Deals to Restrain Generic Drugs Face a Ban

Natasha Singer|The New York Times

A group of House lawmakers and the head of the Federal Trade Commission want Congress to include a provision in the health care legislation that they say could save American consumers several billion dollars a year on prescription drugs.

The group plans to ask Congress on Wednesday to block business deals in which they say makers of name-brand drugs directly or indirectly pay generic makers to delay competition from cheaper generic alternatives.

Sean Russell | Getty Images

The House bill already includes such a ban. The Congressional Budget Office, considering only federal drug spending, has estimated that the House provision could save the government $1.8 billion in health costs over the next 10 years.

The Senate version does not include such a prohibition. But a group of nine Democrats, led by Herb Kohl of Wisconsin, signed a letter late last month to the majority leader, Harry Reid, urging that a ban be included in the final legislation.

An aide to Mr. Reid declined to comment. The Senate does not return from its holiday break until next week.

In recent years, critics say, deals between name-brand makers and generic makers have delayed the introduction of a range of generics including cancer drugs, antidepressants and prescription-strength antacids. The F.T.C. has estimated that such deals currently cost American consumers $3.5 billion a year.

“These are collusive, price-fixing deals,” said Representative Chris Van Hollen, Democrat of Maryland, who is one of those urging Congress to ban the arrangements. “It means the consumer pays a lot more for their pharmaceuticals.”

Opponents of the generic agreements — maligned as “pay for delay” deals — say they are standard industry practice and help prop up monopoly pricing.

Generics account for only about 22 percent of prescription drug spending in this country, although they represent nearly three-quarters of the prescriptions written, according to the research firm IMS Health. That means 78 percent of the nation’s drug bill goes toward the 25 percent of prescriptions written for name-brand medicines.

But representatives of branded drug and generic makers said that settlements were a legitimate and expedient way to resolve expensive and time-consuming patent litigation.

Moreover, Kathleen Jaeger, the president of the Generic Pharmaceutical Association, an industry trade group, contested the term “pay for delay.”

Settlements, she said, typically award the generic challenger the right to enter the market before a brand’s patent is due to expire, giving consumers earlier access to affordable drugs. And compensation, she said, is often for legitimate side deals, like the generic company’s supplying ingredients to the name-brand maker.

“You can’t sweep all the good, the pro-competitive, pro-consumer settlements out with the bad,” Ms. Jaeger said in an interview on Monday.

Nevertheless Jon Leibowitz, the chairman of the Federal Trade Commission, argues that many settlement deals violate antitrust laws when they restrict generic entry and also involve compensation from the name-brand company to the generic maker.

“These sweetheart deals are being done on the backs of consumers,” Mr. Leibowitz said in an interview. “From the perspective of the Federal Trade Commission, these deals are one of the worst abuses across the board in health care and should be stopped.”

But, since 2005, several appellate courts have upheld some of the agreements, ruling that such settlements do not violate antitrust laws when they let the generic drug enter the market before the name-brand maker’s patent is due to expire.

As a result, the F.T.C. is appealing to Congress to ban the compensated settlements altogether.

The settlement deals are an outgrowth of the Hatch-Waxman Act, a 1984 law intended to promote drug price competition by encouraging generic companies to challenge the patents on name-brand drugs.

Some name-brand drug patents, like those on the active pharmaceutical ingredient in a medication, may be strong and not vulnerable to challenge. But other patents, like those on the ingredient formula, may be weaker and more inviting to a generic challenger.

Under Hatch-Waxman, the first generic to challenge a name-brand drug’s patent gains the exclusive right to sell its generic version for six months before other generic makers can enter the market. But Hatch-Waxman also gives drug makers who sue generic infringers an automatic 30-month stay of generic market entry so that litigation can proceed.

Rather than litigate cases to the end, though, many drug makers choose to settle with generic challengers. Sometimes, the parties negotiate an earlier market entry date for the generic, without the generic maker’s receiving additional compensation.

But other agreements, the F.T.C. says, have restricted generic market entry and have involved compensation from drug makers to generic companies, either in the form of direct payments or in side deals in which drug makers agreed to pay generics to provide goods or services. The agency has sued some companies for such deals.

Even now, the F.T.C. is suing the drug company Cephalon, claiming that it illegally induced generic challengers to delay marketing generic versions of the stay-awake drug Provigil to protect the product, which had sales in the United States of about $925 million in 2008.

According to the F.T.C., in late 2005 and early 2006 the company reached settlements with four generic makers that had challenged a Provigil patent.

The generic companies agreed not to market a generic form of the drug until 2012, and Cephalon agreed to pay the challengers at least $238 million for 13 side deals involving services like ingredient supply, the F.T.C. said.

Gerald J. Pappert, Cephalon’s general counsel, said on Tuesday that the company strongly disagreed with the F.T.C.’s characterizations of its agreements with generic makers. He said Cephalon had structured the settlements to be in full compliance with the law. Moreover, the agreements allowed generics to enter the market in 2012, three years earlier than the Provigil patent was due to expire, he said.

Drug companies entered into 19 settlement agreements in fiscal year 2009 that involved both delaying generic entry and compensation from the brand to the generic compared to no such agreements in fiscal year 2004, according to an F.T.C. report to be published on Wednesday. Settlement deals in which generic makers received compensation typically kept generics off the market for 17 months longer than deals without payments, the report says.

Not everyone outside the drug industry agrees that restricting the compensated generic settlements would necessarily benefit consumers.

Senator Orrin Hatch, the Utah Republican who was an author of the Hatch-Waxman law, has raised the possibility that, without the option of negotiated patent settlements, generic companies might be less likely to challenge drug patents, thus delaying generic availability.

In a letter last September to Senator Kohl, who had sponsored a stand-alone bill last year prohibiting the deals, Mr. Hatch wrote: “Any generic entry prior to patent expiration gives consumers the choice of using generic drugs earlier than can be anticipated and provides savings to the health care system — whether by agreement or final court decision.”