With A $1.2 Billion Hammer, The FTC Closes Loophole To Prevent Generic Drugs

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This morning, the U.S. Federal Trade Commission drew blood: Teva Pharmaceuticals will pay $1.2 billion to reimburse insurers, drug wholesalers, and pharmacies who paid full price for the Provigil, produced by Cephalon, a company Teva bought in 2011, because Cephalon had paid generic drugmakers to delay launching cheaper versions of the blockbuster drug.

That comes after a $512 million settlement Teva reached with plaintiffs who said they’d been forced to overpay for Provigil as a result, and a second settlement, the value of which is undisclosed. Some of that will be credited to the new amount.* By point of comparison, Teva spent $6.8 billion to purchase Cephalon in 2011, so these settlements effectively increase the cost of the deal by 18%. Petach Tikva, Israel-based Teva, the world’s largest generic drugmaker, will also enter into a legally binding agreement with the U.S. government that will prevent it from making agreements that the FTC deems anticompetitive.

“This is the largest settlement in FTC history for this type of case,” said Edith Ramirez, the FTC’s Chairwoman. “That’s a big sum and I think that will send a very strong signal to any company that is contemplating entering into any type of deal that is anticompetitive.”

The size of the penalty is probably big enough to make drug makers think twice about crafting deals that delay generics. It also should help clarify the convoluted process through which drugs go generic in the U.S. It builds on a Supreme Court ruling against Actavis that opened the door for the FTC to bring such cases.

The basic idea is simple. Drugs are protected by patents for 20 years after they are invented, allowing their makers to have a monopoly on their sale and charge whatever price the market will bear during that time. When that patent expires, generic drug companies that specialize in making copy-cat versions of medicines flood in, and competition between them can cause the cost of a medicine to plunge 60% or more in short order.

In order to try and protect their business, drug companies will often file multiple patents on single medicine – for treating different diseases, for differing formulations, or for manufacturing processes. To deal with this, Congress set up a system in which generic drug companies can benefit from challenging the patents on drugs. The first generic firm to file with the Food and Drug Administration gets to be the only copycat for six months, during which time it will charge a price only slightly less than the branded drug.

When a generic company files with the FDA, the company that makes the branded version sues it. And then they go to court. If the brand wins, no generic. If the generic wins, it gets to enjoy very high profit margins for six months, and then other generic firms flood the market.

But for Cephalon, keeping generics off the market was worth more than launching those generics was worth to generic makers including Ranbaxy and Mylan MYL +0.9%. In the first quarter after the sale to Teva, Provigil generated $350 million in sales. Earlier, the FTC had said that the deals Cephalon made with Ranbaxy and Mylan were worth $200 million, although they included not cash but intellectual property and manufacturing processes.

Read more: With A $1.2 Billion Hammer, The FTC Closes Loophole To Prevent Generic Drugs

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