Time To End Pay-for-Delay Deals

Time To End Pay-for-Delay Deals

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The patent on Pfizer’s Lipitor, which is the biggest selling drug in the world, expires this June. But that’s not when consumers will be able to start purchasing generic versions of this cholesterol-lowering blockbuster.

In a little-noted accord signed in 2008, Pfizer agreed to pay an undisclosed sum to the Indian drug maker Ranbaxy to postpone introduction of generic versions of Lipitor until the end of November, a five-month delay. While the imminent expiration of the Lipitor patent had been the talk of pharmaceutical stock watchers for several years (it was originally scheduled to expire in March 2010, but the company won several extensions), consumers will have to wait until next December before they can finally begin saving money on their cholesterol-lowering med. Pfizer also granted an exclusive license to Watson Laboratories to sell a generic version of Lipitor with the pills produced at Pfizer factories. That deal, too, doesn't commence until December, five months after the patent's expiration.

The deal took advantage of an unintended loophole in the 1984 Hatch-Waxman act, which created the modern generic drug manufacturing industry. The law provided a 180-day exclusivity period to the first manufacturer to bring a generic version of a drug to market after a patent expires.

The original idea was to get generics in the market quickly for less-prescribed drugs. It was also hoped that one proven generic in a market place would encourage competition among generic makers, who operate with fairly slim profit margins.

But that’s not how the new exclusivity period for generic manufacturers wound up being used. Brand name manufacturers quickly discovered that it was highly profitable to offer payments that equaled or exceeded the profits that the generic maker would have earned during its exclusivity period in exchange for a delay in introduction.

The Pfizer-Ranbaxy deal illustrates the value of delay. While neither company disclosed the size of the payment, it’s not hard to calculate its value to Pfizer or its cost to consumers.

Nearly a half year’s additional exclusivity for Lipitor, which generated roughly $11 billion in sales for Pfizer last year, will add another $4 billion to its top line this year. We can safely estimate that consumers and their insurers, which include Medicare and Medicaid, will have to pay an additional $2 billion, since the maker of the first generic to hit a market usually charges about half what the brand name company charged.

Pay-for-delay deals have been under fire in the courts and on Capitol Hill for most of the past decade. During the last session of Congress, Senators Herb Kohl, D-Wis., and Charles Grassley, R-Ia., introduced a bill outlawing the practice. A similar measure passed the House in 2009 as part of its original version of health care reform.

The Federal Trade Commission issued a report a year ago that reviewed 66 of these deals over the past half decade and found they were costing consumers about $3.5 billion a year. The Congressional Budget Office, which scored the House and Senate bills, pegged the savings from banning pay-for-delay deals at $2.8 billion over ten years, primarily through savings to Medicare.

Congress’s failure to act has triggered numerous court suits against the payment schemes based on the nation’s antitrust laws, including cases brought by the FTC, consumer groups and some states. Earlier this month, 32 states led by California asked the Supreme Court to review a Second Circuit Court of Appeals decision to uphold the legality of the deals. That decision upheld a case involving ciprofloxacin, the antibiotic made famous during the anthrax scare of 2001, where Bayer paid Barr Pharmaceuticals $398 million to delay production of a generic version.

Will the Robert court take up the case? That’s hard to say. But there is no reason why Congress has to wait. Unlike health care reform, this is legislation that has backing on both sides of the aisle. "Passage of our bipartisan bill would bring generic drugs to the market faster, increase drug competition, and drive down prices for consumers," Grassley said in announcing plans to re-introduce the bill next week.

Most Americans would like to see more harmonious relations on Capitol Hill in the wake of the Tucson tragedy. Next week’s up or down vote on repealing health care reform sends a very different message. The House leadership could avoid that impression – and save money for consumers and taxpayers in the process – by finding areas in health care where both sides can back change.

Banning anti-competitive pay-for-delay deals would be a perfect place to start.

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spent 25 years as a foreign correspondent, economics writer and investigative business reporter for the Chicago Tribune and other publications. He is the author of the 2004 book, The $800 Million Pill: The Truth Behind the Cost of New Drugs.