Thursday, July 8, 2010

Why Drug Patent Settlements Are Good For Consumers

Cross-posted from The Science Business on

The New York Times has an editorial out in opposition to the “devious tactic” whereby innovative pharmaceutical companies and generic drug manufacturers settle patent litigation. The Times argues that consumers come out as “the big loser” in such settlements, when in fact the exact opposite is true.

Settlements of patent litigation are just like settlements of any other type of litigation. Each side concedes total victory, in exchange for eliminating the risk of total defeat. In the case of patent litigation, the source of controversy is a patent. Let’s say Forbes Laboratories owns a patent on the composition of a blood-pressure-lowering drug called Presslow. The patent expires on January 1, 2013. A generic company files a lawsuit, arguing that Forbes’ patent is invalid. And let’s also say that there’s a 70% chance that Forbes would win the lawsuit.

But Forbes would rather lock in that 70% chance than risk the possibility that the judge rules against them, allowing generics onto the market today. So they offer to settle with the generic manufacturer, allowing them to sell a generic version beginning in March 2012. The generic company agrees, because they get to sell the generic version of Presslow 9 months earlier than they would have if the patent was upheld, giving the generic manufacturer a revenue boost.

Consumers only “lose” in such circumstances on the 30% chance that the judge rules against Forbes. They win if the judge would have ruled for Forbes, because the settlement allows generic drugs to appear earlier than they would have normally.

Innovative pharmaceutical companies have much more at stake than generic companies do in these settlements. If Presslow sells $2 billion a year, and investors can’t be sure of the stability of that revenue stream, they stay away from Forbes stock. For generic companies, on the other hand, it’s all upside to their existing revenues. Hence, innovative companies have more at risk, and often settle even when they are confident that they would win in court.

As a result, if the government banned the “devious tactic” of legal settlements, the likely outcome is that consumers will spend more on pharmaceuticals, not less. Claims to the contrary are only accurate if you believe that generic companies are dumb enough to settle even when they would win in court. The truth is the opposite: modern generic companies like Teva employ the most sophisticated patent lawyers on the planet. You can rest assured that they will only settle when they think their case is weak.

Thanks to the Hatch-Waxman Act of 1984, the United States has the most efficient generic pharmaceutical market in the world. Generic drugs represented 75 percent of all dispensed prescriptions in the U.S. in 2009, up from 57 percent in 2004. Let’s let generic companies continue their effective work in this regard, instead of tying their hands with clumsy new regulations.

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