Generic competition has helped put the brakes on pharmaceutical manufacturers' growth in recent years. Branded drugmakers compensated for generic competition through consolidation, which provided firms with fuller pipelines and thus more time to make up for patent expirations. Still, generics continued to eat away at sales as pharma companies' R&D productivity remained stalled.
So, big pharma turned to delaying generic market entry. One way to do this was lawsuits, but new rules in 2003 blunted the effectiveness of that tactic. Lately, drugmakers have been using another mechanism to hold onto exclusivity. But this practice, while buying drugmakers time, is drawing the attention of regulators. More ominously, the current moves could create a political backlash against the industry -- with long-term consequences.
The Associated Press reports that the Federal Trade Commission is investigating several recent settlements between drugmakers and generic makers. These deals typically involve pharmaceutical companies paying generic firms not to launch generic versions of branded drugs for an agreed-upon period of time. These agreements are, of course, worthwhile for pharma companies, but the FTC argues that they are anti-competitive and potentially cost consumers "hundreds of millions of dollars," in the words of the FTC commissioner.
The FTC is reportedly scrutinizing an agreement Bristol-Myers Squibb (NYSE:BMY) and Sanofi-Aventis (NYSE:SNY) struck with generic maker Apotex over the blood thinner Plavix. In addition, the FTC has asked the Supreme Court to consider overturning a case protecting a similar agreement crafted by Schering-Plough (NYSE:SGP). In the near term, pharmaceutical companies appear to have nothing to lose from pursuing settlements with generic firms. After all, government challenges will remain tangled in the legal system for months, if not years, while drugmakers continue to enjoy revenue from the products involved.
The potential risk, though, is political backlash. Pharmaceutical companies are already supect in the eyes of many Americans, and these agreements are likely to embolden the industry's critics. That's a dangerous development in an environment where people appear to be ready to vote out incumbents in Washington, D.C. Major reform of the drug industry, which certainly would be to the detriment of branded firms, could very easily become an election issue with a lot of resonance for scores of voters. That's something major pharmaceutical companies should think about as they contemplate settlements with generic drugmakers.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
