Proscribe pay for delay

Financial Express, September 16, 2013

By Pradeep S Mehta

It’s time to integrate patent law and competition law goals, as patent-holders’ pay-off deals with generic drug-makers punishes consumers by keeping drug costs high

In an unprecedented competition case, which the Federal Trade Commission brought against a pharma company Actavis, the US Supreme Court in June 2013 ruled that the US antitrust authorities can pursue ‘pay-for-delay’ cases in the pharmaceutical industry as an anticompetitive practice, which until then was not treated as a competition violation.

Under this arrangement, a patent holder agrees to pay off potential generic producers from marketing their medicines when their patent is about to expire. Thus, it continues to enjoy monopoly profits while consumers bleed from high prices. In the US, so far, such violations were not treated as anticompetitive, but thankfully no longer.

A few days after this action in the US, the European Commission gave its first decision on pay-for-delay deals and fined nine drug-makers, including India’s Ranbaxy, for agreeing to delay the introduction of a cheaper generic version of an antidepressant patented drug, Citalopram, in the market. Denmark’s Lunderbeck, the patent holder, offered guaranteed profits to these nine generic drug-makers under a distribution agreement in return for their commitment to not market their substitute generic drug for an agreed period of time.

These landmark decisions by the apex court in the US and the EU competition authority have successfully opened the gates for integrating the goals of patent law and competition policy globally. India has not yet woken up to this, in spite of the fact that a study done in 2010 for the Competition Commission of India (CCI) did point out this malpractice but also cautioned that their treatment as anticompetitive practices is ambiguous.

A number of tactics are adopted by the patented drug-makers to continue enjoying the exclusivity period of their patented drug for the longest time. Such agreements are known as pay-for-delay deals. Since the settlement requires the patentee to pay the alleged infringer, rather than the other way round, this kind of agreement is also known as a ‘reverse payment’ deal.

It is important to note that such deals have considerable impact on consumer interests. The retail prices for brand-name drugs are generally very high and continue to rise fast. On the contrary, generic prescription drugs are considerably less expensive. The pay-for-delay deals, thus, postpone the introduction of generic drugs which may be as cheap as 10% of the price of the patented drug.

In 2010, the US FTC estimated that a pay-for-delay deal for a single drug could cost an individual consumer and his health plan an extra $4,590 over 17 months. Extended over the average five-year length of a pay-for-delay deal, that amounts to $16,200 in wasteful spending per patient, per drug. FTC estimates that these deals cost consumers and taxpayers $3.5 billion each year in higher costs.

Before starting to speak about the impact of such deals in India, it is important to note that the Indian pharmaceutical industry is one of the largest and most advanced in the developing world. It is the world’s third-largest pharmaceutical market in terms of volume and stands 14th in terms of value. According to a 2010 report by PricewaterhouseCoopers, India will join the league of top 10 global pharmaceuticals markets in terms of sales by 2020 with the value reaching $50 billion.

India’s generic drug industry took off in 1970 when only process payments were in vogue. Today, even after the introduction of product patent in the country following India’s commitments under the WTO TRIPS agreement, India is the world’s largest supplier of generic medicines, unaffected even by the economic slowdown. With the ever-increasing global demand for cost-effective generic drugs, India’s continuous rise in production and export of generic medicines is a blessing for people in poor countries.

For India, effective protection of generic drugs and their manufacturers is important with strong government support and political will. Although not much information is available on the existence of such back-scratching deals in the country, that does not mean such deals are not happening in India. The takeover of Indian pharma companies by foreigners is still being debated passionately.

Be that as it may, the year 2013 saw a couple of welcome judicial decisions boosting generic drugs in India. In March, in the first use of compulsory licensing under Indian patent laws passed in 2005, the Intellectual Property Appellate Board upheld the grant of compulsory licence to Natco Pharma, a generic drug-maker, to produce and market Nexavar, a patented cancer drug of multinational pharma major Bayer.

Similarly, the landmark case of Novartis AG versus Union of India has once again shed the light on the importance of consumer interest over the economic benefits obtained by a patentee. The Supreme Court, by rejecting Novartis’s plea for being granted a patent for its drug, has taken the first and the most important step towards encouraging supply of generic medicines in the country and against “evergreening”, i.e. the alleged practice of tweaking an existing drug to prolong a company’s hold on a patent and protect it from being produced by other firms as a cheaper generic version once the patent has expired.

In the Actavis case, the FTC observed that reverse payment settlements should be declared unlawful as a general rule because they are anti-competitive and harmful to consumers by directly restricting output and raising prices. Although no concrete action has been taken against such deals as yet in India, nothing prevents CCI to carry out investigations to uncover such shady deals and take action.

Banning such deals, in India as well as globally, will not only save consumers extra money, it will also help prevent patients from discontinuing their necessary medication because of high cost of brand-name drugs. It is yet to be seen how quick the world’s largest market for generic drugs realises the need to do the same .

The author is secretary general, CUTS International. Tanushree Bhatnagar of CUTS contributed to the article.

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