Pay-for-Delay: Why the Pharma Industry No Longer Fears Antitrust Law
Once a drug patent is approved by the United States Patent and Trademark Office, the patentholder is essentially granted a monopoly on making, using, and selling that drug for about 20 years.[1] This exclusive reward is an interesting feature in US law contrasted with the typical American ethos that champions unrestrained competition. One rationalization is that this protected period of uninhibited profit may incentivize future inventors to develop groundbreaking, life-saving pharmaceuticals.
Still, the need for innovation must be balanced against the need for affordable drugs. Brand-name drugs are 80–85% more expensive than generics.[2] In the past decade, there have been major advancements in treating diseases like hepatitis-C, but many of the people who would benefit most from these curative treatments never receive them due to high price tags.[3] Cancer treatments are especially expensive.[4] Two years after cancer patients are diagnosed and begin treatment almost half have completely depleted their life’s savings.[5] In the US, medical debt is the leading cause of personal bankruptcy.[6]
Back in 1984, the Hatch-Waxman Act was passed in part as an effort to make generic drugs more accessible. The Act made it less costly to develop generic drugs and easier for generic manufacturers to challenge brand-name drug patents.[7] Now, using a tactic called pay-for-delay, these brand-name pharmaceutical companies are taking advantage of a provision of the Act that rewards the first approved generic its own exclusivity period.[8] Brand-name companies know that in order to get the first approved generic on the market, the generic manufacturers must challenge the validity of the existing brand-name drug’s patent.[9] Generic drug makers have had good luck in proving patent infringement and winning these cases.[10] So, to avoid litigation, brand-name pharmaceutical companies settle out of court and enter pay-for-delay deals, which sees the generic manufacturers being paid off to delay the entry of their drugs.[11] This deal allows the brand-name companies to continue to charge high prices for their likely patent-infringing drug, and the generic companies receive their own profit in turn.[12] Unsurprisingly, it is the consumer who gets the short end of the stick.
Agreements like this between rivals to not compete seem like obvious antitrust violations. In FTC v. Actavis, the Supreme Court even ruled that pay-for-delay deals can be violations of antitrust law.[13] After a victory like that, how could pay-for-delay deals survive judicial scrutiny? Unfortunately for American consumers, since the 1980s the Supreme Court has systematically pulled the teeth from antitrust law.[14] The powerful bite of the per se rule, which views certain anticompetitive scenarios as always illegal, has slowly been phased out in favor of a rule-of-reason analysis, which considers an agreement illegal only if it unreasonably restricts trade.[15] Potential antitrust violations have a much greater chance of being deemed legal if they are examined under a rule-of-reason analysis.[16] Plaintiffs rarely win these types of cases.[17] In FTC v. Actavis, rule of reason is the treatment the Supreme Court destined for pay-for-delay deals.[18]
This lenient approach is clearly displayed in a recent HIV drug lawsuit against two brand-name manufacturers, Gilead and Janssen, and one generic manufacturer, Teva.[19] This antitrust action was brought by a diverse group of consumers, health insurance plans, and retailers. Gilead, Janssen, and Teva are alleged to have entered horizontal agreements to delay the release of generic HIV drugs. [20] As expected, in a federal trial last summer these pharmaceutical companies succeeded in convincing a jury that their pay-for-delay deal did not violate antitrust law.[21]
According to the Federal Trade Commission (FTC), pay-for-delay settlements cost American consumers $3.5 billion per year.[22] However, not only may this number underestimate the total settlement costs, it also leaves out other potential pecuniary impacts. A study by Columbia’s Science and Technology Law Review found pay-for-delay settlement costs range from $6.2–$37.1 billion per year.[23] Additionally, these settlements saddled American patients with at least $600 million in annual out-of-pocket costs. Medicare also pays around $2.3 billion per year to fund the high cost of drugs produced by pay-for-delay deals.[24]
With such toothless antitrust laws, what hope is there to actually impede these anti-consumer, anticompetitive practices? The FTC, tasked with enforcing antitrust laws, has the ability to issue its own rules under the FTC Act. In fact, this agency is currently close to finalizing a rule banning noncompete clauses in employment contracts.[25] It could next propose a rule banning pay-for-delay deals. An admittedly less likely yet more impactful route would be for Congress to pass legislation that explicitly makes these types of agreements illegal. This option is more unlikely because the pharmaceutical and health products industry spent around $380 million in lobbying in 2022. [26] This industry outspent every other industry in the US, sending money to lawmakers who then vote on legislation that would hold healthcare corporations accountable.[27] It is however the hope of consumer activists that legislators will hang up on their corporate donors to answer the call of their constituents who elected them into office and who are bearing the brunt of pay-for-delay agreements.
Footnotes
