FTC Testifies Before U.S. Senate on Barriers to Entry of Generic Drugs

On May 2, FTC Commissioner Jon Leibowitz testified on behalf of the FTC before the U.S. House Subcommittee on Commerce, Trade, and Consumer Protection of the Committee on Energy and Commerce regarding anticompetitive patent settlements in the U.S. pharmaceutical industry. Leibowitz alleged that recent court cases have made it more difficult to bring antitrust cases to stop exclusion payment settlements between brand manufacturers and their generic competitors.

The testimony stated that the FTC commends Congress’ efforts to prohibit such anticompetitive settlements. The FTC looks forward to working with Congress to ensure that the legislation effectively bars anticompetitive agreements but allows exceptions for those agreements that do not harm competition. In addition, the bill also addresses the ‘bottleneck’ problem, which allows the brand company to use its settlement with the first generic filer to prevent subsequent generic companies from entering the market and competing as well.

Exclusion payments, also known as reverse payments, is a term used to describe settlements of patent litigation in which a brand-name drug manufacturer pays its potential generic competitor to abandon a patent challenge and delay entering the market. The increased costs resulting from anticompetitive agreements that delay generic competition harm all those who pay for prescription drugs: individual consumers, the federal government, state governments trying to provide access to health care with limited public funds, and American businesses striving to compete in a global economy.

The testimony stated that Congress enacted several changes in 2003 to the Hatch-Waxman Act that established a 180-day exclusive marketing period for the first generic filer to replace a branded drug, including enabling the FTC to review all settlements of patent cases brought under the Act. Despite this important enforcement tool, the testimony noted that the prospects for effective antitrust enforcement against anticompetitive agreements between branded and generic pharmaceutical manufacturers are substantially less encouraging today than they were in 2001. The reason is that two appellate court decisions handed down in 2005, including Schering-Plough v. Federal Trade Commission, took an extremely lenient view of exclusion payment settlements.

To illustrate this problem, the testimony cited an FTC study released in January 2007 containing the staff’s analysis of a new trend in drug settlements filed during the fiscal year ending in September 2006. According to the study – the third annual report the FTC issued on this subject – half of all patent settlements in FY 2006 (14 of 28) involved compensation to the generic patent challenger and an agreement by the generic firm to refrain from launching its product for some time.

The implications for consumers and others who pay for prescription drugs are serious. Generic competition following successful patent challenges has provided substantial benefits to consumers. The cost savings resulting from generic entry after successful patent challenges are lost, however, if branded drug firms are permitted to pay a generic applicant to defer entry.
According to the testimony, a legislative remedy to the problem of exclusion payments offers a relatively quick solution. While the FTC’s enforcement activities are continuing, the time and uncertainty involved in litigation challenges to anticompetitive settlements is recognized.
The Commission vote authorizing the presentation of the testimony and its inclusion in the formal record was 5-0.

Robert Doyle
(202) 589-1834
rdoyle@dbmlawgroup.com