“Pay for Delay”: Necessary Protection for R&D or Anti-Trust Violation?

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altDrug shortages are an all-too-common problem in the United States. Emergency physicians are more aware of the severity of the issue than most, as we use such a wide variety of medications. While the causes of drug shortages are multi-faceted, there is one contributing factor that’s been flying under the radar: “pay for delay.”

Drug shortages are an all-too-common problem in the United States. Emergency physicians are more aware of the severity of the issue than most, as we use such a wide variety of medications. While the causes of drug shortages are multi-faceted, there is one contributing factor that’s been flying under the radar: “pay for delay.” All that could change if the Supreme Court declares that pharmaceutical companies and generic drug manufacturers have been colluding.  


The basic concept behind “pay for delay” is simple. Brand name drug patent holders spend large sums of money to keep generics off the market. Typically, in patent infringement cases, it is the infringer who must pay the patent holder. However, this is why “pay for delay” is also referred to as “reverse payments.” While this might seem counterintuitive, just follow the money: profit margins are high enough on brand name drugs that it makes economic sense to pay the generic challenger to ride the bench for a while.

In 1984, congress passed the Drug Price Competition and Patent Term Restoration Act. The goal was to provide generic patent challengers with an easier path to approval, while preserving financial incentives for research and development of newer drugs. Under this act, the generic challenger does not have to submit clinical data, only bio-equivalency data. In exchange, the patent holder is afforded a one time, 5-year extension of exclusivity for their product. In addition, the act allows for a 30-month stay for pharmaceutical companies that file a lawsuit against a generic challenger. This 30-month period is the subject of great controversy. This time period allows for 30 more months of exclusivity, more profit, the ability to apply for more patents for their product and file additional lawsuits to further obstruct the process, limiting generics from entering the market.  So, when this legal posturing begins, it is very easy to see that the path of least resistance and cost effectiveness for both parties involved is “pay for delay.” Unfortunately, this results in decreased access to generics and increased cost to the consumer and the health care system.

In March, the U.S. Supreme Court heard oral arguments regarding the legality of “pay for delay” arrangements, and they are slated to deliver a ruling in June. Although many drugs are subject to such deals, the test case before the court focuses on the generic alternative to the popular drug AndroGel (testosterone gel for topical use). In FTC v. Actavis (formerly Watson pharmaceuticals), Solvay held the patent for AndroGel. Watson and Paddock both submitted generic applications, including statements that no infringement would result. Paddock subsequently agreed to partner with Par Pharmaceuticals on their generic product. Solvay then entered into an agreement with Watson, Paddock and Par to delay introduction of their generic products until 2015, while making annual payments of $19-30 million, $2 million and $10 million to Watson, Paddock and Par, respectively.


Siding with Actavis – brand name side of the argument– will allow for prices to remain high and will limit access to generics. Siding with the generics will ostensibly improve access to certain drugs and also reduce cost to the consumer and insurers.
This is, perhaps, a bigger problem than most of us would have anticipated. The Federal Trade Commission has been pursuing this issue, albeit with limited success, for many years. Since 2001, the FTC has filed several anti-trust lawsuits attempting to thwart these unfair trade practices. The FTC has reported that these deals result in $3.5 billion in higher drug costs annually.  
On the surface, this seems very straightforward. This sounds like antitrust and unfair trade practices. Collusion comes to mind. According to www.uslegal.com, “Collusion occurs when two persons or representatives of an entity or organization make an agreement to deceive or mislead another. Such agreements are usually secretive, and involve fraud or gaining an unfair advantage over a third party, competitors, consumers or others with whom they are negotiating. The collusion, therefore, makes the bargaining process inherently unfair. Collusion can involve price or wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties.”

If there is collusion, who is that third party? You, me and every other taxpaying, medication-using citizen of the United States. And there are other parties with a stake in this as well, including insurance plans and even the federal government.

But this issue is anything but straightforward. It is really unclear how this may impact the market.  One thing that’s certain is that, either way, it will have its effects on providers and patients. If the Supreme Court rules that “pay for delay” is illegal, it is likely that this will have a chilling effect on the development of new drugs, as the financial incentive for the pharmaceutical industry to develop such drugs will be drastically lessened. As a result, our drug shortages may worsen. There just isn’t enough money in the production of some generic drugs to incentivize some companies to meet the demand.  On the other hand, if “pay for delay” agreements are deemed illegal, we may see more generic alternatives enter the market earlier.  Unfortunately, we have no control over which generics will be produced and no control over research and development of new drugs.  It seems the market will be the dictating influence.

On January 1, 2013, the FTC published a report defining the extent of the issues1. They reported that “pay-for-delay” deals are in place for 31 products with combined annual sales of $8.3 billion. Comparing fiscal year 2011 to 2012, the number of these arrangements increased from 28 to 40. Nineteen of these agreements included a provision that the brand name patent holder agreed to not manufacturer an authorized generic that would compete with the generic company’s product. The FTC also noted that these deals delay entry of the generic into the market by an average of 17 months. The Congressional Budget Office projects that if legislative restriction was placed on such deals, this would result in reducing the deficit by $5 billion over 10 years.
Unfortunately, rather than debating the impact on American patients or the economy, the Supreme Court’s debate will center on which patent standard to apply, the “Scope of the patent” rule cited by the 11 Circuit or the “Quick look” rule by the 3rd Circuit Court. The “Scope of the patent” approach basically states that if the anticompetitive activity falls within the normal exclusionary extent of the patent, then the actions are immune to antitrust. On the other hand, the “Quick look” approach treats “pay for delay” payments as presumptively anti-competitive.


We’ll know more in June. May God help us. Our fate is once again in the hands of the bureaucratic process.

Kevin Klauer, DO, EJD is Editor-in-chief of Emergency Physicians Monthly, CMO of Emergency Medicine Physicians, Vice Speaker of the ACEP Council.

1. FTC Study: In FY 2012, Branded Drug Firms Significantly Increased the Use of Potential Pay-for-Delay Settlements to Keep Generic Competitors off the Market

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