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Seminal pay for delay law opposed by pharma companies


Generics and innovator companies say they don’t like the new and ‘badly-worded’ legislation introduced by California that bans drug settlements and could actually raise drug prices

Generics and innovators are united in their opposition to a California law that outlaws settlements between companies on both sides of the pharmaceutical ecosystem, according to in-house counsel at Teva and three other drug makers.

Known colloquially as ‘pay for delay’, the law that was passed last month presumes that any reverse payment between two parties constitutes anti-competitive behaviour and is punishable by steep civil penalties of up to $20 million.

Citing a US Federal Trade Commission (FTC) report that says a pay for delay settlements cost patients $3.5 billion in higher drug costs, California lawmakers argue that they can lower drug prices by getting generic drugs to market sooner.

The US Senate has recently proposed similar federal legislation, and sources fear that California’s new law might be only be the start of what could become a widely-accepted policy.

But sources from innovator and generics companies say forbidding any sort of settlement between businesses will have the opposite effect because generics will have fewer tools to combat weak patents.

Colman Ragan, vice president and general counsel at Teva in New York, says forcing generics manufacturers to litigate instead of settling with innovators will mean fewer patent challenges because, most of the time, generics will not want to risk losing a case on at least one patent.

“Challenging patents is both risky and expensive for generics manufacturers,” he says. “If you make it harder to settle, which this law does, you will have fewer patent challenges in the first place and, thus, fewer generic products on the market.

“In the end, this law will have the opposite of its intended effect, and will only result in higher drug prices for patients.

"Teva is a blended company with innovative and generic medicines, so we see this issue from both sides. I don't think pure innovators are too keen on this law either."

The assistant general counsel at a pharma innovator company in New York agrees. He says the law is bad for the industry and for patients because settlements help both sides negotiate to find solutions that help patients.

“The pay for delay deals that were present in the market place largely involved payment of money or cash. This law is broader than that because it includes ‘anything of value’. It raises uncertainty which makes it harder to do pharma settlements, in addition to departing from current law.

“I would simply say that the law may slow down entry of cheaper drugs even though it is intended to do the opposite. It changes the rules and adds lots of unknowns, which could and should make it more difficult to get deals down.”

The law comes at a time of rising drug costs that some legislators believe is the result of unfair agreements innovator companies use to maintain monopoly rights to their blockbuster drugs. Last year, US Senators Chuck Grassley and Amy Klobuchar sent a letter to the FTC asking them to investigate strategies drug manufacturers use to keep exclusive rights to their drugs.

The letter cited AbbVie’s settlements with two generics companies over their best-selling drug Humira which raked in $18.4 billion in sales in 2018 alone. According to the letter, European markets gained access to a biosimilar of the drug last year, but Americans will only gain access in 2023 because of settlements.

The vice president of IP at a US biotech company in California says that although the law has good intentions, it is lacking in nuance and doesn’t take into account all the types of negotiations that innovators and generics companies can make that help get cheaper medicines to patients.

She compares the anti-pay for delay laws in California to going on a strict no-carb diet. “When people go on a diet they say all carbs are bad, but that isn’t the reality.

“The reality is that some carbs are good, and if you don’t have them, your health will suffer. That is the same for the IP system,” she says.

“We need longer attention spans to get the right answer. Many of the laws that are being proposed are very simple. They are looking for a silver bullet in a very complicated system. Many of the silver bullets they are proceeding with hurt everybody, especially the patient.”

The head of patent affairs at a European biosimilar company tells Patent Strategy that his main concern with the law is that it is too broad and that by assuming any negotiation between innovators and generics companies is anti-competitive behaviour, it can accidentally include agreements that get cheaper drugs to market before the original patent expires.

“If a law was designed to prevent agreement between a single biosimilar and the originator I would be fine, but if a law was very strict and prevented co-operation with generics or biosimilar companies with innovators, it would be a problem. It depends on the law,” he says.

Constitutional challenges

Another problem with the law is that it creates uncertainty for the pharmaceutical industry by creating different rules for how companies can operate in each state. Ragan at Teva says questions remain if settlements made in other states will be prosecuted under California law.

"This law will create unbelievable uncertainty. There cannot be 50 different rules for 50 different states. Settlements are good if done properly,” he says.

The assistant general counsel for a pharma innovator agrees and adds the law will be challenged on constitutional grounds. He also notes that the wording of the bill outlawing an exchange of ‘anything of value’ is unclear and that it will make the industry think twice before attempting to settle a patent dispute.

He adds: “This law may affect the patent holder’s rights. It may impact agreements made in different states that came in before the law came into effect.”

The law also stipulates that any person found entering into a negotiation is subject to steep penalties of up to $20 million. Ragan says the wording of the bill creates further confusion because it does not define if ‘person’ means the company or the lawyers involved in settling the dispute.

“Maybe there is an open question what they mean in the law by 'person', but even so that would put a lot of generics companies under water. So if there is a risk a generics company is not going to try. A generics company might have been able to help people with a unique disease, but it won't risk it for $20 million in penalties."

He also notes that it is an open question whether the state of California has the right to regulate patents. When a company sues to enforce a patent, it goes to federal court and states don’t have the power to legislate on a federal question.

One of the biggest frustrations of the law for those in the industry is that it attempts to regulate a non-existent problem. In May, the FTC released a report claiming fewer reverse payment settlements were made between innovator and generics companies that are likely to be anti-competitive. 

Ragan says that in light of the most recent report, there is no need for state intervention in patent disputes: “This law is a solution in search of a problem that, for the most part anyway, has already been solved.”

Just like eating carbs is important to maintaining a healthy diet, so too are settlements important to bringing cheaper drugs to sick patients.

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