Insurance companies v AstraZeneca
“Pay for delay” agreements have been a hot topic on both sides of the Atlantic for some time. These are patent dispute settlements in which a generic manufacturer acknowledges the patent of the originator pharmaceutical company and agrees not to market its generic for a specific period of time. In return, the patent holder makes a payment to the generic company.
In Europe, the issue hit the headlines in 2008 when a European Commission investigation led to raids on a large number of European pharmaceutical companies that looked for evidence of anti-competitive behaviour. It ended with a comparative whimper, however, with fines for just a few companies relating to agreements on drugs such as citalopram, perindopril and fentanyl. That may have been because the pharmaceutical companies are paragons of commercial virtue or it may have been because Europe lacks an equivalent to the US Abbreviated New Drug Application (ANDA) mechanism; there is no incentive to challenge pharmaceutical patents in Europe so there is an absence of deals to scrutinise.
In the US, things started relatively quietly. After several abortive tries, the Federal Trade Commission (FTC) succeeded in obtaining a Supreme Court ruling in FTC v Actavis that “pay-for-delay” or “reverse payment” deals are not immune to antitrust scrutiny. The court also acknowledged, in a split decision, that there are many valid reasons for settling a case. However, it was left to lower courts to determine the cases in question. US ANDA litigation provides an incentive to challenge pharmaceutical patents and with these many patent challenges came many deals to conclude litigation, leading to a potential explosion in the number of deals being scrutinised by the courts.
The case that is being treated as a test involves deals concluded between AstraZeneca and a group of generic companies to resolve litigation on patents covering the drug Nexium (esomeprazole). This blockbuster drug was and is responsible for a significant proportion of AstraZeneca’s revenues. For this reason, it was a prime target for generic challenge; understandably it was also of paramount importance to AstraZeneca that it maintain exclusivity for as long as possible.
ANDA challenges against the Nexium patents were filed by Ranbaxy, Teva and Dr. Reddy’s. Initially, Ranbaxy did a deal with AstraZeneca. Teva and Dr. Reddy’s did not conclude litigation and said they were going to launch at risk, but AstraZeneca did a deal with them to delay doing so until May 2014. Following the Actavis decision, a large group of medical insurance companies have sought redress for what the companies see as elevated drug prices resulting from the deals.
The case has become a many-headed hydra, whose issues are being litigated in multiple jurisdictions. There has been a plethora of decisions in courts across the US on the matter but there has yet to be a formal conclusion. To those on the outside, it is almost impossible to understand the ramifications although those interested in pharmaceuticals have been looking for insights into how this may play out.
"The case has become a many-headed hydra, whose issues are being litigated in multiple jurisdictions. There has been a plethora of decisions in courts across the US on the matter but there has yet to be a formal conclusion."
A decision in October this year from the US District Court for the Eastern District of Pennsylvania (Civil Action No 14-4149), nominally about whether this issue should be argued at a federal level, provides a beautiful summary of the current status of the big questions. As a non-US lawyer I felt I had suddenly seen the first draft of the script for next year’s smash Broadway play.
The decision was about whether to remand back to the Philadelphia Court of Common Pleas rather than, as the defendants wished, move the case to federal jurisdiction. For this to happen, the plaintiffs Time Insurance Company et al needed to show that there was anticompetitive conduct by AstraZeneca and that the conduct caused the damage to them. In practice that means that “the plaintiffs can assert a theory in which they can demonstrate these two elements without litigating the validity of AstraZeneca’s patents”.
How have the issues coalesced?
When you are challenging a pay-for-delay deal, you don’t need to litigate the validity of the relevant patents. This removes a huge barrier given the enormous cost of litigating patents.
To paraphrase the arguments made by both sides: AstraZeneca argued there can be no anticompetitive behaviour unless patents are shown to be invalidated. By contrast, Time Insurance Company et al argued that the fact that a company does a deal allows one to make inferences about the strength of the patents.
The judgment refers approvingly to the plaintiffs, who cited passages from Actavis:
[A]n unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival, and:
The size of such a settlement can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.
The second line of the AstraZeneca defence was that the Actavis case was pertinent to obtaining an injunction. However, in this case, the insurance companies would ultimately be seeking damages and that cannot happen without the second ground of causation:
Even if anticompetitive behaviour can be demonstrated to exist… such conduct cannot be proven to have caused the alleged damages unless the patents were in fact invalid.
In a passage that demonstrates an acute understanding of the pharmaceutical marketplace, the judge concluded:
The unstated premise of defendants’ argument is that only total invalidity of its patents would create competitive pressure in the marketplace from generic suppliers. That position not only misapprehends the market for pharmaceuticals, but also misapprehends the marketplace for claims. In any litigation, a claim has potential value short of an ultimate determination in court. The value of the claim is a function of the parties’ respective evaluations of risk and probability of success. Indeed, the vast majority of claims settle, and the value of many claims can be plotted along a bell curve where the value of the claim is a function of each side’s conviction about strength of its position and its confidence in predicting the outcome. For example, in the context of a catastrophic personal injury claim, although a defendant might have formidable defences to advance, in most instances the exposure created by the extent of the damages in and of itself creates an intrinsic settlement value for the claim. So too in this case, without reaching the ultimate question of the validity of the patents, the risk that the generic manufacturers might enter the marketplace and demonstrate a reasonable likelihood of success in voiding the patents has an economic consequence which plaintiffs contend was blunted by unlawful agreements preventing that form of competition. Taking the analysis one step further, plaintiffs expect to prove that such marketplace risk was in fact the motivating factor for the reverse payments that are the subject of this case. Defendants ignore these realities when they insist that only a formal legal determination of the validity of the patents would have a marketplace effect.”
2. Reverse payments don’t have to be cash.
AstraZeneca apparently did not make a direct financial payment to Teva or to Dr. Reddy’s as part of the deal resolving the Nexium patent dispute. Instead, it appears that they were forgiven other liabilities on non-Nexium-related cases.
There are four divergent cases in the district courts: two interpreting Actavis as requiring cash payments and two disagreeing with that position. The judge came down on the side of the dissenting parties:
“In my opinion reverse payments deemed anti-competitive pursuant to Actavis may take forms other than cash payments,” he said.
Concluding his judgment, Judge Gerald Austin McHugh remanded the case to the Philadelphia Court of Common Pleas.
These are the formal conclusions from the case. Looking forward, what other trends may emerge?
If cases turn on whether a payment is sufficiently large to look suspicious, it looks as though accountants and financial analysts are going to play a key role in these cases. How big is a market? What is an outsized payment? When might a generic have entered even if a patent was valid? The size of payments made to settle such cases does not at present conform to a standard mathematical calculation from which one can measure divergence. Instead it is full of imponderables. However, like pregnancy, anticompetitive behaviour is an absolute not a matter of degree. Squaring that circle with accounting statistics, valuations and analysis will be a huge task, with accountants the new expert witnesses.
This case will now move to a standard civil court with a jury; to my mind a court more likely to favour the insurance companies.
The judgment states that deals are always done between generics and innovators, and companies often choose eventually to settle rather than fight to the bitter end. The relative strength of each side’s position as revealed in litigation tends to dictate the form of the settlement. I agree wholeheartedly with this. But now that any deal can give rise to a pay-for-delay claim, and now that by avoiding assessments of validity such claims are easier to progress, the floor is wide open to a tsunami of claims.
However, in my opinion, there will be a further unintended consequence, although mine is not an original insight. This decision must put another brick under the pharmaceutical companies’ resolve to no longer do deals to settle litigation. As the judge eloquently expressed, innovator pharmaceutical companies often settle even in strong patent cases to allow earlier generic entry. For this reason, exclusivity periods will now be extended, lawyers and accountants will get richer fighting the cases, and consumers and patients will get poorer.
Jason Rutt is an executive at Rouse. He can be contacted at: jrutt@rouse.com
