Pay for delay: Right or wrong?

With market pressures from generic drug manufacturers at an all-time high, firms have turned to what’s known as “pay for delay,” a stalling tactic employed by originator pharmaceutical manufacturers to maintain market share after a pharmaceutical patent has expired or has been found to be invalid in court.

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In the pharmaceutical industry, that hypercompetitivebusiness with astronomical costs, market exclusivity is of paramountimportance. And drug manufacturers will do almost anything keep hold of thatprecious resource.
With market pressures from generic drug manufacturers at anall-time high, firms have turned to what's known as "pay for delay," a stallingtactic employed by originator pharmaceutical manufacturers to maintain marketshare after a pharmaceutical patent has expired or has been found to be invalidin court.
The general idea is that the originator and patent holderpays a third party to delay competition from a generic equivalent of the pharmaceuticalin question. The third party may be a generic manufacturer, particularly incourt cases in which the generic manufacturer has challenged the originator'spatent. Sometimes, the third party is a pharmaceutical benefits management(PBM) company, in which case, the payment may be made to induce the PBM companyto continue to favor the originator's version of the drug over that of ageneric competitor.
Pay for delay is highly controversial and has spawnedmultiple government investigations and even lawsuits. The Federal TradeCommission (FTC), for example, on its website devoted to "reporter resources,"states unequivocally that "consumers lose when branded drug manufacturers useillegal tactics to keep generic alternatives off the market." The websitecontinues that such "illegal" tactics involve "pay[ing] off the makers ofcompeting drugs to withhold their products from the market."
However, are pay-for-delay tactics actually illegal? TheSupreme Court refused to hear the appeal of the FTC in a pay-for-delay caseinvolving Schering Plough in 2001, and while many such cases are currentlywending their way through the court system, few have resulted in a definitiveruling against such tactics. One 2006 case, involving the contraceptive Ovconby the originator Warner Chilcott, resulted in a settlement when the originatoragreed to drop an agreement with Barr, a generic manufacturer, that would haveprevented Barr from marketing a generic version of Ovcon. Currently, there areno court cases brought by the FTC involving the second type of pay-for-delaytactics, in which the originator pays the PBM company to continue to favor theoriginator's version of the drug over that of a generic competitor.
To determine whether any pay-for-delay tactics are illegal,it is important to note that companies are generally constrained in theircommercial behavior by anti-monopoly laws. Blatant collusion between companiesto fix prices is not permitted; for example, Perrigo Co. and Alpharma Inc. wereaccused in 2004 of colluding to effectively fix prices for over-the-counterstore-brand children's liquid Ibuprofen, which is clearly illegal. A settlementwas reached in this case, requiring the companies to pay illegally obtainedprofits from the alleged price-fixing deal. 
Less blatant than collusion, mergers can also beproblematic. For example, the FTC either blocks or places restrictions onmergers between two companies that would result in the new company havingmonopoly power in the market. Pharmaceutical companies are not immune from suchrequirements. For example, proposed mergers between Pfizer Inc. and Wyeth,Schering-Plough Corp. and Merck & Co. Inc. and CSL Ltd. and Cerberus-PlasmaHoldings LLC all resulted in objections by the FTC due to monopoly concerns.The first two mergers proceeded after it was agreed that the merged companywould divest parts of itself; the last merger failed, due to these concerns.Thus, in general, monopoly behavior by pharmaceutical companies is notpermitted.
Patents, however, are one area in which a monopoly ispermitted, but with limitations. For example, patents have a defined lifetime(most recently 20 years from the date of filing of the patent application,barring any extensions). Still, even with this monopoly right, there arelimitations. "Tying," or forcing the purchase of products or services notcovered by a patent in order to be able to purchase a patented product, isillegal in some circumstances. Sandoz Pharmaceuticals Corp. fell afoul of thislaw when attempting to tie purchase distribution and patient-monitoringservices with purchase of clozapine, its (then) patent-protected schizophreniadrug; the FTC considered this tying arrangement to be an abuse of the patentmonopoly. Furthermore, although a patent owner may license the patent, theterms may be considered illegal if they involve tying, price-fixing and soforth. Attempts to fix resale prices of a patented product through a licenseare also not legal. Thus, even patent law does not permit a patent owner tohave an unrestrained monopoly on a product or even on terms for licensing thepatent.
Despite these robust antitrust laws, the FTC frequentlyloses in court on pay-for-delay issues—and any of its successes have comethrough settlements. This failure to curtail the practice is at least partlydue to the lack of explicit language in the law governing these arrangements.The Hatch-Waxman law, which governs generic drugs, does not explicitly forbidpay for delay. The FTC has been trying to induce Congress to support laws thatdo explicitly forbid pay for delay, although no bills have passed both the House andthe Senate. 
Thus, the FTC must rely onmore general antitrust law to block such arrangements—with relatively limitedsuccess to date. 
While the above forms of pay-for-delay arrangements have notconsistently been found to be illegal, the newest form, involving PBM companiessuch as Medco, involve an even murkier area of the law. There is no law thatexplicitly prevents this behavior, yet it clearly results in the enrichment ofthe originator manufacturer at the expense of insurance companies, consumers orboth. The deal between Pfizer and Medco for Lipitor, in which Medco agrees tosupply patients with brand-name Lipitor even if a generic version has beenprescribed, does not directly hurt the consumer, as the copay/deductible is notincreased. However, insurance companies, employers and the U.S. government (asan insurer) will all pay more money—straight into the pockets of Pfizer andMedco, as the latter receives a "rebate" for such prescriptions. Is such a"rebate" illegal? Is it even a rebate—or is it a bribe, as asserted by thewebsite "Public Citizen"?
These questions are not trivial, since bribes and kickbacksare clearly illegal, while rebates are not necessarily illegal. For example,it's illegal for a pharmaceutical company to bribe a doctor to prescribe itsdrug for Medicare patients. A pharmaceutical company that engages in thisbehavior may be the subject of a qui tam,or whistleblower lawsuit, seeking to claw back the resulting illegal profits.In 2010, Kos Pharmaceuticals, a subsidiary of Abbott Laboratories, agreed topay more than $41 million in a settlement of lawsuits for alleged kickbacks todoctors who prescribed its drugs Advicor and Niaspan. The language of theAnti-Kickback Statute (42 U.S.C. § 1320a-7b(b)) is not limited to prohibitingkickbacks to doctors, but instead blocks such kickbacks to any entity involvedin referrals to particular service or product providers when such providers arepaid by Medicare/Medicaid (more generally referred in the statute as "federalhealthcare programs").
The arrangement could also potentially be challenged underlaws preventing price-fixing as previously described. Various pharmaceuticalchains, associations and providers of pharmacy network services have beenpursued by the FTC for various forms of price fixing, collusion, illegalboycott and other anticompetitive behavior. Yet it is possible that none of thelaws that could potentially be applied clearly block the Pfizer/Medcoarrangement, as the two entities are not competitors. Pfizer is not attemptingto abuse patent monopoly power, the deal does not specifically fix the price ofthe drug and Medco is not the sole player in the PBM market; it's not even thelargest of the three major competitors in this area (although the proposedpurchase of Medco by Express Scripts, another of the three competitors, wouldmake the merged company the single largest player in the PBM area). 
Clearly, all parties in the healthcare system would benefitfrom clear laws in this area or, barring new laws, from a decisive court casethat would delineate permitted agreements and arrangements in this area. At themoment, only the originator pharmaceutical companies and those with which theyreach an agreement, such as generic drug companies and PBMs, are benefitingfrom the lack of legal clarity. The Hatch-Waxman Act clearly sought a balancebetween the rights of pharmaceutical originators and generic manufacturers, toultimately provide the best benefits to consumers—both by encouraging (andprotecting) pharmaceutical innovation and by opening up the area ofpharmaceuticals to competition after patent expiry. However, pay to delaythreatens this balance, not only by providing additional months or even yearsof an effective pharmaceutical originator dominant market position (if notoutright monopoly), but also by introducing uncertainty into the ability ofgeneric manufacturers to enter the market. 
After all, with a pay-for-delay arrangement, genericmanufacturers may not be able to sell their products if no one will buy them.Consumers, insurers, employers and the federal government would also benefitfrom clarity in this area. Even originator pharmaceutical manufacturers wouldbenefit from a clear and consistent legal environment, as they would not beunder threat of potential lawsuits or investigations by the federal governmentor other bodies.
Dr. D'vorah Graeser isthe founder and CEO of Graeser Associates International (GAI), an internationalhealthcare intellectual property firm. Dr. Graeser has been a U.S. patent agentfor more than 15 years and has extensive experience and expertise in thebiomedical field.

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