With the passage of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), Congress required pharmaceutical companies to file certain patent settlement agreements with the FTC. Given the FTC’s unique role in reviewing these submissions, going back to 2004, staff of the Bureau of Competition publishes fiscal year MMA reports on the types of terms used in these settlements. These reports, and the data they contain about filing numbers and trends, have been cited by courts, policymakers, and academics. But questions have come up about how to interpret the reports. This blog post highlights three facts about the MMA reports to address divergent interpretations.
The Origin of MMA Reports
Congress enacted the MMA filing requirements in 2003 to address an emerging trend of brand companies paying generic patent challengers large sums in patent settlements (also referred to as reverse payments). Since 2018, the MMA also requires pharmaceutical companies to file certain agreements involving biologics and biosimilars.
The MMA promotes FTC antitrust enforcement by providing the agency with a means to identify reverse-payment agreements that may raise antitrust concerns. In 2013, the Supreme Court confirmed that patent settlements are subject to antitrust scrutiny and that some agreements may violate the antitrust laws. See FTC v. Actavis, Inc., 570 U.S. 136 (2013). The Court distinguished settlements that “allow the generic manufacturer to enter the patentee’s market prior to the patent’s expiration, without the patentee paying the challenger to stay out prior to that point” from settlements that “induce the generic challenger to abandon its claim with a share of [the patentee’s] monopoly profits that would otherwise be lost in the competitive market.” Id. at 154, 158. The first category of settlements—those in which the value transferred is only a non-exclusive license to sell the litigated generic product before patent expiration—do not, without more, raise antitrust concerns. A second category of settlements—those with payments and restriction on generic entry—may raise antitrust concerns because they may allow the brand and the generic to benefit from an extended period of monopoly profits at the expense of consumers who are denied lower-cost generics.
The FTC’s MMA reports provide statistics on the prevalence of key settlement terms, such as whether the generic agrees not to sell a product for some period and whether the brand compensates the generic.
Three Facts About MMA Reports
1. The FTC carefully reviews and tracks the evolution of terms in pharmaceutical patent settlements.
When reverse-payment agreements first emerged in the late 1990s and early 2000s, transfers of value to the generic appeared primarily as large cash payments to the generic, either alone or as part of a purportedly independent business transaction. Over time, settlements included other ways for a brand company to provide a generic company significant value that did not involve cash payments. Most notably, some potentially anticompetitive payments took the form of exclusive licenses, exclusive supply deals, and explicit “no-AG” commitments (in which the brand committed not to sell an authorized generic, or AG, for some period). Because these value transfers could compensate generics for agreeing to abandon their patent challenges for a share of the brand’s monopoly profits, FTC staff has consistently tracked these as compensation in its MMA reports, beginning with the FY 2005 report. Courts later confirmed that these types of value transfers can present the same antitrust concerns as cash payments and thus may also be unlawful. See, e.g., King Drug Co. of Florence v. SmithKline Beecham Corp., 791 F.3d 388, 404 (3d Cir. 2015).
As early as FY 2008, MMA reports began to identify certain terms that did not explicitly compensate the generic company, but might operate as compensation. For example, FTC staff explained in its FY 2008 report how a royalty that declines based on additional generic entry might act as a no-AG commitment. Beginning in FY 2013, MMA reports started systematically tracking this and similar terms, categorizing them as “possible compensation.”
Some have expressed concern that the evolution of the MMA reports is a sign that FTC staff is failing to recognize the various ways that a complex arrangement may provide compensation to the generic patent challenger. But the “possible compensation” category arose precisely because of the increasing complexity of some pharmaceutical settlement agreements and need for facts beyond the face of the agreements to assess their true nature and likely effects. The FTC staff will continue to identify and report new terms that may act as compensation from the brand company to the generic company for agreeing to stay off the market. And importantly, a lack of action by the Commission or its staff with respect to a filed agreement does not signify an implicit approval of the agreement or a lack of antitrust concern.
2. The MMA reports do not assess the legality of agreements.
The purpose of the FTC’s MMA reports is to provide objective information about the types of terms contained within the four corners of the submitted settlement agreements. The reports do not draw conclusions about the legality of specific agreements. Thus, an agreement may be categorized in an MMA report as containing “explicit compensation” but not be unlawful. For example, in recent years, an increasing number of agreements categorized as containing explicit compensation involve only minimal payments to the generic company for saved litigation expenses. Under Actavis, these agreements are unlikely to raise antitrust concerns. At the same time, an agreement categorized as “possible compensation” may pose significant antitrust concerns. Determining whether a particular agreement is likely to be anticompetitive generally requires an investigation into the specific facts and circumstances surrounding the agreement and the competitive landscape. This type of detailed information is not contained in the MMA filings that companies submit. Staff assessments of likely competitive harm are simply outside the scope of the FTC’s MMA reports.
3. Antitrust enforcement has not impeded settlements.
In a previous blog post, we showed that the data does not support pre-Actavis predictions by the pharmaceutical industry and others that subjecting reverse-payment patent settlements to antitrust scrutiny would deter companies from settling patent litigation or even filing generic drug applications in the first place. To the contrary, the number of settlements has increased significantly since Actavis, and they involve an increasing number of branded products subject to patent challenges by generic drug makers. Similar predictions are now offered to oppose new state efforts to police drug patent settlements.
But recent data on MMA filings belie these predictions. For instance, since a California pharmaceutical patent settlement law took effect at the beginning of this year, the most common patent settlements—those in which the generic agrees not to sell for some period but then gets a non-exclusive license to enter prior to patent expiration without compensation—have not disappeared. To the contrary, the MMA filings from the first nine months of 2020 indicate that such settlements appear to have increased slightly since the law took effect as compared to the same period in 2019.
Having objective data to assess such arguments is an important benefit of the MMA filing requirements, in addition to the important function MMA filings serve as a critical investigative screening tool for the antitrust agencies.