Big pharma’s “pay-to-delay” deals: Helping or hurting patients?

A few weeks ago it was announced that Jon Leibowitz has decided to leave his post at the Federal Trade Commission. Jon has been the driving force behind the FTC’s attempt to ban so called “pay-to-delay” deals that have become increasingly common between branded and generic pharmaceutical companies. The FTC claims that these deals are “anti-competitive” and basically amount to collusion between branded and generic companies. According to the FTC, these deals cost the American public $3.5 billion per year in higher drug cost as cheaper generic drugs are delayed from entering the marketplace. Jon’s efforts seem to have paid off as Senator Chuck Grassley recently introduced legislation banning the deals and the Supreme Court will soon decide if the deals are legal.

You might be wondering what these “pay-to-delay” deals are exactly, so lets look at a hypothetical example:

Let’s say a branded pharmaceutical company is selling a patent-protected drug with annual sales of $5 billion per year. The company’s patent on the drug doesn’t expire until 2020 so they will continue to promote and sell the drug until then, upon which time a generic drug company will begin producing and selling a generic version (after gaining approval from the FDA). Generic companies compete with each other to get their generic version approved first, since it comes with a 180 day exclusivity period where no other generic company can sell their version. During the 180 days, the generic company will undercut the price of the branded therapy and grab a large part of the market share. Since the generic drug company only has to do a fraction of the R&D that the branded company did, the 180 day exclusivity is very profitable. After the 180 days are up, any generic drug company can sell their generic and the price falls to the point where there is little profit to be made.

Where thing get complicated is that generic companies often don’t wait until the branded drug’s patent expires. Instead, they will challenge the validity of the patent in court and if successful, they will get the coveted 180 days of exclusivity and can start selling their generic version immediately. As you can imagine, this potential payoff creates a lot of incentive to challenge a patent.

What does the patent holder do when their patent is challenged? Since there are often billions of dollars of profit at stake, they fight it out in court by hiring some very expensive lawyers to argue that their patent is valid . If the generic drug company has already started selling their generic version before the patent issue is settled (a so called “at risk” launch), the branded drug company can sue for damages if the patent is found to be valid. Since the law allows for recovery of triple damages, losing a patent decision is what generic companies fear the most (for a great example of such an outcome, look no further than Pfizer’s request for $2 billion in damages for Teva’s at-risk launch of Protonix).

As you can see, the stakes are very high for both companies if a patent challenge actually ends up being decided by a judge. It’s an all or nothing outcome: one party will win big and one party will lose big. It’s for this reason that many patent challenges lead to out-of-court settlements that include so called “pay-to-delay” deals. In exchange for a payment from the branded drug company (either in the form of cash or other financial incentives) the generic drug company will agree to delay the launch of their generic version. You can think of this as a way to “meet in the middle”. Both companies get something out of the deal and it eliminates the risk of being on the losing end of a winner-takes all outcome.

However, is the FTC’s allegation that pay-to-delay deals delay entry of cheaper generic drugs and hurt the consumer true? No. The launch of the generic drug is only delayed in the sense it would enter the market later than if the generic company succeeded in invalidating the patent. However, the reason why the generic company agrees to the pay-to-delay deal is because it doesn’t believe it will succeed in invalidating the patent. If pay-to-delay deals were banned, the generic company would likely just pack up its bags and head home as the possibility of losing the patent challenge is more risk than they can tolerate. If anything, pay-to-delay deals actually result in a generic drug entering the market sooner than it would have otherwise.

If pay-to-deal deals are banned and branded and generic companies lose the ability to “meet in the middle”, the availability of generic drugs will likely be delayed in many cases, which is exactly what the FTC is trying to avoid. It will remain to be seen if Chuck Grassley’s bill passes into law, but in the mean time, keep an eye out for the Supreme Court decision. The court’s decision will have far reaching consequences for the pharmaceutical industry and in the end the consumer.