Correction to This Article
An earlier version of this editorial incorrectly stated the time frame for a Congressional Budget Office estimate of savings from reforming "pay for delay" patent settlements. The CBO estimated savings of $2.5 billion over 10 years, not annually.

Ending 'pay for delay' tactics on generic drugs could mean lower prices

Thursday, July 29, 2010

FOR TOO LONG, pay-for-delay settlements have been an accepted part of the health-care landscape. In these deals, a brand-name drug manufacturer pays a generic competitor to delay its entry into the market. Sound illegal? It isn't -- but a provision to be considered by the Senate Appropriations Committee on Thursday would finally make it so, banning such settlements unless drug manufacturers could prove they were not anticompetitive. It's a good idea that could save consumers billions of dollars.

In the world of prescription drugs, patents are vital to profitability. Researching, developing and testing new drugs requires a heavy investment, and strong patents keep imitators off the market long enough to make brand-name manufacturers' investment pay off. But the law surrounding these patents was so strong that even where products demonstrated little innovation or novelty, their monopolies could go unchallenged by generic competition out of fear of costly lawsuits.

The 1984 Hatch-Waxman Act sought to change this. It encouraged generic drug manufacturers to enter the market sooner by offering a 180-day window of exclusivity for the first company that could produce a drug that was "bioequivalent" to that of a brand-name competitor without infringing on its patent. Such a deal benefited consumers -- they would be able to access affordable drugs sooner -- and offered an incentive to generic drug manufacturers to develop products to take advantage of the window.

The resulting competition vastly decreases drug prices but cuts into the brand names' profits. As the number of challenges to brand-name patents has increased, the number of settlements has also increased, in which brand-name manufacturers agreed to pay generic competitors to delay their entry into the market. Brand-name manufacturers can thus continue charging monopoly prices longer than their patents might merit, and generics can make more money than they would by entering the market. It's a winning scenario for everyone -- except consumers.

The ederal Trade Commission estimates that these blatantly anti-competitive settlements cost consumers more than $3 billion a yea

r; even the Congressional Budget Office's more conservative estimate placed the cost at $2.5 billion over 10 years. The measure banning the deals found its way into an appropriations bill now before the Senate Appropriations Committee as an offset because the federal government buys one-third of all prescription drugs. Ending this anti-competitive practice would save taxpayers money this year and offer benefits for years to come.

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