Why the ‘first penguin’ of pay for delay has not come in Japan: anatomy of a Japan paradox
- Introduction
A “reverse payment” is an agreement during the settlement of a patent infringement suit filed by the brand-name companies against the generic companies, where the brand-name companies make payments to the generic companies to delay the launch of the generic drugs.
In an ordinary settlement, the alleged infringer pays a settlement to the patentee, whereas in the above case the payment is done in reverse. It is also called “pay for delay” because it has the effect of delaying the market entry of generic drugs. Reverse payments may cause competition law concerns when considered to be anticompetitive practices (cartels), done in order to delay the market entry of generic drugs.
In the US, several judicial precedents on reverse payment have been issued, including the Supreme Court decision in FTC v Actavis in 2013. In Europe, following the decision of the European Commission and the judgment of the General Court, the European Court of Justice (ECJ), the supreme court in matters of European Union (EU) law, rendered a judgement on January 30, 2020.
However, in Japan, no competition law cases have arisen where reverse payments became a direct issue. What caused this difference? This article considers why it is difficult for actual reverse payments cases to arise in Japan and the reason actual reverse payments cases have not arisen in Japan so far.
- The reasons why it is difficult for actual reverse payments cases to arise in Japan
(1) Former concept
The report “Competition and Research and Development Incentives in the Pharmaceutical Market —Through Examinations of the Impact of the Entry of Generic Drugs on the Market” (Report), by Competition Policy Research Center (CPRC), contains interviews concerning the reasons why it is difficult for actual reverse payments cases to arise in Japan: (i) if the substance patent and use patent of brand-name drugs remains valid, approval for the manufacture and sale of generic drugs will not be granted by the patent linkage system in Japan; (ii) due to the drug price system, drug price reduction by a generic’s entry is not severe and the share of the brand-name drugs will not be reduced; and (iii) patent infringement lawsuits occur only after the launch of generic drugs.
Professor Hiroyuki Odagiri, the former Japan Fair Trade Commission (JFTC) Commissioner, gave the following reasons why it is difficult for actual reverse payments cases to arise in Japan: (1) abbreviated new drug application (ANDA) 180-day exclusivity for a first filer does not exist; (2) even if a brand-name company is successful in preventing a first filer’s entry, it cannot prevent the entry of others; (3) drug price reduction by a generic’s entry is not as severe as it is in the US; and (4) unlike ANDA’s paragraph IV filing, patent linkage requires no infringement of the brand-name company’s substance patent or use patent.
The differences in ANDA under the Hatch-Waxman Act (reason 1 and 2 above) and regulation on drug prices (reason 3 above) could constitute reasons why it is difficult for actual reverse payments cases to arise in Japan. What about the lack of an infringement requirement of the substance patent or use patent for patent linkage (reason 4 above)?
(2) Substance Patent and Use Patent
For the substance patent and use patent, approval by the Ministry of Health, Labour and Welfare (MHLW) will not be granted unless the Japan Patent Office (JPO) issues an invalidation decision, however it is possible to settle by reverse payments during an invalidation trial.
The generic companies undertake a stable supply obligation after the launch of generic drugs. As the product is not yet launched and thus the stable supply obligation does not exist during an invalidation trial, a stable supply obligation will not be an obstacle to accept a brand-name company’s reverse payments settlement offer for generic companies. Therefore, irrespective of the lack of an infringement requirement of the substance patent or use patent for patent linkage (Reason (4) above), reverse payments cases could arise theoretically.
However, as no substance patents have been invalidated so far, in reality, the incentive for the generic companies to file for an invalidation trial and the incentive for the brand-name company to settle by reverse payments is not high. Therefore, for the substance patent, a low invalidation rate may be the reason why it is difficult for actual reverse payments cases to arise in Japan, not the lack of an infringement requirement of the substance patent for patent linkage (reason 4 above).
For the use patent, the invalidation rate may not be a reason, because there are many cases in which use patents have been invalided. Therefore, it is difficult to attribute the reason of why it is difficult for actual reverse payment cases to arise in Japan to the lack of an infringement requirement of the use patent for patent linkage (reason 4 above) or the actual situation of invalidation trials.
(3) Formulation patent and method patent
How about formulation and method patents which are not listed in reason 4 above?
(a) Advance adjustment
For formulation patents and method patents, the Japanese patent linkage system requires an advance adjustment between the brand-name company and the generic company before a National Health Insurance (NHI) price listing. At this advance adjustment stage, a generic company can withdraw its NHI price listing and delay the launch of generic drugs by “adjustment.” Thus, irrespective of the patent linkage system, reverse payments cases could arise theoretically.
However, because of the lack of exclusivity and difficulty precluding entry for multiple generic competitors (Reasons (1) and (2) above), multiple generic companies can enter the market simultaneously and a brand-name company usually does an advance adjustment with multiple generic companies.
Unless a brand-name company adjusts with all these generic companies, a generic drug’s entry will not be enjoined. Thus, a brand-name company would need to pay multiple generic companies to delay the launch. If this expense does not match the profit of enjoining the generic drugs’ entry, the brand-name company will lose any incentive to make such a payment.
If at least one generic company does not accept settlement, this generic company will acquire market share in advance. Thus, a generic company’s incentive to accept reverse payments will not be high unless all the generic companies accept such an offer. Therefore, at the advance adjustment stage, the lack of exclusivity and difficulty precluding entry for multiple generic competitors (reasons 1 and 2 above), may be the reasons why it is difficult for actual reverse payments cases to arise in Japan.
(b) After the launch
Under the patent linkage system for substance and use patents, approval will not be granted if the substance and use patents exist, whereas under the advance adjustment system for formulation patents and method patents, even if a brand-name company and generic companies cannot adjust, generic companies can apply for NHI price listing at their own legal risk.
Thus, advance adjustment system for formulation patents and method patents is not as strong as patent linkage system for substance patents and use patents (reason 4 above). Therefore, in many cases no adjustment is made, the generic drugs are launched, and the brand-name company files a patent infringement lawsuit. During this infringement lawsuit, reverse payment cases could arise theoretically.
However, in reality, as the generic company launches at their own legal risk, they will try to comply with the stable supply obligation after the generic drug launch, decreasing any incentives to accept reverse payments from the brand-name company. Therefore, after launch, the stable supply obligation may be the reason why it is difficult for actual reverse payments cases to arise in Japan.
- The reasons actual reverse payments cases have not arisen in Japan so far
What is the reason actual reverse payments cases have not arisen in Japan so far? Europe shares the same system as Japan in that no ANDA exists and regulation on drug prices does exist, however actual reverse payments cases have arisen in Europe. Thus, differences in the system alone cannot fully explain the reason actual reverse payments cases have not arisen in Japan.
In my view, Japanese companies’ attitude towards regulatory authority may be the actual reason. Japanese companies have a mentality of fearing offending MHLW by not complying with a stable supply agreement and wish to avoid being a “first penguin” while the JFTC is monitoring.
- Conclusion
The JFTC has a strong interest in reverse payments and is planning actively to apply the Antimonopoly Act. Indeed, the JFTC unofficially interviewed several pharmaceutical companies regarding reverse payments.
Around six years have passed since the CPRC report was issued and the government’s goal of generic manufacturers achieving an 80% share of the market by September 2020 was accomplished. As this report points out, incentives for engaging in reverse payments may increase and an actual case may arise.
Since the low invalidation rate of the substance patent and the stable supply obligation after the launch of generic drugs will not change in the future, reverse payments cases will not arise in the future during an invalidation trial about a substance patent after the launch of generic drugs.
Thus, should reverse payments cases arise at all, they are expected to arise during an invalidation trial and subsequent litigation rescinding the trial decision on a use patent in the advance adjustment stage for formulation and method patents before the launch of generic drugs. It is desirable to clarify any future reverse payments in Japan by judicial judgment, as in the US and Europe. How Japan-specific factors, in comparison with the US and Europe, influence the decision is worthy of attention.
This article is a shorter version of the one published in ABA, Antitrust Law Section, Intellectual Property Committee, tidBITS, May 19, 2022. For the full version, click here.
Takanori Abe is a partner at Abe & Partners. He can be contacted at: abe@abe-law.com
