Generic Drug Competition in Health Care Reform

A CAP event addresses the impact of pay to delay settlements on generic competition and health care costs.


“Getting health care costs under control is a daunting challenge … but one simple step could save consumers and the federal government billions of dollars annually, and that is stopping pharmaceutical companies from colluding with competitors to keep low-cost generics off the market,” said Federal Trade Commission Chairman Jon Leibowitz at a CAP event on generic drug competition on Tuesday.

A panel moderated by CAP Senior Fellow David Balto—who released a report on removing obstacles to generic drug competition earlier that morning—followed Leibowitz’s talk. Panelists included Seth Bloom, general counsel of the Senate Antitrust Subcommittee on the staff of Sen. Herb Kohl (D-WI); Heather Bresch, executive vice president of Mylan Laboratories; Michael Carrier, professor at Rutgers School of Law; Gerald Masoudi, a partner at Covington & Burling; and Bernard Sherman, chief executive officer of Apotex, Inc.

In 1984 Congress passed the Hatch-Waxman Act to make it easier for generic drugs to enter the market while giving brand name manufacturers protection to sustain pharmaceutical innovation. A critical measure in the law encouraged generics to challenge weak brand-name drug patents, and they subsequently won 73 percent of the patent challenges according to a 2002 FTC study. The resulting competition yielded significant savings for consumers, with drug prices dropping 85 percent on average.

“We’ve had a very good policy, and a law that implemented that policy effectively, but unfortunately that law has been derailed,” said Leibowitz. The cheaper prices and lower margins of generics create incentives for brand-name manufacturers to pay off their potential competitors. These so-called “pay to delay settlements” or exclusion payments are win-win deals for both parties because generics can make millions more by cutting deals than by going to market—only consumers lose.

The chairman advocated a ban on such settlements. Leibowitz acknowledged the legendary strength of the Washington pharmaceutical lobby, but he cited clear support from the Obama administration and Congressional leaders. “It’s an approach we believe that’s at odds with market realities and established antitrust principles, and it leads to a perverse result,” Leibowitz said.

A recent FTC study found that banning settlements could save consumers $35 billion over the next 10 years. The federal government pays a third of the nation’s $325 billion prescription drug bill and would save $12 billion in the same time frame. The ban would also help pay for health care reforms.

The panelists offered differing views on the issue. “The thrust of FTC in trying to ban payments is well intentioned, but my concern is that it misses the mark because it doesn’t address the fundamental problem,” said Sherman. Generic manufacturers are granted exclusivity when they file a patent challenge, and are then able to block entry to the market by other generic competitors. If the resulting “bottleneck” problem was addressed, Sherman argued, pay to delay settlements would disappear.

Masoudi opposed the ban on different grounds. “I think there are good reasons that companies might enter into these settlements that aren’t anticompetitive,” he said. It would also be very difficult to come up with an administrable rule against settlements that wouldn’t be overly broad in definition, said Masoudi, adding that the courts should be left to settle the issue.

“The courts have gotten it completely wrong on this front,” Carrier said. If a patent is found to be valid in a patent dispute, a settlement is appropriate. If it isn’t, then the brand cannot hold the generic off the market. Among other problems Carrier argued that the courts have been assuming that a settlement is within the scope of the patent without first determining whether the patent is valid.

Only Carrier and Bloom—echoing Leibowitz and Balto—gave their full support for the ban. “If the generic is getting tens or hundreds of millions of dollars more money by settling the case than by winning its challenge and entering the market, that tells us something about what’s going on here,” Carrier said.

For more on this event please visit the events page.

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