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Archive for March 21st, 2012

The Economist Corner (2) – Patent Settlements in the Pharmaceutical Sector

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For this second edition of the Economist Corner, Benoît Durand from RBB Economics has sent us a post on patent settlements in the pharmaceutical sector. Benoît advocates against a per se approach to such agreements, and gives examples of pro-competitive settlements. The topic of Benoît’s post is timely. At a Brussels event last week, an EU official hinted that COMP would likely not treat such agreements under a per-se approach. He also said that the Commission would seek to provide as much legal certainty as possible on the issue. As some of you may know, the Commission dropped several settlement cases lately (GSK; AstraZeneca) but still continues to scrutinize other cases (J&J v. Novartis; Cephalon v. Teva; Servier (Perindropil); Lundbeck).

Following the conclusion of the pharmaceutical sector market inquiry in 2009, the European Commission has launched a number of investigations on patent-settlement agreements that include a payment between an originator and a generic company (also called “reverse payment” settlements[1]).  The Commission is worried that some of these payments may be used used by originators to reward generic manufacturers for postponing the launch of cheaper drugs on the market.  It is easy to see that the originator has a strong incentive to delay generic entry in order to continue earning a monopoly rent on the sale of its patented drug.  When the patent exclusivity expires generic drugs may begin challenging the originator’s monopoly position.  In this case, sharing part of the monopoly profit with a potential entrant is a better outcome than letting competition eat the rent away.[2]

However, as you might have guessed, reality is more complicated, and perhaps surprisingly, patent settlement agreements involving reverse payment need not necessarily be anti-competitive. The first thing to note is that the originator drug is protected by a patent, and it is only when the legal exclusivity expires that generic drugs may begin challenge the originator drug.  The second thing to note is that the validity of a patent is never a sure thing, and therefore its expiry date is uncertain.  Even though a pharmaceutical company has filed a patent, generic entrants may still challenge the incumbent before the formal expiry date.  Generic producers may consider that they have a good chance of challenging the patent in courts.  In the case of entry, the patent holder would seek an injunction to prevent entry, but judges may or may not grant the injunction, and they may or may not uphold a patent.

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Written by Nicolas Petit

21 March 2012 at 11:03 am