Biotech settlement agreements – a competition law checklist

This article is part of our Biotech Review of the Year - Issue 11 publication

Introduction

The European Commission (EC) published its last monitoring report on pharmaceutical patent settlements in 2018.¹ However, the competition law risks associated with such agreements have not gone away. Patent-related issues in the biotech and pharmaceutical sectors remain firmly in the sights of competition law enforcement agencies across Europe, including the EC, UK Competition and Markets Authority and national competition authorities in EU Member States such as Italy and France.² In addition, the recent judgment of the General Court in Cephalon provides some useful clarification of the relevant legal principles.³

Against that background, this article offers a brief reminder of the competition law issues in this area and sets out a ‘checklist’ of terms in patent settlements likely to raise concerns.

The competition law analysis of patent settlements

Under EU and UK competition law, patents are not necessarily treated as an insurmountable barrier to generic/biosimilar (hereafter biosimilar) entry.⁴ As a result, settlement agreements between originators and biosimilar companies risk being treated as agreements between competitors.⁵ That risk is particularly high where the disputed patents are process or other ‘secondary’ patents and the biosimilar company has taken preparatory steps towards market entry.⁶ Relevant preparatory steps include initiating litigation to challenge relevant patents. 

The most serious concerns arise where the settlement risks being treated as an unlawful ‘pay-for-delay’ style arrangement. Such settlements are treated as automatic ‘by object’ infringements without the need to analyse their effects on competition. As explained further below, this can happen even where no monetary payment is made.

In order to identify potential pay-for-delay settlements, the EC has adopted a three-part classification based on two criteria. Specifically, whether the overall arrangement:

i. limits the biosimilar company’s ability to enter the market immediately with its own product; and/or

ii. results in a significant transfer of value to the biosimilar company from the originator.⁷

Agreements that do not limit the biosimilar company’s ability to enter the market immediately with its own product (Category 1) will typically be unproblematic.⁸ However, the range of provisions that may be seen as limiting entry is wide and includes, for example, no-challenge clauses and royalty-bearing licences of the disputed patent.⁹

Agreements that do limit entry but do not involve a value transfer to the biosimilar company (Category 2) will also generally be unproblematic.¹⁰ However, the range of provisions that may be considered to give rise to a value transfer is broad. No monetary payment is required. Licences, distribution agreements and active pharmaceutical ingredient (API) supply arrangements may give rise to relevant value transfers – and may do so even where included in separate agreements.

Agreements containing clauses that both limit biosimilar entry and transfer significant value to the biosimilar company (Category 3) have the potential to be considered pay-for-delay settlements and require careful review. The key issue in this regard is whether the transfer of value is sufficiently large to act as an incentive for the biosimilar company not to enter the market.¹¹ It is not necessary that the value transferred exceed the expected profits from entry.¹² Even a promise by the patentee not to launch its own authorised biosimilar product may be deemed a value transfer.

Risk levels in relation to these three categories of settlement may be summarised as follows:

A checklist of key terms likely to raise competition law concerns 

In order to identify which of the EC’s three categories a settlement belongs to, the terms of the settlement must be reviewed to determine whether they might limit entry, give rise to a value transfer, or both. What follows is a brief checklist of the key terms likely to have such effects. 

It is important to note that other arrangements entered into between settling parties at around the same time as or conditional on the settlement agreement – such as licences, distribution agreements, or other side deals – are likely to be treated as part of the same overall arrangement.¹³ The terms of such arrangements therefore need to be assessed in conjunction with the settlement agreement itself.

1. No-challenge provisions

Any obligation on the biosimilar company not to challenge the validity and/or infringement of the patents in dispute in the litigation is likely to be considered to limit biosimilar entry. ¹⁴ However, competition authorities recognise that it is legitimate to put an end to litigation, and therefore accept no-challenge provisions at least for patents at the centre of the dispute. Absent a value transfer to the biosimilar company, they will generally be considered to reflect the parties’ assessment of the strength of the patent and to form an essential part of the overall settlement.¹⁵ Only where other provisions in the settlement potentially give rise to a significant value transfer are concerns likely to arise. In that case, careful assessment will be required.

Different issues arise if the no-challenge obligation extends to patents that were not in dispute. Such provisions are likely to be considered restrictive of competition and would require alternative justification if competition law risk is to be avoided.¹⁶ Absent other restrictive terms in the agreement, however, investigation by competition authorities remains relatively unlikely. The main risk from this kind of clause is the enforceability of the no-challenge provision itself.

2. Non-use and non-compete provisions

Obligations on the biosimilar company not to practise the disputed patent (non-use provisions) are treated in a similar manner to no-challenge provisions. They are likely to be considered to limit biosimilar entry, but absent a value transfer, will generally be considered to reflect the parties’ assessment of the strength of the patent and to form an essential part of the overall settlement.¹⁷ In the presence of a potential value transfer, however, careful assessment will be required.

The position is slightly more complex in relation to provisions that directly prohibit the biosimilar company from manufacturing, marketing, selling, importing or otherwise entering the market with a specified product (non-compete provisions). If narrowly drafted to cover only acts and products that would practise the disputed patent, such provisions are likely to be treated similarly to non-use provisions. However, care may need to be taken to avoid definitions that would also cover non-infringing products.¹⁸ This may be a particular risk where the contested patents relate to production processes. To the extent non-infringing products are covered by the prohibition, it is likely to restrict competition and unlikely to be considered an essential part of the settlement.

3. Acknowledgements of validity and/or infringement

Contractual provisions under which the biosimilar company acknowledges the validity and/or infringement of patents will re-enforce the effect of no-challenge or non-use provisions and raise the same issues. On the other hand, an acknowledgement can be a useful confirmation in a licence agreement that the biosimilar company needs authorisation to practise the contested patent.

4. Licences to the biosimilar company

A licence of the contested patent will be treated as limiting biosimilar entry, unless the licence is royalty free, permits the biosimilar company to launch its own product immediately and imposes no restrictions on quantities, composition, pricing, or other marketing conditions.¹⁹

A licence of the contested patent may also be treated as giving rise to a value transfer to the biosimilar company.²⁰ The EU General Court in Servier took the view that this would not be the case if the terms of the licence were in line with normal market conditions and did not involve an abnormally low royalty rate.²¹ However, on appeal Advocate General Kokott has recommended that the Court of Justice reject this analysis on the basis that, even where its terms are in line with normal market conditions, a licence can give rise to a significant value transfer.²² The risk is particularly high where the licence is limited to certain products or certain territories. A royalty-free licence for the contested patent covering the whole of the EEA may not attract a high degree of antitrust scrutiny if it contains no limits on biosimilar entry other than a delayed entry date.²³

Licences granted to the biosimilar company of patents or other IP that concern products unrelated to the dispute are likely to be treated as a value transfer, particularly where there is evidence that they would not have been granted absent the settlement.²⁴ They are, however, unlikely to be considered to limit biosimilar entry.

5. Distribution and API supply agreements 

Agreements in which the biosimilar company is granted the right to act as a distributor of the originator product or agrees to source its supplies of API from the originator may also be treated as both limiting biosimilar entry and giving rise to a value transfer.²⁵ The analysis will be similar to that applied to patent licences (as set out above).

6. Differential or staggered entry dates

Provisions that set different entry dates for different territories can raise particularly complex issues. Differential entry dates can arise from different expiry dates for non-use or non-compete provisions, or where a licence is granted for certain territories and not for others. 

It may be possible to justify differential entry dates on the basis of objective factors, for example where there are different SPC expiry dates or they are linked to the earliest dates on which marketing authorisations can be obtained. In such cases no significant concerns should arise.

In the absence of objective justification, differential entry dates risk being considered both to limit entry in relation to late entry territories and to give rise to a value transfer to the biosimilar in the early entry territories.²⁶ This is particularly true where the territories concerned are all within the EU and/or EEA and are covered by the same underlying European patent. In such cases it will be difficult to argue that the settlement reflects the parties’ different assessment of the strength of the patent in different territories. 

7. Direct payments

Any significant payment to the biosimilar as part of the overall settlement is likely to increase the risk of competition law challenge and should be carefully examined. Even payments purportedly made in return for the provision of goods or services or in respect of litigation costs may be treated as a value transfer to the biosimilar. For example, payments to purchase the biosimilar’s stock of potentially infringing product are likely to be considered to involve a value transfer even if the stock is bought at market price.²⁷ Other payments likely to involve risk include royalty payments to the biosimilar in relation to patents or other intellectual property that the originator does not require or intend to exploit,²⁸ or payments for the supply of API at an inflated price or in circumstances where the originator has no projected need for additional sources of supply.²⁹

In principle, payments (or other value transfers) may be justified if strictly necessary having regard to the legitimate objectives of the parties.³⁰ This may include compensation payments for costs or disruption caused by the litigation between the parties.³¹ However, even payments for these purposes can raise concerns if no evidence is provided that material costs have in fact been incurred.³²

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^{1 EU 8th Report on the Monitoring of Patent Settlements, 9 March 2018 (“8th EC Monitoring Report”).
2 See, e.g., Under the antitrust spotlight: (mis)use of patents in the pharma sector, Sophie Lawrance and Edwin Bond, Biotech Review of the Year: Issue 10, available here
3 Case T-74/21 Teva and Cephalon v Commission judgment of 18 October 2023 (“Cephalon”)
4 Case C‑307/18, Generics (UK) v CMA, judgment of 30 January 2020, EU:C:2020:52 (“Generics (UK)”), para 46
5 Case T‑691/14, Servier v European Commission, judgement of 12 December 2018, EU:T:2018:922 (“Servier (General Court)”), paras 318-325
6 Generics (UK), paras 43-46
7 8th EC Monitoring Report, paragraph 8
8 8th EC Monitoring Report, paragraph 15
9 8th EC Monitoring Report, paragraph 9
10 8th EC Monitoring Report, paragraph 16. Exceptions may arise, and competition law scrutiny may be attracted, where the settlement goes beyond the exclusionary scope of the relevant patent or the patent is known by the parties (or at least the patent holder) to be invalid
11 Cephalon, para 40
12 Generics (UK), paras 93 and 94
13 Cephalon, para 56
14 8th EC Monitoring Report, paragraph 9
15 Servier (General Court), para 261 and 262
16 Servier (General Court), paras 257 and 262
17 Servier (General Court), paras 261 and 262
18 8th EC Monitoring Report, paragraph 16
19 8th EC Monitoring Report, paragraph 9. See also Cephalon, paras 62 to 87
20 8th EC Monitoring Report, paragraph 12
21 Servier (General Court), paras 963, 973 to 984 and 1029
22 Case C‑176/19 European Commission v Servier, judgment of 14 July 2022, EU:C:2022:576 (“Krka (Opinion)”), paras 145 to 159. The EC found that in the case at issue the generic company was expected to achieve profits of over €10 million  under the licence while paying royalties of no more than €1.1 million (Krka (Opinion), paras 161 to 163). Note also that in Cephalon the General Court held that a licence is likely to give rise to a value transfer where it would not have been entered into absent the settlement, although this related to a licence of unrelated IP (Cephalon, paras 44 to 45 and 107 to 120)
23 8th EC Monitoring Report, paragraph 12
24 Cephalon, paras 107-120
25 8th EC Monitoring Report, paragraph 10 and Cephalon, paras 88-106 and 127-142
26 See, Krka (Opinion), supra
27 8th EC Monitoring Report, paragraph 12; and see also Case AT.39226 Lundbeck, Commission Decision of 19 June 2013, para 789
28 Cephalon, paras 62 to 87
29 Cephalon, paras 88 to 106
30 Cephalon, para 51
31 Generics (UK), para 86
32 Cephalon, paras 143 to 161}