This article discusses the future of reverse payment settlements in pharmaceutical litigation.

ANDA Litigation and Reverse Payment Settlements

As background, ANDA litigation most often arises when a generic drug maker seeks to make a generic version of a brand name drug listed in the Approved Drug Products with Therapeutic Equivalence and Evaluations Book (aka the Orange Book).

Hatch Waxman Act

The Hatch Waxman Act allows the generic drug maker to file an ANDA to get its generic version on the market prior to the expiration of the term of patents listed in the Orange Book as covering the brand name drug. In its ANDA filing, the generic drug maker must show that the generic drug possesses the same active ingredients as the brand name drug and will be “bioequivalent” (i.e., will have the same effect on the human body as the brand name drug). The generic drug maker also must explain how it can market the generic version without infringing the patents listed in the Orange Book related to the brand name drug.

Paragraph IV Certification

If the ANDA includes a Paragraph IV Certification that alleges that one or more of the patents listed in the Orange Book related to the brand name drug “is invalid or will not be infringed by the manufacture, use, or sale of the drug,” the brand name drug maker holding the identified patents has 45 days to file a patent infringement lawsuit against the generic drug maker. If it wins the ANDA litigation, the generic drug maker may enter the market before the expiration of the term of the patent(s) at issue. Otherwise, the generic drug must stay off the market until the patent(s) expire.

Although the Hatch Waxman Act was designed not to foment litigation for its own sake, but “to speed the introduction of low-cost generic drugs to market,” ANDA litigation can be very time-consuming and costly for both brand name drug makers and generic drug makers. The brand name drug maker can only keep the generic drug off the market by filing such litigation, and when the litigation is filed, the Food and Drug Administration (FDA) automatically stays its approval process with respect to the generic drug for 30 months.

Risks Associated with Losing ANDA Litigation

The risks of losing ANDA litigation can be very real for both brand name drug makers and generic drug makers. If there is no infringement or the patent(s) at issue are declared invalid and/or unenforceable, there may be little, if any, barrier to the generic drug maker entering the market to compete against the brand name drug. If the generic drug maker loses the litigation, it may have to keep its product off the market until the patent(s) expire. These risks are why ANDA litigation sometimes ends with a settlement including a reverse payment being made to the generic drug maker.

A reverse payment settlement is when the brand name drug maker agrees to make a payment to the generic drug maker to resolve NDA litigation, essentially the payment is moving in the opposite direction than what typically occurs to resolve patent infringement litigation. In exchange for the payment, the generic drug maker may agree to not enter the market for a period of time.

This period of time sometimes may be shorter than the period of time that the generic drug maker would have had to stay out of the market if it had lost the ANDA litigation (i.e., the generic drug maker may be permitted to enter the market before the patent at issue expires). A reverse payment settlement also may address the potential issue of ANDA litigation continuing for longer than the automatic 30-month stay of FDA approval of the generic drug. This was an issue in the ANDA litigation that has led to FTC v. Watson Pharmaceuticals.

FTC v. Watson – Case Background

Solvay Pharmaceuticals, Inc. (“Solvay” now known as AbbVie Products, a subsidiary of Abbott Laboratories) and Besins Healthcare, S.A. (“Besin”) co-owned U.S. Patent No. 6,503,894 claiming a formulation of AndroGel®, a testosterone replacement therapy. This patent was listed in the Orange Book as associated with AndroGel. Watson Pharmaceuticals, Inc. (“Watson”), Paddock Laboratories, Inc. (“Paddock”) and Par Pharmaceuticals Company (“Par”) each sought to introduce generic versions of AndroGel into the market and filed ANDAs on their respective formulations claiming that they did not infringe the patent and/or the patent is invalid.

In response, Solvay filed ANDA litigation that triggered a 30-month stay of the FDA approval process for the generic versions of AndroGel. The ANDA litigation was still in progress when the FDA-granted stay expired, and the FDA then approved Watson’s ANDA. Around this time, the parties agreed to settle the ANDA litigation. The generic drug makers agreed not to enter the market until August 31, 2015 unless another manufacturer entered the market before then. In return, Solvay agreed to pay Par/Paddock $10 million/year for six years and additional $2 million/year for backup manufacturing assistance. Solvay agreed to share some profits with Watson through September 2015 (approximately $19-30 million/year), likely given that the Watson ANDA had been approved at the time of the settlement.

Reporting of Settlements to the FTC

21 U.S.C. § 355 required the parties to report the settlements to the FTC. Instead of approving the settlements, the FTC filed an antitrust lawsuit against the parties alleging that the settlements were unlawful attempts to defer generic competition under 15 U.S.C. § 45(a)(1) which forbids “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.” The FTC also claimed that the settlements represented an improper attempt for the parties to share monopoly profits at the consumers’ expense. The FTC’s complaint focused on an allegation that Solvay probably would have lost the ANDA litigation and accordingly Solvay’s patent would have been unlikely to prevent generic entry.

The U.S. District Court for the Northern District of Georgia dismissed the complaint on the basis that Valley Drug Company v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003), immunizes reverse payment settlements from antitrust challenges unless a settlement “imposes an exclusion greater than that contained in the patent at issue.” The FTC then appealed to the U.S. Court of Appeals for the Eleventh Circuit, which affirmed the District Court’s decision.

Issues to be Addressed by the United States Supreme Court

The United States Supreme Court granted the FTC’s petition for certiorari. This grant to address the issue of legality of reverse payment settlements was likely due to the split that has occurred in the U.S. Courts of Appeal. More specifically, the Eleventh, Second and Federal Circuits have held that reverse payment agreements are permissible unless the underlying patent litigation was a sham, the patent was obtained by fraud, or the agreement’s anti-competitive effect is outside the scope of the exclusionary rights associated with the patent. However, the Third Circuit has taken the view that reverse payment agreements may be per se anti-competitive and therefore unlawful unless the payment was made for some purpose other than delayed entry or if there was a pro-competitive benefit associated with the payment.

The FTC's Position

Before the Supreme Court, the FTC has taken the position that reverse payment settlements should be deemed presumptively anti-competitive, and therefore, unlawful. As such, the parties who entered into the settlement should have the burden to demonstrate a pro-competitive justification for the agreement under the Third Circuit test. The FTC contends that if these types of settlements are unlawful, the purposes underlying patent law and competition law can be better served. This is because the FTC believes that these settlements directly restrict output, raise prices, and are therefore harmful to consumers. The FTC further contends that these settlements frustrate the purposes behind the Hatch Waxman Act by causing generic drugs to enter the market later than they would through the ANDA process.

Watson and other interested parties counter the FTC’s position by noting that the FTC seeks to improperly shift the burden to the parties to justify settling litigation. Further, it is unfair to call reverse payment settlements “pay for delay” insofar as generic drug makers can sometimes enter the market faster through a reverse payment settlement than they would have been able to if they were unsuccessful in ANDA litigation. Further, the Hatch Waxman Act provides that settlement is a valid basis for terminating a patent challenge and authorizing FDA approval of a generic drug prior to patent expiration.

Pro-Competitive Results

If the generic drug can enter the marketplace before the patent expires, this may provide a pro-competitive result even if the generic drug maker is being compensated as part of the settlement. As an example, Teva Pharmaceuticals, a generic drug maker, estimated in 2009 that in total, its reverse payment settlements had “removed 138 years of monopoly protection” and thereby provided $128 billion in savings to consumers through early generic entry. In another example, generic equivalents of Lipitor, the best-selling prescription medicine of all time, became available in November 2011 due to reverse payment settlements.

Potential Consumer Harm

If, instead of settling, the parties had proceeded with the patent litigation and the brand name drug maker had won, generic entry would not have occurred until early 2017. As such, this earlier entry of a lower-cost alternative is projected to save consumers as much as $4.5 billion per year by 2014. Those opposing the FTC’s position also allege that declaring that reverse payment settlements are unlawful may lead to consumer harm in the form of fewer generic patent challenges and reduced innovation. Finally, they contend that the FTC’s position also seems to treat patents as though they are presumptively invalid even though the Patent Act provides that a patent is “presumed valid.”

Apotex, Inc.'s Stance

Not all brand name and generic drug makers have advocated for reverse payment settlements. For example, Apotex, Inc., a prominent generic drug maker, argued to the Supreme Court that if a settlement is reached between the brand name drug maker and the first generic drug maker to file an ANDA, this can present a barrier to entry for generic drug makers that may later file ANDAs. This is based on the assertion that the first generic drug maker to file an ANDA can still maintain its exclusivity granted by the FDA even though it settled the ANDA litigation.

Apotex also disagrees with how some of the settlements provide that the settling generic drug maker may immediately enter the market if another generic drug maker ends up being successful in later ANDA litigation. Apotex contends that this may deter other generic drug makers from challenging a patent that is associated with a reverse payment settlement.

Open Questions About the Future of Reverse Payment Settlements

It is hard to predict with much certainty how the Supreme Court will rule as to the future of reverse payment settlements. The patent law questions that arise relate in large part to what rights are (or should be) afforded to a patent holder and whether these rights differ depending on whether the patent relates to the pharmaceutical industry or otherwise. Patents by their very nature provide the patent holder with the ability to exclude competitors from making the patented invention unless the United States Patent and Trademark Office or the courts rule otherwise.

If the Supreme Court were to limit the ability of drug makers to enter into reverse payment settlements to resolve litigation, this may suggest that drug makers holding patents are afforded less rights under the patent law than patent holders in other industries. It also raises the question of whether a reverse payment settlement should be treated any differently than a typical patent license agreement that may be entered into to resolve litigation.

Rising Drug Costs

In making its decision, understandably, the Supreme Court may be sensitive to the continually rising costs for drugs and the potential need to make drugs more accessible to consumers. These sensitivities arise insofar as consumers might perceive that reverse payment settlements lead to higher drug costs and less availability of generic versions. However, the Supreme Court has to weigh these sensitivities against the high cost for drug development and the freedom of parties to be able to settle litigation on their own terms within the scope of the Patent Act.

The limited monopoly provided through the grant of a patent as well as the FDA approval process have given brand name drug makers incentive to invest time and money to bring a drug to market. However, if ANDA litigation may no longer be resolved through reverse payment settlements, it may be harder to resolve this litigation and it is possible that the costs of engaging in this litigation may even result in higher costs for consumers.

Issue for Congress or Supreme Court?

Finally, a question remains as to whether this is even an issue that should be addressed by the Supreme Court when it is more public policy-related and in the purview of what Congress should address. However, Congress has been given several opportunities to address reverse payment settlements – and has not done so – leaving the issue apparently open for the Supreme Court’s consideration.

Reverse payment settlements present a complicated and difficult intersection with respect to patent, regulatory and antitrust issues. From the oral arguments, it appears that the Supreme Court is conflicted on the lawful nature of these agreements, just as the pharmaceutical industry, the government, and consumers are also conflicted. However, the future direction of the pharmaceutical industry and the interaction between generic and brand name drug makers may hinge on this decision. The Supreme Court is expected to issue its decision by early summer 2013.

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