FTC's Heart May Be in Right Place on High Drug Prices, but Its Logic Is Not

The FTC's screwed-up attempt to persuade Watson Pharmaceuticals (WPI) to do a deal with Apotex on a promise that it would end an investigation of Watson moves the FTC's crusade against "pay-for-delay" deals from Quixotic Mode into Kamikaze Mode. It's also a sideshow: What the FTC wants is impossible to imagine as a law, as it would ban companies from making licensing deals on their own property.

On its face, what the FTC wants from the drug industry seems reasonable: An end to "reverse payment" deals in which drug companies that hold patents with exclusive marketing rights pay competing companies not to sell similar products before the patent ends. Such deals in theory make drugs more expensive by reducing competition from cheap generics.

But the FTC could not have planned to make its campaign look worse. A federal judge recently ruled that the FTC crossed the line when it made a series of phone calls to Watson and Apotex in an attempt to find out whether Watson had taken money not to market the sleep disorder drug Provigil. The investigator tried to persuade Watson to sell Apotex some of its rights to market Provigil, thus getting Provigil on the market sooner. The FTC should not have used a threat to investigate to engineer a deal between two competing companies, the court ruled.

The mess started when Watson, Apotex and two other companies signed deals with the maker of Provigil, Cephalon (CEPH), in 2006. Cephlon paid those companies $200 million not to sell Provigil until 2012.

In 2007, Cephalon filed another patent on Provigil and Watson earned "first-to-file" status by being the first to file an application to market the drug with that new patent. That gave Watson an exclusive period in which to sell a competing version of the drug once Cephalon's patent was up.

The FTC appears to have suggested to both Watson and Apotex that if they did a comarketing deal, a cheap version of the drug might get to patients sooner. If Watson didn't deal, the FTC suggested, a subpoena would be filed dragging Watson CEO Paul Bisaro to Washington, D.C., to testify under oath about his deal with Cephalon. The ruling quotes an internal Apotex email describing the situation:

Watson refuses to talk to us about a deal to relinquish exclusivity so that we can market modafinil (US) [the chemical name for Provigil]. Watson is oddly saying that it cannot talk to us due to FTC investigation relating to modafinil (US). Yet FTC is investigating because Watson refuses to talk to us ... In my call with the FTC enforcement this morning, I indicated and [the FTC] confirmed that Watson is just mum about deal making. The reason for silence truly evades us and the FTC.

Even if you take the FTC's side and assume this is all a giant misunderstanding -- that the agency was simply calling around to find out whether Watson had taken money not to compete against Cephalon -- it makes no sense. The FTC knew Watson had signed deal with Cephalon in 2006 and 2007. The terms are interesting but irrelevant: All you need to know is that Cephalon is paying Watson to not compete.

And if you agree that paying a competitor not to compete is bad, then you have to fashion a law (or a court ruling) banning them from doing so. The FTC tells BNET it wants to ban only the anti-competitive payments. Fine, but as the deals only take place before the patent runs out, one man's uncompetitive delayed entry is another man's competitive early entry into the marketplace, as long as the entry occurs before the end of the patent. It's a distinction without a difference.

Such a law would, at some point, have to say that someone holding a patent does not have the right to license its use to someone else -- a competitor or even someone in a different industry who has a tangential use for it. Competitors would either have to wait until the patent term ran out -- thus delaying cheap competition -- or litigate to persuade a court that the patent is invalid. Litigation takes years, playing into the hands of the patent holder.

In either scenario, medicines take longer before they see cheap competition, plus the U.S. Supreme Court would have to accept that patent holders at some point do not have the right to sell their intellectual property to others. That's just not going to happen.

Related:

• The FTC Is Losing Its War on Expensive Drugs -- But Doesn't Know It Yet
• If Pay-for-Delay Deals Are Good for Consumers, Why Do Companies Sign Them?
• GAO Report on Drug Price Increases Raises More Questions Than Answers
• Why Cephalon's Provigil Price Hike May Prove FTC's Antitrust Case
• Generics Threaten Drugmaker Cephalon's Success
• The FTC's Pay-for-Delay Threat: It's All Cephalon CEO Baldino's Fault