The Single Worst Practice of the Drug Industry

For millions of ordinary folks like you and me, generic drugs make needed prescription medicines affordable. Generics also reduce the dent in our collective pocketbooks come tax time by cutting billions of dollars annually from the costsof taxpayer-funded healthcare programs such as Medicare and Medicaid.

But if you're a Big Pharma with blockbuster-branded drugs, generic drugs are the enemy. Last year, about 84% of the 4 billion prescriptions written were for generic medicines. The huge discount for a generic med -- up to 90% less than the cost of a branded counterpart -- makes it very rare for patients to switch back to the branded drug once a generic becomes available.

With generic equivalents threatening to obliterate the sales of prized drugs, it comes as no surprise that the Big Pharma giants have developed some pretty questionable legal maneuvers to head off this competition.

While some of these tactics might be defensible, one reallyraises the hackles on consumers' and taxpayers' necks. Called "pay for delay," it allows many pharmaceutical and biotech companies to make deals that enable them to continue to enjoy monopoly pricing much longer than they otherwise would be able to. The Federal Trade Commission claims this tactic adds up to $3.5 billion in higher drug costs every year for taxpayers and consumers.

Let's make a dealOn a company-to-company basis, the specifics of these deals -- which are also called reverse payment, or exclusion payment -- vary widely. But they all boil down to this: As part of a patent litigation settlement, the branded-drug manufacturer pays a competitor an agreed-upon sum to delay the release of the latter's generic alternative.

Hence, "pay for delay." Or, as we might call it today, "go slow or go home."

It's obvious what Big Pharma gets out of these deals. By keeping the generic drug off the market, companies can continue to control the market for their branded drug. But why do generic companies go along with this? It turns out the loss of revenue loss from keepinga generic off the market is vastly less than the loss of sales at the branded-drug company. So Big Pharma can pay a sum big enough for each company to profit.

Who are the losers in these deals? Patients. In the case of uninsured individuals, the consequences can be devastating. To see the impact, let's look at one pay-for-delay case the FTC is pursuing.

The case involves the drug Provigil, which is often prescribed for multiple sclerosis-related fatigue. A generic version should have gone on market in 2005, but the FTC said brand-name drug manufacturer Cephalonpaid more than $200 million to four different generic-drug manufacturers, which therefore agreed to kept their generic versions off the market until 2012. In the meantime, MS patients without insurance had to pay up to $1,200 each month for the drug, or manage without it.

What about patients with insurance? They aren't off the hook, either. Karen Winkler was a 46-year old mother in need of treatment for multiple sclerosis-related fatigue. In an interview with PBS NewsHour, she explained that at the time that Provigil's generics were blocked, she had three young children, andthe cost burden was a severe hardship for her family. Her doctor had told her to expect a generic version, but instead Cephalon's pay-for-delay deal kept her paying "$700 for a three-month supply of Provigil, out-of-pocket, even with insurance." Despite overwhelming fatigue, Winkler said, "for years, I'd skip pills or split doses just to get by." Eventually, she stopped taking the medicine "because I could no longer afford its high price."

Overall costs and the latest dealsPrescription drugs vary widely in price. Looking at an overall average, the Federal Trade Commission estimates pay-for-delay deals add $4,590 to a single drug over 17 months. When you project that over the typical five-year length of a pay-for-delay scheme, we're talking about $16,200 in extra spending per patient, per drug, assuming treatment continues over that length of time.

Provigil's generics are on the market now, dropping the cost for the drug to about $16 for a three-month supply. But many other pay-for-delay deals are still in effect. In September, the The Wall Street Journalreported that the FTC had sued several drug makers -- including AbbVie Inc. , Abbott Laboratories , and Teva Pharmaceutical -- for strikingdeals that delayed the availability of the blockbuster AndroGel testosterone replacement therapy.

And that's just the tip of the iceberg.

A 2012 FTC report cited 40potential pay-to-delay deals, up from 28 the year before. Looking back to 2005, annual reports by the FTC show as many as 142 generics have been delayed by pay-for-delay tactics, with drug companies raking in an estimated $98 billion in additional branded-drug sales when generic versions were delayed.

Pay-for-delay deals are currently blocking generic versions of popular drugs Nexium (heartburn and GERD), Nuvigil (narcolepsy), Niaspan (high cholesterol), and Aggrenox (stroke prevention), according to a report from consumer groupU.S. PIRG.

A good idea gone wrongThe genesis of pay-for-delay goes back to the Hatch-Waxman Act of 1984. The act was supposed to spur competition by encouraging generic-drug makers to challenge brand-name patents. The first successful generic challenger was therefore granted incentives, including a period of marketing exclusivity for its generic drug.

At first, the scheme worked beautifully. But soon, a problem arose.

Rather than compete with the generics, branded-drug companies started creating legal mechanisms in which the brand manufacturer would sue the generic for infringement, then pay a sum of money for an noncompetition agreement. In 2005, when a few appellate courts upheld these agreements, pay-for-delay deals began snowballing.

Thus far, the FTC has had limited success in overturning these deals, but the legal landscape could be changing. Recently, a Supreme Court decision in a reverse payment case discarded lower-court rulings that deemed these agreements automatically legal, and instead declared that reverse payments could violate antitrust laws.

Summing upThe market for drugs is not like the market for a new appliance or an iPhone. When patients don't have reasonably priced access to needed drugs, drug companies risk angering patients and significantly damaging their reputations. Critical questions can then be raised about corporate ethics. Karen Winkler spoke for many patients who have suffered from pay-for-delay deals when she said "It's definitely not moral. It's not humane. It's not fair."

While profits are an important piece of the puzzle for drug companies, at the risk of being branded a hopeless idealist, I don't believe achieving sustainable profit targets and meeting the needs of patients are inherently incompatible. Many great American CEOs in the past didn't believe so, either. For instance, in 1950, George W. Merck, the founder of Merck , said, "We try never to forget that medicine is for the people. It is not for profits. The profits follow, and if we have remembered that, they will never fail to appear."

George Merck was in part responsible for the development of synthetic vitamins, sulfas, antibiotics, and hormones. Under his guidance, Merck generated profits to satisfy shareholders while also greatly improving the lives of patients. Profits before patients is a terrific performance metric, or best practice, for this industry. Here's hoping more multinational pharmaceutical companies aspire to pursue both profit andmaking a meaningful difference in the quality of life of the patients their drugs treat.

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Cheryl Swanson has no position in any stocks mentioned. The Motley Fool recommends Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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