Pay-for-delay agreements, or reverse payment patent settlements, have been under scrutiny for a while. In essence, these deals allow large pharma companies to fend off competition by paying their rivals to hold back on developing generic versions. For the original pharma company, it’s a way to protect their intellectual property and buy some time.
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However, a number of bodies have criticised the practice as anti-competitive and potentially harmful to consumer rights. Because generic drugs are generally cheaper than brand drugs, healthcare costs are kept high. Agreements of this nature are believed to cost American consumers $3.5bn a year.[DG1]
The US Federal Trade Commission, which bills itself as ‘protecting America’s consumers’, has long campaigned to end the practice. For most of the last decade, its efforts didn’t seem to be reaping results: but while there were only three such settlements [DG2] in 2005, the figure climbed to 14 in 2007 and a staggering 40 in 2012.
It wasn’t until 2013 – when the US Supreme Court returned a damning verdict on their legality – that the tide actually began to turn. By 2014, there were only 21 agreements and numerous court cases. Hillary Clinton promised that if she became president she’d ban them altogether.
Striking a balance
In October, the United Nations Conference on Trade and Development (UNCTAD) held a global meeting in Geneva, with pay-for-delay agreements high up the agenda. Rather than seeking a blanket ban, UNCTAD’s message was one of balance; specifically, the need to strike the right balance between the rights of the inventor and those of the consumer.
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By GlobalData“The goal is to prevent anti-competitive practices while maintaining the rewards and incentives provided by a fair and reliable patent system,” says Ebru Gokce, an economist at UNCTAD. “Many speakers underlined the complementarities between the objectives of competition and intellectual property laws, which are to enhance consumer welfare and foster innovation.”
The meeting, called the Intergovernmental Group of Experts Meeting on Competition Law and Policy, gathered government experts from around the world to identify best practice. Pay-for-delay agreements were broached during a roundtable discussion, which looked more broadly at the intersections between competition and intellectual property issues.
According to the keynote speaker, Professor Damien Neven, these agreements should be addressed through competition law enforcement. He alluded to the ongoing Lundbeck case, which recently escalated to the European General Court (EGC) in a landmark judgment.
A cartel by contract
In 2013, Danish international pharma company Lundbeck was fined €93.7m for entering into a pay-for-delay agreement concerning its anti-depressant drug citalopram. Four generics manufacturers were also fined for their role in the deal – €52.2m between them.
This was not the first time the European Commission (EC) had acted to tackle pay-for-delay agreements. Since 2008, when it conducted a broad competition inquiry into the pharmaceutical sector, the EC has been monitoring patent settlements closely and has issued a number of formal ‘Statements of Objection’. Johnson & Johnson and Novartis were fined €16m for their role in a deal, and Servier and other generics companies were fined over €400m.
The Lundbeck case, however, was the first to be appealed. On 8 September this year, the EGC returned its long-awaited verdict: pay-for-delay agreements were in violation of the European Union competition rules.
“The decision of the EC in the Lundbeck case and the EGC decision upholding EC's decision is a very interesting example in terms of the analysis of the impact of pay-for-delay agreements on competition in the market,” says Gokce. “It will probably set a standard in analysing pay-for-delay cases from a competition perspective.”
The EGC essentially regarded the agreement as a kind of “cartel by contract”, aimed at the exclusion of potential competitors from the market. It derived this verdict because, among other indicators, the size of the pay-for-delay agreement was linked to the estimated profit that the generic could have expected to make upon market entry.
Legal developments
What this now means for pay-for-delay agreements is somewhat up in the air. The drug development process is notoriously expensive – around $1.38bn on average – and from the standpoint of many pharma companies, ongoing patent protection is required to cover the costs. Few would dispute that some kind of protection is necessary.
Many pharma companies, then, will still seek to enter into arrangements with generics manufacturers, even if just to place a restriction on their ability to market the drug. Agreements of this kind, which do not include any kind of reverse payment, are not deemed to raise any competition issues and are therefore unlikely to cause a problem.
The vast majority of payment settlements do fall into this category. According to the Federal Trade Commission (FTC), more than 80% of patent disputes in 2014 were resolved without compensation to the generic manufacturer or restrictions on competition.
However, where a reverse payment is involved, the situation grows more complicated. And, while the latest EGC judgment does not give companies clear guidance, pharma companies would be well advised to keep an eye on the legal situation as it develops.
“Pay for delay cases are seen mostly in developed countries but a few cases in emerging markets have been noticed, and as generic manufacturers in developing countries continue to grow, this tactic may become more frequent,” she says. “Personally, I think that pay-for-delay settlements are likely to be challenged more and more by competition authorities not only in developed but also in developing countries in the near future.”
She points to UNCTAD’s role in providing clarity, noting that the UN has 70 years’ worth of experience in the area of competition law and policy.
“UNCTAD remains well positioned to help the global community find the right balance between preventing abusive market power and allowing consolidation when it ensures necessary capital investments. And to help governments strike the right balance between supporting domestic industries and keeping markets competitive,” she says.
From the standpoint of patients, this is undoubtedly good news – cheap generic drugs are one of the cornerstones of affordable healthcare. However, if pharma companies are to make big medical breakthroughs, that requires investment. The patent system should therefore be closely guarded, in a way that does not harm consumers or the market more broadly.
