It is high time that CCI takes steps to curb anti-competitive settlements

Approximately 10-15 cases of ‘Pay for Delay’ exists around the world and these numbers will increase in future given the recent enforcements by EU, US and UK Competition Authority. In India, CCI has not come out with any specific regulations for the pharma industry but internal studies and ongoing market research predicts that it may institute cases suo motu against some pharma companies suspecting of having entered into such deals under Section 3 (3) (dealing with cartel) and section 4 (dealing with abuse of dominant position) of the Competition Act,2002. MM Sharma, Head-Competition Law and Policy, Vaish Associates Advocates speaks to Usha Sharma about the strategy

What is meant by the term ‘Pay for Delay’? How frequently is the strategy used in the pharma industry? Do Indian players also use this strategy?

“A patent’s life is 20 years. This period includes, but is not limited to, the period of establishing validity of the patent after it has been filed, which may take 12 years on an average. These deals are a win-win for the generics as much as they are for the originator.” MM Sharma Head-Competition Law and Policy, Vaish Associates Advocates

Pay for Delay means that patent holder drug makers (originators) use a number of strategies to extend the exclusivity period of their patented drug in order to prevent the market entry of generic drug suppliers (generics) on or before the expiry of their patents. One such tactic adopted by originators is paying the generics for delaying entry of the generic drug and thereby buying time of exclusive supply for the originator’s drug. It is not yet confirmed with any evidence whether this practice is adopted in India by the Indian domestic pharma companies or not. However, European Commission in 2009, started an investigation into the Indian generics Unichem Laboratories, Matrix Laboratories and Lupin along with the originator French firm Les Laboratoires Servier for potentially delaying the generic entry of perindopril by entering into various patent settlement agreements. On June 19, 2013, the European Commission imposed a fine of euro146 million on nine drug makers including Ranbaxy, for blocking the entry of cheaper generic drug suppliers to the market.

Pharma companies get 20 years of patent life, then why do they still resort to this strategy?

This strategy is adopted to avoid costly and lengthy patent litigation between originators and generics, who, respectively, would defend and refute the ever-greening of the originator’s patent. The motivation of the originator comes from the fact that drugs are generally left with only eight years of exclusivity after they enter the market. A patent’s life is 20 years. This period includes, but is not limited to, the period of establishing validity of the patent after it has been filed, which may take 12 years on an average. These deals are a win-win for the generics as much as they are for the originator. The originators’ drug prices stay high and the profits of the originators’ monopoly are shared with the generics.

Some original research companies as well as generic companies have resolved their patent disputes through settlement agreements that compensated generics for substantially delaying the entry of low cost generic drugs on to the market.

Any agreement that eliminates potential competition and envisages sharing the resulting profits is at the core of what the competition laws prescribes. How then is this practice still in use globally?

Yes. This practice is popular because such agreements between originator and generic companies, which are an extension of the original licensing agreements for the commercial exploitation of the original patent, were not viewed earlier as anti-competitive in the US and enjoyed a sort of antitrust immunity. Since the recent judgement in Actavis, in June 2013, this position is slowly going to change as such agreements will now be viewed as anti-competitive and examined by the ‘rule of reason’ approach globally.

‘Pay for Delay’ brings monopoly in the market which has a direct impact on patients. What do you have to say on this?

Pay for Delay deals, in effect, buy the originator protection from competition, at the expense of the consumer, whose access to lower-priced generic drugs is delayed, sometimes for many years. Consumers miss out on low cost generic drugs, which may be as much as 90 per cent less than originators’ prices. For instance, if the originators’ medication costs $330 a month during its exclusivity period, it may be sold by generics for as little as $3 a month after the expiry of the exclusivity period. Empirical evidence shows that the average price of a drug can drop by 90 per cent in the first two years after the entry of the first generic in the market.

A day after the US Supreme Court ruled that US antitrust enforcers can pursue ‘Pay for Delay’ cases in the pharma industry, on June 19, 2013 the European Commission imposed a fine of euro 146 million on nine drug makers including Denmark’s Lundbeck, India’s Ranbaxy, the UK’s Arrow generics and US Zoetis Products, among others, for blocking entry of cheaper generic drug suppliers to the market. Will such action by regulators dissuade pharma companies from pursuing the pay for delay strategy in the future?

Hopefully yes. Rationally, any competition authority will now view such agreements seriously and besides passing a cease and desist order against infringer company may also impose heavy penalty which is most likely to act as a deterrent factor. Recidivist company will be fined double the penalty imposed earlier. Some Competition Authority like US treat such repeat offence as criminal in nature.

‘Pay for Delay’ deals are considered to be a bad choice and it is assumed that the competition authorities across the globe are now anticipating the need to tackle the repercussions of similar deals in their own jurisdictions. Why is it so? How do regulatory authorities plan to compete with this phenomenon?

Pay for Delay deals, being very lucrative for both the originator and the generic companies, are likely to be viewed seriously in all jurisdictions, including India. In the recent study initiated by the Competition Commission of India (CCI) this must have been included. To tackle this menacing problem, which most likely has global dimensions since the originator companies are mostly in the developed world and the generics are mostly in the developing economies like India and China, competition authorities may take help of the provisions such as antitrust cooperation memorandum of understanding (MoUs) to be signed with their counterparts in the other jurisdictions to tackle this menace.

Indian pharma companies have established their presence in the global market through generic drugs. In this scenario will the ‘Pay for Delay’ strategy be the best choice for Indian players?

Financially, it may be the best choice for some drug makers but it’s prohibited under Indian Competition Law.

How does ‘Pay for Delay’ strategy affect competition in the pharma sector and which regulations have been outlined by the CCI for the pharma industry?

‘Pay for Delay’ strategy is harmful not only to the drug producers in the Industry as it de-motivates new research for new molecules due to heavy reliance on ever greening of molecules etc. at the same time it is very harmful for the consumers. CCI has not come out with any specific regulations for the pharma industry till now but, on the basis of its internal studies and ongoing market research, it may institute cases suo motu against some pharma companies suspecting of having entered into such deals under Section 3(3) (dealing with cartel) and section 4 (dealing with abuse of dominant position) of the Competition Act, 2002.

How many ‘Pay for Delay cases’ have been registered in the pharma sector in last three to five year period and is it likely that these numbers will increase in future?

Approximately 10-15 cases around the world. No case has been registered in India so far. Numbers will increase in future given the recent enforcements by the EU, the US and the UK Competition Authority.

What regulatory reforms would you like to suggest to curb ‘Pay for Delay’ strategies in the Indian context and why?

According to me, the strict enforcement of the relevant provisions of the Competition Act, 2002 (the Act) by CCI is the only solution. There are ample provisions in the Act to deal with such anti-competitive agreements under the garb of protecting patent rights. Other mild method such as guidelines etc. may not work in the Indian context, as per my experience of trying to spread the message of competition through competition advocacy,while working in CCI, prior to the commencement of the enforcement in May, 2009. CCI also has extra-territorial jurisdiction to undertake an inquiry into such an agreement or an abuse of dominance that may have been executed outside of India so long as there is an effect on competition felt within India. (Section 32 of the Act). Hence, in my view, it is high time that the CCI take concrete steps by considering launching a sector inquiry into the industry to curb such anti-competitive settlements.

Besides, effective enforcement of the existing statutory provisions of the Act, CCI also has the power to make recommendations to Central Government to project the need for a tighter law, like the Medicare Prescription Drug Improvement and Modernization Act 2003 (MMA) of the US. (In order to bring these illegal practices out of the shadows, US Congress, on recommendations from the FTC, enacted the Medicare Prescription Drug Improvement and Modernization Act 2003 (the MMA) under which pharma companies are required to file certain agreements with the FTC and the US Department of Justice within ten days of their execution) given its mandate of “protecting and promoting” competition, under its competition advocacy initiatives (Section 49 of the Act).

The CCI could also take advantage of its antitrust co-operation pacts with its counterparts. In the past year, the CCI has signed a MoU on Antitrust Co-operation with the Federal Antimonopoly Service of Russia, the US Department of Justice/FTC and the Australian Competition and Consumer Commission. According to a media report, the CCI is also in the final process of signing a similar MoU with European Union and the UK’s OFT. The MoU provide for the sharing of information on significant developments in competition policy and enforcement developments in the respective jurisdictions, including co-operation in appropriate cases.

Pharma companies are also advised to make an internal assessment of their conduct and practices by undertaking an effective competition compliance mechanism before they fall foul of the CCI. As it is said, prevention is always better than the cure.

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