Obama proposes plan to ban pay-for-delay agreements, cut exclusivity period for biologics to 7 years

Noting the spiraling costs of health care ($2.6 trillion in 2010, or 17.6 percent of US GDP) and the pressing need to reduce the national deficit, the Obama Administration recently submitted a Plan for Economic Growth and Deficit Reduction (the Plan) that seeks to cut federal spending on health care.

The Plan mainly takes aim at the Medicare and Medicaid programs but also calls for significant regulatory changes in the pharmaceutical and biotech industries. It proposes a prohibition on "pay-for-delay" agreements and a reduction of the exclusivity period for generic biologics from 12 to 7 years.

Prohibition on "pay-for-delay" agreements

The Plan seeks to increase the availability of generic drugs and biologics by granting the Federal Trade Commission (FTC) the power to prevent companies from entering into so-called "pay-for-delay" agreements. "Pay-for-delay" agreements refer to deals in which brand-name pharmaceutical and biotech companies pay generic competitors to delay the entry of their products onto the market for a certain period of time.

In support, the Administration cites a 2010 FTC study finding that "pay-for-delay" agreements delayed entry of a generic by 17 months on average and cost American consumers as much as $3.5 billion per year.

Under the Hatch-Waxman Act, a generic competitor can obtain FDA approval to market its generic drug before the expiration of a brand-name company's patents provided that the generic competitor can show that its product does not infringe the relevant patents or that the relevant patents are invalid. In patent litigation lawsuits brought against generic competitors, brand-name companies attempt to prevent FDA approval of the generic by arguing that it would infringe their patents. A 2002 FTC study, however, showed that in 73 percent of such cases, courts ruled in favor of generics. Given the costs and uncertainty of litigation, brand-name companies often prefer to settle with the competitor in exchange for delaying entry of the generic onto the market.

In light of the antitrust issues presented, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) requiring pharmaceutical companies to file certain agreements with the FTC and the Department of Justice within ten days of their execution.

The FTC's 2010 study is based on the agreements filed between 2004 and 2009. During that period, 66 agreements involved some form of compensation from the brand to the generic company combined with a delay in generic entry. Out of these, 51 (77 percent) were between the brand pharmaceutical company and the generic company that was the first to seek entry prior to patent expiration for the relevant brand-name drug. Settlements with first-filers delays the entry of all generics because other generic competitors cannot enter until the first-filer's product has been marketed for 180 days.

The 2010 study also points out that in 2003, the Sixth Circuit held such agreements to be per se illegal in Cardizem CD Antitrust Litigation, 332 F.3d 896, but the Second, Sixth, and Federal Circuits subsequently have upheld them.

Many of these agreements are still in effect. Together they protect at least $20 billion in sales of brand-name pharmaceuticals from generic competition.

The study concluded:

Given the magnitude of consumer harm from pay-for-delay settlements - an estimated $35 billion over the next ten years - a legislative solution offers the quickest and clearest way to deter these agreements and obtain the benefits of generic competition for consumers. 

It should be noted that the study was based only on pharmaceuticals because prior to the Biologics Price Competition Act (BPCA) that was passed as part of the Affordable Care Act of 2010, there was no mechanism for biologics to obtain FDA approval as generic-type products based on brand-name reference biologics. (Under the BPCA, a generic-type biologic is called a "follow-on" biologic.) Modeled after the Hatch-Waxman Act, the BPCA provides such a mechanism by creating an abbreviated approval pathway for a follow-on biologic provided that it can be shown to be "biosimilar" to or "interchangeable" with an FDA-licensed reference biologic.

Presumably, the Administration's position is that a prohibition of "pay-for-delay" agreements would also benefit consumers by promoting competition in the biologics market.

Exclusivity period

Like the Hatch-Waxman Act, the BPCA defines an exclusivity period during which a brand-name biologic is protected from competition. During that period, a competitor may not seek approval of its product based on the clinical and non-clinical data generated by the brand-name manufacturer. Faced with the high costs of producing original data, competitors are dissuaded from entering the market altogether. The BPCA sets the exclusivity period at twelve years. This period is significantly longer than the one provided to pharmaceuticals, which the Hatch-Waxman Act sets at 5 years.

In the Plan, the Administration seeks to reduce the exclusivity period to seven years believing that it "will encourage faster development of generic biologics while retaining appropriate incentives for research and development." In addition, the Plan would prohibit "evergreening"; the process through which brand-name manufacturers are awarded additional exclusivity periods based on minor changes in product formulation. The Administration says that the proposal will result in $3.5 billion in savings over 10 years.

Prior to the enactment of the BPCA, a lively debate took place as to the appropriate duration of the FDA period of data exclusivity for biologics. The Obama Administration argued that 7 years was sufficient but Congress ultimately went with 12. The reason for providing biologics with a significantly longer period of data exclusivity than pharmacauticals was based on the assumption that the patent system was not sufficiently protective of biotechnology innovations and, as a result, did not provide time for innovators to recoup their substantial expenditures in research and development.

Industry response

Unsurprisingly, the pharma and biotech industries have voiced their strong opposition to the measures proposed in the Plan.

Seeking Alpha reported that Jim Greenwood, CEO of the Biotechnology Industry Organization, the world's largest biotech organization, said, "A reduction of the exclusivity period will jeopardize the careful balance established in the biosimilars pathway to reduce costs, ensure patient safety, and encourage continued biotechnology innovation."

PhRMA, which represents leading US pharmaceutical research and biotech companies, also criticized the President's Plan stating that "reducing the 12 years of data protection that was approved in strong, bipartisan votes by Congress ... would seriously jeopardize innovative companies' ability to fund research on future treatments and cures. If the proposal were successful, the U.S. would then provide less data protection for new, innovative biologics that is currently bestowed in Europe."