President Obama has been taking shots at the pharmaceutical industry since announcing his deficit reduction plan in a speech last Wednesday (April 13). Despite relying on major drug company support for enacting ObamaCare last year, the President has lately been bashing the industry for high drug prices. He now insists we can reduce health care costs by billions of dollars over the next decade by speeding up the availability of generic drugs and favoring them over more expensive brand name medicines.
Ironically, the plan would threaten brand and generic firms alike, and the proposals would actually result in higher health care costs over the long run.
One initiative would crack down on litigation settlements in which brand manufacturers pay potential generic competitors to drop patent challenges. Critics, including Obama’s Federal Trade Commission, claim they are anticompetitive and condemn these settlements as “pay-for-delay” because successful patent challenges would get generics to market sooner.
The Administration claims that banning settlements could save $9 billion in federal health spending over 10 years. In practice, though, a ban would actually delay the introduction of more generic drugs than it would accelerate, resulting in higher drug prices.
Current law provides incentives for generic producers to challenge potentially weak drug patents in court. But when faced with the uncertainty of patent litigation, brand manufacturers sometimes offer to settle the lawsuits by paying the challengers to drop the litigation. They also agree to let the generics on the market a few years before the patents in question expire. Furthermore, the FTC already has authority under antitrust laws to block settlements where evidence indicates consumers would be harmed by higher prices. The vast majority of settlements are pro-competitive, however, because most of the challenged patents would be upheld in court. After all, every one of them was already deemed valid by the U.S. Patent and Trademark Office, making them difficult to overturn.
More than half of the drug patent cases that make it all the way to a court decision fail. And there is no evidence that settled cases would have been more likely to result in patent invalidation. In the handful of cases where the FTC succeeded in blocking a settlement and forcing the litigation to go forward, courts more often upheld the patents than ruled them invalid.