Merck ready to 'rumble' over pay-for-delay; seeks SCOTUS verdict

While the rivalry between the prescription drug industry and the US Federal Trade Commission (FTC) over pay-for-delay deals may not be the "Sharks versus Jets" knife fight, Merck, nonetheless, is ready to rumble at the highest court in the US.

The Whitehouse Station, New Jersey drug maker has filed a writ of certiorari with the US Supreme Court seeking a ruling on whether US antitrust laws permit a brand-name manufacturer under a patent litigation settlement to pay a generic drug maker to delay entrance of its product into the marketplace as long as the deal does not exclude competition beyond the scope of the patent.

The deals, sometimes called reverse payment settlements, and often referred to by the US government as "exclusion payment patent settlements,” have been a "cause célèbre" for FTC Chairman Jon Leibowitz, who has waged an active opposition to the deals in the courts, while also urging Congress to adopt legislation banning the agreements, noted Washington lawyer Robert L Magielnicki, a partner in the antitrust and trade regulation practice at Sheppard Mullin Richter & Hampton.

Indeed, Mr Leibowitz has claimed the settlements are anticompetitive, calling them "sweetheart deals" that cost the US consumers $3.5 billion per year, or $35 billion over a decade, by having to pay for the more expensive brand-name drugs because the cheaper generics are not available.

Mr Leibowitz also said ending the deals would save taxpayers $5 billion over 10 years by reducing the cost of prescription medications the government pays for through Medicare Part D and other programs – an estimate Mr Magielnicki pointed out is backed up on by a November 2011 report from the Congressional Budget Office (CBO), which provides nonpartisan analyses and estimates to Congress to aid in budgetary and economic decisions (scripintelligence, 10 November 2011).

The CBO also said that putting legislation in place co-sponsored by Senators Herb Kohl (Democrat-Wisconsin) and Charles Grassley (Republican-Iowa), known as the Preserve Access to Affordable Generic Drugs Act (S 27), would accelerate the availability of lower-priced generic drugs. Earlier entry of those generic medicines into the marketplace, the CBO added, would reduce total US drug expenditures by roughly $11 billion over the decade.

Mr Magielnicki noted that the entry of a generic drug can drop the cost of a branded medicine from 50% to 70%.

"So it's dramatic," he told Scrip.

The FTC has charged that, since 2005, the courts have taken an "unduly lenient approach" to the pay-for-delay agreements, making it "increasingly difficult to halt" them through litigation.

Last October, the FTC reported that 28 such agreements took place during fiscal year 2011, although it noted that figure was slightly down from the 31 pay-for-delay deals in FY 2010 (scripintelligence, 31 October 2011).

Of the 28 settlements, 18 involved first filers – the first company to seek FDA approval to market a generic version of the branded drug – and at the time of the agreement, were eligible to exclusively market the generic product for a period of time.

Three appeals courts – the Eleventh Circuit, the Second Circuit and the Federal Circuit – have ruled that reverse payments are permissible so long as they do not exceed the potential exclusionary scope of the patent.

But a decision from the US Court of Appeals for the Third Circuit in July, which involved deals between Schering-Plough, which was acquired by Merck, and generic makers Upsher Smith and ESI-Lederle, went against what the other courts had laid down, instead declaring the "scope of the patent test" improperly restricts the application of antitrust law and is contrary to the policies underlying the Hatch-Waxman Act and a long line of Supreme Court precedent on patent litigation and competition.

The case involves Merck's sustained-release potassium chloride drug K-Dur, which is used to treat potassium deficiencies, including those that arise as an adverse effect of the use of diuretic products to treat high blood pressure.

The Merck/Schering patent is not for the potassium chloride salt itself, a commonly known drug that is not patentable, but instead, the patent is on the formulation of the controlled-release coating applied to the potassium chloride crystals.

In their ruling, the three-judge panel from the Third Circuit took issue with the scope of the patent test's "almost unrebuttable presumption of patent validity."

"This presumption assumes away the question being litigated in the underlying patent suit, enforcing a presumption that the patent holder would have prevailed," the judges said. "We can identify no significant support for such a policy. While persons challenging the validity of a patent in litigation bear the burden of defeating a presumption of validity, this presumption is intended merely as a procedural device and is not a substantive right of the patent holder."

Moreover, the judges said, the "effectively conclusive presumption" that a patent holder is entitled to exclude competitors is "particularly misguided" in pay-for-delay deals, like in the case brought before the court, in which they said the underlying suit concerned patent infringement rather than patent validity.

In infringement cases, the judges noted, it is the patent holder who bears the burden of showing infringement.

The judges said courts must be mindful of the fact that a patent "simply represents a legal conclusion" reached by the US Patent & Trademark Office and that many patents are later found to be invalid or not infringed.

Indeed, the judges pointed out that a 2002 study by the FTC concluded that, in Hatch-Waxman challenges made under paragraph IV, the generic challenger prevailed 73% of the time.

The judges emphasized that nothing in their ruling limits the ability of drug makers to reach the reverse settlements, but said the deals must be scrutinized under antitrust laws.

But the court said that reverse payments are "prima facie evidence of an unreasonable restraint of trade," unless the patent holder manufacturer could demonstrate the payment offers a "competitive benefit that could not have been achieved in the absence of a reverse payment" or where it could increase competition, for example, by enabling a "cash-starved generic manufacturer to avoid bankruptcy and begin marketing a generic drug might have an overall effect of increasing the amount of competition in the market."

The Third Circuit's ruling, said Sheppard Mullin's Mr Magielnicki, "is the epitome of a split" from the other appeals courts' decisions.

In its petition to the Supreme Court, Merck said "no federal court of appeals has ever applied so stringent a standard to settlements" as the Third Circuit's test that treats any payment from a brand manufacturer to a generic drug maker as "prima facie evidence of an unreasonable restraint of trade."

Merck said "immediate intervention" was necessary by the high court to "dispel the uncertainty" about the validity of pharmaceutical patent settlements in the wake of the Third Circuit's decision.

"This case is a compelling candidate for certiorari in every respect, and the petition should therefore be granted," Merck said.

"This case presents one of the most significant unresolved legal questions currently affecting the pharmaceutical industry," the company declared.