IP

Protecting Profits
Congress prepares to stop drug makers from offering
exclusion payments to generic manufacturers, BY STEVE SEIDENBERG

It was an awkward situation, to put it mildly, f The year was 1992, and AstraZeneca Intemational
I Circuit courts
disagree about how was on the verge of losing its rights to a major blockbuster drug—Tamoxifen citrate. London-
to handle exclusion
payments based AstraZeneca earned millions of dollars each year on sales of Tamoxifen, one of the
• Payments create most prescribed cancer drugs in the world. To protect its valuable monopoly, AstraZeneca
antitrust concerns
• Supreme Court may
previously had sued Barr Laboratories, seeking to stop the New Jersey-based firm from
have final word
producing a generic version of the drug. 1[ Filed in November 1987, that lawsuit backfired.
Finding that AstraZeneca had wrongfully withheld important information from the patent
office, a federal court in Manhattan to postpone making generic versions of the pharmaceutical industry, to consum-
struck down the company's patent on blockbuster drugs. ers ... and to large corporations trying to
the drug in April 1992. Courts and legal experts remain manage their health care costs," says W.
AstraZeneca responded by buying oflF sharply divided over the legality of these Scott Simmer, a health care litigator at
its opponent. In a 1993 settlement, made so-called "exclusion payments" or "reverse Robins, Kaplan, Miller & Ciresi.
while AstraZeneca appealed to the Federal payments." But all agree the stakes are
Circuit, the company agreed to pay Barr high, with billions of dollars on the line. Settling In
$21 million. In return Barr agreed not "This is of critical importance to ... Drug companiesfirststarted using exclu-
to produce a generic version of sion payments in the late 1990s,
Tamoxifen until AstraZeneca's but the practice ended when
patent expired in 2002. Barr also the FTC filed some antitrust
agreed to ask the Federal Circuit to enforcement actions in 2000.
vjicate the district court judgment, Between 2000 and 2004, there
thus restoring the Tamoxifen pat- were no known patent litigation
ent to AstraZeneca. settlements that involved exclu-
The settlement was a win for sion payments.
both parties. AstraZeneca got its The legal landscape suddenly
patent back and removed the dan- shifted in March 2005 when the
ger of competition that would cut 11th Circuit issued its decision
into sales—and profits—for its in Schering Plough Corp. v. FTC.
blockbuster drug. Barr received That ruling upheld the legality
more money than it was likely to of exclusion payments Schering-
earn if it had won its lawsuit and Plough made to two rivals. The
produced a low-priced generic. court held that such payments
The Tamoxifen deal is far from violate antitrust laws only if they
unique. In recent years, there has are part of a deal to improperly
been an explosion of settlement extend the scope of a patent Qoy,
agreements where brand-name for instance, forbidding a com-
drug companies pay alleged petitor from manufacturing an
infringers large sums of money unrelated product).

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 IP
The landscape shifted even further in to cease marketing its now-established alleged infringers. That, at least, is the
August 2006 with the 2nd Circuit's rul- product or service, as well as pay treble view of the 2nd and 11th Circuits.
ing in In re Tanwodfcn Citrate Antitrust damages. The typical plaintiff risks only However, not everyone agrees with
Litigation. The class action suit alleged the exclusive right to practice the inven- that analysis.
AstraZeneca's exclusion payment to Ban- tion, which already has been undermined
was an illegal restraint of trade. The 2nd by the defendant's actions. Antitrust Questions
Circuit threw out the suit, which was filed Because the downside risk is so much If the 2nd and 11th Circuit decisions
on behalf of consumers and medical ben- greater for alleged infringers than for become the law of the land, the result
efit providers, ruling that although a trial patentees, it makes sense that litigation will be disaster, according to many
court had struck down AstraZeneca's pat- settlements usually include substantial experts. "Virtually every pharmaceutical
ent, the company was entitled to settle the payments from defendants to patentees. patent case will be resolved by a reverse
ongoing appeal of that verdict by means If the payment went in the other direction, pa}Tnent," says Paul Slater, an antitrust
of an exclusion payment. it would look quite suspicious—as if the attorney at Sterling & Slater.
Pharmaceutical companies have patentee was attempting to either restrain This will keep drug prices far higher
pounced on these rulings, using exclu- competition or protect a dubious patent. than if there were real competition, add-
sion pajTnents to settle almost two dozen The situation changes when drug ing billions of dollars to health care costs.
infringement suits since March 2005. patents are involved. Federal laws pro- "That's not good for consumers, espe-
And those numbers are expected to rise. vide that the patent holder should sue an cially at a time when medical benefits cire
"In the current legal climate, there is infringing generic drug maker as soon as becoming so expensive," Simmers says.
every reason to expect the upsurge in such that drug maker seeks FDA approval to Critics, however, can't agree on what
settlements to continue and early entry of market the generic. If the generic man- to do about exclusion payments. Some say
generics... to decline," FTC Commissioner ufacturer loses this suit, it gives up little the government should deem these pay-
Jon Leibovidtz told the Senate Judiciary more than its litigation costs and the ments per se violations of antitrust law.
Committee in early 2007. chance to market the drug. By contrast, The FTC and 6th Circuit have adopted
the patentee risks losing the exclusive this view. The Senate Judiciary Committee
Pharmaceutical Peculiarity rights to a product that might be earn- also backs this idea and recently approved
In issuing their rulings, both the 2nd ing it billions of dollars per year (see "The a bill that would explicitly prohibit exclu-
and 11th Circuits noted that patent suits Lure of Exclusion Payments"). sion payments. The House may soon
concerning pharmaceuticals are not like Because the downside risk for drug introduce similar legislation.
ordinary patent suits. patentees is so much greater than for Others think exclusion payments
A defendant in a typical patent- alleged infringers, it makes economic should be subject to a tough, case-by-case
infringement suit has a lot on the line. sense for patentees to settle infringement analysis. "There should be a presumption
If the alleged infringer loses, it may have suits by paying large sums of money to of illegality... that would put the burden
on the drug companies to show a high
likelihood that the patent ovwier would
have prevailed if the case had gone to
The Lure of Exclusion Payments trial," says Thomas Cotter, who teaches
As soon as a patented drug faces competition from a generic rival, the drug's patent and antitrust law at the University
retail price typically drops by at least 16 percent. The price plummets further of Minnesota.
as more and more generic drug manufacturers enter the market. Thanks to Unless Congress acts, many observers
vigorous competition, the retail price eventually falls as much as 80 percent. expect the Supreme Court to step in and
That's a lot of money—money patentees and their generic rivals can keep resolve the circuit court split over how
for themselves if they make settlements based on exclusion payments. to handle exclusion payments. There is
FTC Commissioner Jon Leibowitz explained it this way to the Senate simply too much at stake—for the U.S.
Judiciary Committee in January 2007: "In nearly any case in which generic economy, pharmaceutical innovation
entry is contemplated, the profit that the generic anticipates will be much and the health care system—for the High
less than the amount of profit the brand-name drug company stands to lose Court to ignore the problem.
from the same sales. This is because the generic firm sells at a significant "Whether we view [exclusion pay-
discount off the price of the brand-name product.... Consequently, it will ments] as antitrust violations or not has
typically be more profitable for both parties if the brand-name manufacturer enormous consequences," says C. Scott
pays the generic manufacturer to settle the dispute and agree to defer entry." Hemphill, who teaches patent sind anti-
trust law at Columbia University. •

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