The Supreme Court rattled the pharmaceutical industry Monday when it ruled that antitrust regulators should be able to challenge the arrangements that allow rival drugmakers to delay the sale of a generic drug.
Under such arrangements, known as “reverse payments” or “pay for delay,” brand-name drugmakers facing a patent challenge from generic competitors pay them to temporarily stay out of the market.
For more than a decade, the Federal Trade Commission has tried to restrict these kinds of deals, arguing that they’re anti-competitive. But the agency and private plaintiffs pursuing similar cases suffered a string of defeats. Four federal courts have addressed the issue in recent years. Only one has sided with the FTC’s legal analysis; the rest dismissed the cases.
In its 5 to 3 decision, written by Justice Stephen G. Breyer, the Supreme Court ruled that the FTC should have been given the opportunity to prove its claims in a case involving a testosterone gel called AndroGel. These types of arrangements can “sometimes” violate antitrust laws and should be subject to more scrutiny, the justices concluded.
“In sum, a reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects,” Breyer wrote.
Solvay Pharmaceuticals, the maker of AndroGel, had agreed to pay the generic-drug maker Actavis an estimated $19 million to $30 million annually for nine years to temporarily block it from bringing a generic version of the drug to market. It planned to pay millions of dollars more to two other generic-drug firms that challenged its AndroGel patent.
The FTC sued to block the deals in 2009. But a district court dismissed the agency’s complaint, and the U.S. Court of Appeals for the 11th Circuit affirmed the decision using a legal theory cited by other courts in similar cases.
The appeals court found that the deals are lawful, with very narrow exceptions, as long as the rival companies agreed to allow the generic drugs to reach the market before the patent for the brand-name drug expired.
But the Supreme Court rejected that reasoning and sent the case back to the lower court.
“The opinion has two conceptual pieces,” said C. Scott Hemphill, a professor at Columbia Law School. “Piece number one says that these settlements are potentially anti-competitive and that antitrust analysis is appropriate. Piece number two says: Lower courts, go work out the details.”
FTC Chairwoman Edith Ramirez said the agency looks forward to moving ahead with the litigation. The agency estimates that the deals cost Americans $3.5 billion a year in higher drug prices. The government, which buys a third of all pharmaceuticals, picks up part of that tab.
“The Supreme Court’s decision is a significant victory for American consumers, American taxpayers, and free markets,” Ramirez said in a statement.
Jeffrey Brennan, an antitrust lawyer at McDermott, Will & Emory, said the FTC might have given up on dismantling the deals if the standard set by the lower courts were allowed to stand.
“If the Supreme Court affirmed that [standard], the FTC most likely would have just folded its tent and moved onto something else in terms of enforcement priorities,” said Brennan, former assistant director of the FTC’s Bureau of Competition. “The alternative outcome would have left the FTC with very few cases to bring in this area.”
But the ruling had something for both sides.
The Supreme Court declined to hold that reverse-payment agreements are “presumptively unlawful,” the standard that the FTC was advocating.
Instead, the justices directed the lower courts to use the “rule of reason,” which requires balancing whether the benefits of these deals outweigh anti-competitive harm.
The pharmaceutical industry said it was pleased about that aspect of the decision.
“We believe this decision continues to provide for a lawful and legitimate pathway for resolving patent challenge litigation in a manner that is pro-competitive and beneficial to American consumers,” Paul Bisaro, chief executive of Actavis, said in a statement. The company plans to continue defending its position, he said.
The industry has long held that reverse payments are good for consumers. Drugmakers say the deals allow dozens of first-time generics to come to the market months and even years before the brand-name patents expire, and they pressed that point Monday.
The brand-name drug companies have said the patent conveys an absolute right to exclude infringers. If a patent holder enters into an agreement that allows generic drugs to come to market sooner, that’s a win for consumers and taxpayers alike, they said.
The court’s decision threatens that by making it less likely that drug companies will enter into these arrangements, said Mit Spears, general counsel at the Pharmaceutical Research and Manufacturers of America. “This will negatively affect patients and discourage investment in future biomedical research,” Spears said in a statement.