Generic entry: a challenge to traditional EC competition law

Traditionally, innovative pharmaceutical companies lose up to 70% of their market share in the first year after a generic pharmaceutical has entered the market. Provided the innovator follows the price drop which generic entry involves, its market share will usually increase by 15%, to reach 45% at the end of the second year after generic entry (Executive Summary of the Pharmaceutical Sector Inquiry Report of the European Commission, pp 7 to 8). With patent term expiries in full swing, innovative market players increasingly have recourse to what the European Commission (Commission) pejoratively refers to as “a toolbox of strategies” aimed at remedying the adverse effects of generic competition.

Heralding the rise of generics, the Commission announced in late 2006 that its competition policy would give greater priority to competition in the generic sector. The Commission thereby implicitly confirmed that it intended to shift focus from parallel trade cases towards fighting strategies aimed at delaying generic entry. The Commission’s intentions materialised on 15 January 2008, when its officials, accompanied by their colleagues of national competition authorities, performed unannounced inspections (so-called “dawn raids”) at the premises of both innovative pharmaceutical companies and generics manufacturers around Europe. Following these dawn raids, Commission investigators repeatedly sent extensive questionnaires to more than 100 innovative pharmaceutical companies, generics producers, associations of doctors, patients and pharmacies and government agencies responsible for the price-setting of prescription drugs.

The dawn raids and the questionnaires were part of an ambitious sector-wide inquiry, which the Commission had set up to unravel the reasons for the claimed decline of novel medicines entering the market and the alleged instances of lacking timely entry by suppliers of generic medicines.

The Commission’s 2005 decision to impose a EUR60 million (about US$88 million) fine on AstraZeneca for an abuse of dominant position, due to allegedly illegitimate attempts to delay generic entry on the market for proton-pump inhibitors, is generally regarded as the Commission’s launch pad for the sector inquiry. However, some have described the Commission’s timing as surprising given that the Court of First Instance (CFI) has not yet handed down a judgment on appeal in the AstraZeneca case. Further, the Commission itself has not yet terminated its investigation in the Boehringer Ingelheim case, which also involves allegedly anti-competitive behaviour towards generic rivals. Both of these cases concern some of the complex legal issues which were under review in the Commission’s sector inquiry.

In the climate of legal uncertainty which the Commission’s Interim Report on the Pharmaceutical Sector Inquiry of November 2008 (Interim Report) had brought about, expectations ran high that the

Final Report on the Pharmaceutical Sector Inquiry (Final Report) would provide some insight into the Commission’s future enforcement policy. Yet, the outcome of the sector inquiry is widely regarded as particularly disappointing. While the Commission has used an unprecedented amount of resources to carry out a “fishing expedition” which has kept the pharmaceutical industry on its toes for almost 18 months, its Final Report remains silent on the Commission’s assessment of the practices under scrutiny.

The following mantra introduces almost all of the Final Report’s chapters: “It is important to underline that – whilst the report primarily analyses company behaviour – it […] does not provide any guidance on the compatibility of the practices examined with the Competition rules”.

The sector now has to rely on semantics to decipher the vague wording which the Commission uses when describing the “company behaviour” under scrutiny. The sector rightfully is apprehensive of the Commission’s future approach on the issue of generic entry. While the Commission acknowledged that there must be “less red tape” in the pharmaceutical sector and that the shortcomings of the regulatory regimes should be remedied as soon as possible, it repeatedly criticised the sector, announcing that it “will not hesitate to apply the antitrust rules where such delays [of generic entry] result from anticompetitive practices. The first antitrust investigations are already under way, and regulatory adjustments are expected to follow dealing with a range of problems in the sector” (Competition Commissioner Neelie Kroes, press conference 8 July 2009, on publication of the Final Report) .

This worrying language left little to the sector’s imagination as the Commission, on the publication date of its Final Report, announced that it had initiated an antitrust investigation against Les Laboratoires Servier, for suspected breaches of Articles 101 and 102 of the Treaty on the Functioning of the European Union (Articles 101 and 102, formerly Articles 81 and 82 of the EC Treaty), that purportedly resulted in market entry delays for the cardio-vascular generic Perindopril.

Against this background, this chapter examines a number of competition issues that arise because of generic entry relating to Articles 101 and 102, highlights potential pitfalls associated with strategies against generic competitors, and offers constructive alternatives, particularly relating to:

• Evergreening and the competition rules.
• Partnering with generic manufacturers.

Throughout the entire chapter, particular attention is given to the implications of the Commission’s sector inquiry on the practices under scrutiny.

Evergree ning and the competition rules

“Evergreening”, that is, a patentee’s attempts to prolong the period during which it enjoys monopoly rights in its pharmaceutical, is one of the most tried strategies to defy generic competition. This catch-all concept includes many different approaches that challenge the competition rules to varying degrees. The following overview does not aspire to be exhaustive. It provides a selection of those strategies that have caught the Commission’s attention throughout the pharmaceutical sector inquiry.

Supplementary protection certificates

The standard way to secure prolonged patent protection is by applying for a supplementary protection certificate (SPC), which gives the patentee up to five years of additional protection after patent expiry. From a competition law perspective, limited risks are involved. However, it should always be kept in mind that a finding of dominance may change the assessment altogether.

This was the case for AstraZeneca. According to the Commission, AstraZeneca’s dominant position on the market for proton-pump inhibitors should have inspired it to behave according to its “special responsibility”. Instead, AstraZeneca allegedly provided the national patent offices with misleading statements that resulted in AstraZeneca unjustifiably acquiring SPC’s in some member states. In other member states, AstraZeneca allegedly secured excessive protection periods. For the Commission, it was clear that AstraZeneca’s intention had been to delay generic market entry.

In the US, similar infringements have met with a more subtle approach. In Walker Process Equipment Inc v Food Machinery Corp (382 US 172, 86 SCt 657, 147 USPQ 404 (l965)), the Supreme Court held that the fraudulent procurement or extension of a patent can form the basis for an antitrust claim (under section 2 of the Sherman Antitrust Act), resulting in treble damages under the Clayton Act, provided all the elements otherwise necessary to establish a section 2 monopolisation charge are proved. Conversely, a treble damages action cannot be made out if the plaintiff:

• Shows no more than invalidity of the patent arising;
• Shows fraudulent procurement, but no knowledge of it by the defendant; or
• Fails to prove the elements of a section 2 monopolisation charge even though he has established actual fraud in the procurement of the patent and the defendant’s knowledge of that fraud.

Apart from a factual description of the mechanism (paragraphs 293 and following, Final Report) and a reference to the Astra- Zeneca case (footnote 217, Final Report), the Final Report does not contain any statements on the (un)lawful use of SPCs by innovative pharmaceutical companies.

Patent infringement litigation

Another more precarious way for a patentee to prolong the life cycle of its pharmaceutical, is to bring or threaten to bring patent infringement actions against generic competitors that are about to launch substitutes for the patentee’s pharmaceutical. Although not confined to the US, it is arguably a technique that is more rewarding in the US, where it has been characterised by some judges as a natural side effect of the Drug Price Competition and Patent Term Restoration Act (Hatch-Waxman Act).

The US. Under the Hatch-Waxman Act, generics producers are not required to replicate the clinical trials performed by the patentee provided they can establish “bioequivalence” of their products to the branded pharmaceutical. If this is the case, the generic manufacturer can apply for a market authorisation before the expiry of the original patent. As a result, the generic product will be allowed to enter the market the day after patent expiry. However, the Hatch-Waxman Act offers innovative pharmaceutical companies the opportunity to delay generic entry by filing a patent infringement suit against the generic applicant. Provided such an infringement claim is filed within the required time period, the approval of the generic’s market authorisation can be postponed for 30 months. Offering the innovator more than two years’ extended patent protection, this is obviously an opportunity most patentees rely on.

The EU. Even though the EU regulatory framework does not contain similar provisions, innovators have found it worthwhile to file or threaten to file patent infringement claims against their generic competitors or to question their bioequivalence and reliability before the courts in an attempt to prevent or delay generic entry.

Throughout its recent investigations, the Commission has proven to be particularly keen on finding evidence of vexatious, or otherwise abusive, litigation initiated by innovative pharmaceutical companies. The Commission even acknowledged that the reason why it had chosen, for the first time, to kick off a sector inquiry by conducting dawn raids, was to a large extent because information relating to litigation is by its nature highly confidential. As a consequence, such information can easily be withheld, concealed or destroyed, so that unannounced inspections were deemed to be the most suitable instrument in the armoury of the Commission.

The Commission addressed lengthy questionnaires to innovative pharmaceutical companies, in which they were required to provide detailed information about their reliance on different types of litigation against wholesalers, generic companies and fellow innovative pharmaceutical companies. The Commission’s questions particularly sought to ascertain:

• Which companies have initiated patent cases.
• What the success rate of such proceedings is.
• What the effects of interim injunctions are.

Companies reported a total of 698 cases of patent litigation initiated in the period from 2000 to 2007. The cases started by innovators accounted for 54% of the total as against 46% launched by generic companies. Infringement actions represented by far the majority (96%) of legal actions initiated by innovators, and 77% of all cases concerned the best-selling pharmaceuticals which faced loss of exclusivity in the period from 2000 to 2007. According to the Commission, which was undeterred by the difficulties associated with determining which party prevails in a patent case, generic manufacturers “won” 62% of the patent litigation reported in which a final judgment was delivered. Further, out of all litigation cases in which a final judgment was rendered, the courts revoked the patent in 55% of the cases.

However, the Commission recognises that this outcome “was achieved at the expense of the multiplication of costly and often lengthy litigation before different national jurisdictions, thus entailing a significant burden and legal uncertainty […]” (paragraph 625, Final Report). The Commission therefore advocates “the introduction of a Community patent, which could be challenged and enforced before a unified Community patent court”. In the Commission’s view, this “would significantly increase the legal certainty and efficiency of the European patent system” (paragraph 625, Final Report). Pending such regulatory reform, the Commission recognised that as a general rule, litigation will only be considered as vexatious in wholly exceptional circumstances (see below, Use or abuse of (regulatory) procedures).

Patent filing strategies

Many pharmaceuticals enjoy prolonged patent protection because innovators have obtained separate patents on the diverse formulations and other aspects of the product. This results in so-called “patent clusters” or “patent thickets” covering the composition, presentation, manufacturing process, dosing and even the colour of the pharmaceutical. In a controversial finding, the sector inquiry revealed that blockbuster pharmaceuticals are sometimes protected by nearly 100 International Non-proprietary Name (INN )-specific patent bundles and applications (paragraph 488, Final Report). However, the figures ignore the sheer number of patents filed as a result of the multiplication of national patent systems in Europe. Generic competitors are faced with the decision of whether they should wait until all patents have expired before applying for market authorisation, or whether they should be ready to face the risk of patent infringement litigation and consider market entry with a substitute to the originator’s first
formulation of the product.

The Commission further identified the practice of voluntarily filing “divisional” patents as a strategy of innovative pharmaceutical companies which could potentially harm generic competition. When a patent application covers multiple inventions, companies can voluntarily or at the request of a patent office file divisional patents. These patents stem from the same originally filed application (parent patent application) but each cover a separate invention which used to be included in the parent application. Divisional applications have the same priority and filing dates as the parent application, but are from a procedural viewpoint treated as new applications. They will therefore normally be granted or rejected some time after the parent application, but, if granted, the divisional patent will have the same expiry date as the parent patent.

Divisional applications provide opportunities to applicants to extend the period during which a patent application is left pending. Indeed, the subject-matter contained in a patent application can in principle be kept pending indefinitely, by creating new voluntary divisional applications shortly before the previous application is decided on. Under the caselaw of the European Patent Office (EPO), such divisional applications can even be identical to the parent application. Therefore, a successful challenge of a parent application will not create legal certainty as long as divisional applications are still pending.

The Final Report summarised its findings with respect to patent clusters and divisionals as follows: “The intended effects of both patenting strategies as analysed above are identical: in some case[s] both patent clusters and divisionals seemingly serve to prevent or delay generic entry. While this, during the period of exclusivity, is generally in line with the underlying objectives of patent systems, it may in certain cases only be aimed at excluding competition and not at safeguarding a viable commercial development of own innovation covered by the clusters” (paragraph 523, Final Report). The Commission concluded by stating “In other words, patent clusters and divisionals seem to be aimed at creating legal uncertainty for generic competitors […]” (paragraph 525, Final Report).

During the public consultation, the EPO had repeatedly pointed out that the purposes of a patent application are irrelevant to the decision-making process within the European patent system. However, the EPO assessed the strategy of filing divisional patents as follows: “There is a trend for applicants to abuse these procedural possibilities by using the divisional application procedure to achieve a duplication of the proceedings…This is detrimental both to legal certainty for third parties and to patent office workloads” (paragraph 377, Final Report).

On 25 March 2009, the Administrative Council of the EPO decided to introduce time limits for filing divisional applications. Divisional applications now need to be filed within a period of two years from the first communication by the EPO examining division relating to the parent application or, even earlier in a “chain” of applications.

Deregistering marketing authorisations and “product hopping”

The EU. Until recently, generic manufacturers were granted marketing authorisation under an abridged procedure, provided the reference product was authorised in the EU and was marketed in the member states for which the marketing authorisation was requested. It followed that the market could easily become foreclosed for generic companies to the extent that innovators decided to withdraw their marketing authorisation for a particular formulation of their pharmaceutical, while simultaneously requesting a new marketing authorisation for another formulation. While in most cases such a strategy would have been regarded as a legitimate business decision, the Commission characterized it as an abuse under Article 102 in respect of AstraZeneca, because of the company’s allegedly underlying intent to defy generic competition.

The US. In the US, innovative pharmaceutical companies have recourse to a similar practice generally referred to as “product hopping”. The practice consists of introducing a small alteration to a patented pharmaceutical and attempting to direct patients from the old version to the new one (see Jessie Cheng, An antitrust analysis of product hopping in the pharmaceutical industry, Columbia Law Review, 2008, Vol 105, p.1473). This practice is not considered an obvious target for antitrust enforcement, given that generic manufacturers are not prevented from entering the market and selling versions of the old formulation under their own brand names.

However, Abbott Laboratories and two units of Solvay (Fournier Industrie et Santé and Laboratoires Fournier) have over the past years faced accusations on multiple fronts. Downstream retailers, generic competitors, state attorneys-general and indirect buyers have pressed charges against the companies for having blocked generic competition, by engaging in product hopping and other strategies relating to its anti-cholesterol pharmaceutical TriCor. The companies had reportedly made trivial changes to the formulations of TriCor, and marketed those while withdrawing the original pharmaceutical from the market. This made it more difficult for a generic version of TriCor to obtain generic status. After several years of litigation, most of the lawsuits have been settled to avoid the uncertainty of a trial outcome.

In the case brought by 25 states and the District of Columbia (State of Florida et al v Abbott Laboratories, case number 08- 155), the US District Court for the District of Delaware recently granted Abbott’s and Fournier’s request to file three motions for summary judgment before the presumed trial date in January 2010. The companies reportedly intend to argue that the states suffered no state or federal antitrust injury, that they cannot claim money for indirect buyers under federal antitrust law, and that the states’ monopsony powers outweigh any monopoly power the pharmaceutical companies might have.

Use or abuse of (regulatory) procedures?

The four strategies described above can give rise to competition issues if the innovator’s intention is to keep potential generic rivals out of the market instead of competing with them. If the innovator is found to be dominant, it may be accused of having abused these regulatory procedures. Similarly, innovators are under increasingly close scrutiny when initiating court proceedings to ensure that their patents are respected.

The EU. The seminal case in respect of abuse of (regulatory) procedures is straightforward. It is only in “wholly exceptional circumstances” that regulatory or court proceedings can amount to an abuse of a dominant position within the meaning of Article 102 (ITT Promedia NV v Commission (Case T-111/96) [1998]). In assessing whether such exceptional circumstances are present, the applicant’s attempt to assert its rights should be balanced against its potential strategy to eliminate competition. The CFI has specified that these two criteria “should be interpreted and applied restrictively in a manner which does not frustrate the general rule of access to the courts”.

The Commission seems to abide by this ruling. In its Final Report, the Commission repeatedly emphasises that enforcing patent rights in court is legitimate, and a fundamental right guaranteed by the European Convention on Human Rights (for example at paragraph 548, Final Report) and that patent strategies will only raise competition concerns in exceptional circumstances. The Commission suggests that it will focus its resources on originator companies which “consider litigation not so much on its merits, but rather as a signal to deter generic entrants” (paragraph 549, Final Report).

It will be interesting to see whether the Commission will reconsider the position it took in the AstraZeneca case. This is as yet still the landmark case about the abuse of regulatory proceedings in the pharmaceutical sector. However, the Commission received criticism for having qualified AstraZeneca’s strategies as an abuse of dominant position, since the legislative provisions on which AstraZeneca had relied at the time of the abuse were not clear cut.

First abuse. AstraZeneca allegedly made contradictory statements throughout the application procedure for SPC’s about the dates of the “first marketing authorisation” for Losec in the EU. The Commission qualified these as a “pattern of misleading representation to patent agents, patent offices and national courts as part of its overall SPC strategy”. National patent offices required the dates of the first marketing authorisation to calculate the period of additional protection covered by the SPC.

However, at the time of AstraZeneca’s applications, there was a lack of clarity about the meaning to be given to the “first marketing authorisation”. Was this concept to mean the first grant of a marketing authorisation in the EU or rather the date on which the price or reimbursement level was agreed for the first time with a national health authority? The ECJ even had to resolve an issue in this area through a preliminary ruling at the request of a German court. AstraZeneca may have made use of the regulatory confusion to prolong its monopoly rights, but such an approach arguably does not amount to an abuse.

Second abuse. A request was made for withdrawal of the marketing authorisation of the capsule version of Losec and AstraZeneca was accused of having conveniently relied on the loopholes in the existing regulatory framework to delay generic entry. Here, the Commission acknowledged that “single acts involving the launch, withdrawal or requests for deregistration of a pharmaceutical product would not normally be regarded as an abuse” (AstraZeneca, at paragraph 793). The fact that AstraZeneca had limited its plans to request deregistration of the capsule, and implement the switch in only some countries, was taken as further evidence that a key aim of AstraZeneca was to combat generic market entry (AstraZeneca, at paragraph 800). Such abuse is, however, unlikely to be replicated due to the legislative changes to Directive 2001/83/EC on the Community code relating to medicinal products for human use. As already noted, the CFI will have to give guidance in the appeal proceedings.

It is expected that the winding up of the sector inquiry will expedite the Commission’s investigation of the practices engaged in by Boehringer-Ingelheim. In 2007, the Commission initiated proceedings against the company which was accused of “misusing the patent system in order to exclude potential competition in the area of chronic obstructive pulmonary disease drugs.” It will be interesting to see how the Commission will deal with its finding that shortcomings in the regulatory framework play a critical role in defying generic competition. In the Final Report, the Commission repeatedly asserted that the primary focus remains on “those practices which companies may use to block or delay generic competition as well as to block or delay the development of competing originator products” (paragraph 15, Final Report), but that “the industry is strongly regulated and the behaviour of companies needs to be assessed in the context of the existing regulatory framework” (paragraph 16, Final Report). The Commission therefore promised that it would proceed cautiously in cases which are at the intersection of IP and competition.

The US. The question whether the application of competition law should be excluded when a regulatory framework shapes the conduct under scrutiny has been answered affirmatively in the US. In the telecommunications sector, the US Supreme Court in Verizon Communications Inc v Law Offices of Curtis V Trinko LLP (540 US 398 (2004)), held that “one factor of particular importance is the existence of regulatory structure designed to deter and remedy anti-competitive harm. Where such a structure exists, the additional benefit to competition provided by antitrust enforcement will tend to be small, and it will be less plausible that the antitrust laws contemplate such additional scrutiny”.

In the more recent case of Credit Suisse Securities v. Billings (551 U. S. (2007)), which dealt with the interaction of antitrust law and securities, the US Supreme Court even further diminished the role of antitrust law. In the Court’s view, there was “a serious conflict between, on the one hand, application of the antitrust laws and, on the other, proper enforcement of the securities law”. As the application of antitrust law would be accompanied by a substantial risk of injury to the securities markets, the Court set aside any antitrust-based considerations.

Settlements

Patent infringement actions often end up in settlements. This is not surprising if one considers the issues at stake:

• The innovator faces the loss of years of monopoly revenue and profits from the pharmaceutical concerned if it fails to prove that its patent is valid and was infringed.
• If the generics manufacturer does not adequately defend itself, it will be left without a marketable product, wasted investment in research and development, possible damage claims and delayed market entry.

Instead of going through lengthy and complicated patent litigation, competitors understandably prefer the legal certainty conferred by a settlement.

The US. In the US, patent litigation settlements are extremely rewarding as they may result in a complete foreclosure of the market for generics manufacturers. Under the Hatch-Waxman Act, the first generic manufacturer that obtains a marketing authorization for a specific pharmaceutical is entitled to a 180-day exclusivity period that starts to run from effective market entry.

However, if the generics manufacturer decides to delay market entry for some reason, the 180-day period will not begin to run, which results in other generics manufacturers being prevented from entering the market. Therefore, if an innovator succeeds in keeping the first generics manufacturer from entering the market, he can almost indefinitely maintain his monopoly status on the product under attack. This is why in the US most patent litigation settlements contain exclusionary payment features by which the innovator offers payment to the generics manufacturer in exchange for the latter not entering the market, if it obtains marketing authorisation.

Under the Bush administration, the principal antitrust enforcement authorities, the Department of Justice (DoJ) and the Federal Trade Commission (FTC), were at odds on the legality of these so-called “reverse payments”. While the FTC considered the agreements as anti-competitive by their nature, the DoJ traditionally followed a more nuanced approach which up until today received endorsement from the US courts. Their position is to approve settlement agreements when they do not provide for any restraints exceeding those which would exist had the patent been upheld in litigation. For example, in the Cipro case, the United States Court of Appeals for the Federal Circuit upheld the New York District Court’s decision to reject a challenge to the lawfulness of the 1997 patent litigation settlement between Barr Laboratories and Bayer Corporation related to the antibiotic Cipro (Fed Cir, 15 Oct 2008). The Court of Appeals held that because any anti-competitive effects of the settlement agreement were within the scope of the Cipro patent, the agreements could not violate the antitrust laws. In June 2009, the Supreme Court declined to grant the FTC’s request to review the judgment of the Court of Appeals for the Federal Circuit. This is coherent with the Supreme Court’s past precedent in the Schering-Plough case.

The Supreme Court’s consistent refusal to weigh in on the issue has marked a major setback for the FTC in its fight against reverse payments. Innovative pharmaceutical companies have meanwhile won most lawsuits in this respect. The US Courts may soon reconsider their position as President Obama and Assistant Attorney General for Antitrust, Christine Varney, have voiced concern over the legality of reverse payments. This has prompted the DoJ to change its permissive stance on settlement agreements. On 6 July 2009, the DoJ filed a brief with the US Court of Appeals for the Second Circuit in relation to another settlement between Bayer Corporation and Barr Laboratories relating to Cipro. The DoJ now contends that “the anti-competitive potential of reverse payments (…) in exchange for the alleged infringer’s agreement not to compete and to eschew any challenge to the patent is sufficiently clear that such agreements should be treated as presumptively unlawful under section 1 of the Sherman Act” (under heading Summary of argument). In the DoJ’s view, drug companies should provide a reasonable explanation of the payment, “so that there is no reason to find that the settlement does not provide a degree of competition reasonably consistent with the parties’ contemporaneous evaluations of their prospects of litigation success”.

The continuing divergences of opinions between the administration and various courts of appeals have inspired a bipartisan group of legislators to introduce a number of bills which aim at preventing innovators from compensating generics manufacturers for delaying generic entry. Two substantially similar bills are currently pending in the House of Representatives and the Senate: H.R. 1706 “Protecting Consumer Access to Generic Drugs Act 2009”, and S. 369 “Preserve Access to Affordable Generics Act” (Bill). If the Bill becomes law, the Clayton Act (15 USC section 12 et seq) will be amended to make it unlawful to be party to an agreement resolving or settling a patent infringement claim in which a generics producer receives “anything of value” and agrees “not to research, develop, manufacture, market, or produce its product for any period of time”. Arguably, by using the term “anything of value”, the amended Clayton Act will go beyond prohibiting reverse payments and will also ban any form of consideration flowing from innovators to generics manufacturers. Further, the definition of the term “patent infringement claim” is so broad (“any allegation made to [a generics manufacturer] whether or not included in a complaint filed with a court of law, that its [application for market authorisation] or its product, may infringe any patent, or exclusively licensed to, the [innovator]”), that it has been criticised for potentially covering licence negotiations between innovators and generics manufacturers outside the context of litigation. The Bill explicitly allows for agreements which authorise generics manufacturers to market their product before the expiration of the patent and for the waiver of a patent infringement claim for damages. Importantly, the Bill also amends the Hatch-Waxman Act by providing for forfeiture of the 180-day exclusivity period if the amended Clayton Act is violated.

Last year, the FTC issued a report examining the evolution of reverse payment agreements in the US over the past four years. According to the FTC’s report, there has been a notable increase in reverse payment agreements since the FTC first began collecting statistics. Whereas in 2004 no such agreements were known to exist, there were three in 2005, 14 in 2006 and 33 in 2007, with 14 of those agreements including both compensation to the generics manufacturer and an agreement to delay market entry of the generic drug concerned. Interestingly, the FTC asserts that the nature of settlement agreements is evolving with side deals not directly relating to the resolution of a patent dispute being included and sometimes concealing the true purport of the settlement. Typical side deals provide that the compensation to the generics manufacturer constitutes the innovator’s commitment not to sponsor or compete with an authorised generic (see below, Authorised generics) for some period of time.

In response to the alleged proliferation of settlement agreements, the FTC recently decided to bring the issue back to the courts. In 2008, the FTC filed suit against Cephalon, for having delayed market entry of generic versions of its blockbuster sleep disorder drug Provigil by paying four generic drug manufacturers to delay production until 2012. In February 2009, the FTC brought an action against Par Pharmaceutical Companies in the US District Court of Central California, challenging agreements in which Solvay Pharmaceuticals, Inc. allegedly paid generic drug makers Watson Pharmaceuticals and Par Pharmaceutical Companies to delay generic competition to Solvay’s branded testosteronereplacement drug AndroGel, a prescription pharmaceutical with annual sales of more than US$400 million (about EUR585 million).

The EU. Even though the EU does not have similar provisions to the Hatch-Waxman Act, settlements, including agreements involving reverse payments, increasingly occur in Europe. The sector inquiry revealed that between 2000 and 2008, 207 settlement agreements between innovators and generics manufacturers have been concluded. These agreements concerned 49 pharmaceuticals, of which 63% were blockbusters that lost exclusivity between 2000 and 2007. The vast majority of the settlements were reached in the context of litigation cases.

The Final Report further mentions that in about half of the settlement agreements, the ability of the generics manufacturer to market its medicine was restricted. Further, a significant proportion of the settlement agreements contained, in addition to the restriction, a value transfer from the originator company to the generic company, in the from of a direct payment or in the form of a licence or distribution agreement or a “side-deal”. Direct payments occurred in more than 20 settlement agreements and the total amount of these payments exceeded EUR200 million (about US$292 million).

Turning to the Commission’s substantive assessment of settlement agreements, the Final Report distinguishes three main categories of settlement agreements:

• Agreements containing no limitation on generic entry.
• Agreements restricting generic entry but not involving a value transfer from originator to generic.
• Agreements restricting generic entry and involving a value transfer from originator to generic.

Both the Interim Report and the Final Report suggest that settlement agreements of the third category are at risk of being viewed as anticompetitive. Settlement agreements will undoubtedly draw the Commission’s full attention in the years to come. In the executive summary of the Final Report (page 27), the Commission announces that a “first enforcement action is already under way. To reduce the risk that settlements are concluded at the expense of consumers, the Commission will also consider further focused monitoring of settlements that limit generic entry and include value transfer from an originator company”. The Commission specified that “such monitoring would have to take duly into account the administrative burden imposed on stakeholders and will be limited in time until the Commission has gathered sufficient information on the subject matter to decide whether further action is needed” (paragraph 1574, Final Report).

The Commission thereby abandoned the idea of introducing some kind of notification system for patent settlements, whose establishment had been rumoured on various occasions following the publication of the Interim Report. While the absence of a notification system may well relieve the Commission from an important administrative burden, it undoubtedly perpetuates legal uncertainty on the part of innovators and generics manufacturers. The lack of guidance on the Commission’s future assessment of settlement agreements is regrettable, especially after an 18 month “fishing expedition” involving an unprecedented amount of resources, both within the Commission and among companies responding to frequent and robust requests for information and dealing with on-the-spot investigations.

On the day of publication of the Final Report, the Commission opened a formal investigation against Les Laboratoires Servier for suspected breaches of Articles 101 and 102. The Commission announced that it will assess agreements concluded between Servier and a number of generics manufacturers which are suspected of having delayed entry on to the market of the cardiovascular generic Perindopril. Yet, litigation cannot be considered a substitute for proactive guidance that provides a framework for the assessment of the various practices at issue. For now, some guidance on the lawfulness of settlement agreements can be inferred from the AstraZeneca decision and the general principles of competition law. In that case, the Commission stated that “settlements (typically involving cross-licensing) are the standard way to reduce the uncertainty relating to patent litigation, which is especially acute in the pharmaceutical sector, and […] the technological base of the parties (normally absent in the case of generic producers as opposed to research based undertakings) will determine their bargaining position” (at paragraph 526).

Arguing that AstraZeneca’s bargaining position allowed it to “dictate its terms” to its generics competitors, the Commission found that the settlements which AstraZeneca had concluded with three of its competitors against whom it had first brought patent infringement actions, had allowed AstraZeneca to determine the conditions for their access to the market and, therefore, were conducive to the finding that AstraZeneca had abused its dominant position. This is arguably a harsh finding which will make it more difficult for companies in a dominant position to settle a patent suit. But even for firms that are not dominant, settlement agreements may prove tricky. Settlements between innovators and generic competitors generally include one or a combination of the following terms:

• The innovator allows controlled generic market entry by concluding a licence agreement.
• The innovator and the generic manufacturer agree on the cross licensing of their respective patents.
• The innovator pays the generic manufacturer in exchange for delayed generic market entry.

As settlements often constitute agreements on technology between competitors, they should be assessed in the light of Article 101 and Regulation (EC) No. 772/2004 on the application of Article

[101](3) to categories of technology transfer agreements (Technology Transfer Block Exemption Regulation). While Article 101 prohibits agreements which have as their object or effect the distortion of competition between member states, the Technology Transfer Block Exemption Regulation provides for a safe harbour for specific agreements which would otherwise fall foul of Article 101.

According to the Commission’s Guidelines on the Technology Transfer Block Exemption Regulation (Guidelines), settlements involving (cross-) licensing may serve as “a means to avoid that one party exercises its intellectual property rights to prevent the other party from exploiting his own technology” (paragraph 204, Guidelines). Therefore, settlements are not, as such, restrictive of competition as they “allow the parties to exploit their technologies post agreement”. However, the individual terms and conditions of settlements are assessed by the Commission in the same way as any other licence agreements (paragraph 204, Guidelines). The following basic rules should therefore be kept in mind:

• The combined market share of the relevant markets accounted for by the parties must not be higher than 20%.
• The settlement is covered by the Technology Transfer Block Exemption Regulation and, therefore, not to be regarded as anti-competitive, provided it does not contain any of the black-listed restrictions contained in Article 4 of the Technology Transfer Block Exemption Regulation. These include the:

* restriction of a party’s ability to determine its prices when selling products to third parties;
* limitation of output;
* allocation of markets or customers; and
* restriction of the licensee’s ability to exploit its own technology or the restriction of the ability of any of the parties to the agreement to carry out research and development.

• The settlement is generally regarded as pro-competitive if it is likely that in its absence the licensee could be excluded from the market.
• Settlements whereby the parties cross-license each other and impose restrictions on the use of their technologies, including restrictions on the licensing to third parties, may be caught by Article 101, especially when parties share markets or fix reciprocal running royalties that have a significant impact on market prices.
• In cases where the parties have a significant degree of market power, the agreement is likely to be considered anti-competitive if the settlement prevents the parties from gaining a competitive lead over each other. The settlement thereby reduces the incentive to innovate and therefore adversely affects an essential part of the competitive process.

Even if the settlement does not qualify as a transfer of technology agreement falling within the scope of the Technology Transfer Block Exemption Regulation, the mere payment by the patentee to safeguard its intellectual property rights does not in itself constitute anti-competitive behaviour. A correct analysis of any action taken by a patent holder towards a generic competitor requires at least an assessment of the prospects of success for the patentee and the generic manufacturer in litigation. In the authors’ view, it is only when it is obvious that the innovator will clearly fail to prove patent infringement or will be manifestly unable to defend the validity of its patent that the payment to the generic manufacturer is liable to raise competition concerns.

The EU v the US.The Final Report contains a rather shallow comparison between settlement agreements concluded in the US and in the EU. The Commission finds that although the underlying reasons for concluding settlement agreements appear to be the same in the US, there are significant differences as to the object of the settlement agreements.

Whereas in the US, one of the most important forms of value transfers in recent settlement agreements appears to be the originator’s promise not to launch or sponsor an authorised generic for a given period of time after entry onto the market of a first generic, this type of value transfer was not found in the EU. This obviously relates to the significant differences between the regulatory regimes in the US and the EU concerning market entry of generics. Further, side-deals offered by innovators, relating to pharmaceuticals which are not directly concerned by the settlement, do not appear to be a widespread form of value transfer in Europe.

The Commission has repeatedly emphasised that its staff will take inspiration from the approach which the US authorities and courts have taken to settlement agreements. This resolve sounds hollow in the face of the poor and incomplete insight which the Final Report provides into the US approach to settlement agreements.
For example, the seminal judgment of the US Court of Appeals for the Federal Circuit in the Cipro case is not even mentioned. Instead, the Commission focuses its overview on FTC practice and potential legislative initiatives.

Several authors have rightfully deplored the fact that the Commission is not showing more deference to the significant experience gained by the US Courts. For instance, the Commission has relegated to a mere footnote (number 483 of the Final Report) the request of stakeholders to consider adopting a US-like test, which evaluates whether the settlement agreement under scrutiny restricts competition beyond the exclusionary zone of the patent. In characteristic fashion, the Commission refused to take a position and answered the request, in the same footnote, as follows: “as mentioned above, this report does not aim to provide guidance on the legal assessment of certain agreements”.

Authorised generics

Authorised generics are pharmaceutical products commercialized under a generic product name by the manufacturer of the original branded pharmaceutical, or by a generic manufacturer under a supply or licensing agreement with the original manufacturer. Pharmaceutical companies can decide to launch an authorised generic as part of a strategy to secure competition in the generics market on patent expiry. Alternatively, an innovator can license an authorised generic to a generic competitor as a way to terminate patent infringement litigation.

The US. Arguably, it is mostly US firms that have resorted to this strategy because it allows them to undermine the 180-day exclusivity period offered to the first generic manufacturer. The introduction of an authorised generic during the 180-day period indeed results in a situation where two generic companies directly compete on the same market. This substantially reduces the economic incentive warranted by the 180-day rule and possibly deters generic competition. Yet, the Federal Food and Drug

Administration (FDA) and the US courts have stated on several occasions that authorised generics appear to promote rather than to impede competition. Only one judge has warned that antitrust issues, such as predatory pricing, may surface in relation to authorised generics (Judge Keely, cited by NS Banait, Authorised Generics: Antitrust Issues and the Hatch-Waxman Act (see www.fenwick.com/docstore/publication/IP)).

At the request of various lawmakers who have tabled bills that would block innovators from releasing authorised generics during the 180 day window of marketing exclusivity of a first generic competitor, the FTC is carrying out a study on the effects of authorised generics on competition. In its interim report published in late June 2009, the FTC provisionally found that the use of authorised generics may help drive down the price of pharmaceuticals.

However, the FTC also identified uses of authorised generics in settlement agreements which it considered troubling. Indeed, the launch of an authorised generic during the 180 day window of marketing exclusivity of the first generic manufacturer may push down the revenues of that generic firm by as much as 51%, the FTC found. Therefore, the perspective of such a drop may cause a generic manufacturer to agree to postpone its market entry, in exchange for an undertaking by the innovator not to launch an authorised generic during the 180 day marketing exclusivity period. According to the FTC, these kinds of settlements have been concluded in about 25% of the final patent settlements between 2004 and 2008, as reviewed by the FTC.

The interim report therefore also concludes that agreements between innovators and generic manufacturers may harm consumers if they delay the availability of a low-cost generic. However, Commissioner J Thomas Rosh stressed that the bottom-line conclusion of the interim report cannot be interpreted as supporting legislation to ban authorised generics being marketed in direct competition to a generic manufacturer’s product during the 180 day exclusivity period. The FTC announced that the final version of the report would explore the impact of an authorised generic on the business decision-making for both generic and innovative manufacturers.

The EU. The introduction of authorised generics to the EU market provokes less resentment from generic competitors than in the US, given that there are no Hatch-Waxman type rules in the EU. In the authors’ view, the decision to launch an authorised generic may be a commercially sound strategy, allowing the innovator to mitigate to a certain extent the inevitable market share loss it will face on patent expiry. The sector inquiry has revealed that settlement agreements in which originators promise not to launch or sponsor an authorised generic for a given period of time after the entry onto the market of the generic company’s product are less common in the EU than in the US (paragraph 291, Final Report). On the other hand, so-called “early entry agreements”, that is, agreements that provide for the introduction of a pharmaceutical onto the market before the innovator’s product loses its market exclusivity, are common practice according to the Commission.

However, the Commission again expressly refused to offer guidance on whether early entry agreements are compatible with EC competition law. Instead, the Commission provides yet another statistical overview of the occurrence of early entry agreements. Still, from the wording used by the Commission it can be inferred that certain early entry agreements will in the future be on its radar, namely those that contain non-compete and/or exclusivity clauses, and those that outlast the innovator’s loss of exclusivity for a couple of years (paragraph 856, Final Report).

In the case of a finding of dominance, Judge Keely’s remark about predatory pricing (see above) could prove useful. It is indeed conceivable that an innovator attempts to drive a generic manufacturer out of the market by deliberately incurring losses or foregoing profits in the short run. If the generic manufacturer can prove that the innovator is pricing below average variable cost, there is a presumption of predatory pricing. Unlike in the US, the generic competitor is not required to provide evidence about the innovator’s reasonable prospect of recouping the sustained losses. Recoupment will in any event often be impossible because:

• The regulatory framework in most EU member states prevents or limits the possibility of price increases.
• It would not be commercially viable for the patentee to increase its prices, as they tend to spiral down exponentially with each new generic product entering the market.

Partnering with generic manufacturers

Instead of having to face the cost of competition, innovators may find it worthwhile to partner with their (potential) generic competitors. Such co-operation can take various forms and prove beneficial to various extents. However, as with any agreement between (potential) competitors, a number of caveats should be considered. Three of the most common agreements concluded between innovators and generic competitors are licensing agreements, co-marketing agreements and co-promotion agreements.

Licensing agreements

Licensing agreements are arguably a valuable means for a patentee to deal with generic competition proactively. Different combinations can be envisaged, depending on whether patent expiry is imminent and whether the patentee owns a “cluster” of patents:

• If the patent has not yet expired, the patentee could consider launching an authorised generic by a licensing agreement with a potential generic competitor (see above).
• Even if the patent on the active substance of the pharmaceutical has expired, the patentee can still license out other patented formulations of the pharmaceutical.
• If the generic competitor has recently obtained a marketing authorisation for the generic substitute of the originator’s product, it might lack the necessary know-how to engage in large-scale production. In that case, a licence agreement with the originator in respect of know-how may prove meaningful.
• If the generic competitor holds a patent that is of particular interest to the innovator, parties could opt for a cross-licensing agreement.

The legislative framework against which licensing agreements should be assessed is formed by Article 101 and the Technology Transfer Block Exemption Regulation. The Technology Transfer Block Exemption Regulation can bring comfort to those pharmaceutical companies caught up in the intricacies of intellectual property and competition law (see above, Settlements). However, the Technology Transfer Block Exemption Regulation is perhaps not the legal instrument best suited for licensing agreements in the pharmaceutical industry. Its focus on market shares often makes it impossible for a patentee to benefit from its safe haven. A licensing agreement is only exempt from the prohibition of Article 101 provided the market shares of the parties do not exceed the following thresholds:

• In case of an agreement between competitors, the combined market share of the parties must not exceed 20% on the relevant markets (Article 3.1, Technology Transfer Block Exemption Regulation).
• In case of an agreement between non-competitors, the market share of each of the parties must not exceed 30% on the relevant market.

Successful innovative pharmaceutical companies almost invariably have market shares exceeding the Technology Transfer Block Exemption Regulation thresholds and in specific cases can enjoy a monopoly position. As to the licensing of know-how, the Technology Transfer Block Exemption Regulation covers agreements relating to the licensing of a “package of non-patented practical information, resulting from experience and testing, which is secret, substantial and identified” (Article 1, Technology Transfer Block Exemption Regulation).

Licensing agreements that do not fall within the scope of the Technology Transfer Block Exemption Regulation must be assessed in the light of Articles 101(1) and 101(3). Indeed, there is no presumption of illegality of agreements that fall outside the scope of the Technology Transfer Block Exemption Regulation provided they do not contain black-listed restrictions. The Commission states that “Article [101] EC is unlikely to be infringed when there are four or more independently controlled technologies in addition to the technologies controlled by the parties to the agreement that may be substitutable for the licensed technology at a comparable cost to the user” (paragraph 131, Guidelines).

Further, the following obligations will generally not fall foul of Article 101 (paragraph 155, Guidelines):

• Confidentiality obligations.
• Obligations on the licensee not to sub-license.
• Obligations not to use the licensed technology after the expiry of the agreement, provided that the licensed technology remains valid and in force.
• Obligations to assist the licensor in enforcing the licensed intellectual property rights.
• Obligations to pay minimum royalties or to produce a minimum quantity of products incorporating the licensed technology.
• Obligations to use the licensor’s trade mark or indicate the name of the licensor on the product.

If the licence agreement is found to infringe Article 101(1), the efficiencies it generates can still allow for an exemption under Article 101(3). In the authors’ view, a licence agreement concluded with a generic manufacturer before patent expiry may be regarded as pro-competitive as it clearly mitigates the potentially exclusionary effects inherent to any patent right. On the other hand, depending on the specific circumstances, such a licence agreement may create significant entry barriers for third parties. In the Final Report, the Commission confirms its particular interest in licensing agreements concluded between innovators and generics manufacturers as a side deal of settlement agreements. Such agreements will form the subject of scrutiny, especially when they contain exclusivity provisions or non-compete clauses (see above). As to licensing agreements outside the context of settlements, the Commission refers to the general rules of competition law for their assessment (Footnote 488, Final Report).

Co-marketing and co-promotion agreements

Co-marketing and co-promotion agreements are also meaningful ways of co-operation between pharmaceutical companies. While the economic nature of both agreements is intrinsically identical, that is, the acquisition by the owner of the market authorization of additional leverage on the market for a specific pharmaceutical, they operate in substantially different ways:

• Co-marketing can be defined as the simultaneously selling and marketing by two pharmaceutical companies of the same product under different trade names.
• Co-promotion consists of the bundling of commercialisation efforts in respect of a product known under a single trade mark. Co-marketing and co-promotion agreements can be concluded as early as in the research and development or the manufacturing phase of the pharmaceutical but are generally, at least in the EU, only given consideration at the marketing stage.

Despite the fact that co-marketing and co-promotion agreements may well be authorised by the regulatory framework, they may raise a number of competition concerns. As with any agreement between competitors, these arrangements may constitute evidence that the parties have directly or indirectly colluded. As a prerequisite to any assessment under EC competition law, the agreements should be classified as either “vertical” (that is, when the agreement is concluded between parties operating at different levels of the distribution chain) or “horizontal”. Depending on the classification as horizontal or vertical, the agreements will be assessed under one of the following regimes:

• The Block Exemption Regulation on vertical agreements.
• The Commission Guidelines on horizontal agreements.
• The Technology Transfer Block Exemption Regulation.

In respect of co-promotion agreements, there is little room for discussion about their horizontal nature. Their aim is to bundle logistical efforts to give the contractual product maximal exposure. The originator and the co-promoter clearly operate at the same level in the market.

In contrast, the classification of co-marketing agreements as vertical or horizontal depends on where the centre of gravity is perceived to be: should this kind of agreement be r