Davis Merritt: Case pits drug companies against public good

03/28/2013 12:00 AM

03/27/2013 5:07 PM

The nation’s attention has been riveted on two gay-marriage cases considered by the U.S. Supreme Court Tuesday and Wednesday, but those may not be the most significant cases before the court this week. That distinction arguably belongs to Federal Trade Commission v. Actavis, heard in relative obscurity on Monday.

The marriage cases are heavy in emotional content, and the activism surrounding them provides high-octane fuel for the Great Media Engine, but even a definitive ruling, which is unlikely, would merely shift the discussion to other arenas, political and social.

In Actavis, however, the court will decide whether the brand-name drug industry can keep generic drugs off the market through what amounts to bribery and collusion. It’s a case in which two presumptive enemies – brand-name and generic drug companies – are united in an effort to retain a lucrative symbiosis that works for them but against the health and pocketbooks of all Americans.

The stakes are enormous. Only 18 percent of prescriptions are for brand-name drugs, but those represent 73 percent of our total spending on medicines. We pay about 85 percent less for generic versions.

Here’s how it works:

Company A develops a new drug. Getting government approval to sell it involves years of expensive research, engineering, clinical trials, production and marketing – say, $100 million. Company A must price the drug to recover those costs plus a profit, so it sets the price to bring in $200 million a year. But once Company A has spent the $100 million, it’s relatively easy for Company B to reverse engineer the drug and market its own version for, say, $2 million because it doesn’t have the up-front expenditures. Even charging a much lower price, it could make $5 million a year.

Recognizing this, the law provides patent protection to Company A for as much as 20 years, so Company A stands to take in $200 million a year over the life of the patent.

Sounds reasonable enough. But wait – Company B decides to challenge the patent in court. Lawyers align, papers are filed, witnesses subpoenaed. But before the case gets to trial, Company A offers Company B $30 million not to market the generic for four years. Company A can afford it, given its $200 million annual revenue from the drug, and Company B makes $30 million up front instead of $20 million over four years, so a settlement is signed and the generic version goes away.

This deal strikes the FTC as anti-competitive and illegal collusion against the public good, but companies A and B argue that the settlement would get the generic to market faster (after four years, instead of 20). That, of course, assumes that Company B’s patent challenge would fail. The FTC, consumer groups, drugstores, the American Medical Association and AARP argue that about 75 percent of challenges succeed, which makes “pay for delay” settlements simply a sharing of the profits of an artificial monopoly, against the public interest.

So the court must decide whether Company A’s right to protect its intellectual property trumps antitrust law and public good.

Americans pay $320 billion a year for approved drugs – a substantial chunk of the U.S. economy. For millions of people – and for Medicare and Medicaid – reducing that tab by three-fourths would save a lot of money and lives.

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