FTC Fed up with Hatch-Waxman Gaming, Goes on Offense


Over the last week, the Federal Trade Commission (FTC) has become quite active in the area of generic drug competition.  On October 4, 2012, at the request of the FTC, the Solicitor General of the United States petitioned the United States Supreme Court to review whether so-called “pay-for-delay” agreements violate U.S. antitrust laws. See FTC Seeks SCOTUS Review in AndroGel “Pay-for-Delay” Case. Additionally, on October 9, 2012, the FTC filed an amicus brief in the case of Lamictal Direct Purchaser Antitrust Litigation, which is ongoing in the United States District Court for the District of New Jersey. See FTC Submits Amicus Brief.

What is a “pay-for-delay” agreement?  They are sometimes referred to as “reverse payments.”  These types of payments and agreements are between the owners of brand name drugs and one or more generic drug companies.  The brand name drug owner pays the generic drug company to stay out of the market, thereby delaying entry of the generic.  There is absolutely no doubt that this goes on; no one disputes the facts.  What is disputed, however, is whether this constitutes an antitrust violation.

The entire idea of reverse payments and the question about whether they violate antitrust laws seems almost ridiculous to many who are not acquainted with the strange world of pharmaceutical patent litigation.  Clearly, these agreements are anti-competitive, which is typically the hallmark of a good antitrust claim.  These agreements also stand in the way of an overwhelmingly important public policy goal — namely the fast entry of generics into the marketplace.

The problem? With the exception of the United States Court of Appeals for the Third Circuit, these agreements have almost universally been found to be legal and not to implicate any form of antitrust violation.  But how is that possible?  Two words — Hatch-Waxman!

Decades ago Congress passed the Hatch-Waxman Act to encourage generic manufacturers to challenge patents that either are invalid or narrow enough to be designed around. The legislation has worked, but not without unintended consequences. Studies have shown that generic manufacturers have prevailed in the majority of patent challenges, which results in generic entry into the marketplace well before patent expiration.  This leads to significantly lower prices and huge savings for patients and the health care system, which is what Congress wanted to encourage.  So what are the unintended consequences? Simply put, gaming of the system within the rules of the system.

At the time Hatch-Waxman was enacted, it was the intent of Congress to strike a balance between two competing policy interests: (1) inducing pioneering research and development of new drugs; and (2) enabling competitors to bring low-cost, generic copies of those drugs to market. In reality, what Congress enacted was a full employment act for lawyers, and underground funding of generic drug manufacturers who have an incentive to challenge patented drugs.

The real wrinkle in Hatch-Waxman, at least in patent terms, however, comes with respect to certain statements that must be made by the generic manufacturer when they file what is called an Abrreviated New Drug Application, or ANDA for short.

First, why does a generic drug company file an ANDA?  They do this so that they can piggy-back on the time-consuming and extremely expensive research and clinical trials that have been undertaken previously by the brand name drug owner.  The Food and Drug Administration (FDA) requires drugs to go through at least three phases of clinical trials prior to the time that the drug can go to market.  This can take many years and costs many tens of millions of dollars, if not substantially more.  Thus, generic manufacturers want to rely on that data and approval with respect to generic drugs.

In order to do this, they essentially have to allege that the generic drug is identical, or the bio-equivalent, of the drug that underwent such thorough FDA scrutiny.  If it is the same then why would they have to go through the same undertakings?  So there is some logic that makes sense at play here. This becomes an opportunity for gaming the system, however, because generic manufacturers want to get to market as quickly as possible, so they would like to submit their application prior to the underlying patent expiring.

In order to initiate, an ANDA applicant must make one of four certifications regarding each patent that applies to the drug for which approval is being sought: (I) no such patent information has been submitted to the FDA; (II) the patent has expired; (III) the patent is set to expire on a certain date; or (IV) the patent is invalid or will not be infringed by the drug covered in the ANDA. It is the paragraph IV certifications that are the most interesting, and which are responsible for the gaming and the precursor to the problem the FTC sees with reverse payments.

Although making a paragraph IV certification is not an active act of infringement, thanks to specific provisions in the law, when a paragraph IV certification has been made, the patent owner of the drug covered by the ANDA (which lead to all that research and clinical trials) may immediately institute patent infringement proceedings. Not only may an infringement action be instituted, but if one is instituted, an 18-month automatic stay goes into effect, during which time the FDA cannot legally approve an ANDA. Thus, you can start to appreciate the gaming. If a generic files an ANDA and the patent owner files a patent infringement action, no ANDA can be approved for at least 18 months, giving the patent owner a minimum of another 18 months of market exclusivity.

You might think that there would be no incentive for generic manufacturers to file ANDAs then.  You would, however, be severely mistaken.  There is plenty of incentive for generic manufacturers to challenge patented drugs thanks to the so-called 180-day exclusivity.

Congress has generously incentivized generic manufacturers to file ANDAs because the statute provides a 180-day exclusivity period to the first ANDA applicant to file a paragraph IV certification. Thus, Congress has provided the incentive, in the form of a promised 180-day duopoly, for the first generic manufacturer who successfully challenges the scope and validity of drug patents.  So generic drug manufacturers do have significant incentive to file ANDAs and challenge the integrity of patents covering brand-name pharmaceuticals.

So what is the problem the FTC is concerned about? Well, once the patent infringement litigation is commenced, it is largely like any other litigation matter. It can either go through to the logical conclusion with whatever outcome that might be, or it can be settled.  So what many patent owners do is settle the litigation by making a payment to the generic manufacturer.  Thus, the brand name drug owner pays the generic in order to delay entry into the marketplace.

But how does paying off one generic manufacturer delay entry? It does so because the 180-day exclusivity period that provides the incentive for the generic manufacturer to file the ANDA prior to patent expiration is only available to the first generic manufacturer to file an ANDA.  Subsequent generic manufacturers who file the ANDA are not entitled to that 180-day duopoly, thus making it extremely unattractive for them to bear the costs associated with a patent litigation only to wind up opening up the market for everyone (including themselves) simultaneously.

This Hatch-Waxman gaming seems to quite clearly allow activity that is in direct contradiction to the stated goals of the legislation.

One reason the FTC will almost certainly ultimately fail at the Supreme Court is because Congress is well aware of the gaming that goes on under Hatch-Waxman and has done nothing about it.  While we operate under the legal fiction that Congress knows what goes on in the courts, so if they don’t like a decision it is up to them to change it, there is overwhelming evidence that Congress is indeed well aware of Hatch-Waxman gaming. The trouble is the gaming is quite clearly authorized by the legislation.  There have been many attempts over the years to close the gaping loopholes that allow for this type of gaming, but all have failed.

Of course, as I have observed previously many times, anyone who says they know what the Supreme Court will do is delusional. That being said, it seems extremely unlikely that this particular configuration of the Supreme Court will fix the legislation on behalf of Congress where Congress has so clearly refused to do so for themselves.

In any event, the FTC will continue to try, at least under the Obama Administration. Whether this full-Court pressure (pun intended) will continue should Governor Romney prevail in the election remains to be seen.

Leave a Reply

You share in the PLI Practice Center community, so we just ask that you keep things civil. Leave out the personal attacks. Do not use profanity, ethnic or racial slurs, or take shots at anyone's sexual orientation or religion. If you can't be nice, we reserve the right to remove your material and ban users who violate our Terms of Service.

You must be logged in to post a comment.