If Pay-for-Delay Deals Are Good for Consumers, Why Do Companies Sign Them?

Last Updated Jan 14, 2010 11:08 AM EST

Analyst Corey Davis and his team at Jefferies & Co. published a scathing rebuttal to the FTC's report on generic pay-for-delay deals, calling it "fictitious" and accusing the FTC of "desperation." He argued that the deals actually bring generics to the market sooner and are good for consumers. But if that's the case, why do branded drug companies sign them?

The FTC yesterday launched a campaign to urge Congress to ban legal settlements in which branded drug companies pay generic drug makers not to launch cheap competing versions of their brands.

Opponents of the FTC -- who include Cephalon (CEPH), the FTC's poster-boy for pay-for-delay deals -- argue that such deals allow generic competition to enter the market years before the drug's presumptive patent exclusivity runs out.

The FTC statement said:

... the cost to consumers from pay-for-delay deals is an estimated $3.5 billion per year â€" or $35 billion over 10 years.
... settlement deals featuring payments by branded drug firms to a generic competitor kept generics off the market for an average of 17 months longer than agreements that do not include a payment.
The feds produced this neat-o chart showing that pay-for-delay deals are a recent phenom and an increasing trend:

Davis said the "FTC Call for Settlement Ban Is ... Full of Sound and Fury, Signifying Nothing." The note to investors poured particular scorn on the FTC's use of Don Gading, a retired businessman from Bloomington, Ind., who takes Androgel.* He takes half the recommended dose he needs because the price of Androgel is so high and there is no generic equivalent:

In a move of final desperation, it trotted out a retired-citizen-victim of these allegedly "collusive" agreements, and unveiled a new button on its website.
... (It's interesting that they didn't use a "victim" taking Cephalon's Provigil)
Cephalon is being sued by the FTC after it paid four companies not to compete with its sleep disorder drug. Under the deal, generic Provigil will reach the market in 2012, three years before Provigil's presumptive patent expiry in 2015.

Davis adds:

There is zero consideration for the savings created by the settlements with generic entry well ahead of patent expiration ...
Bottom line: It's true that under such deals generic drugs get to market before the presumptive patent runs out. But the detail of the Cephalon deal illustrates why "sooner" might well be "later." Cephalon negotiated its deals in 2006, paying only $200 million to delay generics through 2012 -- and garnering Cephalon an estimated $4 billion in revenues.

It begs the question: If these deals are so good for consumers and so bad for branded companies (as Davis argues), why do the companies do them? The answer seems to be that old business saw: They wouldn't do it if it didn't work.

*Disclosure: The author has a family member who works for a company that has Androgel owner Solvay as a client.