Is the End Near for Pharmaceutical Pay-for-Delay Deals?

CHELSEA OLIVERA—The legal and policy momentum to curb pharmaceutical pay-for-delay deals is ramping up.

On September 22, 2021, Humana and Centene, two health insurance companies, individually filed lawsuits in the U.S. District Court of New Jersey against Merck, a pharmaceutical manufacturer. The health insurance companies alleged that Merck engaged in anticompetitive “pay-for-delay” practices that caused the health insurance companies to overpay for two drugs.

“Pay-for-delay” deals are agreements between generic and patent-holding pharmaceutical companies, where the patent-holding drug maker compensates the generic manufacturer if the generic manufacturer agrees to refrain from marketing the generic version of a drug past the expiration of the drug’s patent.

Typically, a generic drug manufacturer sues under the Hatch-Waxman Act, a statute that encourages generic drug manufacturers to challenge pharmaceutical patents. The patent-holder will then counter-sue the generic drug company for patent infringement. Often, rather than litigating in court, the parties will settle and include a “pay-for-delay” arrangement in their settlement agreement. The patent-holder benefits from this agreement by keeping the generic drug manufacturer out of the market for a specified number of years, which reduces competition and keeps drug prices high. The generic drug manufacturer benefits monetarily either through cash or other forms of compensation.

In their complaints against Merck, Humana and Centene allege that Merck incorrectly listed the patents for Vytorin and Zetia, two cholesterol drugs, delaying the development of drug substitutes that could have made the drugs cheaper through price competition. The plaintiffs argue that Merck violated various state antitrust, consumer protection, and unfair competition laws, and that Merck participated in a monopoly scheme.

This case is only the latest example of a private antitrust suit alleging that a patent-holder’s pay-for-delay scheme violates antitrust laws and results in economic injury to the plaintiff.

The Federal Trade Commission (FTC) may also bring lawsuits on behalf of consumers to enforce federal antitrust laws and bring suits against violators. The FTC reviews pay-for-delay agreements and files antitrust suits against pharmaceutical companies when those agreements produce anticompetitive effects—namely, higher prescription drug prices. However, a 2013 Supreme Court decision has made it more difficult for the government to prove that a patent-holder has violated an antitrust law in a pay-for-delay deal. In FTC v. Actavis, Inc., the Court held that pay-for-delay deals are not illegal per se, but are subject to the more defendant-friendly “rule of reason” analysis. This means that pay-for-delay deals are not inherently illegal. Instead, a court reviewing the legality of a pay-for-delay agreement must consider not only the deal’s anticompetitive effects, but also the defendant’s procompetitive justifications for the agreement.

However, the Biden administration has taken bold steps to make pay-for-delay agreements a thing of the past. On July 9, 2021, President Biden issued Executive Order (EO) 14036 titled “Promoting Competition in the American Economy.” The Order “encourages” the FTC to ban pay-for-delay and similar agreements. The Fact Sheet the White House released accompanying the Order cites studies showing that pay-for-delay agreements raise drug prices by $3.5 billion per year and reduce innovation.

It is unclear how the FTC plans to execute this Order pursuant to the current antitrust statutory framework. Because Congress has not yet passed specific legislation to curb pay-for-delay deals, the FTC would have to rely on its current statutory authority to enforce laws such as Section 5 of the Federal Trade Commission Act. As a result, it is likely that patent-holding pharmaceutical companies will challenge any FTC regulations curbing pay-for-delay deals on the grounds that the agency does not have the requisite statutory authority to ban these deals.

It is possible, however, that Congress will enact legislation banning pay-for-delay deals to address this potential legal issue. Earlier this year, lawmakers from both parties in both houses of Congress introduced several bills to curb these agreements to reduce prescription drug costs. One bill, sponsored by Senator Amy Klobuchar (D-MN) and cosponsored by five Senate Republicans and six Senate Democrats, makes pay-for-delay agreements presumptively illegal and orders the FTC to bring suit against any parties to such an agreement. Another bill, introduced in the House by Representative David Cicilline (D-RI), prohibits “product hopping,” a practice where patent-holders make a minor change to a medication to win a new patent and keep generic drugs out of the market.

On July 13, the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights heard testimony from experts and interested parties. While some experts called for greater antitrust reform to end long patent monopolies and pay-for-delay deals, others argued that greater restrictions on pay-for-delay deals could have a chilling effect on pharmaceutical innovation.

Although it is still too soon to tell whether members of Congress will agree on a policy approach and pass legislation, lowering healthcare costs is one area that has recently garnered both bipartisan support and political will. Last year, Congress passed the No Surprises Act, which protects patients from “surprise bills” from out-of-network emergency facilities. Notwithstanding the usual deadlock in Congress, Congress could plausibly overcome the political obstacles around enacting a pay-for-delay ban.

What we can be reasonably certain of is that patent-holding pharmaceutical companies that are parties to pay-for-delay deals will have to continue vigorously defending this practice, whether they are litigating in a courtroom or testifying before Congress.