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Editorial

Supreme Court should end drug firms’ ‘pay for delay’

FEW CASES before the Supreme Court this session could have more direct impact on consumers’ pocketbooks than the drug industry dispute Federal Trade Commission v. Actavis. Generic drugs cost, on average, 85 percent less than brand-name drugs, and at the heart of the case is whether makers of brand-name drugs can pay to keep generic substitutes off the market. The government’s lawyers argue the practice — known as “pay-for-delay” agreements — violates antitrust laws and unduly adds $3.5 billion in health care costs annually. The court should agree.

Justices heard oral arguments in the case Monday, and a ruling is expected in June. It will likely hinge on how the court views the $20 million to $30 million the FTC suggests Belgian firm Solvay has paid Actavis each year since 2006 not to produce a generic version of AndroGel, a testosterone replacement therapy.

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Solvay and Actavis are taking advantage of an unfortunate legal loophole in the 1984 Hatch-Waxman Act, a law that gave generic producers a financial incentive to contest weak drug patents in court. The idea was to speed generics to market, lowering prices for consumers. Instead, what’s increasingly common today is these cases are settled with “pay-for-delay” deals.

In any other industry, buying off would-be competitors is clearly illegal but, thanks to Hatch-Waxman, not for drug makers. Brand-name companies see the settlements as a bargain, protecting their market share — about 90 percent of which disappears when a generic is introduced — for a small fraction of their sales. (AndroGel sales top $400 million annually.)

Generic firms, too, often profit more from these arrangements than from actually bringing a drug to market. Besides being paid to do nothing and avoiding more costly litigation, Actavis, for example, got another benefit: The company will be allowed to roll out its generic product in 2015, five year before AndroGel’s current patent expires. Lower courts, in fact, have accepted the argument that banning the payments would eliminate any incentive for the generic producers to challenge weak patents in the first place.

In any other industry, buying off competitors would be illegal.

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Losing out, however, are consumers. Brand-name drugs accounted for only 18 percent of total prescriptions written by doctors in 2011 but 73 percent of the roughly $320 billion spent on medicines in the United States that year, according to research firm IMS Health. Financially, patients taking AndroGel would have benefited most from paying the generic’s lower price since 2006, when Actavis’s version was first approved for marketing.

Patent protections shouldn’t be dismissed lightly. Pharmaceutical firms rely on patents to compensate them for conducting clinical trials, half of all drug development costs. Patients rely on trials to determine if a treatment is safe and effective. But this public good must be put up against the fact that, under Hatch-Waxman, generics successfully prove challenged patents are invalid nearly 75 percent of the time.

Neither patent law nor Hatch-Waxman validates allowing “pay-for-delay” deals to continue. But no matter how the court rules, Congress should also act to amend Hatch-Waxman to end this practice. Right now everyone involved is getting richer at the expense of patients, and that must change.

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