FTC member speaks out on Provigil generics payoff case
On February 14, we reported that the Federal Trade Commission is suing Cephalon (NasdaqGS:CEPH) for paying off four generic drug companies not to bring a generic version of its sleepiness drug, Provigil to market. Several of our coalition members have been involved in a class action lawsuit against Cephalon for the same conduct for several years.
Today, Jon Leibowitz, one of the five members of the Federal Trade Commission, has an op-ed in the Washington Post, “This Pill Not To Be Taken With Competition: How Collusion Is Keeping Generic Drugs Off the Shelves” about the suit and its importance. Here are a few excerpts:
Cephalon was entitled to defend its patent in court. Instead, it fought back unfairly. The company paid the competing manufacturers more than $200 million in exchange for their agreements to keep their products off the market for nearly seven years. This payoff benefited the generic manufacturers enormously: They made more by sitting on their hands than they ever could have the old-fashioned way, by entering the market and competing. For Cephalon, too, the payoff was a bargain: Chief executive Frank Baldino Jr. acknowledged that it made about $4 billion “that no one expected.”
Who has to foot the $4 billion bill? Consumers, employers, insurers and the government — who have no choice but to pay the higher price for brand-name Provigil.
So while we are all forced to foot this bill, Cephalon is earning an impressive 2000% return on their “investment” of $200 million in paying off the generics. ($4 billion / $200 million = 2000%). This amply demonstrates that the loopholes the Courts have carved in Hatch-Waxman don’t just invite brand name drug companies to defend even what Leibowitz calls “infirm” patents and to pay off generic companies — they actively encourage such tactics – what pharmaceutical executive could resist a 2000% return on investment? Arguably these so-called “reverse payment settlements” are one of the best investments in pharma — perhaps even better than true research and development.
But this crucial benefit [of generics coming to market earlier] is threatened by a disturbing trend: the emergence of “pay-for-delay” settlements and the willingness of some federal courts to permit such obviously anticompetitive agreements. When these troubling deals first came to light in the late 1990s, the FTC fought them — and stopped them cold. Between 2000 and 2004, no brand and generic companies entered pay-for-delay deals; in other words, companies resolved patent disputes without anticompetitive payoffs.
Unfortunately, that success is under siege. Two federal appeals courts — in rulings that conflict with the analysis of a third appellate court — have found that a brand-name drug company facing a patent challenge is free to pay any amount to keep a generic producer from entering the market until the patent expires. These rulings depart from the spirit of Hatch-Waxman and our nation’s antitrust laws, and they harm consumers by subverting the competition at the heart of our free-market system.
One irony is that in one of these cases, concerning the prescription potassium supplement K-Dur, the Administration’s own Solicitor General sabotaged the Federal Trade Commission’s efforts to get the Supreme Court to review that case and this practice more broadly. (Here‘s the Solicitor General’s brief to the Supreme Court.)
Not surprisingly, after two courts blessed such payoffs, the frequency of these settlements has increased sharply. In fiscal 2006, fully half of all pharmaceutical patent settlements (14 of 28) contained such payments. Brand-name manufacturers, seeing the potential to continue reaping monopoly profits, have taken advantage of this apparent judicial leniency. Since some courts are allowing it, who can blame the companies? They have a duty to their shareholders to maximize profits.
Our case against Cephalon, which may ultimately reach the Supreme Court, will determine more than whether Americans taking Provigil are left to spend hundreds of millions of dollars more than they should for their medication. It will also determine whether the courts have effectively demolished the Hatch-Waxman Act and whether early generic competition will end altogether. If Cephalon prevails, generic companies will stop trying to be the first to compete; they will instead try to be the first to be paid not to compete.
And therein lies the case’s true significance.