When you go to the pharmacy, you probably assume that a less expensive, generic version of the drug you have been prescribed will be available.  This can mean a huge difference in price: generics often cost a fraction of their brand-name equivalents.  What you might not know is that generics can be kept off the shelves by brand-name drug companies by what are called pay for delay or reverse payment agreements.

This is what happens: a generic drug maker challenges a patent, and then the brand-name drug company pays the generic company to drop the challenge.  How much do these agreements cost our country?

  • The FTC estimates that these agreements cost consumers $3.5 billion a year
  • The Congressional Budget Office estimates that a ban on these agreements would save the government over $4.79 billion over a decade, and would lower U.S. spending on prescription drugs by $11 billion over the same period.

But the pharmaceutical companies have numbers of their own.  Firstly, they argue that these payments are not to stop competition or the entry of generic products but to compensate for other services, such as marketing.  They also claim that these settlements have a broader benefit to the public.  It costs about $1.3 billion to create one new drug, and often these drugs fail and do not reach the market.  Without the ability to recoup their costs before generic competition enters the market, pharmaceutical companies say they would be much less likely to take risks and invest in drug development that benefits all of us.

In the particular case that the Supreme Court has accepted, Solvay Pharmaceuticals was making $125 million a year on low testosterone treatment for men, so it paid three generic drug companies between $31 and $42 million a year to delay entry until 2015.

The drug companies argue that these agreements allow generic manufacturers to enter the market before the patent is set to expire, and the fact that they are giving up their last five years of patent protection should count in their favor.

The FTC argues that pay for delay agreements violate anti-trust laws that prohibit blatant agreements not to compete.  They not only want the Supreme Court to resolve the issue but also for Congress to pass a law limiting these types of deals.

The lower courts that have heard the case are split: three Court of Appeals have sided with the drug companies, and one has ruled in favor of the FTC.  The 3rd Circuit Court of Appeals, the only one that has ruled against the drug companies, states that these reverse payments should be automatically considered anti-competitive unless there is clear proof of another purpose for payment.  The other courts state that as long as the patent litigation is not obviously a scam, and the agreements between the parties are within the scope of the patent, pay for delay agreements are permissible.

Because the majority of lower courts have ruled in the favor of the drug companies, it is thought that the Supreme Court will do so as well.  Justice Samuel Alito has recused himself, allegedly because he owns stock in pharmaceutical companies, which leaves open the possibility that the Court will find itself tied on the issue.

What do you think?  Should the government be protecting consumers or drug companies?  Do you buy that these agreements serve any purpose but to make the brand name pharmaceutical companies richer?  It is true that they make large investments in their pharmaceuticals, but does generic competition cut so deeply into the enormous profits that they really discourage innovation?  Or is it just a guise for greed, which even the drug companies themselves can do little to deny.

Summer of 2013 will finally resolve this issue, and the one thing that is undeniable is that either way, it will have a big impact on the way the drug companies do business.

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