The Pros and Cons of Patent Settlements

MARCH 01, 2007
Ed Lamb

There is no question that generic medications save patients and insurers a great deal of money. According to the National Association of Chain Drug Stores, in 2005 the average prices for brand name drug products and generics were $95.54 and $28.71, respectively.1

Because generics are such a value, payers are keen to increase the number of brand competitors. The landmark success in these efforts is the Hatch- Waxman Act of 1984, which facilitates generic approvals and grants the company that receives the first FDA approval of a copy of an innovator drug 6 months of market access without other generic competition.2 Over the past 2 decades, the number of generics on the US market has skyrocketed.

Despite this fact, advocates for generics have repeatedly claimed that brand manufacturers have exploited provisions of Hatch-Waxman to keep generic drugs off the market. Such arguments led to a revised version of the law being included in the Medicare Modernization Act that, in part, requires parties to a settlement of a drug-patent dispute to submit the terms for federal antitrust review.3

These settlements have sparked new debate over whether as many generic-drug options are available as there could be. The stakeholders made their respective cases on January 17 during a hearing before the Senate Judiciary Committee.4 Little common ground was identified.

"Substantial Harm to Consumers"

Judiciary Chairman Patrick Leahy (D, Vt) opened the session by commenting that bipartisan efforts to "provide consumers more choice and lower-cost medicines" were being derailed by "secret, and potentially criminal, deals" between brand and generic drug makers.

These deals involve negotiated payments from drug patent holders to potential competitors who agree to stop developing or delay marketing a copy of the innovator product for some period before its original patent expires. Such "reverse payment" schemes are legal, but Leahy said they violate the spirit of Hatch-Waxman, and he is supporting legislation to ban them. If the Preserve Access to Affordable Generics Act (S 316) becomes law, generic drug companies would be prohibited from "receiving anything of value" for agreeing to vacate a patent challenge or hold a product off the market. Settlements in which patent holders allowed the market entry of generics would be allowed.5

For fiscal year (FY) 2006, the Federal Trade Commission (FTC) found that 14 of 28 completed patent challenge settlements involved reverse payments? up from zero in FY 2004.6 In congressional testimony, FTC Commissioner Jon Leibowitz called this "a disturbing new trend" that poses "substantial harm to consumers and others who pay for prescription drugs."4

Leibowitz noted that his agency interpreted Hatch-Waxman as being antithetical to any attempts to block or forestall generic drug competition and expressed the FTC's support for further "legislation [that] could provide a speedier and more comprehensive way" to get generic drugs marketed than court cases or reverse payments.

Consumers Union Project Director for Consumer Education and Outreach Michael Wroblewski told the senators that reverse payments "restrict generic competition at the expense of consumers, whose access to lower-priced generic drugs may be deferred for years." He then argued that the "dynamics of generic drug competition create powerful incentives for brand name and generic companies to settle patent litigation in a way that harms consumers."

According to Wroblewski, patent holders can pay less than they would lose if a generic equivalent were available, and potential competitors can collect more in settlement fees than they could make in sales. The only way to remove such incentives, Wroblewski said, is "to create a bright line rule to end the use of patent settlements that include compensation."

Getting Generics to Market Sooner

Drugmakers' concerns over a ban on patent litigation settlements are understandable and do not involve "greed," as Leahy claimed. Bruce Downey, chairman and chief executive officer (CEO) of Barr Pharmaceuticals Inc, told the senators, "the proposed legislation? would stifle a generic company's ability to resolve patent disputes?The simple fact is that, in some instances, litigation settlements turn out to be the means by which consumers gain access to generic drugs before patent expiration."

As examples, Downey cited his company's ability to sell generic ciprofloxacin and tamoxifen "years before patent expiration" after settling with the brand products' manufacturers. "These settlements all provided value to the consumer that would not have been achieved if the generics had proceeded to litigate and lose," he said.

Billy Tauzin, chairman and CEO of the Pharmaceutical Research and Manufacturers of America, explained that the expense and uncertain outcome of patent challenges divert resources from the development of new medications and products. He also claimed, "A total ban on settlements in which the brand company gives something of value to the generic could stop proconsumer settlements, reduce the value of patents, and reduce incentives for innovation."

According to Downey, the result of a ban on reverse payments would be very few generics becoming available before innovators go off patent. As he explained, "In deciding whether to challenge a patent, the generic challenger must consider the potential gains from the challenge?including the possible settlement alternatives?against the risk of recovering nothing. The generic challenger will lack the necessary resources to litigate every patent challenge to final judgment upon appeal, particularly when there is the risk that the challenger might ultimately win nothing."

Mr. Lamb is a freelance pharmacy writer living in Virginia Beach, VA, and is president of Thorough Cursor Inc.


1. Generic Pharmaceutical Association Media Kit. GPhA Web site. Available at: Accessed February 13, 2007.

2. Mossinghoff GJ. Overview of the Hatch-Waxman Act and its impact on the drug development process. Food Drug Law J. 1999;54(2):187-194.

3. Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Conference Report to Accompany H.R. 1. November 21, 2003. 108th Congress. 2d Sess. Available at: Accessed February 13, 2007.

4. US Senate. Committee on the Judiciary. Paying Off Generics to Prevent Competition with Brand Name Drugs: Should It Be Prohibited? January 17, 2007. 110th Cong. 1st Sess. Available at: Accessed February 13, 2007.

5. Preserve Access to Affordable Generics Act. S. 316. January 17, 2007. 110th Cong. 1st Sess. Available at: Accessed February 13, 2007.

6. Federal Trade Commission. Bureau of Competition issues FY 2006 summary of pharmaceutical company settlement agreements. Press release. January 17, 2007. Available at: Accessed February 13, 2007.