Brand Names, Generics, and Pay for Delay

Do you know about pay for delay? If you don’t, you should, so here’s a brief explanation.

When a drug goes off patent and the first generic drug enters the market, the generic drug maker brings litigation against the brand manufacturer for patent infringement, related to the 180-day exclusivity period that is granted to the first generic drug to replace a branded drug, under the Hatch-Waxman Act. The brand maker offers a settlement in the form of a huge sum of money, with the stipulation that the generic maker delay putting their drug on the market. That’s pay for delay: brand-name drug companies paying generic drug companies to delay their entry onto the market. The settlement payment is also referred to as an exclusion payment. The delay lasts an average of 17 months, and cost consumers about $3.5 billion per year, according to the Federal Trade Commission. They are profitable for the generic companies, who make more money from the settlement than they would from sales of the drug during that time period, and for the brand company, which earns enough from the extra sales to more than make up for the money paid out in the settlement. (And in case it’s not obvious, generic companies enter into these lawsuits often knowing that they will result in pay-for-delay settlements. It’s an under-the-table handshake kind of thing.)

In 2006, 14 of 28 patent settlements included compensation to the generic maker and an agreement by the generic maker to delay its product launch for some stated period of time. In 2010, there were 31 “suspect patent litigation settlements,” again according to the FTC. These settlements involved 22 different branded pharmaceutical products with a combined annual U.S. sales of approximately $9.3 billion. According to an FTC report overview (PDF), 66 settlements in 2010 restricted the generic drug but without explicit compensation. That being said, these deals did include provisions that could earn the generic maker money via a more circuitous route, such as an altered royalty structure that reduces or eliminates the generic company’s required royalty payments that, in the end, amount to the same amount as an upfront payment.

Pay-for-delay doesn’t happen every time; in fact, 75% of such settlements in 2010 did not include payment by brand company to generic company. But the number of payments happening has been causing increasing alarm for several years now. Here is a chart (PDF) that shows the rising number of payments over the past six years. What’s more, pay-for-delay schemes have held up in court. The FTC has sued brand companies over these settlements and lost.

So, what’s being done about it? There is now legislation out there that would limit pay-for-delay settlements. The bill is S.27 and is called the Preserve Access to Affordable Generics Act. The sponsor is Senator Herbert Kohl, of Wisconsin. The bill was introduced in January 2011, and reported by the Senate Judiciary Committee in July 2011.

The most recent news on the legislation came last week, when the Congressional Budget Office released a report detailing the estimated cost savings in which the legislation would result. Here is that PDF. According to the CBO, S.27 would reduce direct spending by $1.1 billion over four years (2012-2016) and by $4.0 billion over nine years (2012-2021, if you can stomach the idea of projecting pharmaceutical cost issues ten years into the future). The CBO analysis also says that S.27 would increase federal revenues, mainly by Social Security payroll taxes (I don’t understand what this means, so I’m sorry I cannot shed any light). So, a lot of money – but maybe not all that much when you consider that global Pfizer revenues totaled more than $51 billion in 2005. Here is some more about the CBO report, and some interesting points of view in favor of pay-for-delay settlements.

Also in recent news is an addition to pay-for-delay tactics, reported in The New York Times and by ProPublica. Pfizer’s patent on Lipitor expires at the end of this month, and the company is now trying to block sales of generic Lipitor through pharmacy benefit managers. (To understand a little about what pharmacy benefit managers (PBMs) do, you can read my poem on the pharmaceutical supply chain, and yes, I will take any opportunity I can get to highlight my awesome rhyming skills.) Here is a very useful news report by Bloomberg about the deals between Pfizer and the PBMs. This article includes an e-mail quote from a Pfizer spokesman: “Our strategy during the 180-day period is to help patients who want to stay on Lipitor have access to the brand after loss of exclusivity.” Incidentally, the deals will also result in hundreds of millions of dollars of additional profit. Lipitor was the second-highest selling drug in 2010. The Lipitor issue is especially charged right now because the patent expires at the end of this month.

So – make of this what you will. My position, as always, is that whatever the numbers and whatever the deals, it’s good to simply know how things work.

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