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Patent Settlements and Antitrust: Update on the EU Position

Posted in Antitrust, Drugs, European Union, Generic Drugs, Litigation

EU building (vertical)Ever since the publication in July 2009 of the report on its antitrust inquiry into the pharmaceutical sector, the European Commission (EC) has been monitoring patent settlement agreements between originator and generic companies in the EU (plus Norway, Iceland, and Liechtenstein, thus making up the European Economic Area (EEA)). This monitoring was started, because the inquiry identified settlements that limit generic entry and provide at the same time for a value transfer from the originator to the generic company (“pay-for-delay”) as potentially raising antitrust concerns in the EU/EEA.

On December 13, 2016, the EC’s latest report, its seventh, covering calendar year 2015, was published. The headline finding in the report is that, as in previous years, the vast majority of pharmaceutical settlement agreements (some 90% this time) are prima facie unproblematic in antitrust law terms. The EC says this shows the industry’s increased awareness of potentially problematic practices and that companies do not feel hindered from concluding settlements in general.

What are problematic practices in the view of the EC? As set out in its latest report, the EC accepts that settlements (i.e., commercial agreements to settle patent-related disputes such as over questions of patent infringement or validity) are a legitimate way of ending private disagreements. However, certain types of settlements may prove to be problematic from an antitrust law perspective. This analysis is based on two main criteria: whether the agreement includes a limitation on the generic company’s ability to market its own medicine; and whether it includes a value transfer from the originator to the generic company.

In relation to the first issue, a generic company’s ability to enter the market can be limited in several ways. The most straightforward limitation occurs when the settlement agreement contains a clause explicitly stating that the generic company will refrain from challenging the validity of the originator company’s patent(s) (“non-challenge clause”) and/or refrains from entering the market until the patent(s) has(ve) expired (“non-compete clause”). A licence granted by the originator company allowing market presence of the generic company is also categorised as limiting generic entry, if the generic company cannot enter the market with its own product or it cannot set the conditions for the commercialisation of its product freely (save for royalty-free licences that allow generic companies to immediately launch their own product without any further constraints). Patent settlement agreements in which the parties agree that the generic company will be a distributor of the originator product concerned or the generic company will source its supplies of the active pharmaceutical ingredient (API) from the originator company are also seen as limiting entry. The same is true for agreements providing for early entry of a generic medicine where entry is not immediate. This list of potential limitations on entry is, however, not exhaustive.

In relation to the second issue (value transfer), this can also take different forms. The most clear-cut is a direct monetary transfer (e.g., payment of a lump sum) from the originator company to the generic company. This can, for example, have the purpose of purchasing an asset (e.g., the generic company’s stock of own products), but it can also have the purpose–explicitly or implicitly–of paying the generic company for agreeing to delay the product launch and/or for discontinuing the patent challenge, even in situations where stock is bought at market price. It is considered that originator companies are able to afford such payments, as the settlement allows the company to continue reaping the benefits of selling its product. Other types of value transfer include distribution agreements or a “side-deal” in which the originator company grants a commercial benefit to the generic company, for example by allowing it to enter the market before patent expiry in another geographical area or by allowing market entry with another product marketed by the originator company. A value transfer could also consist in granting a licence to the generic company enabling it to enter the market. Similarly, a non-assert clause, whereby—even without a licence—the originator binds itself not to invoke the patent against the generic company, thereby allowing the generic medicine to come onto the market, may technically be perceived as constituting a value transfer. In these cases, the generic gained marketable value as a result of the value transfer. However, an agreement that includes no other limiting provision than determining the date of the generic entry with the originator’s undertaking not to challenge such entry (a “pure-early entry”) is not likely to attract the highest degree of antitrust scrutiny from the EC. Again, this list of possible value transfers is not exhaustive.

Settlements which both limit generic entry and include a value transfer from the originator to the generic company are “likely to attract the highest degree of antitrust scrutiny” and are commonly referred to by the EC as “Category B.II” settlements. The EC’s classification for the purposes of antitrust law analysis in the EU is shown in this table:

The EC does accept that even in Category B.II not all agreements are incompatible with EU antitrust law; “This needs to be assessed on the basis of the circumstances of each individual case.” This is where it gets difficult (and litigious); see, for example, this case from the UK earlier this year. The EC has also investigated various cases and in a very important judgment its views were upheld by the General Court of the EU (GC) (the EU’s second highest court) earlier this year in the Lundbeck appeal. This was unsurprisingly welcomed by the EC. The EC commented:

The [GC] has today fully confirmed the [EC]’s findings. It is the first time that it has ruled on pay-for-delay agreements in the pharmaceutical sector. In particular, it found that:

The [EC] was correct in finding that, irrespective of any patent dispute, generics competitors agreed with Lundbeck to stay out of the market in return for value transfers and other inducements, which constituted “a buying-off of competition”;

The [EC] had correctly established that the agreements eliminated the competitive pressure from the generic companies and are “a restriction of competition by object” [i.e. presumptive infringement of EU competition law]. Furthermore, Lundbeck was not able to justify why these particular agreements would have been needed to protect its intellectual property rights.

So what did the seventh report find in relation to Category B.II settlements? In the period investigated (2015), Category B.II accounted for 10% (13 out of 125) of all agreements (hence 90% were not problematic). The value transfer flowing to generic companies in these settlement agreements took different forms, and sometimes in various combinations, of early entry and a licence or payment. Of the 13 B.II agreements for the 2015 period, 5 (38%) enabled early entry without a licence or a distribution agreement, 6 (46%) combined early entry with a licence to the generic company, 1 (8%) only included a licence, and 1 (8%) included a payment to the generic company to compensate for damages. However, as noted above, the EC considers that pure early entry (although technically a value transfer) is unlikely to be very problematic. Removing the pure early entry examples, it can be seen that the EC found a very limited number of problematic settlements.

The EC states that in the future it “may decide to continue the monitoring exercise in order to examine further the development of … trends”. Given the continuing focus on this area, and pharmaceutical and medical device issues generally in the EU (in antitrust and regulatory generally), this seems likely.