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Testifying today on behalf of the Federal Trade Commission before the U.S. House Judiciary Committee’s Subcommittee on Courts and Competition Policy, Bureau of Competition Director Richard A. Feinstein said that anticompetitive patent settlements in the U.S. pharmaceutical industry delay consumer access to lower-cost generic drugs, and impose “enormous costs” on consumers; employers; federal, state and local governments; and our nation’s health care system. The testimony stated that congressional action to prohibit these “pay-for-delay” settlements between brand-name drug manufacturers and their generic competitors is “both appropriate and timely,” and would help contain spiraling health care costs.

The FTC testimony stated that the Commission strongly supports the Protecting Consumer Access to Generic Drugs Act of 2009, H.R. 1706, which would prohibit these anticompetitive settlements. Such legislation can provide a comprehensive solution to a problem that is prevalent, extremely costly, and subverts the goals of the Hatch-Waxman Act, which was designed to prevent weak patents from obstructing lower-cost generic drug competition.

The Commission has sought to use antitrust enforcement to stop so-called “pay-for-delay” agreements, settlements of patent litigation in which a brand-name drug manufacturer pays its potential generic competitor to abandon a patent challenge and delay entry to the market. “[S]ince 2005, court decisions have taken a lenient approach to such agreements in drug patent settlements,” according to the testimony. As a result, it has become increasingly difficult to bring antitrust cases to stop pay-for-delay tactics, and such agreements have become a common industry strategy.

The implications are troubling, the testimony continued, “because the increased costs resulting from anticompetitive agreements that delay generic competition harm all those who pay for prescription drugs: individual consumers, the federal government, state governments trying to provide access to health care with limited public funds, and American businesses striving to compete in a global economy.”

The testimony noted that the FTC is encouraged that the list of those speaking out against pay-for-delay settlements is growing. “President Obama’s budget proposal expresses the Administration’s opposition to these anticompetitive deals, and Assistant Attorney General Christine Varney has testified that she supports stopping them.”

Because this is such an important issue for consumers, the FTC continues to use its enforcement authority to challenge pay-for-delay settlements, the testimony continued, detailing the agency’s work bringing two new cases in the past 16 months. Despite the Commission’s ongoing antitrust enforcement efforts, however, the appellate court decisions upholding the legality of pay-for-delay settlements “have prompted a resurgence in settlements in which parties settle with a payment to the generic company and an agreement by the generic company not to market its product,” the testimony stated.

The FTC testimony explained that the increased availability of generic pharmaceuticals as a result of patent challenges has helped U.S. consumers save money on the important drugs they use, and stated that pay-for-delay settlements also impose enormous costs on the nation’s health care system. For example, generic competition following successful patent challenges involving just four brand-name drugs – Prozac, Zantac, Taxol, and Platinol – is estimated to have saved consumers more than $9 billion. When branded firms are allowed to pay generic firms to abandon such challenges, consumers must continue to pay higher prices as does the federal government, which in 2008 accounted for almost one-third of all money spent on prescription drugs.

Settlements with payments to the generic patent challenger had essentially stopped in the wake of antitrust enforcement between 2000 and 2004. But the recent appellate court decisions have triggered “a disturbing new trend.” An analysis of settlements filed during the fiscal year ending in December 2007 found that almost half of all the final patent settlements involved compensation to the generic challenger and agreement by the generic not to launch its product for some period of time. In addition, findings concerning settlements with generic first filers found that since 2005, 69 percent involved such pay-for-delay tactics. According to the Commission, the profitability of delaying generic entry means that these agreements will become more prevalent – with consumers paying higher prices as a result.

Legislation is likely to be swifter and more comprehensive than litigation in preventing anticompetitive settlements. The testimony also explained how, according to the FTC, the arguments made by some supporters of pay-for-delay settlements are “contradicted by experience in the market.” In detailing the provisions of H.R. 1706, the testimony stated, the bill “offers a straightforward means to quickly combat anticompetitive conduct that is pervasive and costly to consumers, while also providing flexibility to protect procompetitive arrangements.”

The Commission vote authorizing the presentation of the testimony and its inclusion in the formal record was 4-0.

The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to antitrust@ftc.gov, or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read “Competition Counts” at http://www.ftc.gov/bc/edu/pubs/consumer/general/zgen1.shtm.

(FTC File No. P859910)
(Reverse Payments.final.wpd)