“Pay for delay” situation improves but European Commission continues to scrutinise anti-competitive patent settlement agreements

Paul Gershlick

Matthew Arnold &amp, Baldwin LLP

Paul Gershlick of Matthew Arnold &amp, Baldwin LLP provides an update on the ‘pay for delay’ situation whereby drug companies are paying manufacturers of generic versions of their products to delay getting them to market.

With any form of intellectual property (IP) rights protection, a balance is struck between enabling free competition for the benefit of consumers and rewarding the time, cost and risk associated with investment in creating or developing the intellectual property rights.

The purpose of patents is no different: to reward the risk and cost of innovating by granting exclusivity within the territory in which patent rights are obtained. No one else can manufacture or supply a patented product there. Patents last for a limited period of time (up to 20 years in the UK, but UK supplementary patent certificates extend this for medicines for about a further five years to reflect the long period for regulatory reasons during which commercial exploitation is not initially possible).

Upon expiry of a patent or where a patent is successfully challenged, anyone is free to manufacture or supply a product that had previously been subject to a patent. In the pharma world, that is where the generics companies can step in and supply products comparable to the branded drugs at a fraction of the price (often at about half of the branded price and sometimes significantly less than that).

In many cases, there is a cat-and-mouse game in which generics suppliers want to launch as soon as possible, but branded suppliers undertake strategies to extend the breadth and time for their patents by filing in patent clusters or they otherwise take action to challenge and delay the entry of the generics suppliers (including by challenging marketing authorisation applications on safety grounds). A complex battle can ensue, in which generics suppliers counterclaim in a legal action and challenge the validity of the branded supplier’s patent. A lot of legal cases do not reach trial but settle.

In 2009, the European Commission published a report of an inquiry on the pharma sector and found that some categories of patent settlements could have negative effects on European consumers by artificially keeping the price of medicines higher with agreements on the delay of entry into the market of generic drugs. The inquiry identified 200 settlement agreements between 2000 and 2008 relating to about 50 of the best selling medicines that had lost their exclusivity.

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"…many generic drugs were not reaching the market as quickly as they could do."

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The Commission found that half of the settlements restricted the generics suppliers’ ability to enter the market and some involved millions of euros of direct payments from the branded supplier to the generics supplier (reverse payment settlements, where the branded supplier pays the generics supplier in return for agreeing to limit generic market entry). The Commission concluded that the result was that many generic drugs were not reaching the market as quickly as they could do and sought to continue to examine patent settlement agreements.

The Commission has recently published its third annual report since the inquiry, covering 2011. It noted that the number of agreements in that one year was 120, which was a significant increase. However, the Commission was not overly concerned about that top-level number, which could have reflected the increased number of drugs that had faced patent expiry.

It separated the agreements into three categories. Category A agreements involved the generics supplier entering the market and freely competing and the Commission considered those agreements not to be a problem under competition law. 70% of the agreements covered in 2011 fell within that category.

The second category was Category BI agreements. These involved a ban or a restriction on entry into the market of the generics supplier’s products, but where there was no value transfer from the branded supplier to the generics supplier. Once again, those agreements were not deemed to be an issue. This accounted for 19% of the agreements in 2011.

That left 11% of the agreements in the third category: BII. BII (often dubbed “pay for delay” agreements) contained a ban or a restriction on entry into the market of the generics supplier’s products but where there was a value transfer from the branded supplier to the generics supplier. This was a small increase in percentage terms from the 2010 report, but still significantly down on the 21% that existed at the 2010 sector inquiry.

The Commission concluded that the numbers of BII settlement agreements have justified its continued scrutiny in this area, so that will continue.

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"...the Commission announced that it had sent a Statement of Objections of an alleged breach of European Union competition law to Lundbeck and several generics suppliers..."

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Indeed, the pursuit of problematic agreements continued apace following the third annual sector report.

On the day of the report itself, the Commission announced that it had sent a Statement of Objections of an alleged breach of European Union competition law to Lundbeck and several generics suppliers, with the Commission’s preliminary view that they had entered into agreements under which Lundbeck had paid substantial sums that prevented the market entry of cheaper generics medicines of the antidepressant, citalopram. The EU competition law regulator believed that substantial consumer harm had ensued due to the delay of entry of generic products for up to two years with payments remaining high.

Meanwhile, just five days after the publication of the report, the Commission made a further announcement. This time, it said that it had issued a Statement of Objections to Servier and various generics suppliers in relation to the delayed generic entry of perindopril, the cardio-vascular drug. The Commission was also investigating unilateral conduct from the branded drugs company in a possible abuse of dominance claim – it said it was looking into the way the company had acquired scarce competing technologies to produce perindopril.

The Statement of Objections in these two cases do not mean the recipients are guilty, but they are the first formal steps on the process of competition law actions brought by the regulator.

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"…substantial consumer harm had ensued due to the delay of entry of generic products for up to two years with payments remaining high."

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Together with the recent report and the decision to continue to monitor this area closely, branded drugs suppliers and generics suppliers alike must continue to tread very carefully in the EU when it comes to finding settlements to their commercial war and engaging in strategies to protect their profits.

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