FTC Provides Senate Testimony on Anticompetitive Patent Settlements in the U.S. Pharmaceutical Industry

FTC Study Shows Substantial Increase in Number of Settlements Involving a Payment to the Generic and a Restriction on Generic Entry

Testifying today on behalf of the Federal Trade Commission before the Senate Committee on the Judiciary on the subject of anticompetitive patent settlements in the U.S. pharmaceutical industry, FTC Commissioner Jon Leibowitz said that recent court cases have made it more difficult to bring antitrust cases to stop exclusion payment settlements between brand manufacturers and their generic competitors, and that “the impact of the court rulings is becoming evident in the marketplace.”

Accordingly, the testimony stated that the FTC “supports legislation to prohibit these anticompetitive settlements” and strongly supports the intent of legislation introduced by three senators, including the objective to “adopt a bright-line approach to addressing exclusion payments.”

Exclusion payments, also known as reverse payments, is a term used to describe settlements of patent litigation in which a brand-name drug manufacturer pays its potential generic competitor to abandon a patent challenge and delay entering the market. “Such settlements restrict competition at the expense of consumers, whose access to lower-priced generic drugs is delayed, sometimes for many years,” the Commissioner said in opening the FTC’s testimony. Further, recent developments in the industry threaten “substantial harm to consumers and others who pay for prescription drugs.”

The testimony stated that Congress enacted several changes in 2003 to the Hatch-Waxman Act that established a 180-day exclusive marketing period for the first generic filer to replace a branded drug, including enabling the FTC to review all settlements of patent cases brought under the Act. Despite this important new tool, “the prospects for effective antitrust enforcement against anticompetitive agreements between branded and generic pharmaceutical manufacturers are substantially less encouraging today than they were in 2001.” The reason is that two appellate court decisions handed down in 2005, including Schering-Plough v. Federal Trade Commission, “took an extremely lenient view of exclusion payment settlements.”

To illustrate this problem, the testimony cited an FTC study released today containing the staff’s analysis of a “disturbing new trend” in drug settlements filed during the fiscal year ending in September 2006. According to the study – the third annual report the FTC has issued on this subject – half of all patent settlements in FY 2006 (14 of 28) involved compensation to the generic patent challenger and an agreement by the generic firm to refrain from launching its product for some time. In the current legal climate, according to the testimony, “there is every reason to expect the upsurge in these settlements to continue, and early entry under Hatch-Waxman to decline,” because exclusion payments are highly profitable for brand-name and generic firms.

The implications for consumers and others who pay for prescription drugs are serious, the testimony stated. Generic competition following successful patent challenges has provided substantial benefits to consumers. The cost savings resulting from generic entry after successful patent challenges are lost, however, if branded drug firms are permitted to pay a generic applicant to defer entry.

The testimony continued by describing the FTC’s experience in examining competition in the pharmaceutical entry, as well as the findings of the Commission’s 2002 report entitled, “Generic Drug Entry Prior to Patent Expiration.” Commonly known as the Generic Drug Study, this report recommended a number of the Hatch-Waxman reforms adopted by Congress in 2003. The FTC’s work in this area provides the framework for the testimony’s discussion of the role of generic drugs in the pharmaceutical industry and the regulatory framework that governs their introduction, the economics of exclusion payments and their impact on consumers, the court rulings and industry response, and some of the issues related to a legislative remedy to the exclusion payment problem.

A legislative remedy to the problem of exclusion payments offers the prospect of a relatively swift solution to this important issue, according to the testimony. “While the Commission’s enforcement activities are continuing, we recognize the time and uncertainty involved in litigation challenges to anticompetitive settlements. Legislation could provide a speedier and more comprehensive way to address this pressing concern.”

The Commission vote authorizing the presentation of the testimony and its inclusion in the formal record was 5-0. A copy of the testimony can be found on the FTC’s Web site and as a link to this press release.

Copies of the Commission’s testimony are available on the FTC’s Web site at www.ftc.gov. The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

MEDIA CONTACT:

Mitchell J. Katz,
Office of Public Affairs
202-326-2161

(FTC File No. P859910)