Controversy Remains Over ‘Pay for Delay’

Controversy Remains Over ‘Pay for Delay’

Kenneth Artz

Kenneth Artz (iamkenartz@hotmail.com) is a freelance reporter for The Heartland Institute based in... (read full bio)

A tactic used in some drug patent settlement cases is creating renewed controversy concerning so-called “pay for delay.”

The criticism is targeted at agreements in which a large pharmaceutical company pays a competitor to delay introducing a cheaper alternative to the market. The agreement typically occurs after a generic manufacturer tries to market its drug before the patent expires on a brand-name drug. Rather than risk losing in a court challenge, the original manufacturer chooses to settle with the generic firm by paying them not to introduce their alternative drug until a later date.

The New York Times has denounced pay for delay as a “devious tactic” because it delays the introduction of a cheaper generic drug and ensures the pioneering drug company a continuation of patent-monopoly prices. Sen. Herb Kohl (D-WI) slipped an outright ban into an omnibus Senate spending bill in late 2010, though the legislation is unlikely to receive a vote.

What’s Best for Public?

While the Times argued the public is “the big loser,” the very opposite is true, says Avik Roy, a Heartland Institute health policy expert and an equity research analyst at Monness, Crespi, Hardt & Co. in New York City.

“Innovative companies have more at risk and often settle even when they are confident that they would win in court,” said Roy.

Thus if the government banned the legal settlements which pay generic companies to delay introduction of their product, Roy maintains consumers would likely spend more on pharmaceuticals, not less. He says the assumption of the New York Times and other critics is that the agreements are “tainted” simply because there is money involved.

“The concept they miss out on is: What if the generic company loses? Courts are not going to side with the generic companies every time. In the case where the court sides with the large pharmaceutical company, the public does indeed lose because the decision delays the introduction of a generic drug until the patent fully expires,” explains Roy.

Multiple Patent Requirements

According to John E. Calfee, a visiting scholar at the American Enterprise Institute, usually there are several patents for a particular drug.

“There can be patents on manufacturing methods, ingredients, formulas, etc. However, before generic firms enter the market, they can't enter without the approval of the FDA, which won't approve the new generic drug without some assurance about the patent situation,” Calfee said.

Sometimes it might make sense for the smaller company to let the patent expire, Calfee says. However, there are times when it makes sense to challenge the patent since the smaller firm might not have the money to develop their own drug.

“Pay for delay is useful for the economy. I think the courts should decide on a case-by-case basis whether or not the case proceeds, which is better than having a blanket agreement or law that bans pay-for-delay,” Calfee said. “Currently, the generic firms are very aggressive. The fact that patents are continually challenged means that sometimes they win.”

Kenneth Artz (iamkenartz@hotmail.com) writes from Dallas, Texas.

Kenneth Artz

Kenneth Artz (iamkenartz@hotmail.com) is a freelance reporter for The Heartland Institute based in... (read full bio)