Reverse payment deals under the microscope in the EU

by Dechert LLP

Lessons from the latest Commission decision on agreements affecting generic entry:

  • The European Commission’s crack down on so-called “reverse payment” agreements continues.
  • In the EU these agreements may attract heavy fines.
  • Co-promotion agreements with an actual or potential competitor may raise antitrust concerns and should be thoroughly reviewed by antitrust counsel.
  • Pharmaceutical companies need to ensure that they have effective, industry-specific and regularly updated antitrust compliance mechanisms in place. 

Executive Summary. In a strong signal to the pharmaceutical industry, on 10 December 2013 the European Commission imposed fines totalling just over EUR 16 million on the U.S. pharmaceutical company Johnson & Johnson (J&J) and the Swiss pharmaceutical company Novartis for agreeing in 2005 to delay the market entry of a generic version of the pain-killer fentanyl in the Netherlands. The European Commission concluded that the co-promotion agreement reached between the two companies was in fact a so-called “reverse payment” agreement, designed to delay the entry of a generic drug and to share monopoly profits. Joaquín Almunia, the European Commissioner in charge of competition policy, called such agreements “unacceptable” and threatened that the Commission “will not tolerate such anticompetitive practices”. J&J and Novartis have the right to appeal the European Commission’s decision to the General Court of the European Union.

Background on EU antitrust enforcement in the pharmaceutical sector. The J&J/Novartis investigation followed the European Commission’s pharmaceutical sector inquiry, which was launched in 2008 and triggered dawn raids at a number of pharmaceutical companies. The inquiry concluded that there were structural problems in the pharmaceutical industry that were leading to delays in the entry of new, innovative and cheaper generic medicines in Europe. The inquiry attributed this distortion primarily to patent strategies implemented by pharmaceutical companies.

The pharmaceutical sector inquiry led to the opening of several investigations and to the first ever “reverse payment” fine issued by the European Commission. The terms “reverse payment” or “pay-for-delay” are used by the European Commission for agreements that limit generic entry in return for a value transfer by the originator company to a generic company. Such agreements may be concluded in the context of a potential patent dispute or as part of another commercial arrangement.

In June 2013, the European Commission fined Lundbeck and generic pharmaceutical companies a total of EUR 146 million in a case concerning Lundbeck’s branded citalopram, a blockbuster antidepressant. The European Commission found that Lundbeck agreed with a number of generic companies to induce them not to enter the market in exchange for significant sums of money. Moreover, Lundbeck purchased inventory from these generic companies solely for the purpose of destroying the inventory and also set up a profit-sharing system with the generic firms. The European Commission’s case was supported by internal documents discovered during the dawn raids that referred to a “club” being formed and a “pile of $$$” that would be shared amongst its participants.

Lundbeck and four generic companies that were also fined by the European Commission have appealed the decision to the General Court of the European Union. The General Court will not however hand out a judgment any time soon. It takes approximately 48 months on average to rule on appeals challenging the European Commission’s fines in antitrust cases.

The European Commission is currently also investigating two other agreements concerning the sleeping disorder medicine modafinil and the cardio-vascular medicine perindopril for potential “reverse payment” issues.

The J&J/Novartis case. Following the Lundbeck decision, the J&J/Novartis decision represents the second European Commission decision relating to agreements affecting generic entry. The European Commission initiated proceedings against J&J and Novartis in October 2011. The parties were formally charged in January 2013 for violating the EU antitrust rules and the investigation culminated in a final decision adopted on 9 December 2013.

J&J initially developed fentanyl, a pain-killer 100 times more potent than morphine, and has commercialized it in different formats since the 1960s, but in 2005 its patent protection on one of its fentanyl products, the fentanyl patch, expired. At that time, Sandoz (Novartis’s Dutch subsidiary) was on the verge of launching its own generic fentanyl patch and had already produced the necessary packaging material.

However, instead of launching the sale of its fentanyl patch in July 2005, Sandoz concluded a co-promotion agreement with Janssen-Cilag, J&J’s Dutch subsidiary, the detailed terms of which are not public1. Co-promotion agreements are a common form of collaboration in the pharmaceutical sector and normally provide for the joint commercialization of drugs. While co-promotion agreements are not per se unlawful under EU antitrust law, the J&J/Novartis agreement was found to be a disguised “reverse payment” agreement. It provided strong incentives for Sandoz to delay selling its patch in the Netherlands and included a monthly payment to Sandoz in an amount larger than Sandoz’s anticipated profits from selling its own patch.

The European Commission’s investigation unearthed a number of internal documents that in the view of the regulator shed light on the true purpose of the co-promotion agreement. For example, one document stated that Sandoz would abstain from entering the Dutch market in exchange for “a part of [the] cake” while another revealed that rather than compete, the two Dutch subsidiaries agreed to cooperate so as “not to have a depot generic on the market and in that way to keep the high current price”.

In addition to the internal documents, the European Commission also found that Sandoz undertook little or no genuine promotion activities, that J&J did not search for other co-promoters before choosing Sandoz, and that the agreement ended abruptly once a third party launched a generic fentanyl patch on the market in 2006.

The European Commission found that the J&J/Novartis agreement delayed the entry of a cheaper generic version of fentanyl for 17 months and kept prices for fentanyl in the Netherlands artificially high to the detriment of consumers and taxpayers. It concluded that the J&J/Novartis agreement constituted an unlawful restriction of competition by object and fined both J&J (EUR 10,798,000) and Novartis (EUR 5,493,000).

Comment. The J&J/Novartis decision comes amid increasing antitrust scrutiny by regulators on both sides of the Atlantic in the pharmaceutical industry and, in particular, in relation to “reverse payment” agreements. Both EU and U.S. regulators list such agreements high on their enforcement priorities and have several ongoing investigations.

With its latest decision, the European Commission demonstrates its hard-line approach towards this type of agreement and sends a clear message that agreements that limit or delay access of generic companies to the market and contain a value transfer from the originator to the generic will attract the highest degree of antitrust scrutiny. The European Commission will treat “reverse payment” agreements such as those found in the Lundbeck and J&J/Novartis cases as a restriction of competition by object. This means in practice that such agreements will be deemed to be unlawful under Article 101(1) TFEU2 and that the European Commission will not have to show any actual or potential anticompetitive effects of the restriction. In addition, a defense based on expected efficiencies and synergies under Article 101(3) TFEU will not have much chance of success.

Interestingly, a similar approach by the U.S. Federal Trade Commission (FTC) was recently overturned by the U.S. Supreme Court in its recent FTC vs. Actavis decision. The FTC had previously found that “reverse payment” agreements were presumptively illegal but the U.S. Supreme Court did not agree with the FTC. It found that such agreements may violate antitrust law depending on the particular facts of the case and that they need to be analyzed under the “rule of reason” test. This means that the FTC must demonstrate that the anti-competitive effects of an agreement outweigh its pro-competitive effects, a process that requires extensive legal and economic analysis.

In view of the FTC vs. Actavis decision and pending the appeal of the Lundbeck decision, it will be interesting to see whether the European Courts will uphold the European Commission’s tougher approach to agreements limiting or delaying generic entry or whether they will move closer to the Supreme Court’s FTC vs. Actavis decision.


1. The content and scope of the co-promotion agreement are not in the public domain and no public version of the J&J/Novartis decision has been made available yet. The European Commission and the companies involved are in the process of establishing a public version of the decision that does not contain any business secrets or other confidential information. The publication of the decision may take several months. The Lundbeck decision has not been published yet either for the same reasons.

2. Treaty on the Functioning of the European Union.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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