The Supreme Court is About to Stick it to Big Pharma

The Supreme Court is skeptical and that is never a good thing. During arguments Monday, several justices suggested drugmakers may be open to lawsuits over payments made to generic manufacturers that the Federal Trade Commission says are designed to forestall generic versions of drugs.

The Washington Post reported that justices hinted that a ruling by the court could rewrite the rules pertaining to the release of generic medicines. 

At issue are payments, known as reverse payments, made by drug makers to generic rivals which drug makers claim are legitimate patent settlements. The FTC says otherwise, noting that the payments benefit the companies and end up costing patients up to $3.5 billion a year.

According to the FTC, drug makers struck 40 pay-for-delay accords in fiscal 2012 alone. Several companies, including Bayer, Merck MRK, and Bristol-Myers Squibb BMY have already been sued.

The FTC says courts should start with a presumption that a payment from a brand-name drugmaker to a generic rival is illegal. Justice Stephen G. Breyer said that type of test would be “rigid.”

Justice Anthony M. Kennedy said that brand-name drugmakers should not be permitted to pay generic-drug manufacturers more than those companies could expect to get by winning patent litigation.

The main issue has to do with the economics of the drug industry. Large drugmakers can make billions from blockbuster drugs, often after spending enormous sums to develop those drugs. Then, when the patent expires and the generics come on the scene, sales plummet, costing the original company as much as 90 percent of its market share, according to the Post.

Generics, on the other hand, have saved consumers $1.1 trillion in the past decade, the industry says.

The settlements come into play when a generic maker is about to receive Food and Drug Administration approval to produce a drug. This is when the original company makes its play. The nature of the play is where things get complicated.

The FTC says settlements that merely set the date for a generic drug’s entry into the marketplace are not illegal or a problem. These types of agreements, they say, may simply reflect a company’s assessment of the chances that a court would (or would not) strike down the brand-name company’s patent.

If, on the other hand, the purpose of the payment is to get a generic maker to wait an extra year or two before entering the market, then the transaction is suspect, according to the FRC.

Lower courts have said that unless the patent litigation is a sham, reverse payment agreements are immune from antitrust attack.

The Supreme Court, Monday, was not impressed. Among the eight justices taking part, only Antonin Scalia said he agreed with the lower court.

The case under discussion is Federal Trade Commission v. Watson Pharmaceuticals.

But investors don’t seem too concerned. Not only are big pharma names up Tuesday, they’re up big on the year.