Markets

The FTC Is Losing Its War on Expensive Drugs -- But Doesn't Know It Yet

By Jim Edwards

Updated on: March 30, 2010 / 1:07 PM EDT / MoneyWatch

To hear the chairman of the FTC tell it, he's winning the battle against "pay-for-delay" deals that can keep generic competition to expensive drugs out of the market for years. But a look at recent court rulings suggests the opposite is true, as by and large the courts have rejected the notion that such agreements violate antitrust laws.

FTC chairman Jon Leibowitz may be better off trying to persuade Congress to legislate his solution, but he's tried and failed to do that already. This seems to be one war the FTC is losing.

There's a lot at stake. The FTC's position is that when big drug companies like Sanofi-Aventis (SNY), Cephalon (CEPH) and Bristol-Myers Squibb (BMY) pay smaller generic drug makers to stop challenging their patents and stay out of the market, it keeps the price of drugs artificially high. You and I end up paying those prices one way or another. The FTC believes that pay-for-delay costs consumers an extra $3.5 billion every year.

A March 29 federal court ruling on Cephalon's agreement to pay four drug companies $200 million not to launch cheap generic versions of the sleep-disorder drug Provigil until 2012, allowed challenges to Cephalon to go ahead. Here's Leibowitz's reaction:

Today's decision seems to reflect a growing understanding -- first in Congress now in the courts -- that brand name drug companies must not be allowed to make pay-offs to their generic competitors to keep low-cost generic drugs off the market ... These deals are costing American consumers $3.5 billion a year in higher drug costs.

If you read the ruling, however, it pretty much says the opposite of that, as far as the FTC is concerned. The judge explicitly rejected the FTC's argument that pay-for-delay deals are per se antitrust violations because patents grant companies the right to do pretty much whatever they like as long as the patent lasts:

... a reflexive conclusion that the agreements in question are per se antitrust violations, as urged by Plaintiffs, and in particular the F.T.C., ignores the "exclusionary" patent rights afforded to Cephalon. Simply stated, a patent grants its owner the lawful right to exclude others.

The suit is going ahead only because the challengers (pharmacies, distributors and reimbursers who buy Provigil) have alleged that Cephalon obtained its agreements through what amounts to a conspiracy. Whether that conspiracy exists is now a matter for a jury.

In the other case, a judge ruled that a group of pharmacies who bought Sanofi and BMS's blood-thinner Plavix were not injured by the companies' agreement with a generic drug maker that keeps a cheaper version of the pill off the market, also until 2012. That case has a more tortured history: Basically, BMS tried to hoodwink the FTC over the agreement, got caught, and the feds put an end to the deal a few days later. In those few days, however, Apotex managed to manufacture several months' supply of Plavix, giving pharmacies a taste of what it would be like with competition on the market. They sued when the deal ended, BMS regained its exclusive rights, and the price of Plavix went back up.

The judge ruled that the disappearance of Apotex's cheap generic was not the direct result of antitrust actions by BMS -- it was the result of the FTC stepping in. Therefore, the pharmacies were not injured by BMS and they have no case. The ruling didn't even reach the FTC's question of whether the agreement was a per se violation.

The courts have mostly leaned away from the FTC's position. If a company wins a patent, they say, then drug companies have every right to cut deals that support it.

Liebowitz may have better luck getting Congress to change the law. He asked for such a change to be included in the healthcare reform bill, but in the last-minute efforts to get the act passed his proposal was cut out.

How, exactly, the FTC plans to win this war remains a mystery.

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