Reverse Payment Research Articles

The Simple Math of Royalties and Drug Competition During the 180-Day Generic Exclusivity Period

Abstract In drug patent litigation settlements, the plaintiff brand commonly licenses the defendant generic to sell before patent expiry. Some agreements require the generic to pay the brand royalties. Despite the superficial flow of payments, royalty terms may function as part of an anticompetitive “reverse payment” made to the generic in exchange for delayed entry. Typically, the brand launches its own authorized generic (AG) during the first-to-file generic’s 180-day exclusivity period so initially there are two generic competitors. A royalty structure that deters the brand’s AG launch reduces the number of entrants to one, conveying net value to the generic by allowing it to capture the entire generic market, potentially inducing it to delay its entry. Royalties usually have no place in a brand–generic agreement between rational actors. However, our simple model shows that when royalties are conditioned on the brand’s AG launch, a range of royalty rates exists that conveys net value to the generic by deterring the brand from rationally introducing an AG. Royalty terms that are conditioned on the brand’s AG launch thus raise a red flag that the agreement is a pay-for-delay. Although the numbers are small, publicly available materials on industry experience corroborate this conclusion.

Pay-for-delay settlements and patent expansion practices

Pay-for-delay (reverse payments) settlements and patent expansion practices (PEP), such as preemptive patenting, product hopping and evergreening, have been criticized for their potential anticompetitive effects. This paper shows that reverse payments and PEP are strategic substitutes and, when the information over the patents’ strength is asymmetric and patents’ strength is endogenous, a ban on reverse payments may reduce consumer surplus. This effect is stronger the more generic competition reduces industry profits. When the cost of using PEP is sufficiently high, a ban on reverse payments is optimal, otherwise it is optimal to allow reverse payments at the minimal level consistent with the originator not engaging in PEP. Results are qualitatively robust to allowing PEP to increase patent quality and consumer surplus.

An Event Study of Perindopril (Servier) Reverse Payment Patent Settlements' Case: Is Krka Truly an Exception Within the Pay-For-Delay Commission Decision?

The article aims to fill the gap in the literature on reverse payment patent settlements between patent-holders and generic pharmaceutical firms in EU competition law. Based on the event study of the Perindopril (Servier) case of the European Commission, the research provides a novel assessment of the welfare effects of Commission enforcement and the following judiciary decision on the legality of Commission sanctions. Within the case, the analysis paid particular attention to the generic corporation Krka because Commission fined Krka for the settlement with Servier that did not include the reverse payment, and the Commission decision did not survive the scrutiny of the General Court. The relative economic power of Krka in the perindopril market is also a factor that, together with the enforcement effect assessment, provides a different perspective of the event study's normative implications to the existing research.

Regulating Reverse Payment Agreements in Pharmaceutical Market: A Comprehensive Framework for Antitrust Review

Reverse payment settlement agreement is a type of arrangement between original and generic drug manufacturers that could potentially violate Antitrust Laws by limiting competition, typically appear in the pharmaceutical market. This paper addresses the impact of these agreements on public interests, and the challenges in conducting antitrust review on these agreements. This paper then proposes a comprehensive framework for regulating reverse payment agreements in the context of China’s extensive and complex pharmaceutical market by drawing on the experiences of the United States and the European Union. The framework introduces a two-step antitrust review system for regulating patent settlement agreements, which is suggested by the author to be applied in both patent litigation and daily detection. This paper also advocates establishing an agreement filing system and utilizing the antitrust public interest litigation system in antitrust regulation. This proposed framework provides specific guidance on initiation of antitrust review with respect to multiple backgrounds, in order to protect consumer interests in affordable healthcare, deter anti-competitive behavior, and contribute to the theoretical basis for future legislation.

Anti-Monopoly Review of Pharmaceutical Reverse Payment Settlements in Patent Infringement Cases in China

Anti-Monopoly Review of Pharmaceutical Reverse Payment Settlements in Patent Infringement Cases in China

Intellectual property rights, enforcement costs and EU competition law

Abstract Cases in the intellectual property rights (IPR)–Competition Law intersection have raised the issue of costs of enforcement of IPRs when dealing with the assessment of whether competition law has been breached. Importantly, a systematic underestimation of enforcement costs may be problematic for the protection of underlying investments behind intellectual property as well as obstruct the cooperation between an IPR holder and its licensees, in particular as regards patent rights. Cases on reverse payments indicate that payments by a patent holder to a generic manufacturer under a settlement agreement may well be legitimate in order avoid enforcement costs while not restricting competition. The hard stance on no-challenge clauses and termination clauses under the technology transfer block exemption regulation (TTBER) can destabilize the relation between two parties that would benefit from increased certainty when cooperating to commercialize new technology. In cases regarding the failure of parties to agree on fair and reasonable and non-discriminatory-licensing of standard essential patents, a correct approach has probably been taken in Huawei. However, it is doubtful to what extent the judgment is based upon a balancing exercise that explicitly factors in enforcements cost. Accordingly, it is argued that the current framework of analysis of cases in the intersection is inadequate to proper assess enforcement costs of IPRs.

Reverse Payment: A Comparative Study

Reverse Payment: A Comparative Study

Most-Favored Entry Clauses in Drug Patent Litigation Settlements as a Potential Reverse Payment

Most-Favored Entry Clauses in Drug Patent Litigation Settlements as a Potential Reverse Payment

Selected Developments in Biotechnology Law and the Biotechnology Industry

Selected Developments in Biotechnology Law and the Biotechnology Industry

Paying off the Competition: Market Power and Innovation Incentives

How does a firm’s market power in existing products affect its incentives to innovate? We explore this fundamental question using granular project-level and firm-level data from the pharmaceutical industry, focusing on a particular mechanism through which incumbent firms maintain their market power: “reverse payment” or “pay-for-delay” agreements to delay the market entry of competitors. We first show that when firms are unfettered in their use of “pay-for-delay” agreements, they reduce their innovation activities in response to the potential entry of direct competitors. We then examine a legal ruling that subjected these agreements to antitrust litigation, thereby reducing the incentive to enter them. After the ruling, incumbent firms increased their net innovation activities in response to competitive entry. These effects center on firms with products that are more directly affected by competition. However, at the product therapeutic area level, we find a reduction in innovation by new entrants after the ruling in response to increased competition. Overall, these results are consistent with firms having reduced incentives to innovate when they are able to maintain their market power, highlighting a specific channel through which this occurs. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Paying Off the Competition: Market Power and Innovation Incentives

How does a firm’s market power in existing products affect its incentives to innovate? We explore this fundamental question using granular project-level and firm-level data from the pharmaceutical industry, focusing on a particular mechanism through which incumbent firms maintain their market power: “reverse payment” or “pay-for-delay” agreements to delay the market entry of competitors. We first show that when firms are unfettered in their use of “pay-for-delay” agreements, they reduce their innovation activities in response to the potential entry of direct competitors. We then examine a legal ruling that subjected these agreements to antitrust litigation, thereby reducing the incentive to enter them. After the ruling, incumbent firms increased their net innovation activities in response to competitive entry. These effects center on firms with products that are more directly affected by competition. However, at the product therapeutic area level, we find a reduction in innovation by new entrants after the ruling in response to increased competition. Overall, these results are consistent with firms having reduced incentives to innovate when they are able to maintain their market power, highlighting a specific channel through which this occurs.

Legal Obstacles to Biosimilar Market Entry

Improving the market availability and penetration of biosimilars, “follow-on” versions of biologic products, will require attention to key legal obstacles. Because biosimilars offer the potential for sizeable cost savings to payors and improved access to biologic drugs for patients, obstacles to the timely licensure and market availability of biosimilars are of major public health significance. Issues around intellectual property, potentially anticompetitive contractual arrangements with purchasers and insurers, and laws governing automatic substitution of biosimilars for biologics merit particular attention. This Article examines several key legal obstacles to biosimilar market entry in the United States, including (1) the complexity and imprecise boundaries of the exchange of patent information codified in the BPCIA; (2) patent thickets that protect biologic reference products; (3) unsettled antitrust law surrounding reverse payment patent settlements (i.e., “pay-for-delay” agreements); (4) contractual arrangements such as bundled purchase agreements and formulary exclusivity provisions; and (5) state laws that regulate substitution of biosimilars for biologics at the pharmacy level. Strategies to address these obstacles include reforms to the patent system to curb issuance of ancillary secondary patents intended to delay competition, greater transparency around biologic patents, reconsideration of the need for a regulatory designation of interchangeability, and better detection and enforcement of deliberately anticompetitive practices.

By Object or Effect Restrictions—Reverse Payment Settlement Agreements in light of Lundbeck, Servier, and Generics

By Object or Effect Restrictions—Reverse Payment Settlement Agreements in light of Lundbeck, Servier, and Generics Bernadette Zelger Bernadette Zelger Search for other works by this author on: Oxford Academic Google Scholar Journal of European Competition Law & Practice, Volume 12, Issue 4, April 2021, Pages 273–283, https://doi.org/10.1093/jeclap/lpaa089 Published: 15 December 2020 Article history Received: 16 September 2020 Revision received: 01 October 2020 Accepted: 30 October 2020 Published: 15 December 2020

Reverse payments, patent strength, and asymmetric information.

Reverse payments (pay-for-delay) are payments from an originator to a generic pharmaceutical producer to settle a potential litigation. In many jurisdictions, these payments are banned. This study shows that when the parties' investments are considered and the information about the patent strength is asymmetric, reverse payments increase both the possibility of generic entry and the litigation rate-both of which increase consumer surplus and do not necessarily delay generic entry. Reverse payments typically increase consumer surplus when the asymmetry between the parties is low, the competitiveness in the market is soft, and their size is small. Results suggest that a ban per se may be suboptimal.

Pay-for-Delay Agreements Likely Violate Competition Law Where Reverse Payments Occur without Justifiable Explanation

Pay-for-Delay Agreements Likely Violate Competition Law Where Reverse Payments Occur without Justifiable Explanation

On the Application of Nash Bargaining in Reverse Payment Cases in the Pharmaceutical Industry

Some applications of Nash bargaining in the antitrust analysis of reverse payment settlements estimate the bargaining power parameter as the split of the surplus in the actual settlement with alleged reverse payments. This estimated parameter is then used as the bargaining power parameter in the but-for world where reverse payments are prohibited. We demonstrate that this approach is incorrect. Indeed, in the but-for world there could theoretically be an alternative “no payment” settlement where reverse payments are prohibited. However, the prohibition on reverse payments disproportionately affects the shape of the bargaining set in favor of the patent holder. With this asymmetry in the bargaining set, the estimated “bargaining power” in the actual world (with a settlement) no longer accurately reflects the split of the surplus that would have been agreed during the but-for negotiation with no payments. Moreover, we find that keeping the split of the surplus constant between the actual and but-for worlds is not innocuous because it overestimates the extent of alleged generic delay.

Pay-for-Delay with Follow-On Products

We study pay-for-delay settlements between a patent-holder and a challenger when the patent-holder can introduce follow-on products. We show that ignoring follow-on products biases the inferred competitive harm of pay-for-delay settlements (the “Actavis inference”). The reason is that patent invalidation triggers an earlier introduction of follow-on products, which changes pay-for-delay negotiation payoffs. When follow-on products are ignored, we show that an inference based on a reverse payment over-estimates patent strength. If parties cannot use payments (as in pure-delay settlements), follow-on products may push the parties to settle on an earlier entry date, and litigation may arise in equilibrium.

The anti-monopoly regulation of reverse payment patent settlement agreements in the pharmaceutical industry in China*

ABSTRACT In recent years, the legality of reverse payment patent settlement agreements (RPPSAs) in the pharmaceutical industry has become a contentious issue and attracted the attention of antitrust authorities in many countries. It is a sophisticated intersection of patent protection — encouraging research and development in the pharmaceutical industry — and competition enforcement — maintaining fair and effective competition in the relevant market. Given the complexities, there is no unanimous approach adopted to deal with the compatibility of such RPPSAs with antitrust law. As China’s legal and economic context has changed considerably, there will be great possibility that such RPPSAs will also appear in China. However, there has not been an effective anti-monopoly analysis framework established that focuses on regulating such RPPSAs in China. Therefore, this article proposes that China should prepare itself in advance from two perspectives. On the one hand, a competition inquiry should be conducted in China’s pharmaceutical industry to evaluate the development of RPPSAs; on the other hand, a basic analysis approach should be confirmed in the forthcoming anti-monopoly guidelines for intellectual property rights (IPRs). This article proposes that the anti-monopoly scrutiny should mainly focus on the patent settlement agreements with value transfer from a brand-name drug company to a generic one in exchange for the latter’s commitment to delay market entry. Then, China’s Anti-monopoly Law should be applied differently on the basis of the timing at which the generic drugs are permitted to enter the market. Finally, this article provides some important and typical factors of RPPSAs that should be examined carefully.

THE VALUE ADDED TAX TRANSFORMATION AND MODERN PRACTICES OF IMPROVING ITS COLLECTION

This article deals with the history and current practice of handling the value added tax (VAT). The authors have analyzed the main advantages and disadvantages of VAT: the prevailing negative impact on the cash flows of VAT payers; the complexity of the tax, which increases the costs of its collection from the state and from taxpayers; the low ratio of actual VAT income to potential; the inability to prevent certain types of tax fraud. The authors explain their thesis that the prospects for the VAT development are connected, firstly, with overcoming the inherent tax deficiencies, and secondly, with the transformation of tax under the influence of the external environment. This article studies the directions of tax transformation and the objective prerequisites for applying a single standard tax rate to a wide tax base. The data on the structural transformation of the economy in developed countries and Russia and its impact on VAT are analyzed. Particular attention is paid to the alternative tax collection practices: reverse payment mechanism, split-payment mechanisms, and single window method. The experience of using tax lotteries as a method of increa­sing the collection of value added tax is analyzed in detail. The considered mechanisms for collecting VAT effectively reduce tax evasion arising from the overestimation of VAT deductions, but can not deal with the concealment of income. All the new methods are associated with an increase in the costs of tax administration and approval, require an increase in reporting for taxpayers, introduce new responsibilities for the exchange of data with tax authorities, including the transfer of accounting data and invoice information (including in real time). The reverse payment mechanism and the split payment method, change the nature of VAT collection, canceling fractional payments, which are usually considered as the main advantage of VAT.

Brief Amici Curiae of 82 Law, Economics, Business, and Medical Professors in Support of Respondent

In FTC v. Actavis, the Supreme Court issued one of the most important antitrust rulings in the past generation, finding that settlements by which brand firms pay generics to delay entering the market could violate antitrust law. In March, the FTC applied Actavis for the first time, issuing a comprehensive ruling that offered a ringing bipartisan (5-0) condemnation of this behavior. Impax has appealed to the Fifth Circuit, seeking to overturn this ruling. This brief, filed on behalf of 82 professors of law, economics, business, and medicine, highlights Impax's four erroneous foundations, which seek to (1) overturn Actavis; (2) downplay Impax’s concession that Endo made a reverse payment to delay entry; (3) ignore its role in delayed competition; and (4) remake antitrust law to immunize blatantly anticompetitive behavior. The brief requests that the Fifth Circuit affirm the FTC’s opinion, which is supported by Actavis, real-world evidence, and longstanding antitrust principles.