(By ) On 12 February 2016 the issued its first infringement decision concerning so-called pay for delay settlements in the UK pharmaceutical market, imposing a fine of £ 44.99 million on the branded pharmaceutical company GlaxoSmithKline plc (GSK) and a number of generic pharmaceutical companies including Generics (UK) limited and Alpharma Limited. This blog post considers whether drug companies’ claims that this practice is actually beneficial to customers have any merit.

Pay for delay settlements allow the branded pharmaceutical company to delay generic entry into the relevant pharmaceutical market by paying off generic branded companies whose entry is imminent. In the case of GSK, the company entered into pay for delay settlement with the generic companies in relation to its blockbuster anti-depressant drug, Seroxat (paroxetine).

The result of this type of conduct is generally a win-win situation for the parties to the agreement; the branded pharmaceutical company is shielded from competition and can retain its supra-competitive or even monopolistic profits, while the generic companies to the agreement receive a cash payment or value transfer that is higher than the expected profit from entry.

The only one that loses out is the consumer – or in the case of the UK, the National Health Service. A pay for delay settlement deprives the consumer of earlier access to cheaper generic alternatives to a branded drug. Empirical evidence shows that the price for a branded drug plummets sharply following generic entry. In its press release, the CMA has noted that the price for paroxetine dropped by over 70 per cent following generic entry in 2003.

Despite the potential for this clear anticompetitive effect and the resulting impact on health care expenditure, branded pharmaceutical companies attempt to justify this type of conduct on several grounds. The branded pharmaceutical company usually claims the following:

• The generic entry constitutes a patent infringement and the branded pharmaceutical company is entitled to resolve this patent infringement by means of patent settlement thereby preventing the generic company from entering;
• The pay for delay settlement is pro-competitive as it allows for generic entry prior to the expiry of the patent(s) that cover the original brand drug.

However, on a general basis, both of these claims only hold true under one major assumption: that the patent(s) that protect the original brand drug are valid and not challengeable through patent infringement. Yet, both assumptions are an over-simplification of reality (at best) and understate the probabilistic nature of patents, as the rights afforded are highly uncertain and by no means a guarantee of exclusion.

It is true that the brand company should be able to exclude competitors from the market, if the patent is valid. Yet, being the holder of a valid patent should be sufficient to exclude competitors from the market and should not require a large additional payment or value transfer to the generic company. Such a payment should only be necessary where the patent is vulnerable to challenge. This leads to two results:

• the exclusion of competitors through pay for delay settlements is not necessarily based on the validity of the patent itself, but rather the size of the payment that the generic company receives. For exactly this reason, the US Supreme Court held in Actavis[1] that the size of the payment is a workable surrogate for patent validity.
• The exclusion of competitors potentially turns a probabilistic right that should be challengeable by competitors through patent infringement into a ‘bullet proof’ temporary legal monopoly right that is shielded from any challenge until its expiry. This is not acceptable, if you believe that patents do not confer a “right to exclude” but rather a “right to try to exclude”.

Keeping this in mind, let me now turn to the second justification mentioned above; pay for delay settlement leads to earlier generic entry. In fact GSK, made exactly this claim by stating that “This statement is highly ambiguous as it essentially provides the answer to the wrong question.

The question should not be how much the NHS has saved because of the pay for delay settlement but rather how much the NHS could have saved absent the pay for delay settlement?

Based on the brief discussion above, GSK’s statement only holds true under the assumption that the patent is valid and not challengeable by generic competitors. . However, the validity of the patent is doubtful. Moreover, pharmaceutical patents are often challenged and generic companies also enter ‘at risk’, facing potential patent infringement litigation as they enter the market prior to patent expiry

In fact, in 2001, generic companies such as Generics UK and Alpharma took steps to enter the market for paroxetine, with the sales for the brand drug exceeding £90 million a year. The pay for delay settlements have therefore not led to ‘savings’ of £15 million due to generic entry in 2003, but instead appear to have deprived the NHS of further savings for the period between 2001 to 2003.

FTC v. Actavis 133 S.Ct. 2223 (2013).