Resolving the debate over drug patent settlements: three easy steps

I've been a bit slow in getting this up - its by Tim Gilbert on his proposal for Congressional reform in the areas of drug patent settlements and authorized generics.

BURYING THE HATCHET: RESOLVING THE DEBATE OVER DRUG PATENT LITIGATION SETTLEMENTS IN THREE EASY STEPS

Tim Gilbert

April 20, 2009

Congress should address drug patent settlements by i) setting clear rules on presumptively lawful agreements; ii) enabling the FTC to act as a gatekeeper to prevent anticompetitive agreements falling outside the safe harbor; and, iii) restoring the original incentive in Hatch-Waxman to challenge patents by eliminating authorized generics during the 180 day generic exclusivity period.

Two opposing views of drug patent litigation settlements threaten to derail the pharmaceutical industry and harm consumers in the long run. The first view, held by the Federal Trade Commission (FTC), is that all drug patent litigation settlements involving the exchange of consideration flowing from a brand to a generic company are inherently anticompetitive. On this view the FTC urges Congress to ban all so-called reverse payments on the grounds that they are anticompetitive. But the remedy prescribed may be too strong by half - it may indeed discourage parties from being creative in resolving disputes that should be settled and result in longer delays before drugs become available in generic form. Further, it does not take into account the fact that many of these deals involve generic companies simply getting back what Congress promised them in 1984 in the Hatch Waxman Act but has lately been eroded – 180 days of exclusivity to the first generic company to challenge a drug patent.

The opposing view, that drug companies should be able to structure any deals they want, also threatens to harm consumers. What proponents of this view ignore is that unlike in other areas of commerce, parties to litigation by settling a drug patent case can tie up markets for years. The generally sound policy objective of allowing private parties to order their affairs and settle litigation should come under closer scrutiny when, as a result of the settlement, no other party can enter the market. The big winners in the settlement of drug patent litigation are the parties. When a brand company pays the generic company hundreds of millions of dollars not to make a product – the brand company wins by retaining its monopoly, the generic company wins by receiving an upfront payment not to make a product, but the public is potentially deprived of a less expensive generic drug. The obvious question is whether the consideration was exchanged for a later generic entry date.

Can these two views be reconciled? This paper argues that they can and that the solution in a nutshell can be boiled down to three steps. First, Congress needs to set clear rules on what types of drug patent settlements are presumptively lawful – a safe harbor. These would include settlements that allow early generic entry pre-patent expiry without additional consideration. Another example is settlements involving payments from brand companies to generic companies that compensate generic companies for their development and litigation costs (with no other consideration). This would allow private parties to organize their affairs and settle cases without the specter of a possible antitrust lawsuit and the remedy of treble damages.

Second, Congress needs to create an expeditious mechanism where the FTC can litigate disputes about whether deals falling outside the safe harbor are anticompetitive and set a clear standard for the agency to apply in determining whether drug patent settlements are anticompetitive. This would allow parties to continue to be creative in structuring settlements in any way they wanted – with the knowledge that the FTC may choose to challenge a deal within a particular window and before a forum that is familiar with the unique competition concerns arising in the pharmaceutical industry. Congress also needs to set a clear and practical-to-apply standard on what constitutes an anticompetitive settlement in this industry so that there is not such a disparity of views on such an important area of public policy. The suggested standard is for the FTC to determine what consideration is exchanged in a drug patent settlement (sometimes settlements are complicated and involve consideration other than money), the value of such consideration (the parties may have ascribed values that are not in keeping with the fair market value of the consideration) and whether the consideration has been given in exchange for an agreed entry date (Congress would be signaling that deals that do no more than pay a potential competitor to not enter the market are not lawful).

Third, Congress needs to restore the original incentive in Hatch-Waxman to challenge patents in the first place – by precluding brand companies from launching an authorized generic during the 180 day period of generic exclusivity. This levels the playing field in drug patent settlement negotiations. At present there is little incentive for a generic company not to settle a drug patent dispute – even if the generic company has a strong case it can assume that if it wins the brand company will launch an authorized generic and take a big part of the generic company’s sales. The generic company will prefer to get a payment today and agree to enter the market at a later date, with a commitment from the brand company not to launch an authorized generic.

In this paper I will first provide background information on the legal and regulatory structure of the pharmaceutical industry. Second, I will identify the problem as identified by the FTC and some counter-arguments to the FTC’s position. Third, I will identify a possible resolution to the impasse that seems to divide parties to the debate.

Background

The first thing that needs to be clarified about the pharmaceutical industry (as compared to other industries from a competition perspective) is that there is not an unbridled free market in the approval and sale of drug products. This is the case in many ways and for lots of good reasons. Take one example – the approval of drugs. The Food and Drug Administration (FDA) plays an important role in ensuring the safety and effectiveness of drugs. For this reason, it is unlawful to sell a drug without the FDA approval. Another example lies in the interplay between patents and the drug approval process. Unlike any other area of industry, no one can even get approval to sell a drug product that is equivalent to an already approved product unless and until (i) all patents that are listed in the directory of patents maintained by the FDA known as the Orange Book have been addressed by the potential entrant, (ii) the entrant has notified the existing player in the market of the potential entrant’s intention to enter the market, and (iii) the existing entrant has been given the opportunity to sue that entrant and permanently enjoin it from entering the market. During the time it takes to resolve the law suit, the FDA cannot approve the entry of the potential entrant to the market.

There is a further complexity on top of all of this. Potential entrants to the market who seek FDA approval after the first potential entrant files for approval with the FDA must wait until the first potential entrant has enjoyed 180 days of commercial marketing before they can be approved by the FDA to enter the market.

These regulatory provisions are unique to the pharmaceutical industry and have their origin in the Hatch-Waxman Act. Hatch-Waxman has been characterized in many places as a legislative compromise and a careful balance between providing an incentive to companies to invest in new drug development and the clinical trials necessary to demonstrate a drug is safe and effective for public consumption, and providing an incentive to companies to challenge invalid patents or to demonstrate that a proposed competing version of an already approved product will not infringe a valid patent.

In many ways the Hatch-Waxman has stood the test of time and provided a useful structure to grow the industry. Many new useful medicines have been brought to the market with obvious public benefits while at the same time the generic industry, which was in its infancy at the time Hatch-Waxman was first enacted, is now robust and supplies nearly 70 per cent of the prescriptions dispensed in the U.S. but consuming less than 20 per cent of all dollars spent on prescription medicines.

There has been one substantive modification to Hatch-Waxman since 1984. In 2003, Congress, as part of the Medicare Modernization Act (MMA), clarified that brand companies should receive only one automatic stay of FDA approval of a proposed generic drug when suing over a patent listed in the Orange Book. The practice had developed where companies were strategically timing the issuance of patents so that they could sue the potential generic applicant and obtain a multitude of interlocking stays of approval. This practice was known as evergreening. From a competition perspective it caught the attention of the FTC. Previously, the FTC had left administration of Hatch Waxman to the FDA. But the FTC opened an informal inquiry into the activities of one company listing multiple patents over time and took the unusual step of filing its own citizen petition with the FDA inquiring about the legal basis for allowing multiple stays of approval.

In addition to eliminating the opportunity for multiple stays, MMA also contained provisions that govern how the FDA is to handle Abbreviated New Drug Applications (ANDAs). It included a provision that the 180 day exclusivity of a first applicant to file an ANDA can be triggered if the first applicant obtains a favorable court decision on a listed patent in the Orange Book at the Court of Appeals, and a provision listing several ways the first applicant could forfeit its exclusivity - including failure to obtain FDA approval in a timely manner and a judgment of a court that the applicant had violated antitrust laws.

There have been at least two important developments from a competition perspective since MMA. First, brand companies have systematically engaged in the practice of launching their own so-called generic versions of their own branded products during the period of the first applicant’s exclusivity. These are called “authorized generics” in that the brand company has authorized their sale. They are in fact the same product as the brand company, made on the same production lines with the same ingredients but with different labeling. The entry of an authorized generic into the market during the 180 day “exclusivity” period takes market share from the generic company and thereby depletes the reward the generic company was to receive as first applicant.

The FDA has been allowing the launch of these authorized generics during the period of exclusivity in part because the agency is of the view that it does not have the power to prevent them. The operative language of the exclusivity provision prevents the agency from approving a subsequent applicant’s ANDA. The brand company never needs to file an ANDA as it received its approval for the brand product by a New Drug Application. The brand company can just file a labeling change to sell the authorized generic version of its product.

Concerns about the possible anticompetitive effects of authorized generics have been raised by the FTC. The agency has been conducting a study of the issue for many years but it is uncertain when the report will be delivered. Competing industry papers describe the effects differently. Supporters of authorized generics talk about the benefits of competition from additional entrants, suggesting that the wholesale price of drugs go down with the launch of an authorized generic. Opponents state that the price reductions are exaggerated, do not make their way to consumers, and that brand prices trend upwards after the launch of an authorized generic. Hopefully the FTC will provide some further insight into what is happening in the market.

However, there is no question that the presence of an authorized generic is now assumed on the launch of the first generic product, and that this substantially reduces the revenue the non-authorized generic stands to earn in the marketplace.

Reflecting this fact, reports available from the FTC suggest that authorized generics have a dramatic impact in another related development: settlements of drug patent litigation. The FTC has been monitoring the number and type of drug patent settlements since MMA required all companies to file such settlements with the FTC for review. The FTC has mainly been concerned about settlements that involve reverse consideration, payments made by brand companies to generic companies in exchange for discontinuing litigation, taking an upfront payment of cash and agreeing to a fixed (and delayed) day of entry in the future. But the FTC has found that in 2007 approximately 78 per cent of final agreements containing both compensation and a restriction involved the brand agreeing not to launch an authorized generic during the period of the generic company’s exclusivity. This suggests that one of the most important bargaining chips at the negotiating table is the threat of an authorized generic.

The reasons why generic applicants settle litigation are straightforward and make business sense. Why would you roll the dice in a lawsuit where a loss means you will wait until patent expiry to enter the market and a victory will be met with the presence of an authorized generic when you can take a fixed day of entry pre-patent expiry without an authorized generic?

The FTC’s concerns about drug patent litigation in the past have been about brand and generic companies allegedly colluding to split monopoly profits on patents of dubious validity but there appears to be a more benign reason driving many settlements: the attempt by generic companies to secure what was promised in 1984 – 180 days of exclusive generic market presence.

Eliminating authorized generics during the 180 day exclusivity period would take that bargaining chip off the table, but would it more generally satisfy the FTC so there is no need for action by Congress on drug patent settlements?

The State of Play

The FTC’s bottom line argument against patent settlements that involve consideration flowing from a brand company to a generic company (reverse consideration) has been that every time there is anything of value exchanged by the parties, apart from early generic entry pre-patent expiry, consumers are deprived of a generic product. The concern is that the additional consideration could have been exchanged for an agreed upon entry date (i.e. a later date than what consumers could have expected if the consideration was not given).

Courts, however, have not been receptive to the FTC’s argument. The case law suggests the following principal concerns:

1. The general policy is to favor the settlement of litigation and this extends to patent litigation (see FTC v. Schering-Plough Corporation, 402 F.3d 1056).
2. Patents involve the right to exclude others from making, using or selling the invention. Absent an extension of a monopoly beyond the patent scope or sham litigation, courts have difficulty finding that agreements violate antitrust laws (see In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d187 and In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323).
3. Courts do not like second guessing the parties’ evaluations of the strength of a patent case. Parties can have wildly different views. In a review of any settlement, courts are reluctant to perform an examination of the merits of the case and the strength of the patent – something which they would have done in a trial (see In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323).

The FTC keeps trying to bring antitrust actions despite these losses. Most recently, in January 2009, the FTC brought an action in the federal district court in California against Solvay Pharmaceuticals (the brand manufacturer of Androgel) and three other pharmaceutical companies, only to have it transferred on the basis it had picked the wrong forum. By selecting California, the FTC was hoping to have the case reviewed by the Ninth Circuit, which is said to be a more plaintiff-friendly circuit. The FTC got caught on the horns of a dilemma in that it advised the court that it would try the merits of the patent case if necessary but the patent case itself was before a different circuit.

Legislative Reform

In view of the FTC’s failures in the courts, Members of Congress have come to its aid in the form of bills proposing to change the rules of the game. Senator Kohl (D-WI) with Senators Obama, Leahy, Grassley and others introduced a bill in the last session of Congress (S. 316, 110th Congress) and renewed it with a slightly different version this year (S. 369, 111th Congress). Representative Rush (D-IL), with Representative Waxman and others , introduced similar legislation in the House (H.R. 1706). S. 369 provides what is described as a bright line rule prohibiting drug patent settlements which involve the exchange of anything of value, apart from early generic entry pre-patent expiry. This Bill, unlike the version from the last session of Congress, provides that the FTC may promulgate regulations exempting certain agreements from the prohibition if the FTC finds such agreements to be in furtherance of market competition and for the benefit of consumers. Last year, at the time S. 369 was introduced, it was passed unanimously out of Judiciary Committee but with the caveat that the sponsors would work with other Members of Congress on improving the Bill. Several Republicans expressed concerns that the bright line approach would prohibit settlements which would actually benefit consumers. At the time of hearings before the Judiciary Committee on the subject, Bruce Downey of Barr Laboratories described how his company successfully settled patent lawsuits which resulted in early generic entry. He explained that this was the case in one particular instance because four subsequent generic challengers ended up losing their patent litigation cases and had Barr not settled, there would have been no generic until after patent expiry.

Senator Specter (R-PA) submitted an amendment to S. 316 which would have directed parties that settle drug patent litigation to seek approval from the Court that has carriage of the underlying patent litigation, on notice to the Department of Justice and the FTC. The Court would approve such settlements based on several factors, including the patent holder’s likelihood of success, the length of time remaining before patent expiry, the amount and type of consideration and whether the settlement allows for pre-patent expiry entry by the generic company.

The FTC is not enamored with this approach. The Agency has concerns that the end result of any court review will be the same as the FTC’s previous efforts to reign in patent settlements involving reverse consideration. The factors do not provide a clear direction to the court of what types of patent settlements are unlawful. On close scrutiny, there does not appear to be any change to the legal standard that the court would apply compared to the previous case law. Further, the FTC is concerned about the appropriateness of the forum. A judge with carriage of the patent litigation usually looks forward to resolving cases on his or her docket and would tend to favor settlement.

On the authorized generics front, Senator Rockefeller, together with Senators Schumer, Kohl, Leahy, Brown, Inouye, Shaheen and Stabenow introduced a bill, S. 501, that would prohibit the sale of authorized generic drugs during the 180 day exclusivity period. A similar bill, S. 438, was introduced in the last session of Congress . Companion bills have been introduced in the House by Representative Emerson (R-MO) with Representatives Berry, Moore of Kansas, and Wamp (H.R. 573).

President Barack Obama has addressed the issue of drug patent settlements. As a Senator, he co-sponsored the Kohl Bill in the last session of Congress. He campaigned on the issue and as President he included a provision in his 2010 budget committing his Administration to take action to prevent drug companies from blocking generic drugs from consumers with anticompetitive agreements. But proponents of the two approaches appear to be at an impasse. One approach lumps together all drug patent settlements involving reverse payments and treats them the same – they are presumptively unlawful. The other approach involving a case by case application of factors, looks like it would result in the court making no change at all to the current law other than companies settling patent litigation would receive court blessing for their settlements without antitrust scrutiny.

A Possible Solution

Bright line rules are attractive. They provide clear guidance to industry and the government prescribing acceptable practices. In the patent context, parties should be able to settle litigation without the threat of even further court proceedings. But bright line rules need to be tempered by a recognition that the rules can act as an impediment to the creative resolution of disputes. The rule prohibiting the exchange of anything of value other than early generic entry is useful but perhaps too restrictive. It is possible to contemplate deals that involve different consideration and do not result in an exchange of value for a fixed entry date. This can be addressed by instituting a safe harbor provision.

One such example is the upfront recovery of research and development and litigation costs. The development of an ANDA costs money and patent litigation costs even more money depending on the complexity of the product and the patents at issue in litigation. It is a difficult sell to shareholders of a generic company to recommend a settlement involving the abandonment of the litigation, a date for generic entry many years in the future and no compensation whatsoever for the work that brought the brand company to the negotiating table. By the time the generic company is able to enter the market the brand company may have successfully switched consumers to a new product entirely. It seems reasonable to allow a payment from the brand company to the generic company that reimburses the actual expenditures of the generic company in bringing the litigation to conclusion.

From a procedural efficiency perspective it may be reasonable to set an upper limit on the amount that may be paid to the generic company without documentary proof. This could be set at $10 million. In the context of the kinds of delays that the FTC is concerned about, it is hard to imagine that this amount would be enough to entice a generic company to delay market entry.

Two other safe harbors that would be appropriate relate to commitments given by brand companies to waive statutory exclusivities (such as pediatric exclusivity) or to provide a covenant not to sue a generic company over a patent that is not part of the existing underlying litigation. These provisions would remove potential barriers to entry of generic drug products.

Outside these safe harbors, there can be provisions of a settlement that do not directly involve the date of generic entry but raise anticompetitive concerns.

An example could be a license to sell a particular unrelated product. Evidence may disclose that the license at the negotiated royalty rate is worth $20 million. The fact that the parties have set the value at that number is not dispositive. It may be that any reasonable bargain between arms-length parties would be for a materially different (and lower) amount, and in reality the license is a payment that is consideration for a fixed entry date. For this reason, the FTC could reserve the right to question the ascribed value based on objective expert valuation evidence and challenge the settlement. Note that whether a license is a reasonable bargain between arms length parties is routinely assessed in transfer pricing cases involving the IRS and contracted licenses between related parties.

The heart of the matter is whether both sides of the bargain, leaving aside the entry date, approximately balance. If the objective evidence shows this, then there is no evidence that material consideration has been paid for a fixed entry date. For this reason the test of whether a deal falling outside the safe harbor is anticompetitive can be summarily articulated as follows: whether the consideration received by the generic company was given in exchange for the generic company’s agreement to accept an agreed to entry date.

Who should assess this? Under MMA, parties are already obligated to submit all drug patent settlements for review by the FTC. But the FTC does not have to issue any approval or commence any action complaining about a settlement within any period. If the FTC is going to get significantly enhanced enforcement powers, it seems reasonable for the agency to be required to commence any proceeding complaining about the settlement within a fixed period - for example, 60 days with the possibility of an extension for good cause for no more than an additional 60 days. An FTC review process as proposed above is similar to what the FTC already performs under the Hart-Scott-Rodino Act with respect to corporate mergers.

Who should judge the assessment? The FTC administrative law judges seem best placed to determine these cases as they have expertise in the unique issues involving the triple intersection of antitrust law with patent law and with pharmaceutical regulation. Congress should mandate that the cases proceed expeditiously and afford deference to the FTC judge’s fact finding in any appeal.

The process and standard set out above would not replace the existing law and remedies under applicable antitrust statutes. They are meant only to act as a gate-keeper on drug patent settlements to ensure that the public interest in access to affordable medicines is not compromised by private litigants.


Finally, Congress needs to address the underlying, structural driver of drug patent settlements involving undesirable payments: authorized generics during the 180 day exclusivity period. This should be prohibited. A prohibition on authorized generics during the 180 day exclusivity period will enhance the incentive for generic drug companies to challenge weak patents and pursue worthy patent cases to conclusion. It will protect the intent of Congress in granting the 180 day exclusivity period restoring the original bargain between brand and generic drug companies.

Tim Gilbert is a partner and founder of the law firm Gilbert’s LLP, based in Toronto, and a principal in its D.C. government relations affiliate, Gilbert’s Washington Inc. The views expressed do not necessarily reflect the views of any of Gilbert’s clients. He may be contacted at tim@gilbertslaw.ca.