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Generic dealmaking: 'Pay-for-delay' drug deals are going away

Posted: August 8, 2012 - 12:00am

The following editorial appeared in the Chicago Tribune:

For years now, the makers of brand-name and generic prescription drugs have worked together in a collusive practice that adds billions of dollars to the cost of health care.

The practice is nicknamed pay-for-delay — the “delay” being the longer stretch of time before cheaper generic drugs arrive on the market as patents expire.

In essence, the big companies that develop branded drugs pay off their rivals to slow the introduction of generic equivalents, which sell for much lower prices. The two sides agree to share the proceeds from the continued sale of the branded drug at the much higher price it can command without any competition.

From the drug industry’s point of view, pay-for-delay works well. It heads off risky and disruptive legal challenges. The branded drugmakers can keep charging high prices, and the generic drugmakers can make money by agreeing not to roll out a low-cost rival for a time.

That, of course, doesn’t work well for you. Pay-for-delay depends on monopoly pricing power. It puts health care consumers at a disadvantage.

A recent ruling by the Third Circuit Court of Appeals in Philadelphia rejected the practice as an unlawful restraint to trade, setting the stage for a likely showdown before the U.S. Supreme Court. Meantime, regulators in the U.S. and Europe have stepped up efforts to crack down on pay-for-delay. Legislation putting an end to it also has gathered some support, despite Big Pharma lobbying.

Pay-for-delay is unlikely to continue as is forever. Instead of fighting to the bitter end, the drug industry should help to determine how generics can come to market without prompting court fights and without soaking consumers.

Alas, nothing of the sort is happening. Drug companies make so much bank on pay-for-delay, they show every sign of going down swinging. That’s a mistake.

Pay-for-delay was a practical solution to an unintended consequence. When Congress passed the Hatch-Waxman Act of 1984, it opened the market for stepped-up generic competition. The new law worked as advertised to an extent.

But it also provided an incentive for anyone with a slick lawyer to challenge the patents of profitable pharmaceuticals. If a generic pharma company managed to overturn a patent, it could bring its product to market more quickly than if it had to wait for the patent to expire.

Depending on the industry, patent law can be a salvation or a scourge. It can encourage innovation or stifle it. For companies that develop brand-name drugs, effective patent protection is essential. Considering the up-front research and development necessary to bring new drugs to market, companies need a clear path to reliably recoup their investments over time if a product succeeds.

Industry insiders say pay-for-delay agreements not only support that principle, they also in many cases allow for generics to come to market sooner than the final patent expiration, under terms of the negotiated deals.

True enough, but at what price? The Congressional Budget Office concluded that the Senate legislation restricting pay-for-delay deals would reduce total U.S. prescription-drug expenditures by $11 billion over a decade. The federal government would save $4.8 billion — not a huge number in the scheme of health care spending, but hardly chump change.

Also telling, credit agency Fitch Ratings recently warned that an end to pay-for-delay would squeeze the sales and profit margins of pharmaceutical companies. Pay-for-delay is worth a fortune to the companies, partly because it enables them to charge more than they otherwise could.

The system is flawed. The payoffs from these side deals never will pass the smell test for a fair and competitive business practice. The drug industry needs to figure out a better way, while it still has the opportunity to chart its destiny.

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