Headwinds for the US biopharmaceutical industry

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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.

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.

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.