The Federal Trade Commission has become increasingly concerned that pharmaceutical companies owning patents that cover popular and expensive drugs are entering anticompetitive agreements with generic manufacturers who seek to produce generic versions of these drugs. In settlement agreements between branded- and generic-pharmaceutical firms, the branded-pharmaceutical company may agree to pay the generic manufacturer a sum of money in order to avoid litigation and delay or prevent the marketing of the generic product. Such agreements have been termed reverse-payment settlements because the branded-pharmaceutical company, the party that has initiated the lawsuit in order to enforce its patent, provides compensation to the alleged infringer rather than the alleged infringer paying the branded-pharmaceutical company a royalty to license the use of the patented technology. Because the availability of generic substitutes for popular and expensive drugs decreases the cost of health care, the Senate Judiciary Committee has responded to the reverse-payment trend by considering the Preserve Access to Affordable Generics Act. This bill makes a settlement agreement per se illegal if the alleged infringing generic manufacturer receives anything of value from the branded-pharmaceutical company and agrees to delay or prevent marketing its generic product. While reverse-payment settlement agreements have the potential to be anticompetitive and harmful to consumers, this Note aims to describe why an absolute ban on reverse payments-as in the Preserve Access to Affordable Generics Act-is not the appropriate response. Namely, this Note addresses the reasons why an absolute ban on reverse payments is inappropriate in the context of pharmaceutical patents and may not improve consumer access to generic products.
I. Pharmaceutical Patents
The Constitution gives to Congress the responsibility to pass laws "[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."1 The basic goals of the patent system are to promote public disclosure of inventions and to provide an incentive for innovation by rewarding inventors with the exclusive rights to practice their inventions.2 This incentive is the right conferred by a patent "to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States."3 In return for the patent right, the inventor must disclose how to make and use his invention, thus enabling the invention to be practiced by the public after the patent term expires.4
A. The Importance of Patents in Promoting Pharmaceutical Innovation
Patents provide a greater incentive for innovation in some industries as compared to others. Pharmaceutical innovators, in particular, rely heavily on patent protection.5 While 86% of patented inventions would have been developed in the absence of patent protection, this number falls to 40% when considering only pharmaceutical inventions.6 This phenomenon is likely the result of three unique features of pharmaceutical innovation: the risk and expense associated with developing a novel therapeutic, the unique marketing advantages conferred upon generic products, and the shortened useful life of patents covering pharmaceutical products.7
First, identifying, developing, and testing a novel candidate therapeutic is a risky and expensive venture. Development of a new drug costs an estimated $500 million to $1 billion.8 Before a novel therapeutic can be marketed, it must be approved by the Food and Drug Administration (FDA),9 but only one in one thousand new drugs that undergo animal testing are promising enough to begin the human clinical testing required for FDA approval,10 and only two out of every ten compounds that begin clinical testing are ever marketed." In addition, only three out of every ten compounds that reach the market will be commercially successful enough to recoup the expenses incurred during research and development. …