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The End of “Pay-for-Delay”? By Opening Collusive Pharmaceutical Settlements to Antitrust Scrutiny, FTC v. Actavis Promises to Make Medicines More Affordable

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In a decision that could save U.S. consumers and taxpayers billions of dollars a year, the Supreme Court ruled Monday that “pay-for-delay,” also known as “reverse payment” settlements, between name-brand and generics pharmaceutical companies are subject to antitrust laws.

The seeds of the controversy were planted in 1984 with the passage of the Hatch-Waxman Act. In an effort to encourage faster entry of generic drugs into the market, the Act rewards the first generics manufacturer to successfully challenge a patent with 180 days of market exclusivity—in other words, a six-month period where they are the only generics manufacturer permitted to sell the drug. A 2002 FTC study found that in cases where a patent challenge is decided by a judge, generics companies win 75% of the time.

The pharmaceutical companies that hold patents on drugs are, of course, highly motivated to ensure that their lucrative monopolies do not end prematurely. As a result, company lawyers invented a clever alternative. Rather than risk losing their monopolies in an unfavorable court decision, many pharmaceutical companies have pursued an aggressive strategy of settling such cases out of court. In exchange for the generics manufacturer dropping its suit, the name-brand pharmaceutical company pays the generics company a sum of money, in essence sharing a portion of its monopoly profits. By extending the monopoly and sharing the profits, both the name-brand and generics companies benefit. On the other hand, consumers and taxpayers—who must continue paying monopoly prices—lose an estimated $3.5 billion each year.

Not surprisingly, this arrangement has drawn close scrutiny from federal regulators. The Federal Trade Commission (FTC) has long argued that the practice violates antitrust provisions of the Sherman Act. In essence, the FTC argues that brand-name and generics manufacturers are colluding to maintain an illegal monopoly. However, until now, federal courts largely dismissed the Commission’s view that the Sherman Act proscribed pay-for-delay deals. Repeated attempts to pass legislation forbidding the practice also failed.

On Monday, the Supreme Court breathed new life into FTC’s attempt to challenge pay-for-delay agreements. In the case of FTC v. Actavis, the Court ruled, 5 to 3, that, contrary to the opinions reached by several lower courts, such agreements are subject to antitrust laws. While it refrained from calling the agreements presumptively anti-competitive, legal analysts believe that the ruling will severely curtail, if not eliminate, the practice. At a time of government, and individual, austerity, this decision offers the welcome prospect of lower prices at the pharmacy, and more efficient use of taxpayers’ dollars.

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The views reflected in this expert column are those of the individual authors and do not necessarily represent those of the O’Neill Institute for National and Global Health Law or Georgetown University. This blog is solely informational in nature, and not intended as a substitute for competent legal advice from a licensed and retained attorney in your state or country.

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