pay-for-delay

Authorisation no cure to cartel risks posed by pharmaceutical patent settlement agreements

Published On 29/08/2022 | By lhuett | Authorisations, Cartels

After much anticipation, the Australian Competition and Consumer Commission (ACCC) has recently issued a draft determination indicating it proposed to deny an application for authorisation of conduct in connection with a pharmaceutical settlement and licence agreement.

The application was lodged in late 2021 by Juno Pharmaceuticals Pty Ltd (Juno), Natco Pharma Ltd (Natco), and Celgene Corporation and Celgene Pty Ltd (Celgene) (together, the Applicants) to enter into and give effect to a settlement and licence agreement (Agreement).

Prior to lodging the application, the parties had been engaged in litigation in relation to a number of Celgene’s patents for pharmaceutical molecules, lenalidomide and pomalidomide, which are the active ingredients in certain cancer products.

In exchange for mutual promises to discontinue the litigation, Celgene agreed to grant Juno (as the supplier) and Natco (as the manufacturer) licences to manufacture and launch generic lenalidomide and pomalidomide products in competition with Celgene’s branded products (Revlimid and Pomalyst) prior to the expiry of Celgene’s patents but not before certain authorised launch dates. Juno and Natco also committed not to manufacture, import or distribute the generic products before the authorised launch date. Due to redactions on the publicly available version of the authorisation application and Agreement, it is not possible to determine whether the Agreement provided for the payment of any amounts from one party to any other party.

This is the first time that the ACCC has considered an application for authorisation of cartel conduct in connection with a pharmaceutical settlement and licence agreement. The ACCC indicated in its draft determination that it was unconvinced by the public benefits to which the Agreement was said to give rise and cited the potential public detriment that would likely arise from reduced competition tension in relation to generic entry.

As a possible sign that the Applicants considered the ACCC’s concerns to be insurmountable, the application for authorisation was withdrawn on the eve of the deadline for the ACCC’s final determination. Despite the fact that no final determination was issued, the ACCC’s draft determination is likely to have a chilling effect on similar applications for the foreseeable future.

How might a settlement and licence agreement raise cartel risks?

There are a number of ways in which a settlement and licence agreement entered into by competing businesses could contravene the Competition and Consumer Act 2010 (Cth) (CCA):

  • Cartel conduct: a settlement and licence agreement could fall foul of the parallel civil and criminal prohibitions on cartel conduct, as a contract between competitors (i.e., the originator and the generic), containing a provision with a proscribed anticompetitive purpose or effect. That purpose could be to prevent, restrict or limit the production or supply of the patented drug; to allocate between the parties the customers likely to acquire the drug, or the geographical areas in which the drug is acquired; or it could also be the purpose, or indeed the effect, of maintaining a higher than competitive price level for the drug.
  • Anti-competitive CAU: similarly, a settlement and licence agreement could also contravene s 45, as a contract between competitors with the purpose, effect or likely effect of substantially lessening competition.
  • Misuse of market power: a settlement and licence agreement could constitute a misuse of market power under s 46, if the originator were to hold a substantial degree of market power in a relevant market and engage in conduct with the purpose, effect or likely effect of substantially lessening competition in that market. As the Full Court said in ACCC v Pfizer, such a purpose could exist if the originator “exert[ed] pressure so as to defeat a new entrant’s attempt to gain market share and a place in the market”.
  • Exclusive dealing: depending on its nature, a settlement and licence agreement could also contravene the prohibition on exclusive dealing in s 47. This could arise in the context of a licence or distribution agreement; if the generic could only supply the drug in a particular geographic location, this would arguably constitute a territorial restriction, but it would nevertheless need to have the purpose, effect or likely effect of substantially lessening competition to be proscribed by the CCA.

Prior to the ACCC’s draft determination, the legality of settlements and licence agreements between competitors under the CCA was largely untested in Australia due in large part to the existence of an express exemption in s 51(3) of the CCA for certain agreements involving the grant of a licence in respect of a patent. This exemption operated to insulate certain settlement and licence agreements from the anti-competitive conduct provisions of the CCA.

In 2016, the Productivity Commission acknowledged, as part of a broader review of IP arrangements, that such agreements had the potential to cause serious harm to competition and innovation and may be going undetected in Australia, contributed to by the existence of the exemption. The Federal Government responded by supporting the introduction of a monitoring and reporting regime to enable the ACCC to scrutinise pharmaceutical patent settlement agreements. As a result, there were growing expectations that the combination of increased regulatory interest and the upcoming expiration of Australian patents on several “blockbuster” drugs would create opportunities for pharmaceutical patent settlement agreements to be scrutinised under the CCA.

In 2019, the IP exemption was repealed, and there is now an increased risk that settlement and licence agreements entered into by competitors will contravene the CCA.

What is a reverse payment settlement?

Some settlement and licence agreements involve a payment from one party to another as consideration for entering into the agreement.

A reverse payment settlement — also known as a “pay-for-delay” arrangement — is a settlement agreement between a patent-holding “originator” pharmaceutical manufacturer and a “generic” manufacturer to settle patent infringement and/or validity litigation. Under such an agreement, the originator typically makes a “payment” of some sort to the generic, and the generic agrees to delay, limit or abandon its plans to launch a generic version of the originator’s patented drug. The payment — which may take the form of a non-financial transfer — is said to be in “reverse” because, unlike a typical patent settlement, the payment flows from the patent-holder to the alleged infringer.

In recent years, reverse payment settlements have been the subject of considerable scrutiny by competition authorities in the United States (US) and the European Union (EU) for stifling generic competition and costing governments and consumers billions of dollars by way of increased drug prices.

Reverse payment settlements are seen as particularly egregious where the originator agrees to make a reverse payment to extend protection beyond patent expiry, or to unpatented products or processes – actions which could be said to be an abuse by the originator of its de facto monopoly patent rights.  Indeed, there is now a substantial and well-developed body of jurisprudence in both the US and EU on the scope of legality of reverse payment settlements under competition law.

As referenced above, due to redactions on the publicly available version of the authorisation application and Agreement, it is not possible to determine whether the Agreement provided for the payment of any amounts from one party to any other party. In any event, the cartel risks under the CCA referenced above can arise even where there is no payment made by an originator to a generic company.

 The application for authorisation by Juno, Natco and Celgene

Celgene is the manufacturer and patent holder of Revlimid and Pomalyst, immunomodulatory drugs used in the treatment of some blood cancers. Juno is a supplier of marketing and distribution services to pharmaceutical manufacturers and specialises in post-patent pharmaceuticals (i.e., generic products).  Natco is a pharmaceutical manufacturer which sells and distributes Natco-manufactured pharmaceutical products.

Celgene’s relevant patents expire on 14 April 2023, 17 May 2023, and 3 August 2027.

On 9 November 2020, Juno and Natco commenced proceedings against Celgene in the Federal Court of Australia, seeking to invalidate the compound patent for Revlimid. On 29 January 2021, Celgene filed a cross-claim against Juno and Natco for threatened infringement of the patents.

In December 2021, Juno, Natco and Celgene applied to the ACCC for authorisation under s 88(1) of the CCA, seeking to enter into, and give effect to, certain operative provisions of the Agreement that would resolve the ongoing legal proceedings between the parties.  The Agreement would allow Juno and Natco to bring to market generic versions of Revlimid and Pomalyst from a specified launch date until 2 August 2027, when the last of Celgene’s patents expires.

The ACCC’s draft determination

Section 88(1) of the CCA permits the ACCC to authorise conduct that may make or give effect to a contract, arrangement or understanding that may contain a cartel provision (within the meaning of ss 45AF, 45AJ, 45AG and 45AK of CCA), thereby protecting businesses from legal action under Part IV of the CCA. Under s 90(7) of the CCA, the key requirement is that the conduct must not have the effect or likely effect of substantially lessening competition, or must result or be likely to result in a net benefit to the public.

Public benefits

The Applicants submitted that the Agreement was likely to give rise to a number of public benefits, including:

  • increased competition in the relevant markets;
  • cost savings to the Australian Government under the Pharmaceutical Benefits Scheme (PBS);
  • greater supply security of the relevant pharmaceutical items;
  • facilitation of orderly and expeditious settlement of the proceedings, with benefit to judicial resources; and
  • greater certainty for Celgene over the launch date of generic products.

The ACCC was sceptical of the public benefits put forward by the Applicants, taking the view that they were “uncertain, minimal or unlikely to arise at all”. In particular, while the Applicants claimed that the early launch of generic drugs by Juno/Natco would “trigger an immediate and substantial 25% price reduction” for Revlimid and Pomalyst under the PBS, the ACCC was critical of a lack of evidence as to the significance of such cost savings.  In addition, the ACCC was not satisfied that the proposed conduct would result in greater supply security for lenalidomide and pomalidomide because it had no evidence of any past supply issues and did not consider the cohort of patients being treated to be likely to change significantly in the future. Further, the ACCC did not consider that litigation cost savings would result in a public benefit, noting that it was unsatisfied that the litigation would proceed in the absence of the proposed conduct.

Public detriments

The ACCC considered that the Agreement was likely to result in public detriment by reducing competitive tension in relation to generic entry in the supply of lenalidomide and pomalidomide. In the ACCC’s view, the Agreement would provide Celgene with greater control and certainty over the timing of generic entry by Juno and Natco, sought to confer on Juno and Natco a “first mover advantage”, and might deter generic entry by other manufacturers.  It would also affect Celgene’s response to generic entry by removing elements of commercial risk, which, in the absence of the Agreement, might generate a more competitive response from Celgene to competitive actions of generic manufacturers.

According to the ACCC, affecting the structure of the market in this way may result in a public detriment.  The ACCC noted that the nature and extent of such detriments was unclear, due, in part, to the lack of relevant information provided by the Applicants to the ACCC, as well as the extent of claims for confidentiality made by the Applicants over relevant information.

Accordingly, the ACCC indicated its preliminary view that it would deny the authorisation sought by the Applicants on the basis that the net benefit test had not been satisfied. It invited submissions in relation to its draft determination and foreshadowed making a final determination in July 2022.

However, on the date on which the ACCC’s final determination was expected to be made, the Applicants formally withdrew their application. It would appear that they were sufficiently pessimistic about their prospects that they preferred to avoid having the ACCC publish a final determination.

Key takeaways

The ACCC’s draft determination is notable as the first occasion on which a pharmaceutical settlement and licence agreement has been considered in the authorisation context in Australia. The scepticism with which the ACCC approached the conduct sought to be authorised tends to suggest it might be some time before we see another attempt by other pharmaceutical manufacturers. That being said, the ACCC’s draft determination highlights the need for those seeking authorisation to adduce sufficient evidence so as to ensure the ACCC can be satisfied that any claimed net public benefit is certain, sufficient and likely.

This article was written by Alice Waterston, a Senior Associate in the KWM Melbourne team.

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