WASHINGTON (Reuters) - The Supreme Court ruled on Monday regulators can challenge deals between brand-name drug companies and generic rivals that delay cheaper medicines from going on sale, which regulators say increase costs to consumers by billions of dollars.
But the court, in a 5-3 vote with Justice Samuel Alito recused, declined the Federal Trade Commission's request to declare the deals to be presumed to be illegal. The regulatory agency has fought the practice for more than a decade.
"While we believe the Supreme Court decision will open the door to broader FTC scrutiny of brand/generic settlements, we believe a majority of settlements will still be allowed even if reviewed by the FTC," JP Morgan analyst Chris Schott said in reaction to the ruling.
The companies in the case were brand-name drug maker Solvay Pharmaceuticals Inc, now owned by AbbVie; generic makers Actavis Inc, previously Watson Pharmaceuticals; Paddock Laboratories Inc, now part of Perrigo Co, and Par Pharmaceutical Cos.
Solvay had sued generic drugmakers in 2003 to stop the sale of cheaper versions of AndroGel, a gel used to treat men with low testosterone.
In a settlement of the lawsuit, Solvay paid as much as $30 million annually to the generic drug makers to help preserve its annual profits from AndroGel, estimated at $125 million.
Under the deal, the three would keep their generic versions off the market until 2015. The patent expires in 2020.
Generic drugmakers like the "pay for delay" arrangements because if they bring out their products before patent infringement litigation is over, they run the risk of paying triple damages on sales if they are found to have infringed.
The FTC filed a lawsuit against the companies in 2009, arguing that the companies had simply split up Solvay's monopoly profits and prevented the generic firms from bringing out a cheaper version of the drug.
The FTC lost at the district court level, and that loss was affirmed by 11th Circuit Court of Appeals. The Supreme Court overturned the appeals court ruling and sent the case back to the lower courts for further proceedings.
"This definitely legitimizes the role of antitrust law in these settlements that the FTC has been pursuing for a while," said Noah Leibowitz, a patent expert with Simpson Thacher & Bartlett.
"Any settlement is going to be more difficult and companies will think much more carefully about how they settle these cases," he said.
The prices of AbbVie, Actavis and Perrigo shares were steady on Monday. Around midday on Monday, Actavis was at $124.96, down just under 1.5 percent, while AbbVie was down less than 1 percent at $43.01 and Perrigo was at $119.79, up about 1.2 percent.
FTC Chairwoman Edith Ramirez said the court had "taken a big step toward addressing a problem that has cost Americans $3.5 billion a year in higher drug prices."
"We look forward to moving ahead with the Actavis litigation and showing that the settlements violate antitrust law," she said in an email statement.
Actavis also indicated that the court fight was not over.
"We are pleased that the court ... did not rule that settlement agreements are presumptively unlawful. Rather, the court has ... left it to the lower courts to determine if the benefits of the settlement outweigh harm to consumers," said Paul Bisaro, CEO of Actavis in an emailed statement.
Jeffery Cross, an antitrust expert Freeborn & Peters LLP, predicted more litigation.
"The winners here are the trial lawyers," he said. "There will still be reverse payment settlements. ... However, the parties will be more savvy to avoid 'unexplained' large reverse payments that suggest that the patent is not that valid."
In his opinion for the majority, Justice Stephen Breyer wrote that the deals have the potential to hurt competition.
"Settlement on the terms said by the FTC to be at issue here - payment in return for staying out of the market - simply keeps prices at patentee-set levels, potentially reducing the full patent-related $500 million monopoly return while dividing that return between the challenged patentee and the patent challenger," Breyer wrote. "The patentee and the challenger gain; and the consumer loses."
The court suggested that drug companies may be able to show that some pay for delay deals are legal under the "rule of reason," the opinion said.
"This is sort of the end of the first act. We need to see how the rule of reason is applied," said Seth Bloom, a former aide to now-retired Senator Herb Kohl who as chair of the Judiciary Committee's antitrust subcommittee sponsored legislation to make "pay for delay" deals illegal.
Senators Amy Klobuchar, a Democrat, and Chuck Grassley, a Republican, introduced similar legislation this year.
Spokesmen for Paddock and Par were not immediately available for comment.
The case is Federal Trade Commission v. Watson Pharmaceuticals Inc et al, U.S. Supreme Court, No. 12-416.
Additional reporting by Caroline Humer and Bill Berkrot; Editing by Howard Goller, David Brunnstrom, David Gregorio and Cynthia Osterman