During an era in which the cost of health care and prescription drugs has been of growing concern to most Americans, the tension that exists between brand-name and generic, patent law and antitrust law, and now the Federal Trade Commission and the pharmaceutical industry has never been more important.
As of Friday, the U.S. Supreme Court will undertake a case to address various issues of law regarding whether so-called "reverse-payment" agreements are permissible. While the specific case that will be heard by the Court involves an agreement between Abbott Labs (NYSE:ABT) and Watson Pharmaceuticals (NYSE:AGN), a recent case involving Merck (NYSE:MRK) in the Third Circuit -- as well as others involving Bristol-Myers Squibb (NYSE:BMY) and Teva Pharmaceuticals (NYSE:TEVA) -- will be directly affected by the decision that is expected by June. Ultimately, if SCOTUS rules with the majority of the lower courts and allows these types of deals, it will end up costing all of us more when we go to the pharmacy.
The issue before the court
In order to best understand the issues that will be considered by the court, it is best to go directly to the Petition for a Writ of Certiorari, the filing upon which SCOTUS decides whether it will hear the case. The petition states:
This case presents a recurring question of great economic importance that has divided the courts of appeals: how to judge the legality under the federal competition laws of a "reverse payment" agreement between a brand-name drug manufacturer and a potential generic competitor. In such an agreement, a patent holder (the brand-name manufacturer) agrees to pay a large sum of money to an accused infringer (its would-be competitor), and the competitor agrees that it will no longer challenge the patent and will not enter the market for a specified period of time.
The case is an appeal by the FTC, whose complaints over the reverse-payment arrangements between Abbott and Watson relating to the sale of Abbott's testosterone replacement therapy , Androgel (yes, there are thousands of jokes possible), were dismissed by the lower courts. The FTC, under its chairman, Jon Leibowitz, has been particularly focused on attacking this practice.
The specific questions that SCOTUS is being asked to answer are: "Whether reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the court below held), or instead are presumptively anticompetitive and unlawful (as the Third Circuit has held)."
The ramifications of the decision are likely to have significant economic consequences, as they will directly impact the process of how and when key drugs make the leap from brand-name to generic. The issue has been of particular national focus this year as so many major patents have expired on blockbuster drugs.
The Androgel case involves a complaint filed against Solvay Pharmaceuticals, which is now owned by Abbott. The FTC claims that in 2007, the Food and Drug Administration had approved the release of several generic alternatives to Androgel, including the one made by Watson. The price of the drug would have fallen by at least 75%, benefiting consumers but costing the company as much as $125 million in annual profits. Rather than surrender that revenue, the company negotiated terms with the generic-drug makers. Under the agreement, the generic-drug makers chose to accept cash payments in exchange for delaying the release of the cheaper options until 2015; the combined payouts made by Solvay amounted to roughly $42 million annually.
The position of the FTC is that such arrangements are anticompetitive, in direct conflict with existing U.S. antitrust law. The Third Circuit has agreed with the FTC, while two other federal appeals courts have accepted these reverse-payment agreements as being acceptable under existing U.S. patent law. Those courts found that the existence of U.S. patent law superseded any antitrust claims.
Ultimately, the argument of the drug companies is deeply tied to the structural realities of the market. Under the Hatch-Waxman Act, the first generic-drug maker to apply for an application with the FDA is granted six-months of exclusivity. This filing invariably triggers a lawsuit by the patent holder to protect its intellectual property. While the suits are considered automatic, they still raise valid points of law. Reverse-payment agreements tend to be the result of settling these cases, meaning that they can be potentially treated as proper settlements to patent disputes.
In the case of Androgel, Solvay points out that it surrendered five years of patent protection -- if upheld, the Androgel patent would have protected the drug until 2020 -- as some consideration in the settlement.
While the case is not set to be decided until June, the impact is likely to be significant either way -- and not just for Abbott and Watson. Bristol-Myers, Merck, Teva, and others all have existing arrangement of this type in place. If the case is decided in favor of the brand-name companies -- meaning that the lower court's decision is upheld -- these arrangements will become even more automatic. If, however, the FTC is successful in invalidating such agreements, generic-drug makers may be able to bring cheaper options to market even faster. Given the importance of the case, keeping it on your radar is advisable for anyone with an investment in the space.
Fool contributor Doug Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.