President Obama invoked the ire of the pharmaceutical industry a few weeks ago by including in his proposed budget for Fiscal Year 2013 a renewed proposal “to increase the availability of generic drugs and biologics by authorizing the Federal Trade Commission to stop companies from entering into anti-competitive deals, known also as ‘pay for delay’ agreements, intended to block consumer access to safe and effective generics.” According to the administration, this proposal “facilitates greater access to lower-cost generics and will generate $11 billion over 10 years in savings to Federal health programs including Medicare and Medicaid.”
Brand-name drug manufacturers frequently use pay-for-delay settlements, also known as “reverse payment” or “exclusion payment” settlements, to settle patent litigation with their generic competitors. Pursuant to this type of settlement, a brand-name drug manufacturer agrees to pay its generic rival to delay the market entry of its generic version of a patented drug. Accordingly, pay-for-delay settlements provide protection from competition beyond that which brand-name manufacturers are afforded under their respective patents.
Generic drugs typically cost much less than their branded counterparts. By postponing the market entry of generic alternatives, pay-for-delay settlements increase significantly prescription drug costs for private consumers, third-party payors, and the state and federal governments. These settlements are, conversely, highly profitable for both the brand-name and generic manufacturers: the brand-name manufacturer typically pays the generic manufacturer an amount that is less than the brand-name manufacturer would lose if the generic manufacturer entered the market and more than the generic manufacturer would make if it did so.
According to the Federal Trade Commission’s recent analysis of industry data, pharmaceutical companies entered into 28 potential pay-for-delay agreements in Fiscal Year 2011. Aside from Fiscal Year 2010, in which there were 31 such agreements, this figure exceeds the number of pay-for-delay agreements in any other year since 2003, the year in which the Federal Trade Commission began collecting this data. The pay-for-delay agreements reached in Fiscal Year 2011 involved pharmaceutical products with combined annual U.S. sales in excess of $9 billion.
Pay-for-delay settlement agreements enable brand-name manufacturers to effectively purchase additional protection from competition, and this conduct impacts directly the drug prices paid by consumers and third-party payors. The massive profits that can be reaped under these agreements provide a powerful incentive for pharmaceutical companies to continue to engage in this anticompetitive conduct if permitted under the regulatory scheme. It is therefore encouraging to see continuing efforts to regulate this anticompetitive trend, even if it remains unlikely that an outright ban on these agreements will be enacted in today’s political climate.
 Office of Mgmt. & Budget, Exec. Office of the President, Budget of the United States Government, Fiscal Year 2013 (2012) (proposed) (“Proposed 2013 Budget”), at 37, available here. President Obama’s proposed budget for Fiscal Year 2012 included a similar proposal. See Office of Mgmt. & Budget, Exec. Office of the President, Budget of the United States Government, Fiscal Year 2012 (2011) (proposed), at 81, available here.
 Proposed 2013 Budget at 37.
 According to the Federal Trade Commission, generic drugs typically cost at least 20% to 30% less than their branded counterparts and, in some instances, may cost up to 90% less than the name-brand drug. Press Release, Federal Trade Commission, FTC Study Finds that in FY 2011, Pharmaceutical Industry Continued to Make Numerous Business Deals that Delay Consumers’ Access to Lower-Cost Generic Drugs (Oct. 25, 2011), available here.