In the pharmaceutical industry, timing is crucial. Typically, drugs require years of research and development before they are sold. A patent for a drug grants the patent owner the exclusive right to research, produce, use, sell, and market the drug for the life of the patent. When the patent expires, generic companies scramble to enter the market. However, bringing the drug to the market after the patent expires may take years because of the extensive clinical testing and research required by government agencies, such as the FDA.
Consumers push for more generic drugs because of the decrease in prices. However, it may take many years after the patent expires for generic companies to test, research, and meet the FDA’s requirements before the drug hits the market. This delay essentially creates an extension on the patent life for the name brand drug company.
In 1984, Congress enacted the “Hatch-Waxman Act” which allows a single generic company to challenge the validity of the name brand patent and apply for FDA approval before the expiration of the competitor’s patent. Additionally, these generic companies are not required to do the same extensive clinical studies but are only required to prove that their drug is a bio-equivalent to the name brand drug. Essentially, the government grants generic drug companies the ability to market the drug before the expiration of the patent.
To avoid these losses, large drug companies have been paying large sums of money to the generic drug companies to not begin research or production until the patent expires which buys the large drug companies an extended patent period because no other company may be able to produce the drug for years after the patent expires. This process is called “pay to delay” or “reverse settlement.” These transactions are legal and many federal appellate circuits and the Department of Justice under the Bush administration blessed these types of agreements.
However, the administration under President Barack Obama is challenging the antitrust implications that result from these transactions. In a recent case involving Bayer, the 2nd Circuit Court requested the solicitor generals office to submit a brief regarding the validity of these settlements. Christine Varney, assistant attorney general for antitrust, submitted a brief explaining the new stance that the administration will take on these transactions. The Justice Department wrote that the “[t]he anticompetitive potential of reverse payments … is sufficiently clear that such agreements should be treated as presumptively unlawful under Section 1 of the Sherman Act.” These settlements create a lucrative deal for both parties by keeping the prices high in the market. Congress is now considering legislation that may ban these settlements.
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