On June 24, 2009, the Federal Trade Commission issued "Authorized Generics: An Interim Report," which presents the first set of results from a study conducted to examine the short-term and long-term effects of authorized generics on pharmaceutical drug competition. Although the report's conclusions do not support legislation banning authorized generics, they do reflect increasing concern at the FTC over litigation settlements that limit a branded drug company's ability to launch an authorized generic in competition with a generic settling party.

The FTC first announced the study in March 2006. At that time, several lawmakers and pharmaceutical industry participants voiced concern over the increased prevalence of authorized generics. Authorized generics are created when a branded company, usually when facing the imminent entry of a generic competitor, provides its own "generic" version of its drug, either directly or by license. Although the Hatch-Waxman Act grants the first generic competitor of a branded drug a 180-day period of marketing exclusivity as against all other generic ANDA filers, that right does not preclude an authorized generic, which enters under authority of the branded drug's original NODE. Critics argue that authorized generics raise significant competitive concerns because they reduce the incentives of first ANDA filers to pursue generic entry prior to patent expiration.

At the same time, however, proponents of authorized generics have argued that authorized generics are procompetitive because they allow for the introduction of an additional generic drug prior to patent expiration. In fact, members of the FTC staff have stated publicly that agreements by branded companies with ANDA filers not to enter with their own authorized generic – sometimes made in settlement of ANDA patent litigation – are competitively suspect. Until now, empirical evidence to support either proposition has been wholly lacking.

The FTC Interim Report focuses on the short-term effects of competition between an authorized generic and another generic drug during the 180-day exclusivity period. According to the Interim Report, the FTC's preliminary data analysis found that:

  • Compared to the pre-generic brand price, retail prices are on average 4.2% lower and wholesale prices are on average 6.5% lower when an authorized generic competes with one other generic during the 180-day exclusivity period than when an AG does not enter;
  • Revenues of a sole generic company during the 180-day exclusivity period drop substantially with AG entry, with estimates of the average decline ranging from 47% to 51%;
  • The loss of revenue may make a generic drug company more willing to delay its entry in return for a branded drug company's agreement not to launch an authorized generic during the generic's 180 days of marketing exclusivity;
  • During the period from 2004 through 2008, 25% of all patent settlements between first-filer generic companies and brand companies included an agreement by the brand not to launch an authorized generic to compete against the first filer, combined with an agreement by the first-filer generic to defer its entry into the market.

The Interim Report finds that "consumers benefit and the healthcare system saves money during the 180-day exclusivity period when an AG enters the market." The Interim Report draws no long-term conclusions about the overall competitive effects of authorized generics.

The report goes on to conclude that brand-generic agreements to delay introducing both authorized generics and independent generics and can harm consumers in two ways. First, generic drugs would not be available to consumers as soon as they otherwise might, and thus consumers would be forced to pay higher overall prescription drug costs. Second, consumers would be deprived of the benefit of price discounts from authorized generic competition during the 180-day marketing exclusivity period.

As many commentators have noted, however, critics of license or settlement provisions prohibiting the branded company from introducing an authorized generic are making the perfect the enemy of the good. Absent such promises, it is possible that parties would not enter any agreement permitting the generic challenger to enter the market more quickly. Thus, concluding that these provisions harm consumers is based on the unlikely assumption that the parties would reach the same agreement permitting early entry in the absence of this promise. More generally, patentholders are not required to maximize competition within the scope of their intellectual property. There is no antitrust precedent for requiring a patentholder to license anybody within the scope of its IP, and, once they have licensed a firm, licensors are not obliged to compete in any particular manner against their licensees within the scope of their IP.

The vote to issue the report was 3-0, with Commissioner Pamela Jones Harbour recused. FTC Chairman Jon Leibowitz and Commissioner Rosch issued separate statements. Chairman Leibowitz emphasized his view that the settlements between generic and brand pharmaceutical companies were "troubling" and that the elimination of such settlements could result in estimated consumer savings of approximately $35 billion over ten years. He also stated that a brand company's promise not to launch an authorized generic is "a huge bargaining chip" that effectively allows the brand "to preserve its monopoly and its high profits along with it."

In a separate concurring statement, Commissioner Rosch criticized the FTC Interim Report for its focus on the effect of authorized generics on other generic companies rather than on consumers or the economy. He also commented that the data may overstate the harm caused by brand-generic settlements because it does not take into account the number of settlements in which the authorized generic was the only potential competitor of the other generic entrant. Finally, Commissioner Rosch emphasized that the remedy to any anticompetitive effects of such settlements should not result in a ban of all authorized generics, but rather in a restriction of a brand company's ability to promise not to manufacture an authorized generic.

Interest in authorized generics has steadily increased over the past few years, particularly after the FDA held in 2004 – and the courts later confirmed – that the marketing of authorized generics during the 180-day exclusivity period was permissible under the FDC Act. Since that time, lawmakers have introduced bills in the House and Senate that would prohibit brand companies from introducing authorized generics during that 180-day timeframe. Similar bills are currently pending in Congress, such as H.R. 573, 111th Cong., which would amend the Federal Food, Drug, and Cosmetic Act to prohibit the marketing of authorized generic drugs.

The FTC has announced that it will issue a final report examining the long-term competitive effects of authorized generics. The date of that report's release is currently unknown.