Banning “pay-for-delay” deals that postpone the production of less-expensive generic drugs is a key action point in Hillary Clinton’s comprehensive plan to lower prescription drug costs. Eliminating these deals, she says, could save Americans billions of dollars on medications. But an even more productive strategy would be to stop drug makers from producing so-called authorized generics. (I tried to examine Donald Trump’s thoughts on this issue. While his website says he will remove “barriers to entry into free markets for drug providers,” no details are provided and no mention is made of pay-for-delay deals.)
A patent on a new therapeutic molecule is granted for 20 years, though its validity can be challenged at any time. Much of that 20-year window is often spent formulating the drug and testing it in animal studies and clinical trials. Acknowledging this delay, the Hatch-Waxman Act provides an incentive for drug development by granting the patent holder five years of market exclusivity during which no competitor can file to produce a generic variant. Not surprisingly, the price of the drug is high during this period.
After five years of exclusivity, companies can file with the Food and Drug Administration to produce generic equivalents. As long as no active patents still protect the drug, generic production can move forward. Competition drives down the price, sometimes by as much as 70 percent a few months after generic entry.
If one or more patents remain active, a company can still file an application with the FDA to begin making a generic version of the drug under Paragraph IV of Hatch-Waxman. The company must assert that it is not violating the patent or that the remaining patents are not valid. This filing effectively starts a patent litigation between the branded firm and the generic manufacturer, which can be a lengthy and costly process.
If the court rules in favor of the generic challenger, monopoly protection ends and that firm — as well as other generic drug producers — can enter the market and drive down the price to competitive levels. To prompt generic firms to undertake these legal battles, especially if the patents protecting the branded drug are weak and possibly shouldn’t have been granted in the first place, the first successful Paragraph IV challenger gets an exclusive right to produce the generic version of the drug for six months. In that way, the Hatch-Waxman Act provides incentives for new drug discovery as well as incentives for other firms to challenge patents if they do not genuinely represent innovative new discoveries.
However, patent litigation is lengthy, expensive, and risky. Enter pay-for-delay deals. In essence, the maker of a branded drug offers a financial out-of-court settlement to the generic company in return for withdrawing its challenge to the validity of the patent, agreeing to stay out of the market for a specified number of years, and setting a future entry date for the firm to start making a generic version under license from the patent holder. These are known as authorized generics.
An example is the settlement between Shire and Barr Laboratories in 2006, a pay-for-delay deal related to Shire’s blockbuster ADHD drug, Adderall XR. As part of the deal, Barr withdrew its patent challenge and was allowed to enter as an authorized generic under licence from Shire starting in April 2009. That authorization was exclusive to Barr for six months.
Banning such deals might not save us much. First, settlements can potentially save time and money by avoiding litigation, so we may not want to make settlements per se illegal. Second, settlement payments are difficult to discover as they can be labelled as something else. For instance, as part of the Shire-Barr deal described above, Shire paid a Barr subsidiary $165 million for the development of products related to transvaginal ring technology, which Shire planned to use in its women’s health and oral contraceptives business. Was the price right for this acquisition, or was the subsidiary overpaid and the deal was really part of a pay-for-delay payment? How can we tell?
Making it illegal to launch an authorized generic if an independent manufacturer successfully challenges a patent would be a cleaner, more effective approach than banning pay-for-delay deals.
The six-month period of exclusivity is an incentive for generic companies to be the first to successfully challenge a drug patent. But if the branded firm can launch an authorized generic via a pay-for-delay partner, that deprives the independent challenger of the exclusivity period even if it were to win the patent litigation. So why bother with the expense of mounting a risky challenge when the authorized generic takes exclusive entry off the table?
Eliminating the ability to create authorized generics removes a barrier to independent firms seeking entry. Without the threat of an authorized generic launch, if a branded firm pays off a company in a pay-for-delay deal, other firms can still seek entry or demand a similar payoff. Since paying off all generic firms isn’t possible, banning pay-for-delay deals becomes a moot point as it would no longer be profitable to make such deals.
Whoever is elected as the next president of the United States should consider more nuanced options for reining in drug prices, such as eliminating authorized generic deals.
Farasat A.S. Bokhari is a senior lecturer in the School of Economics and the Centre for Competition Policy at the University of East Anglia in Norwich, England.