The Budget Prescription

Earlier this month, the European Commission launched a new round of investigations targeting the pharmaceutical industry for allegedly colluding to keep low-cost generic drugs off the market. As a result, regulators are looking into the 2005 contractual arrangements between U.S.-based pharmaceutical giant Johnson & Johnson and the generic branches of the Swiss-based company Novartis to see whether the agreements purposely delayed the introduction of a generic version of the painkiller Fentanyl to the Dutch market.

The probe is the latest round in an ongoing battle between commission trade officials and Big Pharma over quasi-legal “pay to delay” deals—settlements forged between drug manufacturers and producers of generic alternatives with the goal of extending brand-name monopolies long after patents have expired. Four days after the Europeans moved against Johnson & Johnson, the Federal Trade Commission (FTC) Bureau of Competition issued its annual staff report on pay-to-delay, which found a surge in the number of patent settlement deals in fiscal year 2011. Pharmaceutical companies inked a total of 156 settlement agreements over the prior 12 months, 28 of which contained a payment to a generic manufacturer that restricted its ability to market its product, according to the report.

Jon Leibowitz, chair of the FTC, has been a vocal critic of pay-to-delay, describing it as a “win-win proposition for the pharmaceutical industry but a lose-lose for everyone else.”

In the U.S., pay-to-delay agreements typically occur prior to the expiration of a drug's patent, under a process outlined in paragraph IV of the Abbreviated New Drug Application process created by the Hatch–Waxman Act of 1984. Before a generic manufacturer can proceed with a “bio-equivalent” version of a patented medicine, it is required to go to court to either challenge the patent's validity—arguing, for instance, that the patent has expired—or prove there is no infringement. Frequently, these cases lead to out-of-court settlements with big payouts from brand-name manufacturers to their smaller rivals to delay their entrance into the market.

Such agreements help generate millions of dollars of unnecessary drug costs for consumers by preventing them from acquiring low-cost alternatives to expensive brand names. The average generic can cost anywhere from 30 percent to 50 percent less than brand-name versions. The FTC estimates that pay-to-delay currently protects $20 billion worth of brand-name sales from generic competition and that over the past six years, the tactic has held up the introduction of generic alternatives by an average of 48 months.

Leibowitz has repeatedly called for a ban on the deals, and he recently urged the 12-member congressional “super committee”—which is tasked with cutting more than $1 trillion from the federal budget over ten years—to take up the issue as a means of saving the government billions in prescription costs. The federal government spent $78 billion on prescription drugs in 2009, according to the Government Accountability Office.

As public sentiment mounts against blatant money schemes that make multinational corporations richer while consumers suffer in the United States, Big Pharma's days of patent collusion may be numbered. Even President Barack Obama has gotten into the game, taking aim at pay-to-delay in his 2012 budget. And with the super committee reportedly at loggerheads as it counts down the final weeks to congressional show time, ending drug-patent settlements might just be a deficit reduction solution everyone can agree on.

In July, the Senate Judiciary Committee approved a bill—the Preserve Access to Affordable Generics Act, introduced by Senator Charles Grassley, a Republican from Iowa, and Senator Herb Kohl, a Democrat from Wisconsin—that would severely limit pay-to-delay deals by preemptively banning the practice.

But with so much money at stake, it's unlikely that the industry will go down without a fight. According to the Center for Responsive Politics, drugmakers spent more than $180 million in 2011 on lobbying fees, and the industry contributed $15.7 million to members of Congress during the 2007–2008 election cycle (and that was before the Supreme Court's Citizen's United decision opened the floodgates to corporate cash in elections).

We're talking big business here, and generics pose a major threat to Big Pharma's bottom line. Brand-name alternatives currently account for more than three-quarters of all U.S. prescriptions and save both the U.S. government and consumers a bundle in health-care costs. In September, the Generic Pharmaceutical Association released a sweeping ten-year study concluding that brand-name alternatives have saved the nation $931 billion in drug costs since 2001—$3 billion every week in 2010 alone.

What's more, the pharmaceutical industry is about to get walloped as a slew of major medicines near the end of their patent cycle. Thirteen of the industry's top-selling drugs will come off patent by 2013, according to sector analysts, including the antipsychotic drug Zyprexa; Singulair, which is used to treat asthma; and Plavix, an anti-platelet drug. Together, the trio of medicines brought drugmakers some $12 billion in sales in 2010. The cholesterol drug Lipitor, which is the world's best-selling medicine and earned Pfizer more than $5 billion last year, will be fair game on November 30.

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