The benefits and adverse effects associated with patent settlements in the pharmaceutical industry - more commonly known as "pay-for-delay" settlements - have been the subject of a considerable amount of debate in recent weeks after a Supreme Court decision made it easier for the Federal Trade Commission (FTC) and other public interest groups to sue companies that engage in the practice.
The practice, for the uninitiated, involves two companies: an innovator and a prospective generic competitor. Generally, the generic company must sue the innovative company to invalidate a patent in order to clear a path for its product to come to market (known as a Paragraph IV certification lawsuit). The innovator is then faced with two options: It can fight the lawsuit, or alternatively (and increasingly in recent years), it can settle the lawsuit, often times paying the generic company a sum of money to drop the suit in return for a certain time of market entry.
The arguments for and against the practice thus far have primarily been focused on its effect on the time it takes for generic competition to come to market. Some groups, including the Generic Pharmaceutical Association (GPhA), have argued that the agreements results in drugs actually coming to market even more quickly than they would otherwise. Other groups, such as the Federation of US Public Interest Research Groups (US PIRG) have maintained just the opposite, saying consumers have overpaid by billions for drugs they would otherwise have had access to.
Report: Investment Climate Will Suffer
Now GPhA is out with yet another report, but one that argues the merits of patent settlements from an entirely different angle: one of regulation and investment.
The relatively brief report by Bret Dickey and Jonathan Orszag, both with the economic consulting firm Compass Lexecon, said a survey of all 27 member companies of GPhA found that bringing a generic drug to market "can be an expensive process."
"Competition policy towards patent settlements will also affect generic manufacturers' incentives to develop new generic drugs and challenge branded patents," the authors write, noting that the costs of patent litigation are disproportionately high for generic companies, many of which are smaller than their innovative counterparts.
As a result, "restricting the range of settlement options, therefore, will reduce generic manufacturers' incentives to bring these types of drugs to market and could lead to underinvestment in patent challenges," the authors continue.
High Litigation Costs
Based on survey data obtained by Orszag and Dickey, GPhA companies reported spending approximately $800,000-$3,250,000 per drug on research and development, $76,000-$250,000 on regulatory filing costs, and $2,000,000-$5,250,000 on patent litigation. In other words, on the high end of estimates, the cost of litigation exceeds all other costs combined.
The paper argues the costs of litigation - already high even with the benefit of being able to settle, which companies admitted to doing in 64% of cases - are only set to rise under a more adverse legal environment.
And while these disincentives may not be enough to deter competition for some drugs, such as ones that have attained "blockbuster" status, the real challenge will come with respect to drugs where the brand recognition is lower and so are the potential profits. Generic companies, the researchers write, lost two out of every three patent cases that reached judgment on average, meaning that settlements were more likely to assist products coming to market, and that companies were less likely to pursue cases where the reward was not worth the potential risk.
Other factors, including potential exclusivity, expected number of market entrants, manufacturing complexity and future market size all factored into a company's decision to bring a generic drug to market as well, the report found.
The Benefits of Patent Settlements: New Survey Evidence on Factors Affecting Generic Drug Investment