How ‘Pay for Delay’ Keeps Us Paying More for Prescription Drugs

Last week the Supreme Court heard arguments in a case about prescription drugs that involves a great deal of money—including yours.

The case concerns whether it’s legal for brand-name drug firms to strike financial deals that delay competitors’ entry into the market. Drug firms typically are awarded 20-year patents, though some of that time is eaten up while the drug is in development and before it begins earning revenues. In the last few years, would-be generic competitors have challenged the legality of a drug’s patent, hoping to be able to sell a generic version before the patent term ends.

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If a generic competitor is successful in their patent challenge and the two companies reach a settlement, some brand-name drug companies have offered to pay the generic firm if it delays bringing its generic version—which costs consumers much less money than the brand name drug—to the market for a period of time. By keeping a lower-priced generic version of a brand-name drug off the market longer, the brand-name companies stand to make a great deal more money. So much money, in fact, that even paying the generics to not sell their drugs for a time is still profitable for them.

Clearly, consumers end up the losers in these arrangements, by paying more for a drug, longer.

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In these deals the brand firms usually pay the generics firms to stay off the market until the patent actually expires, even though the patent challenge could have made a less expensive, generic version of a drug available to consumers months, or even years, sooner.

Many generics firms have gladly taken the so-called “pay to delay” payments because they take in more from these deals than they would from sales of a generic version of a drug. Brand-name firm love the deals, of course, because they can eke out millions, or even billions, of dollars on a drug before it faces generic competition and a drastic fall in revenues.

But the Federal Trade Commission (FTC), which brought the suit against generics drug maker Actavis, says these settlements delay the lower cost consumers typically pay for generic drugs—which can cost as much as 80 percent less than a brand-name drug.

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Generic firms charge less for a drug for a number of reasons. First, they don’t have the research and development costs, which can be upwards of $100 million, according to the Pharmaceutical Research and Manufacturers of America (PhRMA), a major drug trade association. And, after a six-month exclusivity period for the first company to get Food and Drug Administration (FDA) approval for a generic, a generics company faces competition from multiple, other generics firms who all want a piece of the profit. And that drives the cost of a drug down even more.

The drug in the Supreme Court case is AndroGel, a testosterone replacement drug, most commonly used in men over 40, which has sales of over $400 million per year. Consumers without prescription drug coverage typically pay $250 to $300 for a month’s worth of Androgel—and usually a $20-to-$40 copay if insurance covers the drug. The generic price is expected to fall to about $40 a month for people with no prescription drug coverage and to $5 or $10 for people who have insurance and only have a copay. Three lower courts have previously ruled that the settlements between the brand and generic firms are legal. Solvay Pharmaceuticals makes the brand-name version of AndroGel.

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The decision in this case would affect all drug companies that might consider such settlement deals in the future. Drugs expected to come off patent during 2013 include antidepressant drug Cymbalta. And lower drug costs increase the likelihood people will take a drug, according to a 2012 study in the journal Pharmacy and Therapeutics, which is important for effective treatment.

Not surprisingly, the key trade association representing the generic industry firm hopes the court won’t overturn the lower court rulings. The Generic Pharmaceutical Industry Association releases a white paper written by Paul Bender, a former Solicitor General under President Clinton, who said in a statement that “the government should utilize the tools it has in hand under the Medicare Modernization Act of 2003 that require the FTC to review and prove the illegality of settlements on a case-by-case basis.”

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Public Citizen, a nonpartisan public policy group, filed an amicus brief with the Supreme Court which said, in effect, that if the Justices protected “reverse-payment agreements between brand-name and generic drug manufacturers from” anti-trust scrutiny, that such a decision would hurt legislation designed to get generic competitors to brand-name drugs to consumers faster.

The Supreme Court is expected to rule on the case in June, so for now we wait to see what the decision will be—and if the highest court in the land will rule to help more Americans get more affordable drugs to the market sooner.

How you feel about drug companies colluding to control the price of drugs?

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Fran Kritz is a freelance writer specializing in health and health policy and lives in Silver Spring, Maryland.