The Supreme Court passed down a significant ruling for the pharmaceutical industry last week that received a lot of attention but it may not be clear what the impact of the ruling is for many years.  The Court ruled that the so called “Pay-to-Delay” agreements between the branded pharmaceutical company and the generic companies are not necessarily illegal but may be anticompetitive and for that reason the FTC could take action.  Take a quick look at the New York Times article that discusses the ruling and the arguments from the justices.  The media seems to think that this is a huge win for consumers and clearly for the FTC, but only time will tell if this really does cut healthcare costs.

How did we get to this situation?  Lets look at this at a very high and somewhat rough level.  Going way back 30 years ago to the Hatch-Waxman bill that regulated the generic vs. brand world, we see the beginning of this issue.  In that legislation, Congress gave an incentive to the generic companies to go after less than solid branded product patents in the courts.  If a company could invalidate a patent, they were rewarded with six months of exclusivity over other generics.  Over time, this six month period has been the major area of profit for the generic world and has allowed so many companies to thrive and continue to profitably exist.  With Pay-to-Delay, a branded company and a generic company agree to settle on a payment and a launch date that is before the patent expires rather than fight over the patent in the courts.  In other words, they mediate rather than litigate.

It is very interesting that both the generic companies and the branded companies feel that the ability to be able to settle these patent issues without going to court is incredibly important for the stability of both industries.  Take a look at the statements both groups put out on their association websites and you will see the interesting points of agreement.  The generic companies are quick to point out that when going to court to fight over a patent they lose more than half the time.  They recognize the incredible expense of litigation and will more than likely only pick their battles when they have a higher likelihood of winning and when the resulting revenue flow would be worth the risk.  Branded companies like the degree of control they have by being able to defend their patents though negotiations rather than in the court where anything might happen.

So let’s look into the crystal ball and see what could happen based on this Supreme Court’s ruling.  First, it is important to note that the courts did not rule the agreements to be illegal but did give the FTC the right to regulate and sue the companies involved.  Perhaps this will cause both parties to be more careful when determining a settlement so that the FTC does not get involved.  If the FTC should put an end to the agreements through intense scrutiny and heavy fines, perhaps this tactic would become less viable.  The only recourse generic companies would then have is to fully litigate if they want to gain the six months of exclusivity.  The branded companies would do anything in their power to defend their patents and this would result in costly and time consuming court battles for both parties.  While all this is going on, the branded company will keep their product on the market and in many cases they will win their patent case.  This will result in longer periods of exclusivity and higher prices for the consumer.  Generic companies may back down from aggressive pursuit of early entry due to the financial hardships.  We haven’t even mentioned how authorized generics could further complicate this whole situation.  The bottom line is that the FTC and the Supreme Court may have ruled correctly but they probably have not done the consumer any favors.  Clearly, they set up the scenario for many court cases that will keep both parties very busy and increase the cost of doing business that, as usually happens, will be passed on to the payers in some way.