IN 2006 Solvay Pharmaceuticals, the maker of the testosterone-therapy drug AndroGel, settled a dispute with a group of generic pharmaceutical companies, agreeing to allow would-be competitors into the market in 2015, five years before the AndroGel patent expires. So how is this bad for consumers in search of cheaper drugs?
In fact, the Federal Trade Commission (FTC) will argue Monday before the Supreme Court that this settlement and all others like it are so obviously anti-competitive that they should be presumed illegal. And the FTC has a very good case.
The reason lies in the fact that the generic pharmaceutical companies also agreed to take millions in cash from Solvay as part of the settlement. That arrangement, the FTC argues, stinks of illegal collusion — without which generic versions of the drug might have entered the market even earlier.
If a generic pharmaceutical company wants to introduce its own version of a brand-name drug without waiting for the relevant patent to expire, it can file a claim with the Food and Drug Administration, explaining why the patent is invalid or otherwise shouldn’t apply. The brand-name drug firm can then challenge the generic company in court, a proceeding that, if it goes in the generic’s direction, would lead to the near-immediate sale of a low-priced, off-brand version of the drug to consumers. But because litigation brings risks to both sides, many of these proceedings end in settlements. These involve an agreement on a date when generics can be introduced. Sometimes, they also involve the brand-name drugmaker paying its would-be competitor immense sums of cash.
What is the brand-name producer paying for? Valuable time, the FTC says. The brand-name company makes huge profit margins when it has no competition. So it’s in its interest to pay potential competitors a slice to keep generic firms out of the market longer. Those potential competitors, meanwhile, get enriched simply by delaying their entry. If companies can effectively maintain monopoly pricing for a while longer and split up the profits by way of legal settlements, generics firms are less likely to push for competition to begin at the earliest possible date. Both sides make money in the interim, but consumers pay the price. It’s hard to think of a circumstance in which that sort of dealmaking wouldn’t indicate a violation of the spirit of the nation’s antitrust laws.
The pharmaceutical industry responds that settlements involving big cash payments often still result in the entry of generic competitors years before patents expire. Couldn’t taking that option off the table hurt consumers?
Yet there would still be opportunity for settlements, just those in which one side’s interests are fully aligned with those of consumers. The brand-name companies would seek to delay the entry of competitors; would-be competitors would seek only to speed it up. The resulting deals would better reflect the merits of their various claims, including the strength of the patents at issue.
The FTC, anyway, isn’t saying that the court should ban cash payments entirely, just that the parties involved should have to show that they aren’t anti-competitive. That strikes us as a reasonable safeguard against a clear opportunity for collusion.