Headwinds for the US biopharmaceutical industry

Headwinds for the US biopharmaceutical industry

A series of major developments in US foreign trade policies and US FTC (over)zealous actions may shake up the operational environment for life sciences patent owners

It has been a rough few years on a number of fronts for the biopharmaceutical industry in the United States. The heightened patentable subject-matter threshold under 35 USC §101 instituted by the Supreme Court in cases such as Mayo Collaborative Servs v Prometheus Labs, Inc (132 S Ct 1289 (US 2012)) and Association for Molecular Pathology v Myriad Genetics, Inc (133 S Ct 2107 (US 2013)), followed by implementing guidelines issued by the US Patent and Trademark Office, has engendered intense debate and injected uncertainty into certain patent rights protecting present and future biopharmaceutical assets. Added to this are an ever-challenging and increasingly expensive Federal Drug Administration (FDA) regulatory regime and innovation challenges that have seen new drug application approvals stagnate, with new chemical entities in the United States dropping from 39 in 2012 to 27 in 2013. Moreover, the industry is becoming increasingly global and facing controversy in a number of countries about the structure of international legal protection for pharmaceutical innovation. We can see some of these issues playing out in the negotiation of US free trade agreements (FTAs); while at home, the industry faces challenges from recent actions by the Federal Trade Commission (FTC) to regulate pharmaceutical settlements and licences.

Background on US FTAs

The United States advances trade with other countries through FTAs. Under the Constitution, the authority to contract with other countries is held by Congress. However, the executive branch – through the Office of the US Trade Representative (USTR) – carries out the negotiations. Herein lies a fundamental political complexity: the US negotiating party does not have signatory authority. Anyone who has negotiated a licence agreement knows that you always want to negotiate with the party who can approve the contract. This has been addressed in the United States with ‘trade promotion authority’, whereby Congress provides the guiding terms and conditions and then has the opportunity only to approve or veto the entire consensus agreement at the end. This fast-track negotiating authority is not without controversy. It was given by Congress to the president between 1975 and 1994, and again between 2002 and 2007, and continued to apply to agreements finally passed in 2011. The Obama administration has sought renewal of trade promotion authority since 2012, but has not received it.

A renewal bill (the Bipartisan Congressional Trade Priorities Act of 2014) was introduced in January 2014, but has not yet been approved. This bill – introduced in the Senate by Senators Baucus (Montana, now ambassador to China) and Hatch (Utah), with an identical bill introduced in the House of Representatives by Congressman Camp (Michigan) – provides that any FTA under this authority must reflect a standard of protection similar to that found in US law, prevent or eliminate discrimination on the availability of IP rights and enforcement, secure non-discriminatory market access, provide strong enforcement of IP rights and respect the terms of the Doha Declaration on the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) and Public Health.

Some critics of US FTAs assert that the United States is requiring TRIPs-plus provisions as a quid pro quo for entering into the trade agreement

What does this have to do with biopharmaceutical intellectual property? Plenty! The United States is now negotiating two important FTAs, discussed further below, which have significant IP components affecting biopharmaceuticals. Congress’s mandate to the USTR that any FTA require IP protection in the contracting country which is at least as strong as that existing in the United States can be interpreted as meaning that parties to US FTAs must provide at least five years’ protection for test data and trade secrets (regulatory data protection) for new pharmaceutical drugs, patent term extensions for delays caused by regulatory review, patent term adjustments for patent office delay in granting patents, limitations on grounds for revoking patents and provisions for post-grant oppositions or revocation actions, but not pre-grant oppositions. International patent exhaustion is also a big issue, with proponents holding that a first sale of patented goods in one country precludes patent enforcement against the sale of those goods into a second patented country. Some critics of US FTAs assert that the United States is requiring TRIPs-plus provisions as a quid pro quo for entering into the trade agreement. However, this is exactly what contracts allow parties to do: individually negotiate terms in exchange for appropriate consideration – here, the removal of trade barriers and facilitated entry into the largest market in the world.

Trans-Pacific Partnership Agreement Negotiations

The Trans-Pacific Partnership Agreement (TPP) is a proposed multilateral trade agreement which began in 2005 when Chile, Singapore, New Zealand and Brunei joined the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP). The United States agreed to enter into trade talks with this group in 2008, with Australia, Vietnam and Peru subsequently joining. In 2010 Malaysia joined the discussions. Canada and Mexico were added in 2012 and Japan in 2013. Taiwan and South Korea announced their interest in the discussions in 2013, but have not yet officially joined. The United States already has bilateral FTAs with Chile, Singapore, Australia and Peru, and a multilateral FTA with Canada and Mexico through the North American FTA (NAFTA).

On the surface, one could not imagine a more diverse group of countries, cultures and economies than the 12 countries involved in the TPP negotiations. This was confirmed when, contrary to standard FTA confidential negotiation practices, the TPP debate hit the popular press in November 2013 with a Wikileaks posting of the “Secret TPP treaty: Advanced Intellectual Property Chapter for All Twelve Nations with Negotiating Positions”. This 90-plus page document was the confidential working document of August 30 2013, which set out the positions of the various countries on a range of issues.

On November 27 2013, a week after a TPP meeting and just after the release of the Wikileaks TPP negotiating document, the USTR released a statement that the United States would now advocate for a “differential” approach to the policies for patenting drugs in this FTA, indicating that:

  • the TPP was working to do something new and important with regard to medicines in the TPP region – trying to strike the right balance between making life-saving medicines more widely available while creating incentives for the development of new treatments and cures;
  • the United States had begun to tailor potential flexibilities based on other countries’ existing laws and international obligations; and
  • the US approach was previously to base FTA discussions on existing US law, which currently provides for a 12-year biologics exclusivity period, but implied that this would be hard to obtain in some TPP countries.

The most alarming aspect of the USTR November 2013 press release was the following: “[T]he U.S. now supports a more flexible approach under which partners could retain reasonable patent pre-grant opposition procedures. These procedures, available in some countries, allow third parties to formally object to a patent at the initial application phase.” (Emphasis added.)

It is almost unfathomable that the United States would support pre-grant oppositions, which in India have become a key weapon for preventing the patenting of pharmaceuticals

It is almost unfathomable that the United States would support pre-grant oppositions, which in India have become a key weapon for preventing the patenting of pharmaceuticals. Further, one could take the position that no process for pre-grant opposition is reasonable because it can indefinitely hold up the grant of a patent that other jurisdictions – including the United States and Europe – have deemed patentable after a thorough review. Pre-grant opposition is a tool capable of mooting any achieved protection or extension of pharmaceutical patents, because the pharmaceutical patents simply would not exist. The USTR suggested that this dangerous tool could be used in 11 Pacific countries with purported US approval.

In December 2013 a group of largely academic and government representatives, without representation from companies that take the significant risk of investing in or actually creating pharmaceuticals, met in Cape Town, South Africa and issued the Declaration on Fundamental Public Interest Principles for Intellectual Property Negotiations, calling on the negotiators of the TPP to support fully each state’s right to protect public health and promote access to medicines. The declaration demanded that all countries be allowed to avail themselves fully of all TRIPs provisions which provide flexibility to define the scope of and limitations to intellectual property and data protection; defended the freedom of countries to implement international or regional exhaustion of IP rights to facilitate parallel importation; advocated for assurance that IP enforcement measures will be reasonable and proportional to the infringement that they target, including the avoidance of deterrent level civil damages; proposed that countries retain the rights to make independent decisions about the prioritisation of law enforcement resources to promote public interests; and proffered that all IP agreements be consistent with international human rights law and the Convention on Biological Diversity (to which, incidentally, the United States is not a party).

Just to add to this drama, in May 2014 Brunei, one of the four original countries of the TPSEP, became the first East Asian country to adopt Sharia law, despite widespread international condemnation. In June 2014 119 members of Congress wrote a letter to US Secretary of State John Kerry and US Trade Representative Michael Froman urging them to insist that Brunei address human rights violations as a condition of the United States participating in any further TPP negotiations.

Recently, on October 16 2014 Wikileaks released a second secret updated consolidated negotiating document, which was the result of the July 2014 sessions. There were several noteworthy updates concerning contentious biopharmaceutical issues. A comparison of selected IP provisions in the August 30, 2013 and May 16 2014 drafts is provided in Table 1.

Table 1. Comparison of selected IP provisions from the Trans-Pacific Partnership (TPP) Trade Agreement negotiations

IP provision

IP provision from August 30 2013 TPP WikiLeaks draft

Proposing/opposing party August 30 2013 draft

IP provision from May 16 2014 TPP WikiLeaks draft

Proposing/opposing party May 16 2014 draft

Patentable subject matter

Patents shall be available for inventions including: plants and animals; diagnostic, therapeutic, and surgical methods for the treatment of humans or animals; and biological processes for the production of plants or animals.

Proposed: US

Opposed: NZ/CL/PE/MY/AU/VN

Patents may exclude from patentability diagnostic, therapeutic, and surgical methods for the treatment of humans or animals.




Not identified

Opposition by third parties

Third parties may oppose the grant of a patent, either before or after the grant of a patent, or both.

Proposed: NZ/CA/SG/CL/MY

Opposed: Not identified



Regulatory review exception

Acts are permissible that would otherwise infringe a patent if the act is done for purposes of collection and submission of data for the regulatory requirements of that Party or another country.

Proposed: NZ/CA/SG/CL/MY

Opposed: Not identified

Option 1: Consistent with Article QQ.E.4 (Exceptions), if a Party permits a third person to use the subject matter of a subsisting patent to generate information necessary to support an application for marketing approval of a pharmaceutical product, that Party shall provide that any product produced under such authority shall not be made, used, sold in, or imported into, the territory of that Party other than for purposes related to generating information to meet requirements for marketing approval of that Party for the product, and each Party may also permit such a product to be exported outside its territory for purposes related to generating information to support an application for marketing approval in the Party or another country.

Option 2: No change from August 30 2013.

Option 1

Proposed: Not idenitifed.

Opposed: CL

Option 2

Proposed: NZ/CA/SG/CL/MY

Opposed: Not identified

Experimental use of a patent

Acts are permissible that would otherwise infringe a patent if the act is done for experimental purposes relating to the subject matter of a patented invention.

Proposed: NZ/CA/SG/CL/MY

Opposed: Not identified



International Exhaustion of Rights

A patent shall not prevent third parties from making, using, offering for sale, selling or importing a product protected by that patent, which has been put in the market in any country by the patent holder or with his consent.

Proposed: CL/MY/NZ/VN/SG/BN/PE

Opposed: US/AU/JP/MX

Nothing in this Chapter shall be construed to address the issue of exhaustion of intellectual property rights.

Proposed: Not identified

Opposed: Not identified

Patent term extension

Patent term extension available for a patent which covers a new pharmaceutical product or a patent that covers a method of making or using a pharmaceutical product, to compensate for delays from the marketing approval process (up to a five year extension).

Proposed: US

Opposed: CL/SG/MY/AU/VN/BN

With respect to a pharmaceutical product that is subject to a patent, each Party shall make available an adjustment of the patent term to compensate the patent owner for unreasonable curtailment of the effective patent term as a result of the marketing approval process.

Final provision

Data exclusivity – new pharmaceutical products

Five years of regulatory data exclusivity from the date of marketing approval of the new pharmaceutical product in the territory of the Party.

Proposed: US

Opposed: AU/PE/VN/NZ/CL/MY

Five years of regulatory data exclusivity from the date of marketing approval of the new pharmaceutical product in the territory of the Party. [MY propose:, or any other country where marketing approval is first granted].

Final provision

Data exclusivity – previously approved pharmaceutical products

Three years of regulatory data exclusivity from the date of marketing approval based on new clinical information relating to a pharmaceutical product that includes a chemical entity that has been previously approved for marketing in another pharmaceutical product.

Proposed: US

Opposed: AU/PE/VN/NZ/CL/MY

Three years of regulatory data exclusivity for previously approved pharmaceutical products from the date of marketing approval, when a Party requires new clinical information or evidence of prior approval of the product in another territory that requires such new information. [MY propose:, or any other country where marketing approval is first granted].

Final provision

Data exclusivity:


No proposal.

No proposal.

With respect to the first marketing approval of a pharmaceutical product that is biologic, each Party shall provide protection for a period of [0]/[5]/[8]/[12] years from the date of marketing approval.

Proposed: Not identified

Opposed: Not identified

Pharmaceutical patent transition periods: patent term adjustment/ marketing approval

No proposal.

No proposal.

The Parties shall comply with the following time periods for implementation of patent term adjustment/marketing approval and patent linkage: Category A must comply within 2 years, Category B by 2 years plus an unspecified X1 years period and Category C must comply within 2 years plus the unspecified X1 years plus an unspecified X2 years. Current country allocations are the U.S., Japan and Singapore in Category A; Mexico and Brunei in Category B; and Peru and Vietnam in Category C.

Proposed: US

Opposed: Not identified

Pharmaceutical patent transition periods: pharmaceutical data exclusivity

No proposal.

No proposal.

The Parties shall comply with the following time periods for implementation of pharmaceutical data protection: Category A must implement a 5 year period for new drugs within 2 years; Category B must implement a 3 year period for new drugs after 2 years and a 5 year period after the unspecified X1 years; Category C countries are relieved of any data exclusivity requirement for new drugs for 2 years, and then must implement a 3 year period for new drugs after 2 years plus the unspecified X1 years, and a 5 year period after the 2 years plus an unspecified X1 years plus an unspecified X2 years.

Proposed: US

Opposed: Not identified

This table compares the selected IP provisions from the August 30 2013 TPP Trade Agreement Negotiations Document (released by WikiLeaks on November 13 2013) with the IP provisions from the May 16 2014 TPP Trade Agreement Negotiations Document (released by WikiLeaks on October 16 2014).

Country abbreviations: AU=Australia; BN=Brunei Darussalam; CA=Canada: CL=Chile; JP=Japan; MX=Mexico; MY=Malaysia, NZ=New Zealand; PE=Peru; SG=Singapore; US=United States; and VN=Vietnam.


First, apparently as a means of making progress, the section addressing pre and post-grant oppositions was simply removed, suggesting that any treaty document would not address this point. While this is an improvement over the potential US position condoning pre-grant oppositions of November 2013, it could be read as a tacit approval, as the United States was not demanding the elimination of pre-grant opposition procedures, which could effectively eliminate pharmaceutical protection. Where the USTR is charged with ensuring that patent law on pharmaceuticals with trade partners is consistent with US law, simply removing such an important issue does not achieve this.

Another important provision which was removed in the May 2014 consolidated negotiating document was that addressing international patent exhaustion. In the 2013 negotiating document a number of the developing countries proposed that “The Parties are encouraged to establish international exhaustion of rights”, which the United States opposed. In the 2014 document, the language was revised to: “Nothing in this Chapter shall be construed to address the issue of exhaustion of rights.” Therefore, at the time of writing, there is no provision rejecting international patent exhaustion in the TPP.

Both the August 2013 and May 2014 drafts provide non-final language proposed by the United States that a patent may be cancelled, revoked or nullified only on grounds that would have justified a refusal to grant the patent or inequitable conduct. Ten countries currently propose an additional ground that a patent can be cancelled, revoked or nullified if a judicial or administrative proceeding determines it has been used in an anti-competitive manner.

In addition, for the first time, there is a proposal on a patent pharmaceuticals transition period, reminiscent of the TRIPs phase-ins. Current allocations are the United States, Japan and Singapore in Category A; Mexico and Brunei in Category B; and Peru and Vietnam in Category C. These draft transition periods apply to three important issues. For patent term adjustment after marketing approval and patent linkage, Category A must comply within two years; Category B must comply by two years and unspecified X1 years period; while Category C must comply within two years plus the unspecified X1 years, plus an unspecified X2 years. For patent term adjustments, the apparently finalised language is that each party shall make available an adjustment of the patent term to compensate the patent owner for “unreasonable curtailment of the effective patent term” as a result of the marketing approval process. The key question is: what does ‘unreasonable curtailment’ mean? It might be interpreted as the amount of time on top of the normal marketing approval timeframe, as opposed to the timeframe itself, which would substantially undermine the provision’s value.

With regard to pharmaceutical data protection (ie, data exclusivity), the operative language is: “If a country requires, as a condition for granting marketing approval for a new pharmaceutical product, the submission of undisclosed test or other data concerning the safety or efficacy of the product, the Party shall not permit third persons, without the consent of the person who previously submitted such information, to market the product [for a defined time period].” Category A must implement a five-year period for new drugs within two years; Category B must implement a three-year period for new drugs after two years and a five-year period after the unspecified X1 years; while Category C countries are relieved of any data exclusivity requirement for new drugs for two years, and then must implement a three-year period for new drugs after two years plus the unspecified X1 years, and a five-year period after the two years, plus an unspecified X1 years plus an unspecified X2 years.

The framework raises several issues. First, the term ‘undisclosed test or other data’ is a TRIPs term that has been used in a number of developing countries to avoid strong data protection by allowing the generic submitter to rely on publicly available data, such as scientific articles or third-party government clinical trial web portals. This contrasts with a TRIPs-plus regime that prevents the approval of a generic drug within the stated timeframes regardless of scientific publications or government-required disclosure of clinical trial data (eg, as is being discussed in Europe, described in more detail below). Second, a five-year data exclusivity period required after two years, plus an unspecified X1 years plus an unspecified X2 years is not very meaningful. It raises the question of whether this is in fact TRIPs-minus instead of TRIPs or TRIPs-plus.

Abbreviated new drug applications under the Hatch-Waxman Act

The Hatch-Waxman Act allows generic companies to file abbreviated new drug applications (ANDAs) for innovator pharmaceutical drugs in order to get early access into the market by certifying that the innovator’s patent is either invalid or not infringed (a Paragraph IV Certification). This starts a 45-day clock for the innovator to sue the generic company to litigate the issues. The first generic filer of an ANDA with a Paragraph IV Certification is entitled to a 180-day exclusivity after final approval, during which the FDA will not grant final approval to a second generic company to enter the market. The 180-day exclusivity period is important to generic companies because it is during this time that the generic makes the lion’s share of the profit received. There are only two market participants – the innovator and one generic – which means that the generic can charge more for the drug because it does not have to compete with a second generic. When the first generic enters the market, the drug price might drop by as much as 20%. When the 180-day exclusivity ends and multiple generics enter, the drug price can drop by as much as 80% and 90%, or more, which provides a razor-thin profit for the generic. During the 180-day exclusivity, the innovator is itself allowed to sell or can license a second generic to sell a non-branded product at a lower price than the innovator product (referred to as an authorised generic), sometimes with a lower cost formulation. If a pharmaceutical company decides to market an authorised generic, it takes a piece of the generic market from the first generic filer, even in the 180-day period. As with a number of aspects of Hatch-Waxman litigation, one can view an authorised generic in two ways: it increases overall market competition, reduces prices and is a good thing for patient; or it reduces the incentive provided to the generic to file an ANDA and is thus damaging to competition.

Settlement of Hatch-Waxman litigation can be particularly complicated because of the complexity of drug manufacture and sale. Examples of settlement methods include:

  • granting the generic the right to manufacture for the innovator;
  • granting the innovator the right to manufacture for the generic;
  • having the innovator agree not to launch or license an authorised generic product;
  • doing a multi-product deal with various swaps; and
  • having the innovator grant an early-entry licence to the generic so that it enters the market before the patent expires.

In certain isolated reported cases an innovator has paid cash to the generic as part of an overall settlement structure.

Transatlantic Trade and Investment Partnership

What do parmesan cheese, feta cheese, bologna, gruyere cheese, bratwurst and Oktoberfest beer have in common with pharmaceutical clinical trial data – other than the obvious answer that too much of the first group can create a need for new drugs? The first group is important to Europe, while the second is important to the United States, and they have both been caught up in the Transatlantic Trade and Investment Partnership (TTIP) debate.

In July 2014 Obama and both the president of the European Commission and the president of the European Council announced that the United States and the European Union would begin negotiations on a TTIP agreement. Currently, there is no FTA between the United States and Europe. One might imagine there are more similarities than differences between the IP regimes of the two – certainly this is true in comparison to the TPP negotiations. However, two hot issues hindering progress have been geographical indications for the European Union and disclosure of clinical trial data for the United States.

Not to be outdone by TPP, the TTIP has its own set of leaked document from Wikileaks – a two-page excerpt from a March 2014 EU analysis of the TTIP negotiations. This confirms that the parties are in basic agreement that there should be an IP rights chapter to the agreement that addresses a limited number of issues of interest to both parties. The memo states that:

The U.S. continues to convey the concerns of some stakeholders regarding the treatment of undisclosed (pharmaceutical) test data; [the] U.S. insists on clarifying safeguards regarding TRIPS compliance issues and potential negative consequences in the 3rd countries; …

The EU presented the economic rationale behind the GIs [Geographical Indications] show lists, and addresses U.S. questions on a number of key provisions of the EU regulations 11-5/2012 on GIs, notably on the following areas: relation between GIs and TMs, evocation and genericness, homonymous names and genericness, as well as the GI compound names the genericness of part of the compound name.

The European Union has relied on a sui generis system on unitary geographical indications – a scheme for protecting designations of origin – since 1992. It also creates a requirement to insert third-country geographical indications that are protected through bilateral agreements into the EU register. In the European Union, geographical indications are deemed absolute. The EU system is contested by some other countries – including the United States – which use different systems of protection (trademarks) and accuse the European Union of impeding market access for their products. If the United States agrees to this system, some have said that US food names would have to be changed to, for example, Oktoberfest-like beer, parmesan-styled cheese and lunch-meat-that-tastes-like-bologna.

On the other hand, while creating a strong incentive to protect the names of foods, from 2012 to 2014 the European Union has been working on legislation that requires transparency in the conduct and results of clinical trials, with the asserted goal of reducing redundancy and duplication of data, as well as affording health providers and academics the ability to independently analyse data. The legal sinkhole for pharmaceutical companies of a requirement on clinical trial transparency is appreciated when laid on top of the terms of Section 7, Article 39(3) of TRIPs, which provides that: “Members, when requiring, as a condition of approving the marketing of pharmaceutical or agricultural chemical products which utilize new chemical entities, the submission of undisclosed test data or other data, the origination of which involves a considerable effort, shall protect such data against unfair commercial use. In addition, Members shall protect such data against disclosure, except where necessary to protect the public, or unless steps are taken to ensure that the data are protected against unfair commercial use.”

It appeared that at least the early drafts of the EU transparency regulation violated TRIPs because, by requiring disclosure, the European Union would not be protecting such data against unfair commercial use or against disclosure. A number of countries – including India, China and other developing countries – may allow generic companies to refer to detailed publicly available data on innovator drugs to approve the corresponding generic drugs in their countries, even when not given permission to do so by the innovator company; as noted earlier, this is also an issue in the TPP negotiations. Generic companies might have been able to use the information at the EU portal in their drug submissions, which would seem to be unfair commercial use and a violation of the international treaty. Just one historic example of how such a scenario can occur is the Chinese approval of Viread, which was based on a generic application before GSK’s innovator application (under licence from Gilead) was approved where the generic company referred to publicly available innovator data.

On October 2 2014 the European Medicines Agency (EMA) issued the final draft of its clinical trial transparency policy, which attempts to balance the rights of the innovator in its proprietary information with public access. The policy does not apply to drug approvals prior to January 1 2015, so is not retroactive. There are two “Terms of Use” (TOUs) depending on whether an individual wants general information or the right to download for academic or other non-commercial use. The TOUs specify that there is no grant of IP rights and the user cannot make any unfair commercial use of the data. Importantly, the TOUs prohibit the user from using the clinical data to support an application for marketing authorisation or an extension thereof anywhere in the world. The innovator is also permitted to redact commercially confidential information. The TOUs will be governed by UK law with non-exclusive jurisdiction; therefore, courts in other countries can hear disputes while applying UK law. A key provision is that innovators can directly sue users who misuse information, even if the EMA chooses not to. Individual patient data will not be available until the EMA determines a proper format.

It will be interesting to see whether the new EMA October 2014 clinical data transparency policy, effective January 1 2015, will be sufficient to remove it as an issue during TTIP negotiations.

Finally, the authors believe that an additional topic should be added to the TTIP negotiations. The US Congress has made clear that in negotiating FTAs, it will require that its partner provide IP protection that is at least as strong as that available in the United States. We suggest that Europe follow this lead and require that the United States amend the Hatch-Waxman Act to provide at least as much regulatory data exclusivity as is currently provided in Europe (ie, eight years of data exclusivity, two years of market exclusivity and one year of exclusivity for new uses). This would greatly serve European pharmaceutical companies doing business in the United States, would be consistent with US trade negotiating policy and would encourage more new drug development.

As a postscript, in the US election on November 4 2014, the US Senate became Republican-controlled and the Republican majority in the House of Representatives was expanded. One of the only bright lights for President Obama in this result is that Republicans are generally more in favour of FTAs and trade promotion authority, which could result in faster action on the TTP and TTIP agreements.

Adding to the myriad of challenges facing biopharmaceutical companies is the continued aggressive and potentially discriminatory nature of the US FTC actions

FTC and biopharmaceuticals

Adding to the myriad of challenges facing biopharmaceutical companies is the continued aggressive and potentially discriminatory nature of the US FTC actions. The FTC has used its authority to bring suit in federal court to challenge Paragraph IV ANDA litigation settlements as anti-competitive, as well as to require divestiture of drug assets before approving a merger or acquisition, subject to the Hart-Scott-Rodino Act.

In December 2013, for the first time in 37 years, the FTC singled out a specific industry for differential treatment by increasing the reporting requirements only for North American Industry Classification System (NAICS) Code 3254 industries (ie, biotech and pharma) under the Hart-Scott-Rodino Act pre-merger notification rules. The FTC interprets the term ‘acquisition’ in the act to include patent licences. Before the implementation of the new reporting requirements, licensors and licensees were required to report only transactions that involved the transfer of the full panoply of rights recognised under patent law – that is, the right to “make, use, and sell” without restriction. If the patent holder retained any of these rights, the FTC viewed the transaction as not constituting a reportable acquisition of an asset. The new reporting requirement for NAICS 3254 covers any licence that pertains to “all commercially significant rights”, which would include co-exclusive licences where the licensor retains full rights to practice its own patent or where it keeps manufacturing rights.

In December 2013 PhRMA challenged the industry-specific application of the new rules, but did not challenge whether the FTC had exceeded its authority by improperly classifying patent licences of such partial rights as asset acquisitions to begin with – potentially a better argument. The FTC argued that such transfers of patent licences occur almost exclusively in the pharmaceutical industry (in the course of ANDA settlements), and thus the special treatment was reasonable. In June 2014 the US District Court for the District of Columbia held that the FTC has the authority to issue industry-specific rules as long as there is a rational basis for the rule. PhRMA has appealed the decision. Interestingly, the NAICS Code 3254 covers more than industries subject to the Hatch-Waxman Act and thus the scope could be considered overbroad even under the court’s reasoning.

Further, if the purpose of FTC scrutiny is to ensure that companies do not settle patent litigation on patents that would not withstand attack, its actions do seem contradictory and discriminatory. Every year, PricewaterhouseCoopers issues a Patent Litigation Study, which reports success rates of patentees in asserting patents through litigation. The 2013 study covered the period between 1995 and 2012, while the 2014 study covered the period between 1995 and 2013. Chart 6f of the 2013 study and Chart 7c of the 2014 study report “Patent holder success rates: top ten industries”. Biotechnology and pharma had the second highest success rate (ie, upheld patents) (approximately 37%), after only medical devices. In the 2013 study the lowest success rates were found in business/consumer services, chemicals/synthetic materials and industrial/construction. In the 2014 study the lowest success rates were found in software, business services and telecommunication (less than 30%). Interestingly, when ANDA litigation was viewed separately, Chart 21b of the 2014 study indicates a success rate (i.e., patentee win) of 50% in 2013 and 67% in 2012. Therefore, if the FTC is looking for industries that might prop up weak patents through settlements, it should be looking at industries other than the pharmaceutical industry.

Figure 1. Increasing number of patent litigation/ANDA cases in the biotech/pharma industry

Continued aggressive challenges of ANDA settlements

A major goal of any business is to dismiss risk. Patent litigation can be inherently risky in today’s unsettled legal landscape – especially when it comes to complex technologies. Instead of risking the loss of important assets or incurring the expense of a protracted and expensive litigation, many patentees often opt to settle patent litigation. These decisions are the result of economically rational business behaviour. It is not true that settling patent litigation implies that the company believes that its patent is invalid or not infringed. It may simply not trust the court system to be consistent or correct when it comes to important business assets.

For years, the FTC and biopharmaceutical industry have battled over the legality of certain aspects of ANDA litigation settlements, which the FTC has condescendingly labelled ‘reverse payments’ or ‘pay-for-delay’ agreements. These labels are extremely powerful, as readers assume that they are an accurate representation. The FTC has historically taken the position that anything of value is a payment, regardless of whether money is paid. Therefore, if an innovator agrees not to launch or to delay launch of an authorised generic during the 180-day period as part of a patent settlement, the FTC considers this a reverse payment. If any aspect of consideration from the innovator to the generic is labelled a reverse payment – as opposed to a settlement for risk dismissal – it may become the subject of challenges by the FTC, which historically took the position that such agreements are presumptively unlawful under the Sherman Act. Conversely, in defence of such agreements, the biopharmaceutical industry has historically argued that such agreements are rational business decisions to dismiss risk and are immune from antitrust attack if the terms of the settlement are within the scope of the patent’s exclusionary potential.

In 2013 the US Supreme Court rejected both the biopharmaceutical industry’s and the FTC’s arguments with regard to ‘reverse payments’ in a five-to-three decision (FTC v Actavis, Inc), holding that whether a reverse payment settlement involving the exchange of consideration for a delay in entry is subject to an anti-competitive analysis depends on five considerations:

  • the potential for genuine adverse effects on competition;
  • the justification of payment;
  • the patentee’s ability to bring about anti-competitive harm;
  • whether the size of the payment is a workable surrogate for the patent’s weakness; and
  • that antitrust liability for large unjustified payments does not prevent litigating parties from settling their lawsuits (eg, by allowing a generic to enter the market before the patent expires without the patentee paying the generic).

Figure 2. Branded success rate in ANDA proceedings to disposition


Further, the court said whether a reverse payment is justified depends on its size, its scale in relation to the patentee’s anticipated future litigation costs, its independence from other services for which it might represent payment (as was the case in Actavis) and the lack of any other convincing justification. The court held that reverse payment settlements can potentially violate antitrust laws and are subject to the standard antitrust rule-of-reason analysis, with the burden of proving that an agreement is unlawful resting with the FTC. The Supreme Court left the structure of such an analysis to the lower courts.

The Actavis opinion did not directly answer the question of whether settlements that do not include cash payments for targeted market entry are subject to antitrust scrutiny under the rule of reason. It can be argued that the reverse payments targeted in Actavis are those involving actual cash payments. Unsurprisingly, the FTC appears to have attempted to extend Actavis to cover any consideration that can be viewed as enticing the delay of entry by a generic. However, in dicta the Supreme Court appears to have blessed some non-monetary structured settlements, at least implicitly, as evidenced by its discussion of the fifth consideration relating to settlements structured without cash exchanging hands (eg, early but delayed entry by the generic without a patentee-cash payment – a settlement structure used routinely in other industries without antitrust scrutiny).

Unsurprisingly, district courts post-Actavis are still split on what settlement terms are permissible. For example, in In re Nexium Antitrust Litigation the District Court of Massachusetts denied a motion to dismiss on the grounds that the reverse payment settlement provisions at issue were non-monetary, holding that Actavis does not strictly apply only to cash payments to the generic. Likewise, in In Re Lipitor Antitrust Litigation the District of New Jersey concluded the same. In that case Judge Sheridan found that when an ANDA settlement includes non-monetary reverse payments, the non-monetary provisions must be analysed in light of – or converted to – their monetary value in order for the Actavis rationale to be applied. Accordingly, reasonably establishing the monetary value of the non-monetary provisions is a necessary requirement to maintaining an antitrust claim, and failing to do so can result in dismissal, as in the In Re Lipitor Antitrust Litigation action in October 2014.

However, in 2014 Senior Judge Walls disagreed with both decisions in In re Lamictal Direct Purchaser Litigation (DNJ 2014), holding that non-monetary consideration cannot constitute a reverse payment and that a suspect reverse payment requires a payment of cash from the innovator to the generic. There, GSK granted Teva the right to sell Lamictal prior to the expiration of the patent and simply agreed not to launch an authorised generic drug during this period of early entry. Walls held that even if on appeal it is determined that an agreement not to launch an authorised generic falls under a rule-of-reason antitrust analysis, in this case the facts supported the reasonableness of the settlement.

Similarly, the district court in In re Loestrin 24 FE Antitrust Litig (DRI, September 4 2014) also held that Actavis requires cash consideration in order to trigger rule-of-reason scrutiny. The court ruled that because the plaintiffs had not adequately alleged payment in the form of cash, they had failed to state a claim upon which relief could be granted and dismissed the case.

The FTC’s recent position in FTC v Cephalon that “a patent’s strength or weakness is irrelevant to antitrust analysis of a reverse payment settlement” is troubling and, in fact, preposterous. How could it be that the perceived strength of one’s litigation position does not affect a calculus of a corporate dismissal of risk? Some have made the observation that since the FTC does not have patent expertise, it has merely adopted an expedient position. The FTC position – together with the breadth of its position on what constitutes a reverse payment – severely undermines the potential pro-competitive effects that settlement structures may have (eg, early but delayed entry) in the face of a strong patent.

Ironically, the FTC’s aggressive position in these matters may result in branded pharmaceutical companies forgoing settlements altogether. Given the PWC patent litigation statistics that about 50% of ANDA court decisions favour the patentee, forcing ANDA parties to litigate all cases instead of settling could easily result in more delayed generic market entry as pharmaceutical companies are forced to successfully defend their markets.

Overly zealous FTC-required divestiture in pharma M&As

The Hart-Scott-Rodino Act (15 USC §18a) requires a person intending to “acquire, directly or indirectly, any voting securities or assets of any other person” to file notification with the FTC and wait a designated period before consummating such transaction. These reporting requirements apply to an acquisition that meets or exceeds certain monetary jurisdictional thresholds – for 2014, the minimum transaction threshold was $75.9 million. The act is designed to enable the FTC to determine the potential competitive implications of acquisitions before they occur. The FTC has the authority to seek a preliminary injunction if, after investigation, it determines that the transaction is likely to harm competition. The act also authorises the FTC to promulgate rules implementing the pre-merger notification programme, including “to define the terms used in the Act” (15 USC §18a(d)(2)(A)) and “as may be necessary and appropriate to carry out the purposes of HSR” (15 USC §18a(d)(2)(C)). This means that the FTC has broad authority over what an acquisition is and thus the scope of its power. The FTC issued initial rules in 1978 (codified at 16 CFR, Parts 801 to 803) and regularly amends these. Patents, as a type of property, have routinely been determined as assets under the act, so assignments of patents fall under the FTC’s jurisdiction. Further, the FTC takes the position that merely licensing patents without assignment also comes under ‘asset acquisitions’, which stretches the normal definition of an ‘acquisition’.

The FTC has the authority to challenge or unwind a merger or acquisition in federal court if it believes that the deal would create anti-competitive effects within the industry. Alternatively, the FTC can seek concessions from the parties – usually in the form of divestitures – in exchange for approval of the deal. Many parties agree to divest assets simply to get FTC approval for the deal.

The FTC has been especially forceful in requiring divestitures in the pharmaceutical industry. An FTC report titled “Horizontal Merger Investigation Data, Fiscal Years 1996-2011”, released in January 2013, indicated that pharmaceutical M&As were the least likely to get FTC approval without some sort of divestiture. Of the 122 deals reviewed by the FTC in the pharma industry, the FTC required some sort of concessions (eg, divestiture) in 119 of them. For example, over the last few years, the FTC has required the following divestiture of assets:

  • Watson’s acquisition of Actavis – required divestiture of assets and intellectual property relating to 21 drugs;
  • Mylan’s acquisition of Agila – required divestiture of 11 generic drugs; and
  • Akorn Inc’s acquisition of Hi-Tech Pharmacal – required divestiture of five products to Watson Laboratories.

One basis for this heightened scrutiny appears to be the way that the FTC views a market in the pharmaceutical industry. For example, in the Mylan/Agila acquisition, the FTC alleged that a possibility existed that the acquisition would result in loss of a potential entrant into a future (not yet existing) generic drug market, and required certain divestitures of assets based on that position. This aggressive divestiture approach is facilitated by the FTC’s position that a single drug is a market, as opposed to a broader view of a market as an indication or group of drugs to treat the same indication as the subject drug. For example, ganciclovir injections may constitute one market as opposed to an indication-based market comprising all approved drugs or even drugs used off-label to treat a particular indication – in this case, herpes simplex virus. This narrow view results in market size distortions which allow the FTC to make tenuous market power arguments when, in reality, the purported monopoly market power does not exist.

Need for a more rational approach

The United States has historically been the primary source of, and has paid a disproportionate amount of the cost for, global drug development. Despite this, the US biopharmaceutical industry continues to face headwinds from the US and foreign governments, which seem to be advocating a world dominated by generic drugs with little meaningful protection for high-risk investment in pharma innovation. We would urge a more rational and business-realistic approach which provides heightened legal, administrative and judicial support for the industry and acknowledges the huge contribution to our lives from pharmaceutical innovation.

Action plan

Major IP developments in trade policy discussions between the US and foreign governments mean that there is plenty for pharmaceutical companies to keep their eyes on:

  • Follow the negotiations of the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Partnership (TTIP) and submit your comments to the Office of the US Trade Representative at www.ustr.gov/tpp or www.ustr.gov/ttip.
  • Join the discussion on whether Congress should give President Obama trade promotion authority to finalise TPP and/or TTIP.
  • As part of the TTIP negotiations, advocate that Europe demand that the United States increase the data exclusivity period provided in the Hatch-Waxman Act to be consistent with the period provided in Europe.

You should monitor Federal Trade Commission (FTC) positions and actions to determine impact on your company:

  • During ANDA settlement discussions, litigants should carefully consider the rule-of-reason antitrust standard set out by the US Supreme Court in FTC v Actavis.
  • ANDA litigants should seek antitrust advice from a highly experienced antitrust lawyer before finalising settlement terms.
  • Careful consideration should be given to settlements that include direct cash payments by the branded company to the generic company.
  • Understand that the FTC has selectively expanded the reporting requirements to the Hart-Scott-Rodino pre-merger notification rules in the pharmaceutical and biotechnology industry.
  • During pharmaceutical company consideration of acquisitions, mergers or asset transfers, it should take into account that it is becoming more likely that the FTC may require technology divestitures to get Hart-Scott-Rodino qualifying transaction approval.

Sherry Knowles is principal and Brent Bellows is a partner at Knowles Intellectual Property Strategies, Atlanta, Georgia.


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