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Antitrust considerations of biotech settlement agreements between generic and brand pharmaceutical companies

Since the Supreme Court decision in FTC v. Actavis, the Federal Trade Commission (“FTC”) has been actively injecting itself into biopharma litigation to convince the courts to interpret the Actavis holding as encompassing agreements where the “reverse payment” is non-monetary; e.g., the brand drug company forgoes its right to sell its authorized generic during the 180 day exclusivity period. All parties to ANDA litigation benefit monetarily from these agreements, but the application of antitrust restrictions may bring that money train to a halt. And as the stance of the courts is far from clear, several considerations should be kept in mind while negotiating and drafting a biopharma patent settlement agreement so as to avoid antitrust violations.

Use of no-AG provision in settlement agreements

Many brand pharmaceutical companies lose a significant amount of revenue due to the entry of a generic counterpart. Brand drug companies often stem their losses by selling an authorized generic during the 180 day exclusivity period reserved for the generic company that first files its abbreviated new drug application (“ANDA”) with the Food and Drug Administration (“FDA”). The first to file generic company’s revenues during the exclusivity period decreases significantly in the presence of an authorized generic.

Recognizing the value of its ability to market authorized generics during the exclusivity period, brand pharmaceutical companies have been more frequently leveraging this right during litigation settlement negotiations. In return for a delayed entry by the generic into the market, the brand pharmaceutical forgoes marketing its authorized generic during the exclusivity period (“no-AG provision”). By being the only generic available during this 6 month period, the first to file would realize revenues 45-55% greater than it would have with a competitor in the market. In 2012, according to the Federal Trade Commission (“FTC”), 40 patent settlements may have included a pay-for-delay agreement, 19 of which included a no-AG provision.

Increasing scrutiny of no-AG provisions

The use of no-AG provisions has been coming under increased antitrust scrutiny in light of FTC v. Actavis. In Actavis, the Supreme Court ruled that “reverse payment” biopharma patent settlements – agreements where the brand drug company pays the patent challenger and potential competitor to abandon litigation and, in return, the challenger agrees not to sell its generic drug product for a specific period of time – are not exempt from antitrust scrutiny and should be analyzed under the “rule of reason” using traditional antitrust factors. Although the payment at issue in Actavis was money, the FTC argues that non-monetary payments, such as no-AG provisions, also bring about the antitrust concerns discussed in Actavis and should be analyzed under the Rule of Reason. Specifically, the FTC contends that if the settlement includes considerations that the generic challenger could not get upon prevailing in litigation and provides for preserving and sharing monopoly profits, the patent settlement may raise antitrust concerns.

Some courts are also applying the ruling from Actavis to non-monetary forms of payment, e.g., no-AG provisions, at least for preliminary trial issues, such as motions to dismiss and amendments to complaints. They interpret Actavis as not restricting the definition of “payment” to monetary form. The definition of “payment,” however, is far from being clear. In fact, in the District of New Jersey, one court stated that “nothing in Actavis strictly requires that the payment be in the form of money,” whereas another court held that it “will not extend the holding of Actavis to the non-monetary facts before it.” We may get a clarification of “payment” in the Third Circuit’s reconsideration of Upsher-Smith Laboratories, Inc., v. Louisiana Wholesale Drug Company, Inc., et al. and Merck & Co., Inc. v. Louisiana Wholesale Drug Company, Inc., et al. which were remanded by the Supreme Court in light of its holding in Actavis. The FTC submitted an amicus brief to the Third Circuit stating that if the Third Circuit does not reverse the district court decision, it “would undermine the Supreme Court’s decision in [Actavis] and encourage parties to structure potentially anticompetitive reverse-payment settlements simply by avoiding the use of cash.”

Rule of reason analysis

Regardless of the form of payment, once the court determines that antitrust concerns have been raised, it applies the Rule of Reason analysis to the settlement agreement. Actavis puts forth five factors to be considered in the analysis: (1) “the specific restraint at issue has the potential for genuine adverse effects on competition”; (2) “these anti-competitive consequences will at least sometimes prove unjustified”; (3) “where a reverse payment threatens to work unjustified anti-competitive harm, the patentee likely possesses the power to bring that harm about in practice”; (4) “the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself”; and (5) “parties may still settle in other ways such as by allowing the generic manufacturer to enter the patentee’s market prior to the patent’s expiration, without the patentee paying the challenger to stay out prior to that point.” The overarching message is that to avoid violating antitrust laws, there must be a reasonable explanation for the reverse payment other than to maintain and share monopoly profits.

Considerations for drafting settlement agreements with no-AG provisions

Although there is ambiguity surrounding the term “payment,” it appears that the broader definition of “payment” may be gaining traction within the courts. As such, parties should be aware that antitrust claims against an agreement containing a no-AG provision may survive a motion to dismiss and the agreement may be subject to antitrust analysis.

The agreement is more likely to survive scrutiny if the parties are able to justify the no-AG provision by showing, for example, that the provision is not a quid pro quo for a delay in market entry of the generic drug and that the alleged infringer’s financial gain from the provision is reasonable consideration for avoided litigation costs or fair value for services, such as distributing the patented drug or helping to develop a market for that drug. If, however, the basic purpose of the no-AG provision is to split monopoly profits between the parties of the agreement, the agreement will likely be found to violate antitrust laws.

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Grace Yang, Ph.D. is a patent attorney, based in New York. She focuses her practice on patent litigation in biotechnology, pharmaceuticals, including Hatch-Waxman suits against potential generic competitors, and medical devices. Her litigation experience includes small molecule drugs, vaccines, antivirals, breast cancer gene therapy, and surgical devices.

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