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How a D.A. Would Regulate Pharma

A few government agencies have adopted a new approach for overseeing pharma, a strategy that is illustrated by FTC action against Cephalon regarding several "pay-for-delay" deals.

By guest blogger Daniel Hoffman:

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The veteran journalist Martha Rosenberg recently took stock of 2010 in the pharmaceutical industry, and her review resembles a police blotter more than a typical business roundup at year's end.  Perhaps that is why a few government agencies have adopted a new approach for overseeing pharma.  The strategy is illustrated by action the Federal Trade Commission began in 2008 against Cephalon regarding several "pay-for-delay" deals that the Chester County company made.  The sad fact to emerge is that regulation of an industry necessary for the world's health must now resemble Law and Order or some other legal crime drama.

A pay-for-delay deal is one in which a branded pharma company knows it will lose patent protection on one of its high revenue, high margin products.  As a means of protecting a substantial portion of those profits from low-cost generics, the branded pharma cuts a deal with generic companies to delay launching generic versions of the highly profitable brand.  Essentially the branded pharma pays off the generic companies, giving the latter a substantial percentage of the profits they would make if they were to sell the generic compound.  The generic outfits thereby receive a nice envelope of cash and save the expense of manufacturing the product.  They also save the expense, uncertainty and delay of litigation.  The branded pharma gets to keep selling its product at the high, patent-protected price. And without a low-cost, generic competitor on the market, it can even recapture some of what it paid the generic companies by raising the brand price still higher.

The FTC has frowned on this way of doing business because buyers (government, private insurers and consumers) wind up paying higher prices for drugs even after their patents have expired.  When the FTC sought to nullify such pay-for-delay deals in the past, the affected Big Pharmas took their indignation to court.  The courts have mainly found nothing objectionable with pay-for-delay - providing in the process a good example of why vigilant agencies do a better job than judges of regulating industries that gouge the public.

Undaunted, the FTC began a suit in 2008 against Cephalon for its pay-for-delay agreements. The Commission wants to overturn deals where the company paid four different generic companies a total of $200 million not to launch generic versions of Provigil, the top-selling Cephalon brand that will generate $1 billion of revenue this year.

The FTC claims that pay-for-delay deals cost drug buyers an extra $3.5 billion a year, a conclusion based on pay-for-delay deals that Big Pharmas filed with the Commission between 2004 and 2009.  Now Cephalon wants a federal judge in Philadelphia to compel the FTC to reveal the precise terms of those deals that were made by Big Pharmas such as Pfizer, Bristol-Myers Squibb and Novartis.  The Frazer company claims that it needs to see all the data the FTC has on each case to rebut the Commission's argument. The FTC says that when it acquired the full details about how much each of the Big Pharmas paid, what they saved, and the other specifics on each deal, it promised not to reveal the information.

If the court orders disclosure, however, the Commission must comply - thereby divulging the extent to which pharma's "free market" champions actually thwart that mythical condition with anti-competitive deals.  No doubt the FTC claims it is "shocked, shocked" that a court would order disclosure.  In doing so it resembles the Casablanca character who first spoke that facetious line.

So here is a situation where the government has learned that it must regulate big businesses such as pharma and investment bankers with tactics similar to what it uses for organized crime - offer a choice of sanctions or leniency to induce any vulnerable member of the syndicate to rat out the others.  If the FTC plays here the role of the wily district attorney, Cephalon is cast as pharma's Sammy Gravano.

One might speculate that Pfizer, BMS, Novartis and other Big Pharmas are displeased with Cephalon for possibly exposing their sweetheart deals.  Let's see if they can make a virtue of necessity by turning a new leaf and claiming that pay-for-delay represented the "bad old days."

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