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Today, staff of the Bureau of Competition published four reports covering fiscal years 2018, 2019, 2020, and 2021 on the types and terms of the pharmaceutical patent settlement agreements filed with the FTC under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”). The MMA requires brand drug and generic manufacturers (and since October 2018, biologic and biosimilar manufacturers) to file certain types of patent settlements with the FTC. This mandatory reporting requirement promotes FTC antitrust enforcement by providing the agency with the means to identify pharmaceutical patent settlements that may raise competitive concerns. 

In 2013, the Supreme Court’s decision in FTC v. Actavis, Inc. confirmed that patent settlements are subject to the antitrust laws and that some may be unlawful. 570 U.S. 136, 157-58 (2013). Since that decision, enforcement against anticompetitive patent settlement agreements has remained an FTC priority. For instance, the Commission found (and the Fifth Circuit affirmed) that a settlement that included a large and unjustified payment from a brand manufacturer to a generic entrant along with a “No Authorized Generic” or “No-AG” commitment and other promises violated the antitrust laws. As the Commission explained, a No-AG commitment that allows a generic manufacturer to obtain greater revenues from its generic sales than it would if the branded manufacturer entered the market with its own authorized generic is a type of in-kind payment that may harm competition. ImpaxLabs., Inc., No. 9373, 2019-1 Trade Cases P 80723, 2019 WL 1552939, at *19-20 (F.T.C. Mar. 28, 2019).

Given the FTC’s unique role in reviewing the MMA submissions, agency staff have produced periodic reports presenting fiscal year data and information relating to the filed settlement agreements (“MMA reports”). The MMA reports allow lawmakers and the public to monitor ongoing trends relating to the number and types of pharmaceutical patent settlements. The reports do not draw conclusions about the legality of specific agreements. Thus, an agreement may be categorized in an MMA report as containing “explicit compensation” but not be unlawful. For example, some agreements categorized as containing explicit compensation involve only minimal payments to the generic company for saved litigation expenses. Under Actavis, these agreements are unlikely to raise antitrust concerns. At the same time, an agreement categorized as containing “possible compensation” may pose significant antitrust concerns. Determining whether a particular agreement is likely to be anticompetitive requires an investigation into the specific facts and circumstances surrounding the agreement and the competitive landscape. This type of detailed information is not contained in the MMA filings that companies submit. Staff assessments of likely competitive harm are simply outside the scope of the FTC’s MMA reports.

Over the years, staff has noted several emerging trends in pharmaceutical patent settlement terms. First, in the wake of Actavis and judicial decisions confirming that value transfers other than cash payments could be anticompetitive, patent settlement agreements have grown increasingly complex, and explicit reverse payments, beyond compensation attributed to litigation expenses, have become less common. Second, these increasingly complex patent settlements have started to include other terms that could act as compensation to the generic or biosimilar company. Staff has categorized these terms as “possible compensation” because the likely effect of such provisions is uncertain absent further investigation.

Staff’s review of agreements filed between fiscal years 2018 and 2021 reveals that “quantity restrictions” are a particular type of possible compensation that has become increasingly prevalent in pharmaceutical patent settlement agreements. As noted in the recently released MMA reports, 23 agreements involving 8 different drug products restrict the quantity of a product that the settling generic company may sell for a period of time.

Quantity restrictions, if they are sufficiently strict, have the potential to alter the competitive dynamics of the market, maintain supracompetitive prices, and allow for the sharing of monopoly profits between the patentee and patent challengers. Determining the extent of the potential anticompetitive effects from a quantity restriction requires analyzing the specific marketplace circumstances surrounding the product at issue. For instance, if the quantity restriction under the settlement agreement is sufficiently relaxed, the generic or biosimilar seller may be able to generate competitive pressure approximating unrestricted market competition. In contrast, if the quantity permitted to be sold under the restriction is relatively small, the settling company may have little incentive to compete by lowering price, resulting in supracompetitive prices on products sold by both the brand company and its generic or biosimilar competitor. In some cases, such quantity restrictions may be effectively a de facto market allocation between the patent holder and the patent challengers.

MMA filings are an important tool for detecting pharmaceutical patent settlement agreements that raise significant competitive concerns. In addition to quantity restrictions, the MMA reports have noted numerous other forms of “possible compensation,” including:

• Commitments from the brand company not to use a third party to distribute an authorized generic for a period of time;
• Granting the generic company a right of first refusal to act as the brand’s third-party distributor;
• A declining royalty structure in which a generic company’s royalty payments are eliminated or reduced if the brand company launches an authorized generic;
• Agreements to provide authorized generic supply to a non-first filer and permitting the non-first filer to sell during the first filer’s exclusivity period;
• Possibly reducing the generic company’s potentially significant infringement damages from a prior at-risk launch; and
• Granting the generic company a much earlier product license date in foreign jurisdictions than in the United States for the same product. 

In October 2018, Congress amended the MMA to require filings to include any agreement entered within 30 days of an agreement that otherwise must be reported to the FTC. As a result, in fiscal year 2019, the FTC began assessing these related side agreements as part of its review of MMA filings. The recently released MMA reports note the number of such additional agreements the FTC has received, including the number of additional agreements that contain explicit or possible compensation.

As explicit cash reverse payments become less common, Bureau of Competition staff will continue to scrutinize filed settlements for “possible compensation” that could constitute a reverse payment. This includes investigating specific marketplace circumstances where appropriate and presenting trends in future MMA reports.