FTC appears to be winning a battle with generic-drug makers

Generic-drug manufacturers admit they have lost the sound-bite battle over payoffs to settle patent disputes. As slogans go, it's hard to beat the negative "pay-to-delay" label the Federal Trade Commission has pinned to the practice, which the FTC says costs consumers billions in savings each year - a claim the generic makers dispute.

By inches, however, the generic industry seems to be losing the larger war, too, as Congress moves closer to enacting a law to prevent brand-name drugmakers from paying competitors to drop their patent challenges.

The payments ensure that a patented drug holds on to its exclusive market position. As a result, consumers are denied, for a time, less expensive generic versions.

On Thursday, the U.S. Senate Appropriations Committee passed an amendment to an appropriations bill aimed at making such settlements more difficult. A House committee approved a similar measure Friday.

The FTC and its chairman, Jon Leibowitz, have made the fight over what also are known as "reverse payments" a signature campaign.

"When a company pays off its competitors to stay out of the marketplace, it is a form of price-fixing," Leibowitz said in an interview Monday.

The generic industry has pushed back, contending that the FTC's proposals themselves will delay marketplace entry of generics by reducing the incentive to bring patent challenges. If they are unable to negotiate settlements, generic companies will shy away from long, costly, and uncertain legal fights, the theory goes.

"You are going to end up with less early access to generics, not more," said Bill Head, a spokesman for the Generic Pharmaceutical Association.

Leibowitz countered that the FTC is not opposed to all negotiated settlements, only those involving cash payments. Over the last five years, most settlements (152 of 218) between branded- and generic-drug companies over patents have been settled without payments, according to the FTC.

Still, the agency's hardball tactics on the issue with a New Jersey generics drugmaker - Watson Pharmaceuticals, of Morristown - have won it no fans with a number of lawmakers, including Sen. Arlen Specter. In June, the Pennsylvania Democrat sharply questioned Leibowitz about accusations that the FTC tried to bully Watson into a deal to bring a generic drug to market sooner.

Last week, Specter was among a bloc of senators who tried to strip the payment amendment from the appropriations bill.

"An outright ban of such settlements will potentially eliminate billions of dollars of consumer savings," Specter and six other senators wrote in a letter to Senate Majority Leader Harry Reid (D., Nev.).

In an interview Monday, Specter said he favored allowing judges to remain the arbiters of whether any generic settlement would be harmful to consumers.

The settlement practice stems from a provision in the 1984 Hatch-Waxman Act that permits a generic-drug company to challenge the validity of existing patents. If a challenge is successful, a generic drug can be brought to market before the patent has expired.

Patented-drug makers have increasingly resorted to paying generic companies a fee - sometimes hundreds of millions of dollars - to settle the disputes.

Typically, under the settlements, the generic drug enters the market before the patent has expired, but not as quickly as it would have had the case been settled by a court in the generic's favor.

The delay to market averages about 17 months and adds $3.5 billion to the annual costs to consumers, according to the FTC.

Several Wall Street analysts and the Generic Pharmaceutical Association challenge those figures and take issue with the presumption that ending cash settlements will eliminate delays.

They cite an RBC Capital Markets Corp. study that found that the generic-drug industry won about 48 percent of patent challenges that went to trial over the last decade. The success rate improves to 76 percent when settlements are included.

"If two parties in a lawsuit can't settle, they have to fight to the death," said Charles Mayr, spokesman for Watson Pharmaceuticals. "If you know your odds are 50-50, that you are going to spend years litigating and there is the possibility of damages at the end of it, you are not going to do it."

Watson is particularly aware of the FTC's insistence on ending such settlements. The firm is locked in a court battle with the agency over whether Watson cut an illegal deal with Cephalon, a Frazer-based drug company, not to challenge Cephalon's patent on Provigil, a $1 billion-a-year sleep-disorder medication.

Watson has denied any wrongdoing. The FTC is pressing to depose Watson CEO Paul Bisaro, who, the company contends, has no new information to offer.

In response, Watson has accused the FTC of sharing confidential information with a competitor, Apotex Inc., in an effort to force a challenge of the Provigil patent.

Last month, U.S. District Judge Alan Kay found merit in Watson's position.

"The FTC sought to place Watson between a rock and a hard place," Kay wrote, "where the only way Watson could clear its name and escape further FTC scrutiny was to . . . enter into a business deal with Apotex."

The FTC has denied it shared confidential information with Apotex.

Watson spokesman Mayr said his firm could not comment on the ongoing proceedings.

Gerald J. Pappert, Cephalon's general counsel, called Watson's allegations "exceedingly troublesome to Cephalon. And it should be troubling to any American company regulated by the FTC."

Leibowitz defended his agency Monday.

"We have nothing to hide. Our staff did nothing wrong," he said. "We just think that this is a sideshow. It is the policy of these payoffs that are really harming consumers."