The Federal Trade Commission is urging a reform-minded Congress to ban so-called reverse-payment patent settlements, creating an uncertain legal environment for companies pursuing these popular deals. To make matters even dicier, while the FTC is staunchly opposed, the courts and the Antitrust Modernization Committee, a government agency, have come out in support of to these agreements as an avenue for brand and generics companies to resolve their differences without messy litigation.

"Reverse payment" deals--in which an innovator company pays a generics maker to delay market entry--have become more common since 2005, when two appellate courts concluded that the settlements are not anticompetitive. Since then, 14 of the last 28 deals between brand and generics companies have included some sort of pay-for-delay provision.

"There was a historic divide between the FTC and the justice department," said Jesse Markham, a partner at law firm Morrison & Foerster who specializes in antitrust cases. "It's a terribly murky environment for both the brand name company and the generics company."

Under Hatch-Waxman, generics companies are encouraged to look for holes in an innovator's patent--and if they're successful, their product gets six months of marketing exclusivity before other generics can enter the picture.

"The difference between the brand's loss and the generic's gain is the money consumers save," testified FTC Commissioner Jon Leibowitz in front of the Senate Judiciary Committee. "By eliminating the potential for competition, the parties can share the consumer savings that would result if they were to compete."

Leibowitz added that generics companies win about 73 percent of patent challenges against innovator companies, citing figures showing that consumers saved more than $9 billion as a result of challenges to the patents of four blockbuster drugs. And he implored the Senate to enact legislation introduced by senators Herb Kohl (D-WI), Patrick Leahy (D-VT), Chuck Grassley (R-IA), and Charles Schumer (D-NY) that would ban reverse-payment deals.

Pay-for-delay supporters, however, argue that the deals still shave time off a brand's patent--so consumers still save money. "As long as the delay is within the scope of the patent, I think those agreements should be permitted," said Carlton Varner, an attorney at Sheppard, Mullin, Richter & Hampton, who has litigated antitrust cases in the pharmaceutical industry. "What you have is companies settling and resolving their differences instead of litigating."

In a move to be more FTC-friendly, deals are getting increasingly creative. Once recent out-of-court settlement between Barr and Shire was so novel that no money even changed hands. Reverting to a barter system, Barr got to launch generic Adderall XR (extended-release mixed amphetamine salts) before Shire lost the patent, while Shire gained European marketing rights to Barr's contraceptive technology.

"A good way to resolve litigation is to enter into some sort of win-win business situation," Markham said. "In general, it's more difficult [for the FTC] to challenge it if there's a real quid pro quo. I think you'll see a lot more of these cases--and it frustrates the FTC."

Reverse-payment deals are not free of risks, however. Bristol-Myers Squibb is still trying to claw its way out of the legal quagmire created when state attorneys general struck down its Plavix (clopidrogel) settlement with Apotex. The agreement included some unusual stipulations to Apotex, including waiving the right for BMS to seek treble damages if the deal fell through and Apotex launched a generic "at risk." As, of course, Apotex famously did.

Companies doing delay-for-pay deals will probably be on solid legal ground as long as they don't exceed the length of the patent, Varner noted. Nevertheless "it is a very unusual situation because you have the FTC and the antitrust commission at odds," he said. The FTC itself admits that it is looking for another test case to bring in front of the courts.

Articles

FTC is looking to ban reverse-payment settlements and pharma must tread with caution.

Patent Challenges

Now that the House of Representatives has made good on Democratic campaign promises to repeal the noninterference clause of the Medicare drug benefit and mandate the government to negotiate drug prices, industry attention is focused on the bill's chances of surviving a veto. But rather than sit back quietly while the industry is made a scapegoat for Medicare Part D's shortcomings, strategists are advising pharmaceutical leaders to move into action mode.

Pharma should publicize--gingerly, given its low ratings in most polls--what it's already doing to help beneficiaries. "There's a huge education role," said Ted Sweeney, a partner at PriceSpective, a pricing strategy firm. "[But] the industry can be easily miscast. There are benefits that the industry has brought to society that are hard to communicate."

In a recent bulletin on the H.R. 4 bill, PriceSpective urged the industry to expand its extensive patient-assistance programs and not be shy about promoting the fact. "It's not price by itself [that's behind H.R. 4]--pricing is a component," said Sweeney. "It's a question of access."

Which doesn't mean price should be ignored. The report proposes that pharma also expand programs that help ease budgetary pressures--such as capping annual costs for certain medicines (Genentech's strategy for Avastin), limiting patient co-pays (Amgen's strategy for Vectibix), or linking price decisions to quality of data (GlaxoSmithKline's strategy in Europe).

At the same time that PriceSpective urges action, it warns the drug industry not to appear too aggressive in lobbying against the bill because "this may feed further political impetus for even greater government restrictions in the future."

So far, groups like PhRMA and BIO have focused on countering calls for Medicare reform by promoting the drug benefit's success. Studies from Harris Interactive and the Kaiser Family Foundation show that plan options have increased this year and that most seniors (70 percent in one poll) say they're saving money under the program. Moreover, Medicare has managed to come in under budget and projections overjudged its cost by 10 percent.

"An overwhelming number of beneficiaries indicated that they were extremely satisfied with the program," said Peter Carlin, senior vice president at Market Strategies, a research and consulting firm that has been tracking beneficiaries' attitudes since 2004. "It's pretty clear that the one issue that came out of this is that beneficiaries are having problems with co-pays and cost-sharing."

He too advised pharma to focus on access--rather than get bogged down in the specifics of the legislation. "Industry needs to continue to hammer away at the [underlying] issues and not at the politics of the situation," he said, adding that it is unlikely that the bill will become law since the call for government price negotiations is based on a "specious argument."

Even if the current bill is tepid enough to get bipartisan support, it remains essentially toothless. With no national formulary in place, and a desire to give beneficiaries as many drug choices as possible, the government has little leverage to compel price cuts. "The government would really be impotent in its negotiating," Sweeney said. "You have to be able to walk away in order to be able to negotiate."

The real danger, however, is the slippery slope the legislation sets in place, he noted. "This is a step toward government intervention in the market," he said. "It's a longer-term risk: If you incur more government intervention, you risk more price controls."

Experts offer strategies for blocking repeal of non-interference bill.

How to Fight Medicare Reform

In the nonstop trial by fire that has been his seven-months tenure, Pfizer CEO Jeffrey Kindler has shown that he can follow through in taking the shears to the struggling giant's operations. Yet when the new leader took the podium on Monday to announce the firm's "strategic direction," analysts hoping to hear about a major overhaul in Pfizer's business strategy were left scratching their heads, wondering if the firm's former general counsel may lack the necessary vision.

"What [analysts] are looking for is a very different structural model," said Jeffrey Moe, director of business development/emerging issues at Duke University's Health Sector Management Program.

A meeting to discuss the company's "strategic direction" was widely understood as a euphemism for a cost-cutting announcement, and on that score Kindler did not disappoint. Pfizer plans to cut 10,000 jobs (which will include the 2,200 US sales force cuts announced last month as well as cuts to the European sales force, manufacturing jobs, and a slew of middle managers) and close three manufacturing sites and three research facilities worldwide. Yet the other features of the company's five-pronged plan--launching consumer-focused marketing campaigns to support new products, reorganizing operations into five business units, and increasing communication with stakeholders--were less than dazzling.

Analysts have seen the writing on the wall for some time--even before torcetrapib, the saving grace of Pfizer's pipeline, turned out to be a bust. Yet they lament that Pfizer and its competitors still aren't abandoning their old blockbuster business model, despite evidence that it hasn't yielded the spectacular innovations that the drug industry needs to remain profitable.

"The promise of all these big mergers was that we'd have more money for R&D, and that just hasn't proven to be true," Moe said. "The industry has not benefited from the investments overall."

Torcetrapib's failure didn't cause Pfizer's unraveling, but it did illuminate quite clearly what the industry is up against: the slow and cost-intensive R&D process, higher hurdles at FDA, risk of unforeseen adverse events, and the urgency of extending patent life of important products facing generic competition.

"[Pfizer's managers] don't just have one problem--they have multiple problems," said Peter Young, president of investment banking firm Young & Partners. "There's a major structural change in the pharmaceutical industry. The model where you have a large portfolio product is no longer true."

Pfizer, to its credit, does not deny the challenges. Calling his company "too big and too unstructured," Ian Read, Pfizer's president of worldwide pharmaceutical operations, noted that the company would house medical, marketing, and sales under five umbrellas: cardiovascular/metabolic, urology/respiratory, central nervous system/pain, specialty drugs, and customer support (with particular emphasis on managed markets.) "We are determined to win," he said, "and capitalize on our financial strengths."

Jerry Cacciotti, managing director at SDG Life Sciences, described the changes as a "real departure" from how Pfizer once operated, and a recognition that a company can no longer have a single strategy for marketing, say, a drug that's become the standard of care and one in an emerging category. "This is saying that there's a different model for different markets," he said. "I think it's broader than what anyone else has done."

The company is also planning a shopping spree--investing not only in new compounds (both biologics and small molecules) but also in diagnostics, vaccines, delivery systems, and new technologies that will allow it to extend the patent life of some of its current growth drivers. And it pledged to launch two products a year starting in 2010.

Pfizer will maintain its current level of spending on R&D--a move Moe described as "counterintuitive" considering the need to hold down costs, but he suggested that the high prices for biotech drugs might be driving pharma to look inward.

To gauge how the industry leader's new strategy will affect its competitors, all eyes are now on GlaxoSmithKline, which hasn't had Pfizer's pipeline woes but might relax what many describe as a sales and marketing arms race with Pfizer. "It's a bit of a game-theory problem," Moe said.

Young predicts that GSK and the rest of Big Pharma will eventually follow suit. "The feeling two years ago was that Pfizer was a model of success. Now even mighty Pfizer" is changing its business strategy, he said. But the problem, at least for armchair analysts, is that the changes may not be ambitious enough--more tactical tweakings than strategic directions. It remains to be seen whether even incremental innovations among such fiercely competitive players can drive an industrywide transformation.

Kindler's Strategic Direction Is Neither, Say Cranky Analysts

Pharmaceutical Executive-01-24-2007

Patent Challenges

How to Fight Medicare Reform

Pfizer When It Fizzles