It takes a ton of time and money for a pharmaceutical company to produce a new drug.  Some companies claim an average of 12 years and over $350 million just to get one new drug from the research lab to your medicine cabinet.  And only then does a brand name drug starts to finally make money for its maker.  But after a number of years in the marketplace (usually between 7-12 years in the U.S. and up to 20 years in Canada), that brand name drug’s exclusive patent protection expires, thus opening the market to competition from cheaper generic forms of the same drug.  When generic drugs become available, the market competition often leads to much lower prices for both the original brand name drug and the generic forms.

So when a drug falls off the patent cliff, drugmakers stand to take a substantial hit to their profits from then on.  The bigger the blockbuster drug, the bigger that financial loss will be. 

No wonder Big Pharma has come up with clever if slightly slimy plans to postpone the sales of generics produced by competing companies, sometimes for years. In the industry, one such plan is called ‘Pay for Delay’ or ‘Pay To Go Away’ and here’s how it works.

Let’s say that a drug company like Bayer Corporation is gearing up for a big sales drop when its antibiotic Cipro loses patent protection.  A less expensive Cipro would still be on the market and prescribed by many physicians, but many more docs will now opt for the cheaper generic version of the drug ciprofloxacin for their patients. Cipro will suddenly cease to be a big blockbuster name brand drug for Bayer.

So Bayer decides to approach three of its competitors, Barr Laboratories, Rugby and Hoechst-Marion Roussel – all manufacturers of generic drugs.  According to California Superior Court documents:

“…HMR and Rugby agreed to refrain from selling or marketing a generic Cipro in exchange for a lump sum of $49.1 million and quarterly payments to Barr and HMR that have totalled several hundred million dollars.”

Bayer is happy because they can continue to sell their blockbuster brand name drug for six more profitable years, long after Cipro’s patent protection is legally lifted.

The three competitors are happy because they’re essentially getting paid not to work.

The only stakeholders who are not particularly happy are patients. Their access to cheaper generic versions of the brand name Cipro has been effectively blocked.

Oh, make that two unhappy groups of stakeholders: the other is your neighbourhood drug store owners, who earn much higher profit margins on the generic drugs they sell there compared to brand name drugs.

So let’s also say that two unhappy American drug store chains called CVS and Rite Aid decide to challenge the Pay for Delay deal. Make no mistake: although they may look like consumer activists and local heroes standing up for their poor deprived customers, they too are looking out for their own profits.

Drug companies like Bayer insist that the practice of Pay for Delay is perfectly legal. But the U.S. Department of Justice Anti-Trust Division, along with The Federal Trade Commission, both oppose what they call these reverse payment agreements.

And across the pond, in a report from the European Competition Commission, this agency accused drugmakers of costing consumers in 17 countries as much as $4.2 billion by using patent rules and lawsuit settlements to restrict sales of cheaper generic medications. The Commission found that various tactics are used to delay or block the sale of generics, including:

• filing large numbers of patents for the same drug
• suing generic companies
• settling patent disputes and intervening in national procedures for generic drug approvals

All major drug companies would have you believe that the newest, most expensive, brand-name drugs are best, and have used implicit and explicit tactics to discourage consumers from asking for generic and other classic drugs. According to PharmedOut.org in their report called Fast Facts On Generic Drugs:

“Demanding older, classic drugs will not only personally save you money, it will help drive down health care costs. It may even decrease your chances of drug-related adverse effects. Taking classic drugs is a sound health care decision. Don’t let fancy packaging and glossy ads tell you otherwise.”

Brand name drug companies typically file patent suits against generic companies to prevent them from getting regulatory approval for copies. And then legal settlements like the Bayer case involve brand name drugmakers paying generic-producing companies to keep their products off the market.

It’s a brilliant scam.  Stay tuned to see if government regulations have any teeth when it comes to reversing these reverse payment agreements – and other methods that Big Pharma successfully employs to keep cheaper generic drugs out of your medicine cabinet.

NEWS UPDATE: March 8, 2011

The U.S. Supreme Court has refused to hear a challenge to a patent deal between Bayer and Barr Pharmaceuticals covering their antibiotic Cipro. That deal has been the subject of an intense, closely watched anti-trust battle between drug purchasers – who allege such patent deals are anti-competitive – and the two companies, who’ve defended their arrangement.

Back in 1997, a drug wholesaler and pharmacies sued, saying that the settlement was illegal under anti-trust law, but the courts ruled that the deal did notbreak antitrust rules.

The Federal Trade Commission has been on a crusade against Pay For Delay deals, and European anti-trust regulators have been probing patent settlements in the EU, too. As PharmaTimes reports, U.S. President Obama has proposed a ban on these patent settlements, saying it would save the federal government up to $8.8 billion over 20 years. Both branded drugmakers and generics firms, of course, oppose a ban.

* NEWS UPDATE: November 11, 2011

The New York Times has reported that the biggest introduction of a generic drug in pharmaceutical history is being met with tough business strategies by Pfizer and pharmacy benefit companies.  Pfizer has agreed to large sales discounts for benefit managers designed to block the use of generic versions of Lipitor by instructing pharmacists to substitute brand name Lipitor for any doctor’s prescription for its generic replacement, at least until next spring.

Find out more about Pay For Delay issues in this Wall Street Journal report.

See also:

• Lipitor and Nine Other Blockbuster Drugs That Are Falling Off the “Patent Cliff”
• Generic Drugs: Are They Really Exactly the Same as Brand Name Drugs?
• How a New Drug Gets Approved
• Is Big Pharma Onboard the Titanic?
• “Pay For Delay”: How Off-Patent Drugs Fight Off Generics