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Developed markets turn spotlight on generic drug settlements

Last week, the European Commission fined an innovator pharmaceutical company and four generic firms (including Ranbaxy Laboratories) for a settlement it deemed anti-competitive. (Last week, the European Commission fined an innovator pharmaceutical company and four generic firms (including Ranbaxy Laboratories) for a settlement it deemed anti-competitive.)Premium
Last week, the European Commission fined an innovator pharmaceutical company and four generic firms (including Ranbaxy Laboratories) for a settlement it deemed anti-competitive.
(Last week, the European Commission fined an innovator pharmaceutical company and four generic firms (including Ranbaxy Laboratories) for a settlement it deemed anti-competitive.)

Increasing scrutiny poses uncertainty for Indian generic firms, adding to the list of uncertainties for investors

Regulators in developed markets are turning on the screws for pay-for-delay settlements entered between innovator and generic companies. Last week, the US Supreme Court ruled that anti-trust authorities could scrutinize these deals.

Last week also saw the European Commission fining an innovator pharmaceutical company and four generic firms (including Ranbaxy Laboratories Ltd) for a settlement it deemed anti-competitive. Increasing scrutiny of such deals poses some uncertainty for Indian generic companies, marking an addition to the list of uncertainties investors contend with when investing in generic pharmaceutical companies.

In the US market, a patent challenge by a generic company could lead to the innovator company suing for patent infringement. Subsequently, the two parties can either wait for the courts to get a final decision or settle the case. The Federal Trade Commission’s (FTC) opposition is to those settlements where the generic company agrees to delay the launch of the drug, and is compensated either directly or more often indirectly for the same.

Such settlements allow the innovator company to retain its patent, while the generic company gets rewarded for the effort and expense incurred in a patent challenge. Settlements do provide certainty in comparison to court battles that can last for years. But the FTC’s opposition stems from a belief that pay-for-delay settlements deny consumer drugs at cheaper prices—a key cornerstone of the policy of facilitating entry for generic drug companies to the US market.

The US Supreme Court has now ruled in the FTC’s favour, saying that it has the power to apply the anti-trust laws to such cases. The court was ruling on appeal filed by the FTC in a case it had lost in a lower court against Actavis Inc. and other generic companies. These companies had settled with Solvay Pharmaceuticals (subsequently acquired by Abbott Laboratories) and agreed to not launch a generic version of AndroGel, a testosterone replacement product, for several years. Separately, it entered into a marketing agreement with the generic players for AndroGel in the US.

Earlier, a lower court had ruled against the FTC, saying that the drug’s patent anyway excluded competition till the patent expired, and the settlement did not create a new barrier to competition. This was not accepted by the Supreme Court. The court has also said that the FTC can investigate reverse payment cases to determine if they are anti-competitive in nature.

But it has not declared pay-for-delay settlements as illegal and said that the facts of each case need to be considered. That means that the FTC will have to take legal recourse to halt a settlement that it deems anti-competitive. Next, one will see the FTC argue its case against the AndroGel settlement and that case’s outcome will be watched with great interest.

The bigger worry is whether the FTC will target other settlements too. “We also are studying the Court’s decision and assessing how best to protect consumers’ interests in other pay for delay cases," says a statement from the FTC. Note that all settlements are not under threat. Only those where the anti-trust authorities believe that a generic company is foregoing a launch opportunity in return for compensation may come under scrutiny. The FTC estimates that consumers in America are paying $3.5 billion a year as higher drug prices due to these settlements.

Companies may now structure settlements in a manner that alleviates anti-trust concerns. Investors are usually enamoured by such settlements because they bring in certain and healthy revenue streams for generic companies. If the FTC action were to block that, they would be disappointed for sure.

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