FTC Issues Long-Awaited Final Report on Authorized Generics; Report Examines Both the Short-Term Effects and Long-Term Impact on Competition and Drug Prices

August 31, 2011

By Kurt R. Karst –      

On August 31, 2011, the Federal Trade Commission (“FTC”) announced the issuance of its final report, titled “Authorized Generic Drugs – Short-Term Effects and Long-Term Impact,” which has been in the works for years since it was requested in 2005 by several members of Congress.  The massive (270 pages in all) final report follows up on the FTC’s June 2009 interim report (“Authorized Generics: An Interim Report”). 

As we previously reported, the interim report presented the first set of results from the FTC’s study of authorized generics and focused on the effects of authorized generic introduction during the first, 180-day period of competition by a generic drug.  Not surprisingly, the FTC found in 2009 that drug retail and wholesale prices dropped, as well as an ANDA sponsor’s revenues (which sponsor was granted 180-day exclusivity) with the introduction of an authorized generic.  Those results were carried through to and modified in the FTC’s final report. 

The interim report also raised the FTC’s concern about the use of authorized generics in the context of patent settlement agreements and commented on how, according to the FTC, such agreements can harm consumers.  The final report includes additional data that the FTC says confirms its interim findings. 

The “authorized generic controversy,” as the FTC frames it, is as follows:

Brand-name companies that offer AGs contend that they are procompetitive – that they make valuable products available to consumers at lower prices than those of brand-name products and provide competition that leads to lower generic prices overall.  Some in the generic drug industry, in contrast, contend that AGs harm competition by drawing revenues away from generic firms during the 180-day exclusivity period provided for first-filers that challenge a brand-name company’s patents.  They caution that this reduces the potential reward available to generics that challenge patents, thereby discouraging patent challenges that facilitate earlier generic competition and reduce prices for consumers.  This, the AG critics argue, undermines long-run competition and the goals of the Hatch-Waxman Amendments.

The FTC’s final report, which includes a lot of nifty data, analysis, and commentary, to keep folks busy reading and thinking through the long Labor Day weekend (e.g., data on Paragraph IV certification filings and 180-day exclusivity), says that the bottom line is that although “authorized generics have a substantial effect on the revenues of competing, generic firms during the 180-day exclusivity period . . . the reduced revenue stemming from authorized generic competition during 180-day exclusivity has not affected the generic’s incentives in a way that has measurably reduced the number of patent challenges by generic firms;” however, “there is strong evidence that agreements not to compete with an authorized generic have become a way for brand-name companies to compensate generic competitors for delaying entry.”

The final report contains four main findings:

  • Competition from authorized generics during the 180-day marketing exclusivity period has led to lower retail and wholesale drug prices.  During this time, competition by an authorized generic is associated with retail prices that are four-to-eight percent lower, and wholesale prices that are 7 to 14 percent lower, than those without an authorized generic.
  • Authorized generics have a substantial effect on the revenues of competing generic firms.  During the 180-day exclusivity period, the presence of an authorized generic competitor on average reduces the first-filing generic’s revenues by 40 to 52 percent. In addition, revenues of the first-filing generic are between 53 and 62 percent lower during the first 30 months after the exclusivity period ends, if it is facing authorized generic competition. Introduction of an authorized generic can mean hundred of millions of dollars in lost revenue for the first generic competitor to enter the market.
  • Lower expected profits could affect a generic company’s decision to challenge patents on products with low sales.  However, the reduced revenues resulting from authorized generic competition during the 180-day exclusivity period have not substantially reduced the number of challenges to branded drug patents by generic firms. Despite the presence of authorized generic competition, generic companies have continued to challenge patents, even on brand-name drugs in small markets.
  • There is strong evidence that agreements not to compete using authorized generics have become a way that some branded firms compensate generic firms for delaying entry to the market.

It is the last finding that the FTC will almost certainly use to further its agenda (read crusade) both on Capitol Hill and elsewhere to put an end to patent settlement agreements, or what opponents call “pay-for-delay” or “reverse payment” agreements.  Retiring Senator Herb Kohl’s (D-WI) bill to restrict such agreements, the Preserve Access to Affordable Generics Act (S. 27), was reported out of the Senate Judiciary Committee in July.  The FTC’s final report could add some steam to the bill.  (For an interesting twist on how the FTC handled a recent case, see WLF’s The Legal Pulse recent post “FTC Injects Its Crusade Against “Reverse Payment” Drug Patent Suit Settlements into Merger Consent Order.”)

What is less clear is how the FTC’s final report might pan out for Sen. John Rockefeller’s (D-WV) pending bill, the Fair Prescription Drug Competition Act (S. 373), and the related bill introduced in the House of Representatives by Rep. Jo Ann Emerson (R-MO), H.R. 741.  (See our previous post here.)  Both bills would amend the FDC Act to prohibit the manufacture, marketing, sale, or distribution of an authorized generic version of an NDA-approved drug until any period of 180-day exclusivity associated with an ANDA for a generic version of that NDA-approved drug has expired or has been forfeited.  The FTC’s final report could take any wind out of the sails of those bills.