I. Introduction

In June 2013, two important decisions regarding 'pay-for-delay' arrangements in the pharmaceuticals industry were made in the EU and US. Generally speaking, 'pay-for-delay' or 'reverse-payment settlements' involve a type of patent settlement through which a payment is made by a patent holder, in this case a pharmaceutical company, to its competitors. In return, those competitors keep generics off the market. Such arrangements are usually used to avoid the time and costs involved if the parties were to enter into a patent dispute in the courts. However, patent settlements have recently been receiving increased scrutiny from anti-trust authorities across the globe, raising legal uncertainty in this area.

As outlined in our recent K&L Gates alert^[1], the US Supreme Court has applied a rule of reason assessment when reviewing an anti-trust challenge to a pharmaceutical reverse-payment patent settlement. The court concluded that reverse-payment settlements in the US were neither per se unlawful nor per se lawful, but must be assessed under a traditional 'rule of reason' analysis in terms of their effect on competition and potential justifications.

Following on, this alert considers the effect of the European Commission's (the 'Commission') recent infringement decision against Danish pharmaceutical company Lundbeck and a number of generic manufacturers for delaying the market entry of generic medicines. This is the first time that the Commission has imposed a fine in respect of a patent settlement case, amounting to €93.9 million (US$122.3 million) in respect of Lundbeck and €52.2 million (US$68 million) for the generic manufacturers. This decision is related to the Commission's earlier competition inquiry into the pharmaceutical sector which concluded in 2009, and other follow on pay-for-delay cases are currently being investigated at an EU level.

II. Lundbeck - the background

The product and the patent
Lundbeck's branded blockbuster antidepressant 'Citalopram' was Lundbeck's best-selling product. Lundbeck held various patents for the product, both in relation to the basic patent for the substance itself (i.e. the substance molecule) and in relation to related manufacturing processes, which provided a more limited protection. However, the basic patent for the substance molecule expired prior to the other patents held by Lundbeck.

The agreement
The Commission found that when Citalopram was nearing the end of its life-cycle, i.e. when the basic patent for the substance held by Lundbeck had lapsed, generic versions of the same drug had the possibility to enter the market, despite the continued existence of manufacturing process patents. In fact, one generic manufacturer had started selling its own generic version of the drug, and others were actively preparing to do the same.

However, in 2002, Lundbeck entered into discussions with the generic manufacturers regarding potential infringement of its patents for manufacturing processes of Citalopram. As a result, it was agreed with four generic manufacturers that Lundbeck would:

• Pay the generic manufacturers substantial amounts and other inducements amounting to tens of millions of Euros not to enter the market; 
• Purchase generic stock from the generic manufacturers with the purpose of destroying it; and 
• Offer the generic manufacturers guaranteed profits in a distribution agreement.

The Commission also discovered incriminating documentation referring to a 'club' being formed and 'a pile of $$$' to be shared among the participants. These agreements were viewed as giving certainty to Lundbeck that the generic manufacturers would stay out of the market for the agreed period (without any assurance of generic entry after the agreements had expired).

III. The European Commission's infringement decision

The Commission's enquiry into the pharmaceutical sector, mentioned above, indicated a number of structural issues and problems in pharmaceutical companies' practices which have the ability to delay the entry of cheaper medicines, and emphasised the importance of stronger competition law enforcement.

The Commission concluded that Lundbeck's arrangement with several generic manufacturers violated Article 101 of the Treaty on the Functioning of the European Union, and imposed fines on Lundbeck (€93.9 million/US$122.3 million) and on the generic manufacturers (€52.2 million/US$68 million).

While the infringement decision itself has not yet been released, the Commission commented in its press release regarding the fine that the agreements in question were not comparable with other legitimate patent dispute settlements where generic companies are "not simply paid off to stay out of the market". Recognising the unacceptable object of the agreement, Competition Commissioner Almunia is quoted as stating that it is "unacceptable that a company pays off its competitors to stay out of its market and delay the entry of cheaper medicines. Agreements of this type directly harm patients and national health systems […]".

Furthermore, in his speech Almunia highlighted that "Lundbeck did not prevent market entry by successfully enforcing its patent rights; rather, it simply paid other companies so that they would not compete, giving them the equivalent of what they would have earned if they had entered the market. This means they shared monopoly rents among themselves […]". The Commission found that prices of the generic equivalent in the UK were on average 90% of the price of Ciralopram once wide-spread generic market entry occurred following the discontinuation of the agreements.

In a public announcement that it intends to appeal the Commission's infringement decision, Lundbeck has asserted the validity of the patents on manufacturing processes, and claims that over 600 analyses of generic Citalopram demonstrated that they were all produced with patent-infringing processes.

IV. Legality of pay-for-delay following Lundbeck

The Commission has been monitoring patent settlements with a view to detecting "those settlements which could be potentially problematic from an anti-trust perspective - namely those that limit generic entry against a value transfer from an originator to a generic company".

The Commission's Third Report on Patent Settlement Monitoring, published in July 2012, illustrates that levels of potentially problematic settlements have stabilised at 11% (defined in the report as 'settlements limiting generic market entry showing a value transfer from originator to generic company'). The Commission commented in its Lundbeck press release that this shows that the vast majority of patent settlements are unproblematic from a competition perspective (defined in the report as 'settlements without limitation of generic market entry' and 'settlements limiting generic market entry, but without value transfer from originator to generic company'). Moreover, there has apparently been a significant rise in the number of patent settlements since the Commission's pharmaceutical sector enquiry.

While the Commission interprets this as a sign that its actions have not hindered pharmaceutical companies from concluding legitimate settlements, the continued existence of potentially problematic settlements means it will nevertheless remain vigilant. Competition Commissioner Almunia referred in his speech to the US Supreme Court's recent ruling, welcoming its similar position that "such 'pay-for-delay' deals should be subject to anti-trust scrutiny".

However, the difference between 'legitimate' and 'problematic' settlement agreements under EU competition law is one of significant importance for pharmaceutical companies, which will now be looking to increase certainty that such arrangements are indeed legitimate in view of Lundbeck. The disadvantage for patent owners and generic companies is a potential return to resolving more patent disputes in the courtroom if parties are forced to adopt a more cautious approach.

Other ongoing 'pay-for-delay' Commission investigations will be closely followed, and Commissioner Almunia has indicted more decisions are likely before the end of his mandate next year, which will hopefully clarify the position further.