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California Bill Would Fight Deals That Delay Generic Drugs

(KHN Illustration/Getty Images)

California’s attorney general touted a legal victory this week against drugmakers who he said made secretive, backroom deals to keep less expensive drugs off the market.

In nearly the same breath, Xavier Becerra also lamented that he didn’t have enough legal tools to go after all the companies that engage in the practice of “pay for delay,” in which brand-name drugmakers pay off generic manufacturers to keep the more affordable generic versions of their medications off the market.

“It’s hard to prove some of these activities as being illegal,” Becerra said Monday.

So, even as he announced that Teva Pharmaceutical Industries and Endo Pharmaceuticals together will pay the state nearly $70 million to settle allegations that they entered into pay-for-delay agreements, he also called on the state legislature to pass a bill that he said would make it easier to crack down on the “collusive” deals.

The bill, by Assemblyman Jim Wood (D-Healdsburg), would be the first of its kind in the nation, Becerra said. It would classify all agreements in which “anything of value” is exchanged between brand-name and generic drugmakers to delay the release of generic versions as anticompetitive and therefore illegal. This would help the state Department of Justice bring cases against brand-name or generic drugmakers by shifting the burden of proof: It would be up to the companies to prove their deals are legitimate.

“Every pharmaceutical company has the right to get a return on their investment and on the products they produce that in many cases save lives, but they should not be allowed to exploit the desperation and the need of an American in order to make money,” Becerra said.

The state Assembly approved the measure in May. It is now under consideration in the state Senate.

Both the brand-name and generic drug industries are putting up a fight, warning that the measure could backfire by further delaying the entry of generics into the market.

The Federal Trade Commission has estimated that pay-for-delay deals cost U.S. consumers and taxpayers $3.5 billion in higher drug costs every year.

Here’s how they work: When a new drug debuts, the manufacturer obtains patents that give it a period of exclusivity — usually about 20 years — to supposedly recoup costs associated with researching and developing the drug.

As soon as those patents expire, generic versions of the drug can be manufactured and sold.

But generic drugmakers can try to shorten the period of exclusivity by challenging the patents. When they do, brand-name drugmakers often sue them for patent infringement. Because litigation is costly and timely, the generic drug companies often settle and agree to delay the release of their version of the drug. They typically agree to a date that’s a few years before the original patents expire.

When these deals include money or “anything of value” transferred from the brand-name manufacturer to the generic, that’s a red flag that the companies are using pay-for-delay tactics, which can violate antitrust laws, said Geoffrey Joyce, director of health policy at USC’s Leonard D. Schaeffer Center for Health Policy & Economics.

Brand-name drugmakers are “trying to make money, and the longer they can extend patents, it’s in their financial interest to do so,” Joyce said.

In his announcement Monday, Becerra said Teva delayed the release of a generic version of its narcolepsy drug Provigil for six years, from 2006 to 2012, through pay-for-delay agreements. The drug was previously made by Cephalon, which is now owned by Teva.

Becerra’s office also settled with Teva, Endo Pharmaceuticals and its partner Teikoku, a Japanese drugmaker with operations in the Bay Area, for making pay-for-delay agreements for the drug Lidoderm, a medical patch to relieve pain from shingles.

Neither Teva nor Endo returned calls for comment.

About $25 million of the settlement money will be used to create a fund to compensate California residents who purchased Provigil between 2006 and 2012. Some also will be used to strengthen the attorney general’s enforcement of pay-for-delay cases.

The Federal Trade Commission has made it a “top priority” to investigate these deals, according to its website, and has filed a number of lawsuits since 2001 to stop them. The commission would not comment on the California bill.

Recently, the agency noticed a curious trend: Even though the number of patent settlements has gone up in recent years, the number of those that resulted in pay-for-delay arrangements has gone down. The commission credits the drop to a 2013 Supreme Court decision, FTC v. Actavis, Inc., in which the court held that pay-for-delay settlements violate antitrust laws.

But these deals may just be better disguised now, said Robin Feldman, a professor at the University of California Hastings College of the Law. Originally, pay-for-delay agreements were simple cash exchanges, but over time these deals have become extremely complicated, she said.

“These are rational, profit-making companies. Why would companies enter into these agreements in increasing numbers if they’re not receiving any benefits?” Feldman said.

Pharmaceutical companies argue the bill overreaches — and will hurt patients.

The FTC already has a system to determine if patent settlements are anticompetitive, so state regulation would just add another layer between generics and consumers, said Jeffrey Francer, general counsel for the Association for Accessible Medicines, a generics trade group. “It wouldn’t make sense to have 50 different versions of this,” he said.

Industry representatives said they are particularly concerned about the bill’s definition of “anything of value,” which they believe is overly broad. Even if drug companies aren’t making financial settlements, brand-name manufacturers may offer compensation to generic drugmakers in other forms such as sharing knowledge or paying their legal fees.

Under the bill, those could qualify as “anything of value,” Francer said.

Ultimately, the bill would complicate the patent settlement process and result in more delays for consumers, said Priscilla VanderVeer, a spokeswoman with the trade group Pharmaceutical Research and Manufacturers of America.

Some patients feel they’ve already waited too long, said Blanca Castro, advocacy manager at AARP.

“We do think that this has been fueling the high cost of prescription drugs,” she said. “People are victims of an industry that gives them no choice.”