The U.S. Federal Trade Commission recently issued a report again criticizing the role that authorized generic drugs sometimes play in patent infringement settlements between branded pharmaceutical manufacturers and their generic counterparts.  The August 31, 2011, report, titled Authorized Generic Drugs: Short-Term Effects and Long-Term Impact,  concludes a 5-year study by the agency into the effect of authorized generics on pharmaceutical competition.  It demonstrates once again that, despite losses in the courts, the agency has no plans to soften its stance against so-called "reverse payment" patent litigation settlements.  This report arrives as legislation that would restrict such settlements is once again before Congress.

An authorized generic is a branded drug maker’s own generic version of its patented drug that is marketed either directly by the branded firm or by its licensee. Branded drug companies often release authorized generics when faced with entry by a generic competitor.  Although the Hatch-Waxman Act was designed to encourage generic drug competition, in part by granting a 180-day period of marketing exclusivity to the first generic competitor of a branded drug to file an Abbreviated New Drug Application ("ANDA"), the courts have held that the Act does not preclude the branded manufacturer from introducing an authorized generic version of the drug during the exclusivity period.  (The reason is that the exclusivity provision only bars the FDA from approving another generic ANDA for 180 days.  In contrast, the authorized generic enters under the authority of the original new drug application ("NDA"), by which the branded drug is sold.)

The FTC study focused on the effect that authorized generics have on generic competition.  The report makes four basic findings:

  • Competition from authorized generics during the 180-day marketing exclusivity period results in lower retail and wholesale drug prices.  According to the report, retail prices are four-to-eight percent lower, and wholesale prices are seven-to-fourteen percent lower when an authorized generic is available during the exclusivity window.
  • Introduction of an authorized generic during the exclusivity period has a significant effect on revenues of the generic firm, both during the period and beyond.  When an authorized generic is available, revenues of the generic firm drop between 40 and 52 percent during the 180-day exclusivity period and between 53 and 62 percent during the 30 months after the exclusivity period ends.
  • While lower expected profits due to the potential presence of an authorized generic could affect a generic company’s incentive to enter the market early by challenging the branded manufacturer’s patents, generic companies continue to bring patent challenges for most drugs even when authorized generics are present. 
  • A branded manufacturer’s commitment not to launch an authorized generic version of its drug as part of a patent infringement settlement can be a form of compensation to a generic manufacturer for agreeing to delay entry beyond the date on which the parties otherwise may have agreed, a practice the FTC contends causes substantial consumer harm. 

Critics of authorized generics contend that they inhibit competition by reducing the reward provided by the 180-day exclusivity period, thus creating a disincentive for generic firms to challenge the branded manufacturer’s patents.  This, they say, is counter to the very purposes of the Hatch Waxman Act – although as noted the courts have disagreed that the Act precludes such entry.  These critics also claim that this result harms competition in the long run, because fewer challenges means that fewer patents will be struck down, and fewer generics will enter the market early.  Although the FTC’s second finding supports the view that the first-filer’s profits will suffer, the first finding makes it clear that lower prices result from the presence of a second rival (the authorized generic).  Thus, it is difficult to argue that the disincentive results from reduced competition that might implicate the antitrust laws. 

The third and fourth findings are particularly interesting.  The FTC’s third finding asserts that, while the introduction of an authorized generic has a dramatic effect on a generic firm’s revenues, it does not appear to inhibit generic patent challenges in a manner that the FTC deems significant.  The extent to which such patent challenges are fewer than they otherwise would have been, however, is unknown.

The fourth finding goes directly to the FTC’s longstanding stance against so-called "reverse payment" or "pay for delay" settlements.  The agency has for years contended that patent infringement settlements by which a generic manufacturer agrees to delay its entry into the market and receives payment from the branded manufacturer violate the antitrust laws.  Although numerous courts have upheld such arrangements against antitrust challenge, the Commission continues to investigate them and sometimes challenge them in litigation.  The finding that a branded firm’s commitment to refrain from introducing an authorized generic may be merely another form of compensation to the generic company is, according to the FTC, doubly troubling.  In a press release issued with the report FTC Chairman Jon Leibowitz stated:  

The clearest and most disturbing finding is that some brand companies may be using the threat of launching an authorized generic as a powerful inducement for generic companies to delay bringing their drugs to market.  When companies employ this tactic it is a double whammy for consumers.  Consumers have to pay the higher brand prices while the generic delays its entry and, once generic entry does occur, consumers pay higher prices without the benefit of competition from the authorized generic.

Critics of the FTC’s position argue that reverse payment settlements are legitimate mechanisms for dispute resolution that cannot harm competition unless the settlement excludes competition beyond the scope of a valid patent.  The courts have overwhelmingly agreed.  The critics also point out two weaknesses in the FTC’s antipathy toward agreements not to enter with an authorized generic: (1) if settlements with cash payments are legal, it does not matter what form the "compensation" takes, and (2) an agreement not to enter with an authorized generic is indistinguishable in competitive terms from an agreement to provide a wholly exclusive license, which is commonplace and generally considered to be within the patentee’s rights. 

Clients considering patent settlements in general, and pharmaceutical settlements in particular, should keep two points in mind:  First, it appears that almost no one uses actual cash in Hatch-Waxman settlements anymore.  All such settlements are filed with the FTC, and the threat of a burdensome and expensive FTC investigation has caused the use of actual payments (except for small amounts designated as legal expenses) to disappear.  Second, settlements in which the branded company agrees not to enter with an authorized generic do continue to occur with some regularity, even though the FTC has publicly criticized them.  We know of no instance in which the FTC has challenged a settlement based on such a clause.

In sum, the FTC report seems to convert the concern expressed by Congress over a branded company’s entry with an authorized generic into a concern over a branded company’s promise not to enter with an authorized generic.  Indeed, when the "Interim" version of this report was issued in July 2009, Commissioner Rosch criticized the "reverse payments" section because "[n]o member of Congress has asked the Commission to address the impact of an agreement that provides that an AG will not compete."  He concluded that "to the extent that [reverse payment] settlements cause consumers harm, the report does not (because it cannot) show that AG competition is the cause of that harm."  (Concurring Statement of Commissioner J. Thomas Rosch on the Release of the Commission’s Interim Report on Authorized Generics, available at here.) 

It may be that the report’s timing and emphasis has a different purpose.  Over the years various attempts have been made to legislate against such "reverse payment" settlements, thus far without success.  The FTC report comes in time for yet another round of proposed legislation.  The Preserve Access to Affordable Generics Act (S.27) would make most reverse payments presumptively unlawful.  The legislation was introduced in January by Senator Kohl (D-WI), and was reported out of the Senate Judiciary Committee in July.  Proponents of the legislation, including the FTC, will no doubt use the latest report to argue for its passage.