Patent settlement agreements in pharma: EC’s preliminary view on Teva/Cephalon

On 17 July 2017 the European Commission (EC) sent Statement of Objections to pharmaceutical company Teva with its preliminary view that a patent settlement agreement concluded with Cephalon was in breach of EU competition law. Under the agreement, Teva committed not to market a cheaper generic version of Cephalon’s drug for sleep disorders, modafinil. In other words, the originator company Cephalon  agreed on paying the generic company Teva to keep its cheaper generic version of Cephalon’s sleep disorder drug modafinil out of the market. The sending of a Statement of Objections does not prejudge the outcome of the investigation.

Essence of Teva/Cephalon agreement

Cephalon owned the patents for the drug and its manufacture. After certain Cephalon patents on the modafinil compound expired in EEA, Teva entered the UK market for a short period of time with its cheaper generic product. According to the EC’s press release, following a lawsuit concerning an alleged infringement of Cephalon’s processing patents on modafinil, the companies settled their litigation in the UK and the US with a world-wide agreement. As part of this agreement Teva undertook not to sell its generic modafinil products in the EEA until October 2012 in exchange for a substantial transfer of value from Cephalon to Teva through a series of cash payments and various other agreements. Such agreements in the EC’s view served as a significant pay-for-delay inducement for Teva not to compete with Cephalon’s modafinil worldwide and hence could delay the entry of a cheaper generic medicine, leading to higher prices. The EC launched inverstigation into the agreement in April 2011.

Patent settlements or “pay-for-delay”

The enforcement of EU competition law in the pharmaceutical sector has recently become a major trend. Practices preventing or delaying entry of generic rivals into the pharmaceuticals market, particularly the contents of patent settlement agreements, have been under the scrutiny of the EC as generic-side competition is essential for a proper functioning of the market as well as consumer welfare.  Over the past few years the EC has been monitoring patent settlement agreements in order to identify those settlements which could potentially be problematic from an antitrust perspective — namely those that limit generic entry against a significant value transfer from an originator to a generic company.

Categorization of agreements

PSAs can be categorised into agreements (i) with no limitation of generic entry; and (ii) with limitation of generic entry (with or without the transfer of money).

  • Agreements that do not restrict the generic company’s ability to market its own product are normally agreements that simply discontinue proceedings without any further commitment on any of the parties, and without any payment. Some form of payment from originator to generic is acceptable if it covers litigation costs and/or damages, i.e. in case of an interim injunction invoked against a generic that was prevented from  marketing its products. There could also be payment from generic to originator, i.e. when the generic company had riskily entered the market before the expiration of the patent. Mutual compensation or mutual royalty-free licences are also acceptable under PSAs that do not restrict generics’ entry into the market, and are normally unproblematic from a competition law perspective.
  • Agreements that foresee a limitation on the generic company’s ability to market its own product without payment from the originator to the generic company can raise competition concerns and require competition law scrutiny on a case-by-case basis. Such agreements normally contain a “non-challenge clause”, i.e. a clause stating that the  generic company will refrain from challenging the validity of the originator’s patent, and/or “non-compete clause”, i.e. a clause preventing market entry until the patent has expired.
  • Agreements that foresee a limitation on the generics’ entry with payment from the originator to the generic company for agreeing to delay the generic product  launch and / or for discontinuing the patent challenge are problematic and require the highest degree of competition law scrutiny on a case-by-case basis. Teva/Cephalon agreement falls within this last category of patent settlement agreements.

Patent settlements in Turkey

Currently there is no sufficient information on how the patent settlement agreements are treated in Turkey. According to the TCA’s 2013 Pharmaceutical Sector Report, there is no information on how often parties enter into patent settlement agreements. The Turkish Comeptition Authority (TCA) very often refers to the EC’s/FTC’s decisions/practice, but  it has not yet rendered a decision on that front yet. Originators in Turkey are constantly initiating lawsuits against the generics; the majority of the lawsuits are decided in favour the generics. The aim is to delay generic’s competition (originators know that they will lose the case, but initiate the lawsuit anyway). The originators generally argue that the reason behind their unsuccessful litigations is the weakness in Turkish patent legislation: it used to be under the old laws/decrees that raising claims was only possible before patenting the product/process. Following the IP law reform in Turkey under the new Industrial Property Law No 6769 (which came into force on January 10, 2017) objecting/raising claims against the patents to the Patent Office is possible within 6 month after the patenting.

Concluding remarks

Pro-competitive patent settlement agreements can be considered an opportunity for both generics and originators as they prevent high litigation costs and provide certainty as to the outcome of the dispute. However, special care is required when negotiating patent settlement agreements, especially if the settlements involve restrictions on the entry of generic products onto the market and/or a value transfer from originators to generics (e.g. any payment from originators under the patent-settlement agreements cannot exceed generic profits). Any language that might suggest an anticompetitive intent/exclusion should be avoided. Rather, the focus should always be on protecting legitimate IP rights .

The Statement of Objections in Teva/Cephalon case, just as in any other case, is a formal step in EC’s investigations into suspected violations of EU antitrust rules to inform the parties concerned in writing of the objections raised against them. There is no legal deadline for the EC to complete antitrust inquiries into anticompetitive conduct. The duration of an antitrust investigation depends on a number of factors, including the complexity of the case, the extent to which the undertaking concerned cooperates with the Commission and the exercise of the rights of defence.

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