A member of the

Federal Trade Commission

said Thursday that his agency should conduct a study on what generic drug companies say is a loophole in federal law that reduces their incentives to produce reduced-price versions of brand-name drugs.

A study of so-called authorized generics "deserves the commission's attention," says Jon Leibowitz, one of five FTC commissioners. "The introduction of an authorized generic will likely diminish the incentives for generic firms to challenge patents and incur substantial development and litigation costs."

Authorized generics exploit a section in federal law, the Hatch-Waxman Act, that grants a generic company 180 days of exclusive marketing once a brand-name drug loses patent protection. This exclusivity is given to the first company that files a proper application with the Food and Drug Administration.

Because generic drugs are cheaper than brand-name drugs, and because generic-drug profit margins are much smaller than brand-name profit margins, this 180-day period is crucial to generic drugmakers.

However, makers of brand-name drugs have circumvented this first-to-file provision by signing licensing deals with other companies. Once the brand-name drug goes off patent, the first-to-file winner must compete with a company aligned with the brand-name drugmaker, losing the full impact of that 180-day benefit.

By authorizing a company to sell a cheaper version of the brand-name drug, the brand-name drugmaker gets a piece of the sales action. That enables the brand-name maker to ease the impact of losing revenue once a patent expires.

In a variation on this strategy, brand-name drugmakers try to fight generic competitors by selling generic versions of their own brand-name product.

Competitive Forces

Separately, three senators have asked the FTC to examine this practice because "it may produce anticompetitive results."

The letter, sent to the FTC May 9, alleges that authorized generics "could have a negative impact on competition for both blockbuster and smaller drugs." The letter is signed by Sens. Patrick D. Leahy, D-Vt.; Charles R. Grassley, R-Iowa; and John Rockefeller, D-W.Va.

"It is possible that fewer generic drugs would come to the market and the prices for certain drugs would remain high for consumers," the senators say.

"Several generic companies have argued that authorized generics are impermissible under Hatch-Waxman and violate antitrust laws," says Leibowitz, in remarks prepared for a speech Thursday in Washington at a conference of the American Bar Association and American Health Lawyers Association. "I am not persuaded by these arguments. But I am persuaded that authorized generics may have competitive implications that could upset the Waxman-Hatch balance."

Leibowitz notes that during a 180-day first-to-file period, a generic brand "usually undercuts the brand price by somewhere between 25% and 35%." But if an authorized generic enters the picture during this period, "prices for the generic products should fall even greater -- perhaps to around a 50% discount off the brand."

And once multiple generic products enter the market, the prices go down, and so do the profit margins of these drugs.

Leibowitz says the current system probably creates inconsistent impacts on generic companies. In the case of giant-selling drugs losing patent protection, "the pot of gold will still be large enough so that they will fight to be first-to-file and first to market," he says. But for smaller brand-name drugs, "we could very well see fewer generic applications," leading to "less competition down the road

and that would be bad for consumers."

Can't Always Get Along

Leibowitz says it will be challenging to conduct a study that balances the short-term benefits of reduced drug prices vs. the long-term "disincentives" of discouraging first-to-file applications. But he advocates conducting the study because the practice of authorized generics is growing.

Authorized generics has pitted

big pharma vs. generic drug companies, the FDA vs. generic drug companies and the even the generic industry against itself. The FDA has rejected complaints about authorized generics, saying the practice permits lower prices for consumers.

And although companies such as

Mylan Laboratories

(MYL) - Get Report

and the industry's trade group, the Generic Pharmaceutical Association, have sought to change federal law, some generic companies, such as

Watson Pharmaceuticals

(WPI)

and

Par Pharmaceutical

(PRX)

, use authorized generics as part of their corporate strategy.

The generic drug industry is also trying to convince the federal agency that runs the Medicaid program to change its reimbursement policies. The Generic Pharmaceutical Association argues that brand-name companies get a "windfall" rebate for authorized generics. Two months ago, the association received a letter from Dr. Mark McClellan, director of the Medicaid and Medicare programs, saying his agency "is reviewing its policy on the calculation of prices for these drugs."