RAD Rite Aid Corp

A federal appeals court on Thursday upheld the legality of pharmaceutical patent settlements that can delay the introduction of generic rivals, but suggested the issue needed further court review.

In an opinion Thursday, the U.S. Second Circuit Court of Appeals affirmed the legality of a so-called reverse exclusionary payment settlement in which Bayer AG (BAYRY) paid Barr Pharmaceuticals Inc. (BRL), a potential generic competitor, to drop its patent challenge to Cipro, an antibiotic drug.

However, the three-judge panel, in a somewhat unusual move, invited drug purchasers who challenged the settlement to ask that the case be reviewed by the full circuit, citing the "exceptional importance" of the antitrust implications of so called "pay for delay" settlements of patent suits.

Barr challenged Bayer's Cipro patent in October 1991 and entered into a settlement with Bayer in January 1997, about two weeks before the case was set to go to trial.

A group of direct and indirect drug purchasers, including CVS Caremark Corp. (CVS) and Rite Aid Corp. (RAD), challenged the settlement beginning in 2000.

Steve D. Shadowen, a lawyer for the drug purchasers, said he's "cautiously optimistic" these types of settlements will be declared illegal.

"I'm very optimistic the court will get it right in the end," Shadowen said.

The U.S. Federal Trade Commission has been an opponent to these types of settlements and the U.S. Department of Justice, in a policy reversal, said in a court filing last year that similar drug patent settlements should presumed unlawful.

"This is further evidence that courts are rethinking their approach to pay-for-delay settlements, which cost American consumers $3.5 billion a year in higher prescription drug prices," said Jon Leibowitz, chairman of the Federal Trade Commission. "Hopefully, the courts will put an end to these deals. In the meantime, the FTC will continue to explain, in court and in the halls of Congress, why these sweetheart deals for drug companies are such a bad deal for American consumers and taxpayers."

Lawyers for Bayer and Barr didn't immediately return phone calls seeking comment Thursday.

-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com

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