FTC Goes After New Generic Sweetheart Deals

In HOOKED I described one way that the brand-name drugmakers collude with generic drugmakers to "evergreen" a lucrative blockbuster drug about to go off patent. The process starts with the usual abuse of the patent system that seems standard these days, where the original company patents every aspect of the drug they can think of down to the color of the capsule. When the first generic manufacturer appears, the brand-name company immediately sues them for patent infringement, threatening to tie the whole thing up in court for years and keeping the price of the drug for consumers high. But (knowing that they are unlikely to win any of these basically frivolous patent claims) the brand-name company then offers a deal to the generic company--just delay the entry of your cheap drug into the market, and we'll pay you a sum about equal to what you could have made by selling the generic for that many months (but well below the profit we expect to make with the brand-name drug having no competition during those months). The winners--both drug companies. The loser--US consumers and taxpayers.

According to Duff Wilson at the New York Times:
http://www.nytimes.com/2011/09/01/business/ftc-criticizes-agreements-that-delay-generic-drugs.html
--the FTC has just reported that companies have figured out a new twist. To evade regulations, apparently, the brand-name firm no longer comes out with a blatant payoff to the generic firm. Rather the payoff is indirect. The brand-name firm simply agrees to postpone for the requisite length of time its own generic version of the drug. I know this gets complicated when we start talking about the apparently self-contradictory term "brand-name generics." The FTC claims in its report that when in the first 6 months of competition (during which by law a single generic firm can have a monopoly on the generic side of the trade), if the brand-name company (the only company legally entitled to compete during that time window, as I gather) puts it own generic out on the market, the overall cost savings to the consumer is 4-8%. So if the brand-name company can promise the generic company that it won't compete, that amounts to the same thing as handing over cash, but without handing over any cash.

At least I think that's the way it works. Anyone among the four regular readers of this blog who understands the law better than I or who can explain it better, please send us a comment.

The FTC report struck a nerve because both the brand-name drug industry, in the person of PhRMA, and the generic industry association are grousing. Each insists that agreements that prevent extended patent fights in court are good for consumers and the FTC should take a hike. Of course they are partly right--if the patent laws were effectively enforced as they were intended, all of these lawsuits would get tossed out of court from the get-go. But the FTC is certainly right in claiming that sweetheart deals by which both drug firms make a bundle at the consumers' expense is not the answer.