NEWS ANALYSIS
K
The shady world of pay-to-delay
Patent World’s senior news reporter Khurram Aziz looks at the scrutiny
pharmaceutical firms are coming under over settlements made with generic
competitors
I
n 2003 Solvay Pharmaceuticals secured
a patent for something that is a rare
commodity in the pharmaceutical world
– a blockbuster drug. Its Androgel
testosterone cream has since amassed over
US$400m in sales every year, and become a
vital therapy for AIDS patients, cancer
patients, elderly men and those suffering
from low levels of testosterone. The
USPTO gave the company 17-year patent
protection for the product, which would see
these sales continue until 2020.
That is unless other companies
successfully challenge the patent. Under
the 1984 Hatch-Waxman Act, generic drug
makers have been encouraged to challenge
existing pharmaceutical patents in an
effort to bring cheaper drugs to the
market, quicker. This is exactly what
Watson Pharmaceuticals, Par
Pharmaceuticals and Paddock Laboratories
did when they filed an application with
the US Food and Drug Administration
to make and sell generic versions of
Solvay’s Androgel.
In response Solvay made a deal that has
become all too common in the
pharmaceutical industry: it reached out to
its competitors and offered a compromise
under which the companies would agree
not to market a generic version of
Androgel for another nine years. The
generic firms would, in return, take a share
of Solvay’s monopoly profits. It seemed as
though everyone was a winner.
Except, of course, the consumer. By
holding generics off the market until 2015,
the deal has kept prices high. In January
2009, the US Federal Trade Commission
responded by filing a suit against Solvay,
calling the deal illegal and anti-competitive.
It said the companies had chosen to “collude
rather than compete”.
Despite the FTC’s reaction, these socalled “pay-to-delay” deals have become
standard practice in the industry.
According to the FTC, nearly half of all
agreements between generics and brandname manufacturers in 2006 and 2007
included payments in return for staying
www.ipworld.com
out of the market. Regulators in Europe
and the US now believe these practices
have gotten out of hand.
In November 2008 the EU’s Competition
Commission released the preliminary
findings of its sectoral inquiry into the
pharmaceuticals industry. It concluded that
unfair practices in the sector have cost
consumers more than €3bn since 2000.
The report specifically pointed the finger
at practices brand name pharma companies
employed to delay competition, which
included: initiating litigation to hold up
competing products, filing multiple patent
applications for the same medicine and
concluding settlements with generics
companies to limit their ability to enter
the market.
The Commission has not yet given its
conclusions, but the tone of its preliminary
report and statements given by the
Commissioner Neelie Kroes spell out a
clear message to pharmaceutical companies
– current patent strategies are affecting
competition and the Commission will take
legal actions on grounds of anticompetitive behaviour.
In the US too, legislation has been put
before congress, supported by President
Barack Obama, which seeks to end pay-todelay deals. Senators Herb Kohl and Chuck
Grassley, who introduced a bill targeting
pay-to-delay in February 2009, said:
“It’s time to stop these drug company
pay-for-delay deals that only serve the
profits of the companies involved and
deny consumers access to affordable
generic drugs.
“In a time when our federal health care
programs such as Medicare and Medicaid
are facing extraordinary fiscal strains,
this wheeling and dealing only delays the
entry of lower-priced medicines in
the marketplace.”
Regulators have so far found it difficult
to mount successful anti-trust action
against pharmaceutical firms who
negotiate these deals. Indeed it was a case
in 2005, in which a US court upheld the
legality of agreements reached by
Schering-Plough and AstraZeneca with
generic companies, that opened the door to
a fresh wave of pay-to-delay deals.
Pharmaceutical firms have argued, so far
successfully, that the deals they reach with
generic companies are perfectly legitimate.
“Plaintiffs assert that so-called reverse
payments – payments flowing from the
patent holder to the generic manufacturer
– are nefarious and, therefore, are illegal,”
says Patrick Birde, partner at law firm
Kenyon & Kenyon. “But there is something
unique about Hatch-Waxman settlements:
they are a function of Hatch-Waxman’s
impact on the parties’ relative risk. These
settlements are a natural by-product of
Hatch-Waxman’s shift of the litigation risk
from the generic manufacturer to the
patent holder.”
Amendments in the Hatch-Waxman
Act gave generic manufacturers a channel
for challenging patents without incurring
the cost of entry or risking enormous
damages flowing from any possible
infringement. The act essentially
redistributes the relative risk assessments
giving generics considerable leverage in
patent litigation: their exposure to liability
amounts to litigation costs, but pales in
comparison to the volume of generic
sales and profits should the challenge
be successful.
“Parties settle cases based on their
perceived risk of prevailing in the
litigation,” explains Birde. “In encouraging
artificial acts of infringement, the
Hatch-Waxman Act grants generic
manufacturers standing to mount a
validity challenge without incurring
the cost of entry or risking enormous
damages flowing from infringing
commercial sales. This statutory scheme
affects the parties’ relative risk
assessments and explains the flow of
settlements from patent holders to generic
companies, and their magnitude.”
Jonathan Radcliffe, IP partner at law firm
Nabarro, argues that the practice is more
widespread in the US and has only recently
gained traction in the EU.
April 2009 | Patent World Issue # 211 | 9
K NEWS ANALYSIS
“In the US generic companies are given
180 day market exclusivity when they file a
challenge to a patented drug,” explains
Radcliffe. “This means that, effectively, the
first to file generic company can get a
higher price on a pay-to-delay deal. It is
effectively a function of the relative
economic balance of power conferred by
this regime.
“There is no real difference in the
commercial objectives of originator
companies between the EU and US
markets. They want to protect their
the volume and price of generic products,
enabling the patentee to create a ‘false’
commercial environment in which generics
are competing.”
It is these practices that have caused
regulators to accuse pharmaceutical firms of
engaging in shady back-room deals. But as
far as existing patent laws are concerned,
there is a strong case for arguing these
practices are legitimate.
At a pharmaceutical patenting
conference in Munich recently, lawyers
representing pharmaceutical companies
These settlements are a natural by-product of
“
Hatch-Waxman's shift of the litigation risk from the
generic manufacturer to the patent holder
”
inventions for as long as they can do so.
The differences lie in the nuances of the
differing regulatory and legal regimes, and
the subtleties of the different legal
systems.”
Nevertheless, as the EU Competition
Commission pointed out, such practices are
becoming increasingly prolific in Europe
too In its sectoral enquiry, the commission
highlighted a range of tactics that pharma
companies employ to stifle generic
competition – all of which it deems as anticompetitive.
“There are many ways in which
pharmaceutical firms can manipulate
market prices for drugs,” says Radcliffe.
“The Competition Commission’s evidence
revealed that patentees commonly
manufacture and distribute products to
potential generic competitors. The
patentee can do this by supplying the
original product to a generic firm, for sale
under a new name and repackaged in
different livery. The generic purchaser
sells the patentee’s product on the market
under a different guise, and secures a
proportion of the generic market for the
patentee. The purchasers of products such
as this from patentees are known as
‘authorised generics’.
“Authorised generics allow the patentee
to maintain its established branded
product, often at a higher price than the
generic alternative. This maintains the
cache of its premium market. The sales of
this branded product are supplemented by
the patentee’s sale of products to the
authorised generics. The patentee can
therefore continue to exert an influence on
10 | Patent World Issue # 211 | April 2009
challenged the European Commission’s
findings. “Most of the practices the
commission report highlighted are
perfectly normal and legitimate in the
patenting industry,” said Allen Norris, vice
president and head of group IP at UCB
Pharma. “I am concerned that the report
will be used to change wider patent laws.
I urge solutions to the problems
highlighted to be sought within the
current patent system.”
These practices are not unique to the
pharma industry either. “These are no
more than the standard toolkit of
techniques that all patentees can utilise,
equally pervasive in the technology and
motor sectors,” says Jonathan Radcliffe.
“The Commission got it largely right in
their interim report; the thrust of their
findings is that whilst the strategies are
perfectly legitimate, on occasion their use
in practice may cross the line into anticompetitive behaviour. And it is on the
latter that they appear to be concentrating
for their final report.”
The overriding concern for legislators is
the costs incurred to their health care
systems. Generic drugs are widely seen as
the answer to reducing state funded health
care, and governments have actively
introduced measures to promote their
use. Anything that gets in the way of
generics entering the market, is seen by
policy makers as a threat to their health
care plans.
Barack Obama was elected after
promising to bring down health care costs
and specifically targeted anti-competitive
behaviour of pharmaceutical firms in his
campaign. The president’s first budget has
set out plans to promote the availability of
generic drugs, including bio-tech drugs,
which he hopes will save the US more
than US$9.2bn over 10 years. Together
with the legislation before Congress,
US law may soon outlaw any deals reached
between pharma companies and generic
drug makers which delay the release
of generics.
In the EU, however, the Commission is
likely to bring judicial action against the
firms, and rely on the courts to deter
such deals. This will see the EU
entering uncharted territory, as it
attempts to argue against the
pharmaceutical firms on grounds of
anti-competitive behaviour.
“Legislation at the EU level is so far off
implementation that we can rule it out for
many years,” says Radcliffe. “Even if it
comes in, and do not forget that the
Commission report upholds the critical
importance of patent rights, there will
always be ways for originators to
tackle generics.”
The Competition Commission will
publish its final report in Spring 2009,
after it has heard the opinions of
pharmaceutical firms. The authors of the
report have been careful to point out that it
believes in the existing patent system,
which is necessary in bringing new and
important drugs to the market. Though
there have been criticisms against practices
such as “evergreening”, where companies
file new patents for old products to extend
their protection, pay-to-delay deals have
caused far more concern as far as anticompetitive fears are concerned.
There is, however, no evidence that
targeting this practice could have
a significant impact on bringing
more generics to the market. Analysts
have argued that “pay-to-delay”
deals are normally a last ditch
effort by originator companies to preserve
the life of their patents. Other methods,
rooted in the laboratory rather than
the court-room, are seen as being far
more effective.
Most recently H Lundbeck won a
patent case in the UK after it successfully
argued that a new method for producing
its drug Citalopram affords it extended
patent protection. This is seen by
many as a strategy more and more
pharmaceutical firms will employ to
protect their monopoly on drugs, if
pay-to-delay deals become
increasingly contentious. K
www.ipworld.com