Monday, 13 January 2014

The EU Commission publishes the 4th Monitoring Report on Patent Settlements in the pharmaceutical sector: all is going well!

On 9 December 2013, the EU Commission published its 4th Report on the Monitoring of Patent Settlements in the pharmaceutical sector. The Commission started its monitoring activity in 2009, following the Pharmaceutical Sector Inquiry, launched in 2008 to investigate reported delays in generic entry and the perceived decline in new drugs marketed in the EU. The sector inquiry highlighted, inter alia, the potential anti-competitive effects of agreements concluded between an originator company and a generic manufacturer, under which the latter agrees to delay generic entry, in exchange for a value transfer from the originator company. Such pay-for-delay agreements are particularly frequent in the context of patent infringement actions filed by the originator company, or of invalidity challenges brought by the generic manufacturer against the patents protecting a brand drug, and are therefore also known as reverse payment settlements. The provision of direct or indirect financial inducement to delay generic entry has attracted antitrust scrutiny, as the value transfer is seen as evidence of a strategic choice made by the originator company to avoid challenges to weak or probabilistic patents, in order to postpone the loss of exclusivity that would result from a judgment of invalidity. Recent developments in this field include the US Supreme Court's judgment in FTC v Actavis, and the decisions of the EU Commission in the cases of Lundbeck and Johnson & Johnson.

The sector inquiry found that pay-for-delay agreements accounted for 22% of all the patent settlements concluded between 2000 and June 2008. Although agreements that did not restrict generic entry (52%), or that imposed restrictions without providing a value transfer (26%), were much more common than pay-for-delay agreements, the Commission decided to closely monitor patent settlements, "in particular where the motive of the agreement is the sharing of profits via payments from originator to generic companies to the detriment of patients and public health budgets".

The monitoring activity, as well as the willingness shown by the Commission to take action against anti-competitive settlements, resulted in an immediate decline in the number of reverse payment settlements. According to the survey conducted in the 1st monitoring Report, pay-for-delay agreements fell to 10% in the year following the sector inquiry. The 3rd Report confirmed this finding (the 2nd Report highlighted a further decline of pay-for-delay agreements to 3% of all patent settlements in 2010, but such reduction was not confirmed in subsequent surveys).

The 4th Report shows that the number of pay-for-delay settlements concluded each year, after the sector inquiry, has stabilized (with the exception of 2010) at an average 10% of all the patent settlements concluded in the EU pharmaceutical sector (this number excludes settlements concluded in Portugal, where a new law caused a significant increase in patent settlements in 2012). At the same time, the new survey certifies a change in the type of value transfer provided by originator companies. The sector inquiry found that pay-for-delay agreements provided generic companies with patent licenses in 64% of the cases, direct payments in 51% of the cases, and supply and/or distribution agreements in 20% of the cases. According to the 4th Report, instead, most of the agreements concluded in 2012 contained a non-assert clause permitting early entry (83%), coupled with a license to the generic company (33%), or with a license and a supply agreement (8%), while a monetary payment was present only in 17% of the cases.

The sector inquiry determined a significant and long-lasting decline of pay-for-delay agreements, without affecting the parties' right to conclude other kinds of settlements. The Commission notes that "93% of the settlements fall into categories that prima facie raise no need for competition law scrutiny", a figure that shows how "[c]ompanies, in most cases, are able to solve their disputes in a manner that is typically considered unproblematic from a competition law perspective". A question, however, remains unanswered: why has the number of pay-for-delay agreements stabilized at 10%, rather than falling further? Although the Commission's reports do not address this question, the answer may be hidden in the change of value transfer offered by originator companies. Essentially, even if their number is not decreasing, the pay-for-delay agreements concluded after the sector inquiry are less likely to raise significant anti-competitive issues, as the use of monetary payments to avoid generic entry before patent expiry has generally been substituted by non-assert clauses which permit early entry. Such arrangements may still allow originator companies to postpone loss of exclusivity where a patent is at risk of being declared invalid, but significantly reduce the impact of pay-for-delay agreements on generic entry.

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