Pay-for-Delay in the Pharmaceutical Industry

Pay-for-Delay in the Pharmaceutical Industry

In May 2011, the Federal Trade Commission (FTC) released its annual report on pay-for-delay agreements. Under the Medicare Prescription Drug and Modernization Act of 2003 (MMA), pharmaceuticals companies must notify the FTC of such agreements, and the agency must report them. The FTC argues that these agreements violate the antitrust laws because they restrict competition and increase prices.

According to the MMA, there were a total of 20 pay-for-delay agreements in 2010, a 60% increase from the previous year. 26 of this past year’s agreements involved generic drug companies that had been the first company to request Food and Drug Administration (FDA) approval to market the particular drug. According to the FDA, the first filer gets generic market exclusivity for 180 days after it launches its drug.  If that first filer agrees with a branded company to delay its entry, then the 180-day period begins running later. Because the first filer pay-for-delay agreements thereby prevent any relevant generic drugs from launching, the FTC finds them particularly problematic.

During FY 2011 (October 1, 2010-September 30, 2011), drugmakers reached a total of 156 final patent settlements, 28 of which contained a payment to a generic manufacturer and also restricted the generic’s ability to market its product.  This is just under the previous year’s total of 31, and they involve 25 different brand-name drugs with combined annual US sales of more than $9 billion, according to a new FTC report.  Of the 28 settlements in FY 2011, 18 involved “first-filer” generics.

The brand and generics makers insist that these deals are consumer-friendly. It can be argued that in many cases the settlement monies serve to ensure the financial ability of the generic drug companies to eventually release the generic, proving an ultimate benefit to all. The head of the Pharmaceutical Research and Manufacturers of America, John Castellani, said,  “patent settlements are a vital aspect of a patent owner’s ability to protect intellectual property and that if banned, the proposal would provide less data protection for new, innovative biologics than is currently bestowed in Europe”.  He also adds, “It provides appropriate incentives to support future medical advances”.

The US Generic Pharmaceutical Association (GPhA) also adds to the concern over the ban to patent settlement proposing that such a ban would save $8.8 billion over the next 10 years. GPhA believes that this economic assumption is fatally flawed.”

Past efforts to persuade Congress to pass a law making the settlements illegal have failed. Senators Herb Kohl, a Wisconsin Democrat, and Charles Grassley, an Iowa Republican, have introduced a measure that would bar the settlements. It has run into opposition from lawmakers who say the deals actually help consumers. The FTC is currently considering using its rule-making power to stop the pay-for-delay agreements between brand name drugs manufacturers and generic pharmaceuticals. FTC Chairman, Jon Leibowitz, is currently urging to abolish these deals. He estimates that the deals cost consumers about $3.5 billion a year due to higher drugs prices from the delay in the introduction of generics.



About Bourne Partners

As a healthcare-focused merchant bank, Bourne Partners provides financial advisory, direct investment, alternative assets and management consulting services to our client-partners. We play an active role in helping businesses grow by creating long-term, profitable relationships that extend beyond single transactions. It is our focus on relationships and long-term results that has yielded us an impeccable track record of client satisfaction . Our direct and indirect investments in sector-leading companies – often through our relationships with top-tier Private Equity funds – allow us to learn about the best-of-the-best from the inside and apply that knowledge to the companies we serve. At Bourne Partners, we operate within a specific set of core boundaries: integrity, accountability, teamwork, loyalty and commitment are the driving forces behind everything we do.
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