Pay-for-Delay: The end of sweetheart deals

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Pay-for-Delay: The end of sweetheart deals

by Vaibhav Choukse, Vaish Associates

The sweetheart deals: an agreement between two companies that offers advantages to both but is unfair to competition

Patent holder drug makers (Originators) use a number of strategies to extend the exclusivity period of their patented drug in order to prevent market entry of generic drug suppliers (Generics) on or before the expiry of their patents. One such tactic adopted by Originators is paying the Generics for delaying entry of the generic drug and thereby buying time of exclusive supply for the Originator's drug.

Under competition/antitrust laws, such arrangements are (infamously) popularly known as 'Pay-for-Delay' or 'Reverse Payment' deals. These deals mushroomed as a consequence of avoiding costly and lengthy patent litigation between Originators and Generics, who, respectively, would defend and refute the ever-greening of the Originators patent. (Ever-greening is an aspect of patenting that leads to a patent life cycle enhancement technique largely employed by the pharmaceutical organisations to develop bullet proof patent portfolios around lucrative drug molecules.) 'Reverse Payment' deals delay the entry of lower-priced generic drug for a considerable amount of time.

The motivation of the Originator comes from the fact that drugs are generally left with only eight years of exclusivity after they enter the market. A patent's life is 20 years. This period includes, but is not limited to, the period of establishing validity of the patent after it has been filed, which may take 12 years on average. These deals are a win-win for the Generics as much as they are for the Originator. The Originators' drug prices stay high and the profits of the Originators' monopoly are shared with the Generics.

Such deals, in effect, buy the Originator protection from competition, at the expense of the consumer, whose access to lower-priced generic drugs is delayed, sometimes for many years. Consumers miss out on low cost generic drugs, which may be as much as 90% less than Originators' prices. For instance, if the Originators' medication costs US$330 a month during its exclusivity period, it may be sold by Generics for as little as US$3 a month after the expiry of the exclusivity period. Empirical evidence shows that the average price of a drug can drop by 90% in the first two years after the entry of the first generic in the market (see Dr Matthew Bennett, CRA, "The economics of Pay for Delay cases", May 2013). A study by the US Federal Trade Commission (FTC) shows that these settlements are estimated to cost US consumers US$3.5 billion a year, which will rise to US$35 billion over the next ten years (Jon Leibowitz, "Pay-for-Delay Settlements in the Pharmaceutical Industry: How Congress Can Stop Anti-competitive Conduct, Protect Consumers' Wallets, and Help Pay for Health Care Reform (The $35 Billion Solution)", 23 June 2009). Any agreement that eliminates potential competition and envisages sharing the resulting profits is at the core of what the competition laws proscribes.

Competition law and laws relating to intellectual property rights (IPR), especially patents, are legal tectonic plates - always in motion, occasionally converging, occasionally diverging, and occasionally moving in parallel (William D. Coston, "The Patent-Antitrust Interface: Are There Any No-No's Today?", January 2013).

'Reverse Payment' deals are reason enough for these laws to converge, though these deals provide more protection from competition for the parties than the protection from patent assertion.

Competition authorities across jurisdictions have expressed deep concerns over these settlements that have been transpiring in the pharmaceuticals sector. There is no real difference in the commercial objectives and motives of Originators in the EU, US or Indian markets. Originators aim for protection of invention, on the one hand, and the maintenance of monopoly profits, on the other. However, the difference lies in the approach taken by competition authorities to regulate such practices in accordance with the subtleties of their legal system. This article analyses the situation in the US, EU and UK and presents the state of affairs in India with respect to how the competition authorities in these jurisdictions are uncovering these anti-competitive settlements.

Lessons from both sides of the Atlantic

United States

In 2002, the FTC published a study showing that Generics dominated more than 70% of patent litigation undertaken by US Courts between 1992 and 2002. Interestingly, it was this study that first highlighted the negative impact of 'Pay-for-Delay' deals, as it concluded that some Originators and Generics had resolved their patent disputes through settlement agreements that compensated Generics for substantially delaying the entry of low cost generic drugs on to the market. In order to bring this practice out of the shadows, Congress, on recommendations from the FTC, enacted the Medicare Prescription Drug Improvement and Modernization Act 2003 (the MMA) under which pharmaceuticals companies are required to file certain agreements with the FTC and the US Department of Justice within ten days of their execution (see Pharmaceutical Agreement Filing Requirements).

US Courts have a long-standing history of favouring 'Pay-for-Delay' agreements for reasons of public policy. In 2000, prior to the publishing of the 2002 study, the FTC had made futile efforts to persuade the US Courts that 'Pay-for-Delay' settlements should be illegal per se. After failing in almost every US Court i.e. the Second, Eleventh and the Federal Circuits, the big win for the FTC finally came in 2012 when the Third Circuit accepted the FTC's contention in FTC v Watson Pharm., Inc. (677 F.3d 1298, 1312 (11th Cir. 2012)), which then created a circuit split. The US Supreme Court had to intervene to resolve the issue (see FTC v Actavis, No. 12-416, 570 U. S., 17 June 2013).

The circuit court split started in 2003, when Watson Pharmaceuticals (now known as Actavis, Inc.) filed an Abbreviated New Drug Application (ANDA), seeking approval to market a generic drug, AndroGel. The Originator, Solvay Pharmaceuticals, filed a suit against Actavis for patent infringement. The case soon settled by way of a settlement agreement, under which Solvay, the Originator, agreed to pay Actavis US$19-30 million a year for nine years, while Actavis, Inc. agreed to promote Originator's AndroGel along with delaying entry of its own generic drug until 2015.

Six years into the agreement, the FTC filed a suit against the settling parties, questioning the validity of such a settlement. The FTC's challenge was dismissed by the District Court, which the Eleventh Circuit upheld, holding that "…absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from anti-trust attack so long as its anti-competitive effects fall within the scope of the exclusionary potential of the patent…". The other circuit courts also ruled on the issue, at times reaching opposite decisions. Finally, the Supreme Court took up the case for review.

On 17 June 2013, arguably, the most significant patent antitrust decision in decades was delivered by the US Supreme Court, in Federal Trade Commission v Actavis, Inc. reversing the order of Eleventh Circuit Court and holding that 'Reverse Payment' patent settlements are subject to antitrust scrutiny. The Court, however, did not agree with FTC's assertion that these settlements are per se illegal. It, rather, provided for the examination of these agreements under the "rule of reason", as these settlements may only at times infringe antitrust laws (see also Legal update, Supreme Court Issues Decision in Pay-for-Delay Case FTC v Actavis).

Following this landmark ruling, on the very next day, Merck & Co. (Originator) filed a supplemental brief in the Supreme Court pleading that the Third Circuit had, in July 2012, in a suit against Merck and Generics held that a pay-for-delay settlement should be presumed to be anti-competitive, which did not square with the recent ruling of the Supreme Court. On 24 June 2013, the Supreme Court vacated the ruling of Third Circuit and remanded the case back to the Third Circuit to evaluate these alleged anti-competitive agreements using the rule of reason (Merck & Co. Inc. v. LA Wholesale Drug Co. et al., case number 12-245).

Interestingly, President Barak Obama was elected after promising to bring down healthcare costs and specifically targeted anti-competitive behaviour of pharmaceutical companies in his campaign (see Khurram Aziz, "The shady world of pay-to-delay", Patent World, April 2009 and Robert Pear, "Antitrust Laws a Hurdle to Health Care Overhaul", New York Times, 26 May 2009).

European Union

In 2005, the European Commission imposed a fine of EUR60 million on an Originator, AstraZeneca, for abusing the patent system in order to thwart generic competition from the market, for the blockbuster ulcer drug named Losec (see AstraZeneca/Losec and AstraZeneca appeal). This marked one of the first steps taken by the European Commission towards reforming the pharmaceuticals sector, which intensified with the launch of the pharmaceuticals sector inquiry launched in early 2008. This sector inquiry targeted the Originators and the Generics, and was coupled with unannounced inspections. The inquiry indicated a number of structural issues and problems in companies' practices that could delay entry of cheaper medicines into the European Economic Area (EEA). It radically contributed to the debate on EU policies for pharmaceuticals, especially for generic medicines.

Following the sector inquiry, the European Commission conducted two monitoring exercises of patent settlements in 2010 and 2011. Pharmaceuticals companies were issued a request to file copies of patent settlements. The sector inquiry concluded that the unfair practices in the sector have cost consumers more than EUR3 billion (see European Commission, DG Competition Staff Working Paper, "Pharmaceutical Sector Inquiry Preliminary Report", 28 November 2008).

To date, the Commission has opened four formal proceedings in relation to patent settlements, involving Laboratoires Servier, Lundbeck, Teva & Cephalon, Johnson & Johnson and Novartis.

On 19 June 2013, the Commission fined nine drug makers for blocking the supply of a cheaper anti-depressant (generic version) to the market. Based on the Commission press release, when Generics were close to entering the market, Lundbeck agreed with each of them that they would stay out of the market in return for payment. Lundbeck did not prevent market entry by successfully enforcing its patent rights; rather, it simply paid Generics so that they would not compete, giving them the equivalent of what they would have earned if they had entered the market. Apart from making substantial payments, Lundbeck purchased generics stock for the sole purpose of destroying it, and offered guaranteed profits under a distribution agreement. Lundbeck bought for itself the certainty that Generics would not enter the market for the duration of the agreements without giving the Generics any guarantee for entering the market thereafter. This is the first decision adopted by European Commission on 'Pay-for-Delay' cases.

United Kingdom

In April 2013, the Office of Fair Trading (OFT) issued a Statement of Objections to GlaxoSmithKline (GSK) for abusing its dominant position for striking deals with three generic drug makers by paying them to delay launching a generic version of paroxetine (see Agreements to delay generic entry in the pharmaceutical sector). The move by the OFT is the latest example of regulators trying to curb "pay-for-delay" deals, following a series of investigations against drug companies by the EU and US.

Two years ago, in 2011, the UK Secretary of State for Health launched a lawsuit claiming £220 million damages from Servier Laboratories for abusing its dominant position in order to delay the entry of Generics At the beginning of this year, the UK High Court suspended damages action against Servier due to the ongoing European Commission investigation (see Secretary of State for Health and others v Servier Laboratories Ltd and others).

Against the backdrop of the OFT's recent investigation into GSK and the recent decision of the European Commission against Lundbeck, it is certain that the OFT will gain momentum on the issue gradually.

India

The Indian pharmaceuticals industry is one of the largest and most advanced amongst developing countries. It is the world's third largest in terms of volume and stands at fourteenth position in terms of value (US$13 billion in 2012 (see Kelly Scientific Publications, "Pharmaceutical Market India: A Comprehensive Industry Analysis", May 2013).

According to the Associated Chambers of Commerce and Industry in India (ASSOCHAM), the industry is expected to touch the US$20 billion mark by 2015, making it one of the world's top ten pharmaceuticals markets. The industry is expected to grow between 11% and 13% in 2013. A report released on the industry considers that Generics will continue to dominate the market, while patent-protected products are likely to constitute 10% of the pie up to 2015 (McKinsey Report, "India Pharma 2015- Unlocking the potential of Indian Pharmaceuticals market", October 2007). According to ASSOCHAM, the industry could account for about 30% of the growing world generic market, up from its current 22% (Dr. Murali Kallummal, "Trends in India's Trade in Pharmaceutical Sector: Some Insights", WTO Report, August 2012).

More specifically, in 2012, 40 brand-name drugs lost their patent protection, meaning that Generics were permitted to make their own lower-priced versions (see Katie Thomas, "Generic Drug Makers See a Drought Ahead", The New York Times, 3 December 2012).

In 2009-10, the Competition Commission of India (CCI) conducted a market study to identify the competition issues prevalent in the pharmaceuticals industry (Competition Law and Indian Pharmaceutical Industry, 2010). The study examined issues concerning the working of the pharmaceuticals sector from both the horizontal and vertical points of view. Although the report shed some light on the EU and US approach towards 'Pay-for-Delay' deals, it failed to recommend or even identify its implications for the industry.

Interestingly, following its sector inquiry in 2008-09, the European Commission, in 2009, started an investigation into the Indian generics Unichem Laboratories, Matrix Laboratories and Lupin along with the originator French firm Les Laboratoires Servier for potentially delaying the generic entry of perindopril by entering into various patent settlement agreement (see Servier and generic companies). The recent fine on Ranbaxy and the ongoing European Commission investigation into Indian Generics will pose major challenges for the CCI in times to come.

It will be interesting to see whether such deals, although executed outside India, can cause, or are likely to cause, an appreciable adverse effect on competition (AAEC) within India. The CCI has extra-territorial jurisdiction to undertake an inquiry into an agreement or an abuse of dominance that has taken place outside of India so long as there is an AAEC within India (see section 32, Competition Act 2002).

The Competition Act 2002 recognises the importance of IPR, including patents. While section 3 of the Competition Act prohibits anti-competitive agreements, sub-section (5) thereof states that this prohibition shall not restrict "the right of any person to restrain any infringement of or to impose reasonable conditions, as may be necessary for protecting any of his rights". Therefore, by implication, unreasonable conditions such as 'pay-for-delay' imposed by Originator in order to protect his patent may appear to be anti-competitive under the Act. Such an unfair/unreasonable condition when imposed by a dominant player i.e. the Originator in this case, may also amount to abuse of dominant position under section 4 of the Competition Act.

India: Inspiring possibilities, a challenging journey and a way forward

At the turn of this century, health outcome in India and the quality of underlying health system significantly lagged behind those of peer nations (see McKinsey Report, "India Healthcare", 2012). More than half of Indians do not have access to basic medical services. When it comes to healthcare, the estimated 1.25 billion Indians, the majority of whom live below the poverty line in rural areas, have extremely limited access to medical care in terms of money and availability. The austere disparity of available healthcare in India has shaped the current market environment and should always be kept in mind when examining the industry.

India is believed to be a victim of many international cartels, including potash, soda ash, air cargo and vitamins. Based on an estimate by former World Bank economists, the infamous vitamin cartel cost India more than INR1500 crore in 1990 (see Pradeep S Mehta, "New Competition Law, Sans The Wherewithal?", The Financial Express, 23 December 2002). 20 May 2013 marked the fourth anniversary of the CCI and its successful enforcement of competition law. To date, the CCI has passed orders in more than 237 cases imposing a total penalty of more than Rs.8013 crores (approximately US$1.8 billion), but surprisingly inquired into only four cases relating to the pharmaceuticals sector.

Paying competitors to stay out of the market at the expense of consumers has nothing to do with the legitimate protection of intellectual property: it is an illegal practice. It is high time that the CCI take concrete steps by considering launching a sector inquiry into the industry to curb such anti-competitive settlements. The CCI has the power to make recommendations to Central Government to project the need for a tighter law, like the MMA of the US. The CCI could also take advantage of its antitrust co-operation pacts with its counterparts. (In the past year, the CCI has signed a Memorandum of Understanding (MOU) on Antitrust Co-operation with the Federal Antimonopoly Service of Russia, the US Department of Justice/FTC and the Australian Competition and Consumer Commission. According to a media report, the CCI is also in the final process of signing a similar MoU with European Union and the UK's OFT. The MOU provide for the sharing of information on significant developments in competition policy and enforcement developments in the respective jurisdictions, including co-operation in appropriate cases.)

When an Indian company decides to operate under different and challenging standards, the entire organisation - from top to bottom - has to change its attitude towards compliance. Initially, such attitudinal change requires time, patience and commitment from top management (see D G Shah, "Indian pharma's generic challenge, The Business Standard", 28 May 2010). Pharmaceutical companies do need an internal assessment of their conduct and practices by undertaking an effective competition compliance mechanism before they fall foul of the CCI. As it is said, prevention is always better than the cure.

Vaibhav Choukse is a competition lawyer working as Senior Associate with Law Firm, Vaish Associates, Advocates in New Delhi (India). He holds a LL.M in Commercial Law with focus on EU Competition Law from Kings College London. The author would like to thank Ms. Rimali Batra for her valuable input. The authors' views expressed in the article are personal and author is solely responsible for any errors that may remain in this article. The author may be contacted at e-mail: [email protected].

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