Reverse Payments in the Pharmaceutical Industry: Finding the Right Prescription

By Royalty, Kent W.; Oliva, Suzanne et al. | Southern Law Journal, Spring 2012 | Go to article overview

Reverse Payments in the Pharmaceutical Industry: Finding the Right Prescription


Royalty, Kent W., Oliva, Suzanne, Fix, William A., Southern Law Journal


I. INTRODUCTION

Escalating prescription drug prices and the resulting impact on consumers have placed the costs associated with pharmaceutical medicines into the forefront of public consciousness. Political candidates, lobbyists, media personalities, and industry experts have offered various reasons for the high prices of pharmaceutical prescriptions and have suggested a wide array of possible solutions to lessen those costs. One of the most significant efforts to control rising pharmaceutical prices occurred when Congress passed the Drug Price Competition and Patent Term Restoration Act of 19841 (also called the Hatch- Waxman Act). The Hatch- Waxman Act was designed to reduce prescription drug prices by encouraging and facilitating the development of generic drugs.2 The Act accomplishes these goals by reducing the obstacles of generic entry into the pharmaceutical marketplace and by providing rewards for generic companies that challenge existing brand patents.3

Propelled by the Hatch-Waxman Act, generic drugs have proven enormously popular. The share of U.S. prescriptions filled by generics has surged from 19% of total prescription volume in 19844 to 75% in 2009.5 Much of this popularity is due to the cost savings provided by generic drugs. One recent study reported that generics saved U.S. consumers more than $824 billion from 2000 to 2009, including $139 billion in 2009 alone.6 However, in recent years, a surge of patent litigation settlements between pharmaceutical patent holders and generic challengers has produced what appear to be anticompetitive results and deprived consumers of the savings intended by the Hatch-Waxman Act.

The Federal Trade Commission (FTC)7 and a host of scholars argue that certain settlements of patent litigation encouraged by the Hatch-Waxman Act significantly contribute to escalating drug prices.8 These settlements are referred to as reverse payment or pay-for-delay settlements because, rather than the potentially infringing generic manufacturer making a payment to the patent holder, the patent holder pays the generic company to drop its lawsuit and refrain from or delay entry into the market. Despite this practice, recent court decisions have not found these settlements to be anticompetitive if the scope of the original patent was not exceeded.9 In an effort to act where the judiciary has not, legislation was considered in Congress last year that would severely limit settlements of patent litigation between pharmaceutical patent holders and generic challengers.10

In Part II, this article will focus on the Hatch-Waxman Act and its historic role in promoting generic pharmaceuticals. Part III will explain reverse payments and the controversy surrounding the settlements. Part IV will review the decisions of the federal circuit courts that have addressed the legality of pharmaceutical reverse-payment settlements and describe the escalating utilization of reverse payments subsequent to judicial approval of the settlements. Part V explores the proposed and, as yet, unsuccessful legislative attempts to severely restrict settlements by introduction of the Preserve Access to Affordable Generics Act. Part VI analyzes the advantages and disadvantages of reverse payment settlements and the effects of possible restriction or elimination of settlements. In Part VII, this article concludes with a recommendation for a legislative compromise that utilizes many of the features of the Preserve Access to Affordable Generics Act while still conserving opportunities for litigants to establish the merits and legality of beneficial settlements.

II. THE HATCH-WAXMAN ACT: A CAREFUL BALANCE BETWEEN COMPETING INTERESTS

Congress passed the Hatch-Waxman Act to facilitate the development of a vigorous and healthy generic drug industry. The drafters of this legislation were cognizant of the need to foster innovation by brand manufacturers within the pharmaceutical industry and, at the same time, encourage the entry of generic pharmaceuticals into the market. …

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