The introduction of authorised generic versions of brand-name drugs reduces prices modestly and in the short term, but the threat to do is a "powerful inducement" to generics firms to delay launching their products, says a US government report.

Promises by a brand-name drugmaker not to market competing authorised generics are frequently present in pharmaceutical patent settlements between branded and generic firms, according to the Federal Trade Commission (FTC)'s final report on the impact of authorised generics on the market.

The report finds that authorised generics "modestly reduce drug prices during the first 180 days of generic competition, and identifies some evidence suggesting that the presence of an authorised generic could affect decisions by generic competitors to challenge patents on drugs with low revenues," said FTC chairman Jon Leibowitz.

However, he added: "the clearest and most disturbing finding is that some brand companies may be using the threat of launching an authorised generic as a powerful inducement for generic companies to delay bringing their drugs to market." 

"When companies employ this tactic, it is a double whammy for consumers," said Commissioner Leibowitz. "Consumers have to pay the higher brand prices while the generic delays its entry and, once generic entry does occur, consumers pay higher prices without the benefit of competition from the authorised generic," he added.

The FTC has for years opposed pay-for-delay patent litigation settlements, in which a brand-name drug manufacturer compensates its generic competitor to delay entering the market. In its new report, the Commission says it has become increasingly common for brand-name drugmakers to start marketing authorised generics at the same time a generic firm is beginning the 180-day marketing exclusivity period established by the Hatch-Waxman Act for the first generic competitor of a brand-name drug – known as "first fliers."

This practice leads to questions about the effects of authorised generics on pharmaceutical competition, says the FTC.  

The study finds that competition from an authorised generic during the 180-day exclusivity period is associated with a 4%-8% reduction in retail prices and a 7%-14% cut in wholesale prices, but that it also reduces the first-flier's revenues by 40%-52% during the period. Moreover, revenues for the first-flier drop by an average 53%-62% during the first 30 months after the exclusivity period ends if it is facing authorising generic competition.

Nevertheless, this impact on revenues has not substantially reduced the number of patent challenges by generic firms, who have continued to challenge patents, even on drugs in small markets, the Commission also finds.

The report also sees "strong evidence that agreements not to compete using authorising generics have become a way that some branded firms compensate generics firms for delaying entry to the market." In FY2010 alone, 15 drug patent settlements included such an agreement, or nearly 60% of all such settlements for the year, compared to around 25% of all such settlements during FY2004-FY2010.

The 39 such settlements which contained such an agreement during FY2004-FY2010 involved drugs with a total market value of more than $23 billion and delayed generic entry by an average of 37.9 months past the settlement date, says the FTC.

Commenting on the report, US industry group the Generic Pharmaceutical Association  (GPhA) accused the FTC of continuing to "mislead" consumers on patent settlements.

"By continuing to push its misguided policy to ban pro-consumer patent litigation settlements, the FTC is gambling with consumers' savings," said GPhA executive director Bob Billings.

"It's the patent, not the patent settlements that holds up the launch of a new drug. Patent settlements have never prevented competition beyond the patent expiry, and generally have resulted in making lower-cost generics available months and even years before patients have expired,” said Mr Billings.