Teva Pharmaceutical’s $1.2 Billion Fine Just A Warning Shot

It looks as if Teva Pharmaceuticals (TEVA) has finally settled a longstanding fight with the United States Federal Trade Commission (FTC) to pay $1.2 billion. The charges were actually against one of its subsidiaries, Cephalon, which illegally blocked generic versions of its popular pill Provigil — which promotes wakefulness for people who suffer from sleep apnea and narcolepsy, among other sleeping disorders — through a series of agreements with four of the top generic drug manufacturers. According to the USA Today article:

“FTC lawyers charged that Cephalon sued the generic drug makers for patent infringement on Provigil. However, Cephalon allegedly later paid the companies more than $300 million to drop their patent challenges and agree not to market competing generic products until 2012.”

The Israel-based pharmaceutical company will use the settlement money to compensate wholesalers, pharmacies and insurers who overpaid for the drug.

“Today's landmark settlement is an important step in the FTC's ongoing effort to protect consumers from anti-competitive, pay-for-delay settlements, which burden patients, America businesses and taxpayers with billions of dollars in higher prescription drug costs,” FTC Chairwoman Edith Ramirez said in a statement announcing the agreement. “Requiring wrongdoers to give up their ill-gotten gains is an important deterrent.”

Considering the large settlement number, Teva’s stock is surprisingly only down 1.5% since last Thursday when the settlement was announced. Part of this may be because Teva will get credit for private settlements it has already made in similar litigation related to Cephalon, making the actual financial commitment of the settlement considerably less than $1.2 million.

The agreement is good for generic drug makers, but bad for drug manufacturers like Teva. The FTC has long attempted to keep big pharma from paying generic drug makers to drop lawsuits that could lead to earlier introduction of lower-cost generic medicines. In fact, the FTC has argued that it’s a matter of antitrust regulation, and it won a Supreme Court ruling in June 2013 that helped its ongoing efforts.

In a news conference, Ramirez said, “I believe this settlement brings us another step closer to stopping these illegal arrangements.” It’s important to understand why this is so important to the FTC, too. In a way, it hearkens back to an ancient Kenyan proverb: “When elephants fight, it’s the grass that suffers.” These deals put a burden on patients, taxpayers and business in the former of high-cost prescription drugs.

And because Cephalon compensated several generic-drug manufacturers — coincidentally, including Teva — around $300 million in exchange for abandoning patent challenges to Provigil and refraining from selling a generic version in 2012, only the elephants won in the deal. Everyone else, from wholesalers all the way down the line to end customers suffered the cost of the brand-name drug.

In the future, Teva management and other brand-name drug makers should take note: With the cost of healthcare already increasing across the board, the FTC will likely continue to fight against these types of antitrust actions. It seems as if pharmaceutical companies, like big banks, are continually finding loopholes to get around the rules. But now that regulators are more aggressive, it’s time for companies like Teva to fall in line.