FTC Testifies Before U.S. Senate on Barriers to Entry of Generic Drugs

Testifying today on behalf of the Federal Trade Commission before the U.S. House Subcommittee on Commerce, Trade, and Consumer Protection of the Committee on Energy and Commerce regarding 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.”

The testimony stated that the FTC commends Congress’ efforts to prohibit such anticompetitive settlements, and that, “We believe the bill introduced by Chairman Rush, Chairman Dingell, Chairman Waxman, and other members of the Committee, H.R. 1902, represents a fundamentally sound approach to eliminating the exclusion payment problem.”

“We look forward to continuing to work with you to ensure that the legislation effectively bars anticompetitive agreements but allows exceptions for those agreements that do not harm competition,” the testimony continued. “In addition, we are pleased that the bill also addresses the ‘bottleneck’ problem, which allows the brand company to use its settlement with the first generic filer to prevent subsequent generic companies from entering the market and competing as well.”

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. “The increased costs resulting from anticompetitive agreements that delay generic competition harm all those who pay for prescription drugs: individual consumers, the federal government, state governments trying to provide access to health care with limited public funds, and American businesses striving to compete in a global economy,” the Commissioner said in presenting the testimony.

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 enforcement tool, the testimony stated, “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 in January 2007 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.”

According to the Commission, H.R. 1902 provides two mechanisms to prevent settlement avenues from being unduly limited. “First, it contains express exclusions from the general prohibition on settlements in which the generic firm receives something of value and agrees to
refrain from selling its product . . . Second, the bill provides flexibility by authorizing the FTC to adopt rules to exempt certain agreements from the general prohibition. In sum, H.R. 1902 offers a straightforward means to quickly combat conduct that is costly to consumers, provides drug companies with certainty about why conduct is prohibited, and provide flexibility to protect procompetitive arrangements.”

The Commission vote authorizing the presentation of the testimony and its inclusion in the formal record was 5-0.

The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read “Competition Counts” at http://www.ftc.gov/bc/edu/pubs/consumer/general/zgen01.shtm.