In 2000, a pharmaceutical company named Solvay obtained a patent for a drug called “AndroGel,” which is used to treat men with low testosterone levels. Shortly thereafter, several of Solvay’s competitors sought to market generic versions of the same drug, claiming that Solvay’s patent for the testosterone replacement gel was invalid. These claims were never resolved, however, due to a settlement agreement where Solvay agreed to pay its competitors millions of dollars if they abandoned their efforts to cut into Solvay’s monopoly until August of 2015. This settlement, according to the Federal Trade Commission, was an agreement by generic drug manufacturers “to share in Solvay’s monopoly profits, abandon their patent challenges, and refrain from launching their low-cost generic products to compete with AndroGel for nine years.”
In other words, the FTC alleged, Solvay got to keep charging monopoly rates for its drug. Its competitors got a cut of the profits. And consumers got the shaft, in the form of higher drug prices.
Thanks to the Supreme Court’s decision yesterday in FTC v. Actavis, an FTC lawsuit challenging this settlement will move forward. Conservative Justices Antonin Scalia and Clarence Thomas, however, joined an opinion by Chief Justice John Roberts that would have given the Court’s effective blessing to the AndroGel settlement (Justice Samuel Alito was recused from the case).
The legal issue in the case involves a complex question of what happens when federal antitrust law runs headlong into federal patent law. On the one hand, allowing a company to simply pay its competitors not to enter the market would defeat the entire purpose of antitrust law and open the door to monopolies in every marketplace. On the other hand, the whole point of patents is to give inventors a temporary monopoly in order to encourage them to pursue their inventions. Drug companies would have little incentive to create new drugs if their discoveries could be poached immediately after they are created.
Yet, patent law does not allow someone to unilaterally proclaim that they invented a product and then change monopoly prices for it. As Justice Breyer explains in the majority opinion, “a valid patent excludes all except its owner from the use of the protected process or product,” Breyer’s opinion explains, “[b]ut an invalidated patent carries with it no such right.” The whole point of cases like the FTC’s lawsuit is to prevent pharmaceutical companies from giving a wink and a nod to each other’s more doubtful patent claims in order to squeeze more money from consumers.
The dissent, which seems to presume that the patent at issue in this case is valid, rests largely on a desire not to upset “the public policy in favor of settling.”
As it turns out, there is a disinterested study available which shines light on whether the majority or the dissent’s approach will be better for consumers. In 2011, the nonpartisan Congressional Budget Office conducted a study on the budgetary impact of the Preserve Access to Affordable Generics Act, which would have created a strong legal presumption against settlements such as the one that occurred in this case. The CBO determined that restricting such settlements, where a drug company pays its competitors not to enter the generic drug market, “reduce[s] total expenditures on prescription drugs in the United States, on net, by about $11 billion over the 2012-2021 period.” Federal programs alone would save $4 billion. As CBO explained, restricting arrangements similar to the AndroGel settlement would “accelerate the entry of generic drugs affected by the bill by roughly 17 months, on average,” thus enabling consumers to buy cheaper generic drugs that much sooner.
Admittedly, this bill cast a more skeptical eye on these settlements than Justice Breyer’s opinion does in Actavis. Nevertheless, this CBO report is strong evidence that the conservatives’ approach to these cases would have ultimately led to higher prices for consumers and windfall profits for drug companies.