8/14/2019 Protecting Profits Payments
1/3
I P
Protecting ProfitsCongress prepares to stop drug makers from
offeringe x c lu s io n p a y m e n t s to g e n e r ic m a n u f a
c t u r e r s , BY STEVE SEIDENBERGI Circuit courts
disagree about howto handle exclusionpayments
Paymen ts createantitrust concerns Supreme Court mayhave final
word
It was an awkward situation, to put it mildly, f Th e year was
1992, and AstraZeneca Intemationalwas on the verge of losing its
rights to a major blockbuster drugTamoxifen citrate. London-based
AstraZeneca earned millions of dollars each year on sales of
Tamoxifen, one of themost prescribed cancer drugs in the world. To
protect its valuable monopoly, AstraZenecapreviously had sued Barr
Laboratories, seeking to stop the New Jersey-based firm
fromproducing a generic version of the drug. 1[ Filed in November
1987, that lawsuit backfired.Finding that AstraZeneca had
wrongfully withheld important information from the patent
office, a federal court in Manhattanstruck down the company's
patent onthe drug in April 1992.AstraZeneca responded by buying
oflFits opponent. In a 1993 settlement, madewhile AstraZeneca
appealed to the FederalCircuit, the company agreed to pay Barr$21 m
illion. In return Barr agreed notto produce a generic version
ofTamoxifen until AstraZeneca'spaten t expired in 2002. Barr
alsoagreed to ask the Federal Circuit tovjicate the district court
judgment,thus restoring the Tamoxifen pa t-ent to AstraZeneca.The
settlement was a win forboth parties. A straZeneca got itspatent
back and removed the dan -ger of competition that would cutinto
salesand profitsfor itsblockbuster drug. B arr receivedmore money
than it was likely toearn if it had won its lawsuit andproduced a
low-priced generic.The Tamoxifen deal is far fromunique. In recent
years, there hasbeen anexplosion of settlementagreements where
brand-namedrug companies pay allegedinfringers large sums of
money
to po stpone making generic versions ofblockbuster drugs.Courts
and legal experts remainsharply divided over th e legality of
theseso-called "exclusion payments" or "reversepayments." But all
agree the stakes arehigh, with billions of dollars on the
line."This is of critical importance to ...
the pharmaceutical industry, to consum-ers ... and to large
corporations trying tomanage their health care costs," says W.Scott
Simmer, a health care litigator atRobins, Kaplan, M iller &
Ciresi.Settling InDrug companiesfirststarted using exclu-sion paym
ents in the late 1990s,but the practice ended whenth e FTC filed
some antitrustenforcement actions in 2000 .Between 2000 and 2004 ,
therewere no known patent litigationsettlements th at involved
exclu-sion payments.
The legal landscape suddenlyshifted in March 20 05 when the11th
C ircuit issued its decisionin ScheringPlough Corp. v. FTC.That
ruling upheld the legalityof exclusion payments Schering-Plough m
ade to two rivals. Thecourt held that such paymentsviolate an
titrust laws only if theyare part of a deal to improperlyextend the
scope of a patent Qoy,for instance, forbidding a com-petitor from
manufacturing anunrelated product).
2O INSIDECOUNSEL MAY 2007 WWW.INSIDECOUNSEL.COM
8/14/2019 Protecting Profits Payments
2/3
I PThe landscape shifted even further in
August 2006 with the 2nd Circuit's rul-ing in In re Tanwo dfcn
Citrate AntitrustLitigation. The class action suit
allegedAstraZeneca's exclusion payment to Ban-was an illegal
restraint of trade. The 2ndCircuit threw out the suit, which was
filedon behalf of consumers and m edical ben-efit providers, ruling
that although a trialcourt had struck down AstraZeneca's pat-ent,
the company was entitled to settle theongoing appeal of that
verdict by meansof an exclusion payment.
Pharmaceu t ica l compan ies havepounced on these rulings, using
exclu-sion pajTnents to settle almos t two dozeninfringement suits
since March 2005.And those num bers are expected to rise.
"In the curre nt legal climate, there isevery reason to expect
the upsurge in suchsettlements to continue and early entry ofgene
rics... to decline," FTC CommissionerJon Leibovidtz told the Senate
JudiciaryComm ittee in early 2007.Pharmaceutical PeculiarityIn
issuing their rulings, both the 2ndand 11th Circuits noted th at pa
tent suitsconcerning pharmace uticals are not likeordinary patent
suits.A defendant in a typical patent-infringement suit has a lot
on the line.If the alleged infringer loses, it may have
to cease marketing its now -establishedproduct or service, as
well as pay trebledamage s. The typical plaintiff risks onlythe
exclusive right to practice th e inven-tion, which already has been
underminedby the defendant's actions.
Because the downside risk is so muchgreater for alleged
infringers than forpatentees, it makes sense that
litigationsettlements usually include substantialpayments from
defendants to patentees.If the payment went in the other
direction,it would look quite suspiciousas if thepatentee was
attempting to either restraincompetition or protect a dubious
patent.
The s i tuat ion changes when drugpatents are involved. Federal
laws pro-vide that th e patent holder should sue aninfringing
generic drug m aker as soon asthat d rug maker seeks FDA approval
tomarket the generic. If the generic m an-ufacturer loses this
suit, it gives up littlemore than its litigation costs and
thechance to market the drug. By contrast,the patentee risks losing
the exclusiverights to a product that might be earn-ing it billions
of dollars per ye ar (see "TheLure of Exclusion Payments").
Because the downside risk for drugpatentees is so much greater
than foralleged infringers, it makes economicsense for patentees to
settle infringementsuits by paying large sums of money to
The Lure of Exclusion PaymentsAs soon as a patented drug faces
competition from a generic rival, the drug'sretail price typically
drops by at least 16 percent. The price plummets furtheras more and
more generic drug manufacturers enter the market. Thanks tovigorous
competition, the retail price eventually falls as much as 80
percent.
That's a lot of moneymoney patentees and their generic rivals
can keepfor themselves if they make settlements based on exclusion
payments.FTC Commissioner Jon Leibowitz explained it this way to
the Senate
Judiciary Committee in January 2007: "In nearly any case in
which genericentry is contemplated, the profit that the generic
anticipates will be muchless than the amount of profit the
brand-name drug company stands to losefrom the same sales. This is
because the gen eric firm sells at a significantdiscount off the
price of the brand-name product.... Consequently, it willtypically
be more profitable for both parties if the brand-name
manufacturerpays the generic manufacturer to settle the dispute and
agree to defer entry."
alleged infringers. That, at least, is theview of the 2nd and
11th Circuits.
However, not everyone agrees withtha t analysis.Antitrust
QuestionsIf the 2nd and 11th Circuit decisionsbecome the law of the
land, the resultwil l be d isas ter , according to manyexperts.
"Virtually every ph armac euticalpate nt case will be resolved by a
reversepa}Tnent," says Paul Slater, an ant itru stattorney at S
terling & Slater.
This will keep dru g prices far higherthan if there were real
competition, add -ing billions of dollars to health care
costs."That's not good for consumers, espe-cially at a time whe n m
edical benefits cirebecom ing so expensive," Simm ers says.
Critics, however, can't agree on whatto do about exclusion paym
ents. Some saythe government should deem these pay-ments per se
violations of antitrust law.The FTC and 6th Circuit have
adoptedthis view. The Senate Judiciary Committeealso backs this
idea and recently approveda bill tha t would explicitly prohib it
exclu-s ion payments . The House may soonintroduce sim ilar
legislation.
Others th ink exclusion paymentsshould be subject to a tough,
case-by-caseanalysis. "There should be a p resump tionof
illegality... tha t would put the burde non the drug companies to
show a highlikelihood that the patent ovwier wouldhave prevailed if
the case had gone totrial," says Thomas Cotter, who teachespaten t
and an titrust law at the Universityof Minnesota.
Unless Congress acts, many observersexpect the Supreme Court to
step in andresolve the circuit court split over howto handle
exclusion paym ents. There issimply too much at stakefor the
U.S.economy, pharmaceutical innovat ionand the health care
systemfor the HighCourt to ignore the problem .
"Whether we view [exclusion pay-ments] as antitrust violations
or not hasenormous consequences," says C. ScottHemphill, who
teaches patent sind anti-trust law at Columbia University.
2 2 INSIDECOUNSEL MAY 2007 WWW.INSIDEC0UNSEL.COM
