JHLI Lecture Series: Reverse Payment Antitrust Litigation: Pay-for-Delay

On February 17, 2015, The Jaharis Health Law Institute welcomed Kenneth A. Wexler of Wexler Wallace LLP, who has championed complex class action and commercial litigation cases for over 30 years.

The lecture focused on pay-for-delay, a market power strategy, implemented by some of the pharmaceutical industry’s major stakeholders. Pay-for-delay occurs when brand name drug manufacturers offer payment to generic drug manufacturers to delay their entry into the marketplace. [1] These deals give brand name manufacturers an opportunity to maintain their patent-protected legal monopolies without the threat of less expensive generic competitors entering and saturating the market. [2]

Wexler began the presentation by describing the typical relationship between brand name and generic drug manufacturers. Brand name drug manufactures experience little to no competition before generic drugs enter the market. Their consumer bases are determined by doctors who promote particular brand names, marketing that differentiates one brand name from others in its class, and the personal experiences consumers have with a brand name drug’s active ingredient. Additionally, a brand name can receive its exclusivity rights through regulations or patents. When a brand name drug earns exclusivity rights through a patent, it possesses all of the rights afforded to a “legal monopoly.” The brand name manufacturer is allowed to charge consumers whatever price the market will allow, push for higher than normal profit margins, and benefit from low cross-price elasticity of demand. These monopoly rights are protected in entirety for the life of the patent as long as the patent is valid. 

Conversely, a generic drug contains the same active ingredient as the brand name drug. In addition to bioequivalence criteria, all generic drugs must also be AB-rated and gain final approval by the Food and Drug Administration (FDA) before entering the market. The difficulty in assessing the individual rights of brand name and generic drug manufacturers arises when looking at the economy. When a generic drug enters the market, it creates price competition for an active ingredient and market competition allows for a consumer surplus. A brand name drug loses up to 80% of its sales revenue within the first six months of a generic entering the market. [3] This reduction in revenue will often reach 90%, with 10% of the “brand loyal” consumers continuing to purchase the brand name regardless of price. [4] 

The stark contrast between a brand name drug’s market shares before and after generic drug competition exemplifies the tension between antitrust laws promoting price competition and patent laws encouraging innovation. Wexler went on to explain how the Hatch-Waxman Amendments were passed as an attempt to “meld” these two areas of law and balance their goals. [5] Under the Act, a generic can now enter the market before the brand name’s patent expires if it can develop a product without infringing on the brand name’s patent, or can prove that the patent is invalid. [6]

Wexler explained how pay-for-delay is woven into the market competition between generic and brand name manufacturers. A generic manufacturer must notify the brand name manufacturer that it has an Abbreviated New Drug Application (ANDA) and Paragraph IV certification which identifies any invalid patents while simultaneously disclaiming infringement. The brand name manufacturer has a right to sue the generic for patent infringement within 45 days of notice. [7] The claim against the generic will result in no damages because the drug has not yet entered the market. Instead, a successful lawsuit will preclude the generic from entering the market while an unsuccessful lawsuit will facilitate its entrance as long as it has final FDA approval. The first manufacturer to file an ANDA is entitled to 180 days of exclusivity as a generic monopoly. [8]

There are also specific barriers in place to help delay a generic drug’s entrance into the marketplace. In order to sue for patent infringement under the Hatch-Waxman Amendments, brand name manufacturers must list their patents in the FDA Orange Book. [9] A lawsuit creates an automatic 30-month stay of the FDA’s ability to grant final approval such that a generic cannot enter the market regardless of who wins the lawsuit. [10] Similarly, filing a citizens petition alleging safety concerns creates a stay and precludes the FDA from granting final approval of the generic’s ANDA until the manufacturer resolves the issues. [11] Wexler noted that both brand name and generic manufactures abuse the Hatch-Waxman Amendments. Certain brand name manufacturers will list fraudulent patents in the FDA Orange Book, take part in sham litigation, file sham citizens petitions, engage in product hopping, and make reverse payments. Certain generics reciprocally create “statutory bottlenecks” when they agree to delay market entry because all other generics are barred from entry until the first filer has exhausted its 180 day window of exclusivity.

Wexler concluded the lecture by discussing the progression of pay-for-delay litigation. He focused on the Supreme Court’s holding in Actavis and his personal experience with the case. [12] Actavis adopted the rule of reason, which requires fact intensive analysis to determine whether a payment was made to delay market competition. [13] Settlements are favored, but unexplained payments from a brand name manufacturer to a generic drug manufacturer are expected to avoid anticompetitive consequences. [14] If the manufacturers cannot provide any pro-competitive justifications, the payment is presumed to be compensating for delay. [15]

Kenneth A. Wexler is a partner at Wexler Wallace L.L.P., a respected law firm seeking to protect the rights of all, where he focuses on antitrust litigation cases. Wexler Wallace L.L.P. is based in Chicago, Illinois.

If you missed the lecture, you can view the recording HERE!

Sutapa Adhikari is a first year law student at DePaul University College of Law in Chicago and a fellow of the Jarharis Health Law Institute. Ms. Adhikari received her undergraduate degree in Political Science from the University of Illinois in Urbana-Champaign. 


References:

1. Pay-For-Delay: When Drug Companies Agree Not To Compete (Apr. 3, 2015), http://www.ftc.gov/news-events/media-resources/merggers-and-competition/pay-delay. 
2. Id.

3. Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman Amendments) (statement of Daniel E. Troy, Chief Counsel, FDA). (Aug. 1, 2003), http://www.fda.gov/newsevents/testimony/ucm115033.htm.

4. Id.

5. Id.

6. Id.

7. 35 U.S.C. § 271(e)(2)(A) (2013).

8. 21 U.S.C.S. § 355(j)(5)(B)(iv).

9. 35 U.S.C. § 271(e)(2)(A).

10. Id.

11. 21 C.F.R. 10.30 (2013).

12. FTC v. Actavis, Inc., 133 S.Ct. 2223 (2013).

13. Id. at 2236.

14. Id. at 2238.

15. Id.