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FTC Report on over 200 Pharma Settlements Post-Actavis Shows Common Terms, Less “Compensation”; FTC Calls “Possible Compensation” Its “Next Frontier”

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A recent report issued by the FTC’s Bureau of Competition reveals that, in fiscal year 2016 (there is a lag in the FTC’s reporting), pharmaceutical companies filed a whopping 232 final settlement agreements resolving patent disputes between brand and generic manufacturers. The report, which summarizes agreements filed with the FTC pursuant to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”), noted that 232 is the largest number of filings since the MMA’s enactment. The time period covered, 2016, is three years after the 2013 landmark Actavis decision, in which the FTC successfully challenged an alleged pay-for-delay settlement. This report reflects that significantly fewer settlements in 2016 included “reverse” payments (compensation flowing from the brand to the generic) that the FTC is likely to suspect of being anticompetitive. A high-level take-away is that while pharmaceutical companies are reaching more reportable settlements than ever, they are now structuring them more conservatively than they did pre-Actavis or even immediately post-Actavis. FTC Chairman Joe Simons remarked that the 2016 data makes “clear” that the “Actavis decision has significantly reduced the kinds of reverse payment agreements that are most likely to impede generic entry and harm consumers.”

Focus on Compensation Terms and Restriction on Competition

The MMA requires generic and brand pharma companies to file Hatch-Waxman settlements and related agreements with the FTC and DOJ. Absent certain exceptions, the agreements must be filed with the agencies within ten business days of signing. The 232 agreements filed in fiscal year 2016 (ending September 30, 2016) relate to 103 different branded products. The report focuses heavily on the extent to which the settlements contain compensation – explicit or implicit – from a brand to a generic. This focus is not surprising in the wake of Actavis, which held that a brand manufacturer’s reverse payment to a generic competitor to resolve patent litigation (and induce the generic to stay out of the relevant market for a period of time) could harm competition and run afoul of antitrust laws. The report also examines the number of settlements in which the generic’s ability to market its product in competition with the brand product is restricted.

Notable highlights from the report include:

  • Only 30 settlements contained both explicit compensation from the brand to the generic and a restriction on the generic’s ability to market in competition with the branded product. Only one of the 30 involved a side deal or a “no authorized generic” commitment (commonly referred to as a “no-AG agreement”), the type of payment challenged in Actavis.
  • Fourteen settlements involved “possible compensation” to the generic, which the report noted could, depending on the specific facts in each case, give rise to competition concerns.
  • One hundred and eighty-eight settlements involved no compensation – explicit or possible – to the generic.
  • Seventy-six of the settlements involved a generic that was the first to file an abbreviated new drug application on the product that was the subject of the settled patent litigation. At the time of settlement, these generics were potentially eligible for 180 days of exclusivity pursuant to the Hatch-Waxman Act.

Actual Compensation: Avoided Litigation Expenses, and one No-AG Commitment

Twenty-nine settlements compensated the generic for its litigation fees in the underlying patent case. In the wake of Actavis, avoided litigation expenses may constitute a justified payment, distinguishable from the “large and unjustified” payments the Actavis Court held could give rise to an antitrust suit if accompanied by sales restrictions or an outright sales ban. Across the reported settlements, patent litigation fee payments ranged from $250,000 to $7 million (only two were that high), with an average payment of $2.85 million. According to the American Intellectual Property Law Association’s (“AIPLA”) 2015 Survey Report, the estimated cost to litigate a patent infringement suit brought under the Hatch-Waxman Act varies from $350,000 when less than $1 million is at risk up to $5 million when more than $25 million is on the line. Thus, the reported litigation expense payments in the settlements are, generally, within AIPLA’s estimates.

Only a single settlement involved compensation to the generic in the form of the brand’s promise not to market an authorized generic in competition with the generic’s product for a certain period of time – the lowest number since 2004. The FTC’s report is silent as to which settlement agreements, if any, were investigated at the time of filing.

“Possible Compensation” Scrutinized

The FTC categorized 14 settlements as containing at least one form of “possible compensation” to the generic. For these settlements, analysis of whether certain provisions constituted compensation depended on specific circumstances of the market and was outside the scope of the FTC’s summary report.

The most common form of “possible compensation” – present in nine settlements – was a commitment by the brand not to use a third party to distribute an authorized generic for a period of time (such as during the generic’s first-filer exclusivity period). The FTC noted that “this type of commitment could have the same effect as an explicit no-AG commitment” and could therefore be problematic depending on the specific terms of the deal and circumstances of the market.

Also prevalent was “possible compensation” in the form of a declining royalty structure, whereby the generic’s royalty obligations are reduced or eliminated if the brand launches an authorized generic. Three agreements contained such terms, which the FTC characterized as potentially achieving “the same effect as an explicit no-AG agreement.”

In contrast, 151 of the 232 settlements restricted the generic’s ability to market its product, but did not include explicit or possible compensation. An additional 37 settlements did not restrict the generic’s entry at all and involved no compensation – explicit or possible.

In 82% of the settlements (215), the generic received rights to patents held by the brand but which were not the subject of litigation between the generic and brand. In the vast majority of such settlements (191), the generic received licenses or covenants not to sue that covered all patents owned by the brand at the time of settlement (or at any time in the future) that could be alleged to cover the generic product. In the remaining 24 settlements, the generic received licenses or covenants not to sue covering some, but not all, such additional patents owned by the brand.

In announcing the report, Chairman Simons noted that the FTC will continue to use the annual summary reports to monitor the continued evolution of patent settlement terms and to identify settlement provisions that may be anticompetitive.

New Filing Procedures

Relatedly, in early June 2019, the FTC announced changes to the process for reporting settlements covered by the MMA to the FTC and DOJ. The purpose of the changes, which became effective on June 17, 2019, is to streamline and modernize the filing process. Electronic submissions, rather than hard-copy, will now be required.

Additionally, amendments made to the MMA in 2018 require agreements between brand and biosimilar drug manufacturers to be filed with the FTC and DOJ if they involve the manufacture, marketing, and sale of biosimilar versions of reference drug products. The 2018 MMA amendments also expanded the types of documents that must be submitted to the agencies with any relevant agreement. Updated guidance documents and detailed instructions are available on the FTC’s website.

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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.