Pay-for-delay
When a new drug is patented, the product is protected against competition from generics for a number of years. However, in the US, a generics competitor may seek market entry prior to expiry of the patents under the Hatch-Waxman Act, which encourages legal challenges. If lucrative sales are established, the scene is set for a challenge. A generic drugmaker comes up with a chemical equivalent to a patented drug and applies to FDA to sell it, arguing that the patent is invalid.

Rather than spend years and millions of dollars defending its patent, the brand-name company often offers a settlement: it pays the generics company to keep its drug off the market until the patent expires, perhaps also offering to let the generics company market an ‘authorised’ generic drug version later on.

The Federal Trade Commission (FTC) has long viewed this as anticompetitive and its enforcement actions against pay-for-delay agreements deterred their use from 1999 to 2004. However, in 2003 a legislative change and subsequent legal rulings opened the door to them again.

A dream come true, but will there be a rude awakening?
At the moment, it is a businessman’s dream―it is legal to pay your competitor to keep its product off the market, and legal for the competitor to be paid not to sell its product. A cosy arrangement supported by both sides.

In 2010, the FTC estimated that pay-for-delay cost US$3.5 (Euros 2.8) billion a year, as purchasers continue to pay brand-name, instead of generics, prices. Last year, a Senate bill to outlaw such payments floundered.

On 16 July 2012, a federal appeals court in Philadelphia issued a decision that the arrangement is prima facie anticompetitive, i.e. obviously anticompetitive at first sight. It potentially sets up a confrontation before the US Supreme Court. If the decision were accepted, the outcome could profoundly affect drug prices and healthcare costs. The Supreme Court has called cases of competitor collaboration ‘the supreme evil of antitrust’, but will pay-for-delay be recognised as such?

Both sides of the industry vehemently deny that their agreements are collusive, they are simply a way of settling patent fights. ‘These agreements have never delayed the availability of a generic drug past the expiration of a brand-name drug’s patent,’ says the Generic Pharmaceutical Association, a lobbying group.

Credit status risks downgrade
The ruling has attracted the attention of Fitch, the powerful credit ratings agency. It issued a statement on 27 July 2012. ‘Fitch Ratings believes the possibility of a Supreme Court review regarding ‘pay-for-delay’ agreements between brand-name and generic drug manufacturers has no immediate credit implications. However, if and when a decision is made ruling the settlements illegal, we believe that negative credit implications for the industry would be possible.’

If the courts do not settle the issue, the pending Senate bill, which enjoys cross-party support, may still do so. In the words of one of the bill’s sponsors ‘There’s no room in a competitive marketplace for these kinds of back-room deals.’

Also a European problem
Pay-for-delay is not just an issue in the US. On 25 July 2012, the European Commission accused Danish pharmaceutical company Lundbeck and eight other pharmaceutical companies (Arrow, AL Industrier, Alpharma, Generics UK, Merck KGaA, Ranbaxy, Resolution Chemicals and Xellia Pharmaceuticals) of using pay-for-delay tactics to prevent the sale of generic versions of Lundbeck’s blockbuster antidepressant Celexa (citalopram).

In Europe, any such pay-for-delay deals infringe on Article 101 of the Treaty on the Functioning of the EU that prohibits restrictive business practices. The European Commission considers that the practices may have caused substantial consumer harm in delaying the entry of generic medicines for up to two years and keeping prices for citalopram high as a result.

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