration Act knows that gaming the system is something that can be accomplished with extraordinary ease. As a result of a healthy dose of extremely specific and narrowly tailored provisions, the Congressional purpose of attempting to speed up the approval of generic drugs has been foiled repeatedly. In fact, the Hatch-Waxman Amendments have historically been full of loopholes and technicalities.  At the time Hatch-Waxman was enacted it was the intent of Congress to strike a balance between two competing policy interests: (1) inducing pioneering research and development of new drugs; and (2) enabling competitors to bring low-cost, generic copies of those drugs to market. In reality, what Congress enacted was a full employment act for lawyers, and underground funding of generic drug manufacturers who have an incentive to challenge patented drugs. 

The whole purpose of Hatch-Waxman was to make it easier for a generic drug manufacturer to piggy-back on the studies previously submitted by the original inventor of a new drug. In the United States, in order for a new drug to receive market approval a New Drug Application, known as an NDA, must be submitted to the Food and Drug Administration (FDA). To lessen the burden on generics, Hatch-Waxman allow generic manufacturers to submit Abbreviated New Drug Applications, known as ANDAs. In the event that the generic manufacturer can establish that the drug mentioned in the ANDA is the bioequivalent of a drug approved in a NDA, the generic manufacturer can sail through approval by relying on the costly and time consuming studies previously submitted as a part of the NDA.

The real wrinkle in Hatch-Waxman, at least in patent terms, however, comes with respect to certain statements that must be made by the generic manufacturer in the ANDA. Indeed, an ANDA applicant must make one of four certifications regarding each patent that applies to the drug for which approval is being sought: (I) no such patent information has been submitted to the FDA; (II) the patent has expired; (III) the patent is set to expire on a certain date; or (IV) the patent is in valid or will not be infringed by the drug covered in the ANDA. It is the paragraph IV certifications that are the most interesting. Although making a paragraph IV certification is not an active act of infringement, thanks to specific legislation, when a paragraph IV certification has been made the patent owner of the drug covered by the NDA may immediately institute infringement proceedings. Not only may an infringement action be instituted, but if one is instituted an 18 month automatic state goes into effect, during which time the FDA cannot legally approve an ANDA.

In the past what many patent owners instituted lawsuits to enjoy a further 18 month automatic stay, and have even sought to seek consecutive 18 month stays. Such gaming is old news really, but generic manufacturers have still been enticed to file ANDAs because the statute provides a 180-day exclusivity period to the first ANDA applicant to file a paragraph IV certification. Thus, Congress has provided the incentive, in the form of a promised 180-day oligopoly, for those who would challenge the scope and validity of drug patents.  So generic drug manufacturers do have significant incentive to file ANDAs and challenge the integrity of patents covering brand name pharmaceuticals. 

The key to understanding the abuse that this latest Senate bill seeks to prevent is that only the first generic drug manufacturer who files the ANDA and challenges the patent is entitled to a 180-day exclusivity period.  So there is incentive to file an ANDA and bring the issue to a head when you are the first generic to file an ANDA.  The law provides an incentive to both the brand name drug company and the generic drug manufacturer to settle the dispute, and settle the dispute quickly.  If a settlement cannot be achieved then the generic drug company is facing an enormous and costly patent litigation, and if the generic drug company wins the brand name drug company faces a 180-day shared market followed by a flood of generics hitting the market. 

What happens is the brand name drug company then settles with the generic drug company, makes a payment to the generic drug company to drop the challenge and that pretty much ensures that no generic drug will enter the marketplace until the expiration of the underlying patent.  This is true because there would be no incentive for a subsequent generic company to go to the expense of filing an ANDA and challenging the underlying patent because if successful they would not be entitled to a 180-day period of exclusivity, but rather would have engaged in the effort for the benefit of all generic companies.  So it is unrealistic to assume any generic drug company would ever be the second in line to challenge a patented pharmaceutical.

The bill submitted in the Senate goes to great lengths to establish the findings of fact that support the position that this type of gaming is harming the economy, health care and just enriching brand name drug companies.  Lets not forget though that it also enriches the generic companies that decide to fold and walk away.  In fact, I think a persuasive argument can be made that generic companies engage in filing ANDAs not to mount real challenges to patented drugs, but to force what will inevitably be a pay off from the brand name company.  So in that sense don’t discount the possibility that many ANDAs are filed for extortion-like reasons.

In any event, here are the findings of fact contained in the Senate legislation:

1. prescription drugs make up 10 percent of the national health care spending but for the past decade have been one of the fastest growing segments of health care expenditures;
2. 67 percent of all prescriptions dispensed in the United States are generic drugs, yet they account for only 20 percent of all expenditures;
3. generic drugs, on average, cost 30 to 80 percent less than their brand-name counterparts;
4. consumers and the health care system would benefit from free and open competition in the pharmaceutical market and the removal of obstacles to the introduction of generic drugs;
5. full and free competition in the pharmaceutical industry, and the full enforcement of antitrust law to prevent anticompetitive practices in this industry, will lead to lower prices, greater innovation, and inure to the general benefit of consumers;
6. the Federal Trade Commission has determined that some brand name pharmaceutical manufacturers collude with generic drug manufacturers to delay the marketing of competing, low-cost, generic drugs;
7. collusion by pharmaceutical manufacturers is contrary to free competition, to the interests of consumers, and to the principles underlying antitrust law;
8. in 2005, two appellate court decisions reversed the Federal Trade Commission’s long-standing position, and upheld settlements that include pay-offs by brand name pharmaceutical manufacturers to generic manufacturers designed to keep generic competition off the market;
9. in the 6 months following the March 2005 court decisions, the Federal Trade Commission found there were three settlement agreements in which the generic received compensation and agreed to a restriction on its ability to market the product;
10. the FTC found that 1?2 of the settlements made in 2006 and 2007 between brand name and generic companies, and over 2?3 of the settlements with generic companies with exclusivity rights that blocked other generic drug applicants, included a pay-off from the brand name manufacturer in exchange for a promise from the generic company to delay entry into the market; and
11. settlements which include a payment from a brand name manufacturer to a generic manufacturer to delay entry by generic drugs are anti-competitive and contrary to the interests of consumers.

While I don’t begrudge Senators from questioning whether this practice is one that should be eliminated, it is naive to suspect that with this practice forbidden by law that generics will as a matter of fact more quickly and easily reach the marketplace.  In fact, the exact opposite might be the outcome.  If you lessen the incentive for generic drug companies to challenge patented drugs it seems logical to suspect that there will be fewer challenges.

About the Author

Eugene R. Quinn, Jr. President & Founder of IPWatchdog, Inc. US Patent Attorney (Reg. No. 44,294) B.S. in Electrical Engineering, Rutgers University J.D., Franklin Pierce Law Center L.L.M. in Intellectual Property, Franklin Pierce Law Center Send me an e-mail

Gene is a US Patent Attorney, Law Professor and the founder of IPWatchdog.com. He teaches patent bar review courses and is a member of the Board of Directors of the United Inventors Association. Gene has been quoted in the Wall Street Journal, the New York Times, the LA Times, CNN Money and various other newspapers and magazines worldwide