The European Commission recently published its eighth report on the monitoring of patent settlements in the pharmaceutical sector. The Commission's sector inquiry that concluded in July 2009 identified that some patent settlements may be problematic from a competition law perspective and can result in the consumer paying the ultimate price for a delay in market entry by a generic product. Since then the Commission has conducted annual monitoring exercises, collecting data on the number of settlement agreements and the type of restrictions agreed by parties in the sector.
As part of the monitoring exercise, requests for information were sent to the innovator and generic companies which had co-operated with the Commission in the sector inquiry and/or were reported as having settled a matter in the relevant period. In this case, the report has been issued for the period 1 January 2016 to 31 December 2016.
57 originator and 50 generic companies responded to the Commission's request, reporting a total of 107 settlement agreements. 13 of these agreements covered at least half of the EU member states. 55 of the settlement agreement agreements covered Portugal, and the Commission reports that this is likely due to the introduction in 2011 of mandatory arbitration proceedings in Portugal for certain infringement cases against generic medicines. Over 20 patent settlement agreements covered the UK or France. 22 of the 107 settlement agreements concerned the same INN or pharmaceutical substance.
Categories of agreements
Settlement agreements can take a variety of different forms. The Commission classifies agreements according to (i) whether the agreement imposes a limitation on generic entry, and (ii) whether the agreement contains a value transfer from the originator to the generic company. Settlement Agreements are split into three categories:
- Category A: Category A covers settlement agreements with no limitation on generic entry. The report describes Category A agreements as unproblematic from a competition standpoint, as they provide that the generic company can market its own product immediately, under the conditions chosen by the company itself. 27% of patent settlements reported in this period were classified as Category A (29 agreements). 31% of the Category A agreements were on a "walk-away" basis, and contained no value transfer. 59% of agreements in this category provided a value transfer from the originator to the generic company.
- Category B.I: Category B.1 agreements accounted for more than half of the reported settlement agreement (66 agreements or 62%). This category refers to settlement agreements with a limitation on generic entry but provides for no value transfer from the originator to generic company. The limitations on generic entry may be in the form of a prohibition on the generic company from challenging the originator's patents (a "no-challenge clause") and/or a restriction from entering the market before expiry of the relevant patents (a "non-compete clause"). Unless in the context of a royalty-free licence permitting an immediate launch, a settlement agreement that contains a licence granted by an originator to a generic company will fall under this category, as the generic company is not in a position to determine the conditions of the commercialisation of its product. This would include an agreement for delayed market entry, payment of royalties by the generic company or restrictions on quantities that may be marketed.
- Category B.II: According to the report, category B.II agreements are "likely to attract the highest degree of antitrust scrutiny". These types of agreements contain limitations on generic entry and a value transfer from originator to generic companies. However, the anti-trust implications need to be considered on a case by case basis. Category B.II agreements are less common than the other types, accounting for 11% of all reported settlement agreements. The report notes that the proportion of settlement agreements falling into this category has decreased (from 22%) compared to the period covered by the sector inquiry ending in June 2008.
The overall number of settlement agreements reported in the monitoring exercise has increased since the results of the sector inquiry were published (see graph below). However, some of the increase can be attributable to legislative changes in Portugal. Also relevant is that the data for the sector inquiry was based on responses by 43 originator and 27 generic companies (70 respondents). The eighth monitoring exercise collected responses from a total of 107 companies. The number of settlement agreements reported does not appear to be an issue; the report concludes that the results of this report "show that the Commission's announcement that it would continue scrutinizing B.II category settlements in the future has not hindered companies from settling their patent disputes." The low and stabilised rate of category B.II settlements demonstrates that the majority of patent disputes can be resolved by the parties by agreements that are less problematic from a competition law perspective. The Commission may continue the monitoring exercise in the future, but as the Commission has used this language in every report since the 3rd report published in 2011 it is reasonable for parties to expect the same monitoring exercise to occur this year. There is no doubt a value in comparing annual trends, but the Commission may also appreciate a benefit in requiring parties to proceed on the basis that their settlement agreements may be scrutinised by the Commission.