So-called pay-for-delay settlements between branded and generic drugmakers is on the rise and is costing consumers $3.5 billion a year, Federal Trade Commission Chairman Jon Leibowitz told lawmakers during testimony this week in which he said stopping such agreements is a top priority.

Branded and generic drug companies entered into 21 patent litigation settlements involving compensation in the first nine months of fiscal 2010, the FTC reported. That’s more than the total for the entire previous fiscal year. Those settlements, the FTC said, protect $9 billion in prescription drug sales from generic competition.

“That’s almost an epidemic,” Leibowitz says, “and left untreated, these types of settlements will continue to insulate more and more drugs from competition. Every single FTC Commissioner, going back through the Bush and Clinton administrations, has supported stopping these unconscionable agreements.”

The testimony comes as the agency is pushing for passage of legislation that will put an end to pay-for-delay patent settlements. Such legislation is currently in a spending bill before the Senate, but it is unclear that it will survive the legislative process. Proponents argue such agreements are anticompetitive and artificially keep the priced of branded drugs high. But both generic and branded drugmakers say the agreements actually help accelerate the introduction of generic competition.

The agency noted that drug companies do settle patent litigation cases without branded companies paying generic firms not to compete. In the first nine months of fiscal 2010, 75 percent of all such settlements reported to the FTC did not involve a payment by the brand to the competing generic firm.

Representatives of both branded and generic drugmakers blasted Leibowitz comments before the House Judiciary Subcommittee on Courts and Competition Policy. “The FTC’s testimony fails to present the whole story regarding patent settlements. The six months of data presented by the FTC does not override the fact that over the past 10 years patent settlements have enabled dozens of first-time generics to come to market many months before patents on the counterpart brand drugs expired,” The Generic Pharmaceutical Association said in a statement.

It argues that settlements have never resulted in delaying generic market entry past patent expiration. In fact, an RBC Capital Markets study concluded that of the 37 new generic drug launches expected in 2010 and 2011, 24 of them will be able to launch prior to patent expiration because of settlements.

The Pharmaceutical Research and Manufacturers of America said the FTC’s efforts for a blanket ban were “misguided” and said the agency and the courts already have the enforcement power to monitor and review these agreements.

“A blanket ban on certain types of patent settlements could decrease the value of patents, remove an important option for a patent-holder’s defense of intellectual property, and reduce the incentives for future innovation of new medicines,” the trade group said in a statement. “A ban would also prevent the settlements that would expedite patient access to generic medicines.”

A Senate panel has already approved a pay-for-delay ban carried in a spending bill before the Senate, but narrowly. Senator Arlen Specter, a Pennsylvania Democrat, introduce an amendment to kill the provision, but his efforts ended in a 15-15 split vote. The ban still must pass the full Senate and House.