High Court's Generic Drug Ruling 'a Holy Mess'

Supreme Court Justice Stephen Breyer
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Supreme Court Justice Stephen Breyer

A Supreme Court decision Monday allowing federal regulators to continue challenging "pay-for-delay" deals between pharmaceutical companies and generic drug makers on anti-competitive grounds was greeted with dismay by industry observers after the court failed to rule whether such arrangements are always legal or illegal.

The ambiguity in the Supreme Court's decision in FTC v. Actavis, those observers said, means pharma companies and their generic competitors will be uncertain of the financial benefits and risks when they enter into such deals because their legitimacy may be challenged.

"I think they're going to create a holy mess out of this," said analyst Ronny Gal, who follows Actavis for Sanford Bernstein. "If I were a patent attorney in the drug world, I would be opening a bottle of Champagne right now. It's basically a 'full-employment of patent attorneys' decision."

Gal said the high court's 5-3 ruling in the case, which was written by Justice Steven Breyer, "basically says that you have to go to court every time to prove" a deal is legal under antitrust law if the Federal Trade Commission or another company files a lawsuit challenging the deal.

At issue in the case are so-called reverse pay patent settlements, where pharmaceutical companies with pricier brand-name drugs pay would-be generic competitors to delay entering the market by dropping or not launching lawsuits challenging the brand-name's patents.

FTC regulators "don't like" patent settlements, said Damien Conover, a health-care industry analyst at Morningstar.

(Read More: Actavis to Buy Warner Chilcott for $8.5 Billion)

Regulators have attacked these settlements by claiming that consumers would have saved billions of dollars if lower-priced generic versions of the drugs came to market more quickly.

In the Supreme Court case, the FTC sued to invalidate a 2006 patent settlement between Solvay—the then-manufacturer of testosterone replacement drug AndroGel—and Watson Pharmaceuticals, which is now known as Actavis.

Conover said that despite the FTC's disdain for patent settlements—which have been used by many drug companies— "they haven't had much success" to date in challenging them on a case-by-case basis.

The Supreme Court on Monday refused to give the FTC what it wanted: a complete ban on patent settlements. But justices gave the agency the right to continue pursuing legal challenges to individual settlements—and ordered the 11th Circuit Court of Appeals in Atlanta review its decision to toss out the FTC's case involving Actavis.

"In practical terms, I think we're going to see a lot of continued litigation," said Lesli Esposito, an antitrust and appellate attorney for DLA Piper who previously was a lead attorney in the FTC's Bureau of Competition. "I think the FTC is going to continue to challenge these agreements."

And, Esposito said, "I think we'll see a lot of class-action" lawsuits filed to challenge patent settlements because of the Supreme Court ruling.

(Read More: High Court's Ruling on DNA Could Boost Biotech)

The industry group Pharmaceutical Research and Manufacturers of American had a chilly response to the ruling for just those reasons.

"We are pleased that the court unanimously rejected the FTC's position that patent settlement agreements between innovator and generic pharmaceutical companies should be viewed as presumptively unlawful under the antitrust laws," said PhRMA general counsel Mit Spears.

"At the same time, we are disappointed that the majority failed to provide clear and unambiguous guidance as to how patent settlements could be structured to avoid antitrust exposure short of litigating a patent dispute to the end," Spears said.

"Fully litigating patent disputes can result in substantial costs for both innovator and generic companies, create business uncertainty and can result in delayed availability of generic drugs," he said.

In a statement, Actavis CEO Paul Bisaro said the company would continue to defend the patent settlement over the testosterone drug, and said the Supreme Court's ruling provides a way to resolve challenges to patent settlements in a way that is "pro-competitive and beneficial to American consumers."

But, Bisaro noted, "The court's ruling, however, does place an additional and unnecessary administrative burden on our industry."

Mercedes Meyer, a patent lawyer with the firm Drinker Biddle in Washington, D.C., said the Supreme Court's failure to provide "bright-line guidance"—a ruling that would settle once-and-for all whether patent settlements are legal or not—means there's "really no difference now than what was going on."

"You have to treat those things very, very carefully," Meyer said of the settlements, noting that they continue to be potential targets for FTC or class-action litigation that could end up costing the companies involved more money than they expected to save from doing the deals.

Conover, the Morningstar analyst, agreed. "The uncertainty's still out there," he said. "The one thing the financial and analyst community hates more than bad news is uncertainty."

But Conover added, "Until the FTC or the Department of Justice gets the upper hand" in patent settlement litigation and starts winning more cases against drug companies, "you're still going to see these settlements happening at a high rate."

By CNBC's Dan Mangan. Follow him on Twitter @danpostman.