Drug deals busted

A wee while back I posted about obnoxious "pay for delay" arrangements between drug patentholders and generic drug manufacturers, which involved the patentholders paying - I would say bribing - the generic makers not to produce when the patent expires, thereby extending the patentholder's monopoly pricing power.

I didn't know about these kinds of arrangements before the Economist wrote about them, but to my mind they are such a breath-taking interference with competition that I've done a bit of mugging up since.

My first reaction had been that they were clearly, and rightly, illegal under New Zealand's competition law (bang to rights under s27 of the Commerce Act), but that I didn't know what the legal state of play was overseas. Here's an update.

It's illegal in the European Union under Article 101 of the Treaty on the Functioning of the European Union which says "The following shall be prohibited as incompatible with the internal market: all agreements between undertakings...which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:...(b) limit or control production, markets, technical development, or investment" (italics mine). And often enough it'll also trespass against the misuse of substantial market power provision in Article 102.

The Europeans have been able to sheet the law home, too. According to this press release from the European Commission, just this month Servier, a French drug company, and five generic manufacturers got pinged nearly €430 million (call it NZ$670 million): "Servier made payments to the generic companies against the certainty that they would not enter the market and refrain from legal challenges [to Servier's patents]  for the duration of the agreement. In one case, the settlement was not based on cash payments but on a market-sharing arrangement with the generic company".

The Commission (which has a couple of other pay for delay scalps on its belt) summarised by saying that Servier "tried hard to unduly prolong its exclusivity. And it managed to do so not through innovation or the strength of its patents, but thanks to its deep pockets and in complicity with its generic rivals. Such behaviour is prohibited in the European Union. When companies break these rules, they will be pursued and penalised accordingly. Pharmaceutical companies should focus their efforts on innovating rather than attempting to extract extra rents from patients and taxpayers". I'm no great fan of the Brussels machine, and even in the competition area I think they've lost the plot from time to time, but on this one they've nailed it.

In the States, it's not so clearcut. There, the case that matters, at least for now, is last year's Federal Trade Commission (FTC) vs. Actavis Pharmaceuticals (in the background I can hear the collective heavy sigh of competition lawyer readers as yet another economist clambers awkwardly over the fence into their territory). Competition tragics can find the full decision here: if life's too short, it has a summary at the front, and there's a good Wikipedia article on it, but in any event the gist of it goes like this.

The drug companies said they had a patent dispute, that the supposed "pay for delay" payments were part of the patent settlement, and that what was legal under patent dispute litigation was home free and not subject to antitrust litigation review. The FTC wanted "pay for delay" ruled always and everywhere illegal.

The FTC lost in its first two outings in lower courts, but won the penalty shoot-out 5-3 in the Supreme Court. Or sort of: the court didn't go the whole hog and say "pay for delay" was always wrong - "This Court declines to hold that reverse payment settlement agreements are presumptively unlawful" - but it did say that they couldn't hide behind the skirts of patent law and could be found to be anti-competitive if challenged. There could be “potential for genuine adverse effects on competition", and "Payment for staying out of the market keeps prices at patentee-set levels and divides the benefit between the patentee and the challenger, while the consumer loses". Sometimes the arrangements might be okay, but it would come down to the facts, and the court was minded to look especially sceptically at large brown paper bags being passed under tables: "The size of the payment from a branded drug manufacturer to a generic challenger is a strong indicator of such  power", "such power" meaning the power "to work unjustified anticompetitive harm".

There was a withering dissent from three of the judges (including the Chief Justice), so who knows how settled the matter is. But at least it's good to see that the FTC has been given the opportunity to take on these rorts. I'm sorry for any genuine patent disputes that might end up wearing some collateral damage by having to go through the antitrust mill to prove they're above board. But I haven't a skerrick of sympathy for the collusive jack-ups.