New IMS Report Ups the Ante on Drug Patent Settlement Agreement Savings

July 10, 2013

By Kurt R. Karst

Although the battle over the appropriate test to apply to drug patent settlement agreements (aka “reverse payment” or “pay-for-delay” settlement agreements) when evaluating whether or not they are immume from antitrust attack ended with the U.S. Supreme Court’s June 17th decision in Federal Trade Commission v. Actavis, Inc., 570 U.S. ___ (2013) (Docket No. 12-416), where the Court declined to hold that reverse payment settlement agreements are presumptively unlawful and ruled that that “Courts reviewing such agreements should proceed by applying the ‘rule of reason,’ rather than under a ‘quick look’ approach” (see our previous post here), the battle over the amount of saving (or not) to U.S. consumers and the government from such agreements rages on.  The latest salvo in that battle was launched today with the release of a report by the IMS Institute for Healthcare Informatics, titled “Impact of Patent Settlements on Drug Costs: Estimation of Savings.”

The IMS report (supported by GPhA) is intended to “quantify the impact of patent settlements and early generic market entry on drug costs, measured at the trade price level.”  Based on an analysis of patent settlement agreements reached between 2005 and 2012 for 33 molecules (identified in Appendix 1 of the report and in an accompanying presentation) IMS concludes that the effects of the settlement agreements through 2012 are as follows:

1. Generic pharmaceuticals launched prior to patent expiry as a result of the 33 settlements analyzed, have resulted in a reduction of $25.5 billion in drug costs from 2005 through December 31, 2012.

2. Average annual savings per year since 2005 amount to $3.2 billion from these 33 settlements.

3. Savings varied widely by molecule, ranging from $0.1 million to more than $4 billion during the full period and on average, generics had a 64.5 percent share of the molecule’s market by the end of 2012.

4. Almost one third of the estimated savings accrues to the Federal Government or $8.3 billion over the past 8 years.

Moreover, says IMS, for those settlement agreements where the patent expiration date reflected in the Orange Book is in 2013 or later, significant savings will continue to be realized: “the remaining savings resulting from the 33 settlements would be $61.7 billion if the level of savings remained at the current level through patent expiry for each molecule.” 

Although apparently 65 molecules were the subject of drug patent settlement agreements from 2005 to 2012, 32 molecules were excluded from analysis for various reasons, including because a generic version of the brand-name drug has not yet launched, insufficient data were available to IMS, or the calculated price of the generic was not less than the brand-name price.

The IMS savings estimate differs significantly from other estimates of the effects of drug patent settlement agreements.  In January 2010, the Federal Trade Commission (“FTC”), a longtime opponent of such agreements (with consideration), issued a report, titled “Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions,” that concludes that pay-for-delay agreements “cost American consumers $3.5 billion per year – $35 billion over the next 10 years” (see our previous post here).  In addition, in June 2010, the Congressional Budget Office (“CBO”) estimated (see here) that the Federal government would save $0.9 billion during 2010-2015 and $2.7 billion during 2010-2020 (both on net) if S. 369, the Preserve Access to Affordable Generics Act, was enacted (see our previous post here).  To be fair, however, the IMS, FTC, and CBO analyses do concern somewhat different data sets.  As the IMS explains in its report:

A direct comparison of the results of this analysis with the previous estimates of the economic impact of patent settlements published by the FTC and CBO would be difficult, however, since the detailed methodology, specific products, sales estimates and impact assessments have not been disclosed.  The 33 settlements analyzed for this report are a subset of those submitted and reviewed by the FTC.  Moreover, the FTC and CBO assessments are based solely on a subset of patent settlements that include consideration (often referred to as “reverse payments”).

Nevertheless, says IMS, “[w]hile direct comparisons with these analyses are difficult absent additional information, an arithmetic modeling of the results of patent settlements under different assumptions is possible . . . .” 

Using a January 2010 RBC Capital Markets analysis of litigation success rates in the pahrmaceutical industry from 2000-2009, which found that generic drug manufacturers were successful in 48% of the Paragraph IV patent infringement cases brought against them, IMS posits that “[i]f this success rate is applied to account for cases that might have been won by the generic manufacturers had a settlement not been achieved, the total savings of $87.2 billion [(i.e., $25.5 + $61.7 billion)] would be discounted to $45.3 billion, assuming the generic entry date would have been the same as the entry date agreed to as part of the settlement.”  To make a more-apples-to-apples comparison, the IMS then uses the FTC’s estimate (from the March 25, 2013 Oral Argument in Federal Trade Commission v. Actavis) that approximately 26%-30% of all drug patent settlements are settled with consideration.  “If this percentage were applied to the $45.3 billion in savings from cases that the patent holder would have won had a settlement not been reached, the related savings would amount to $11.8 billion to $13.6 billion,” says the report.  Moreover, “[a]pplying a Federal Government’s share of 32.6%” – calculated based on the aggregate share of total retail drug costs in 2011 attributed to Medicaid, Medicare Part D, and other Federal programs including the Department of Defense and Veterans Affairs – “would result in $3.8 billion to $4.4 billion in savings,” according to IMS. 

IMS cautions that its arithmetic modeling “is not intended to represent in any manner whatsoever what would have happened absent the patent settlement agreements that occurred,” but rather, that “it is presented to illustrate the magnitude of the potential impact based on the specific and actual cases of 33 settlements that occurred since 2005.”  The organization also says that “[f]urther analysis and modeling of outcomes under different scenarios is required, with more specific information of the actual cases documented, in order to advance the understanding of patent settlements and their impact on consumers, payers, and manufacturers.”

The use of the IMS analysis in antitrust litigation to somehow influence a “rule of reason” analysis is speculative; however, the analysis could come in handy on Capitol Hill.  Still unclear is whether legislators, in light of the Supreme Court’s decision, will continue to pursue legislation effectively banning drug patent settlement agreements.  If they do, however, the IMS analysis could be useful in dampening concerns about such agreements, and serves to highlight the benefits of such agreements.

Additional Reading: