PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

by

BHUSAN JATANIA1

Under the Guidance of

Dr. Anil Kumar, Assistant Director (CS) Competition Commission of India

RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

Fourth Year (Candidate - 2012), B.A. LL.B. (Business Law Honours), National Law University, Jodhpur E-mail: bhusanjatania[at]gmail.com

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

DISCLAIMER This report has been prepared by the author as an intern under the Internship Programme of the Competition Commission of India for academic purposes onl y. The views expressed in the report are personal to the intern and do not reflect the view of the Commission or any of its staff or personnel and do not bin d the Commission in any manner. This report is the intellectual propert y of the Competition Commission of India and the same or any part thereof may not be used in any manner whatsoever, without express permission of the Competition Commission of India in writing.

2 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

Contents
1. Introduction .............................................................................................. 4 2. Understanding the Pharmaceutical Industry ................................................. 5 A. The Economics of Pharmaceuticals Market .............................................. 6 B. Indian Pharmaceutical Sector Snapshot ................................................... 7 C. Changes in the Con sumer Spending Pattern ............................................. 9 3. Pay-for-delay/Reverse Payment Agreements ............................................. 10 4. Artificial Barriers to Competition ............................................................ 11 5. Patent Litigation as a Bargaining Strategy ................................................ 12 6. Indian Competition Law: Enforcing TRIPS -plus Obligations? .................... 13 7. Instances of Conduct Indicative of Anti -competitive Tendencies in the Pharmaceutical Industry .............................................................................. 15 8. Legalit y of Pay-for-delay St yle Agreements in India at Present .................. 16 9. Recommendations ................................................................................... 17 10. References ............................................................................................ 18

3 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

1. Introduction
The Indian pharmaceutical industry was a relative non-entit y until the 1970s. 2 The market then was dominated by major multinational drug companies , and Indian firms, mostl y public sector undertakings set -up with the assistance of the World Health Organisation in the two decades fol lowing independence, could onl y produce cheap bulk drugs . 3 Today, there is not a single completel y state-owned pharmaceutical company on the horizon . 4 But 95% of the nations medical needs are met domesticall y and the industry represents around 1.3% of the world market in value terms and 8% in volume terms . 5 That makes India one of the top 15 drug manufacturing countries in the world. 6 Such phenomenal growth was enabled by a weak patent regime along with protectionist measures for the domestic industry and belies the belief that an infant industry, if coddled, tends to remain an infant industry . 7 Changes in the industry landscape after the introduction of TRIPS compliant product patent regime since January 1, 2005 have resulted in the re-entry of multinational pharmaceutical companies in the Indian market. This is likel y to change the competitive dynamics as the grant of patents to these entities and the subsequent patent litigation that can emanate between them and the Indian firms may provide a strong in centive to both these entities to enter into agreements which result in a pay-off or transfer of economic value from the patent -holder to the patent -challenger in return for delaying generic entry.
2

Ni k h il B ha t na ga r et al., Mea su rin g a n d p r ed ic tin g co mp e ti ti ven e s s o f In d ia n f i rm s in Ph a r ma ceu tica l I n d u st r y , Co n f er e n ce o n G lo b al Co mp e ti tio n & Co m p eti ti v e ne ss o f I nd ia n Co rp o ra te . 3 In d ia s Ph a r ma ceu tica l I n d u s tr y o n co u r se f o r G lo b a l isa tio n , De u t sc he B a n k Re s earc h, Ap ri l 9 , 2 0 0 8 . 4 Ib id . 5 Dr. Gee ta Go ur i ( Me m b er : Co mp et it io n Co m m is s io n o f I nd ia), Co mp e tit io n I ssu es in th e Gen e ri c P h a r ma c eu ti ca l s In d u st r y in In d ia , A va ilab le at ht tp : // www. c ci. go v .i n /i ma g e s/ me d ia /p re se n ta tio n s/ Co mI s sG e nP h ar mI nd u sI nd i a_ 2 0 1 0 0 4 0 1 1 4 2 3 4 6 .p d f. 6 Rep o r t - I n d ia s P h a rma ceu t ica l In d u s t ry , Co rp o ra te Ca tal ys t Ind ia, Av ai lab l e at ht tp : // www. c ci. i n/p d f / s u r ve ys _ r ep o r t s/ i nd i a s_ p h ar mac e ut ica l_ i nd u st r y.p d f. 7 Quo te a t tr ib uted to Sir J o hn J a me s Co wp ert h wait e, wid el y cr ed i ted wi th t ur ni n g p o st - war Ho n g Ko n g i nto a t hr i v i n g g lo b al fi n a nci al ce n tr e.

4 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

This argument is positioned on the logic that as the number of patents awarded increases and the Indian pharmaceutical market rapidl y expands, potentiall y anti -competitive agreements to restrict market entry of cheaper versions of drugs may become irresistible . It is pertinent to note that multinationals and Indian pharmaceutical companies are already engaging in such tactics abroad, so given the opportunit y to short-circuit the litigation process by means of an out of court settlement that pays the generic company to not compete and extends the monopol y status of the incumbent firm, pay-for-delay deals may become commonplace among the similar set of players in India as well.

2. Understanding the Pharmaceutical Industry

The pharmaceutical sector consists primaril y of three t ypes of players : bulk drugs producers, pure fo rmulators, or integrated firms ( which produce both bulk drugs and market formulations ). Bulk drugs form the therapeuticall y relevant active pharmaceutical ingredients that are processed further to prepare formulations eventuall y consumed by patients. 8 A drug formulation is in product form, which is ultimatel y administered to the user. Companies dealing in formulations can be divided into innovating ones and non-innovating ones. Innovating firms are research-based pharmaceutical

companies engaged in new drug discovery, while the firms which do not do so are regarded as non-innovating or generic firms. 9 Internationall y, the pharmaceutical sector has a two-tier layout. The largest firms do the bulk of the research and development ( R&D) spending and possess

S h ub ha m C ha ud h ur i et al., E st ima tin g th e Ef fec t s o f Glo b a l P a ten t P ro t ect io n in Ph a r ma ceu tica l s: A Ca se S t u d y o f Qu in o lo n e s in In d i a , NB ER W o r ki n g P ap er No . 1 0 1 5 9 , Dece mb er 2 0 0 3 , Re vi sed J ul y 2 0 0 6 . 9 Op tio n s fo r U sin g Co mp et it io n La w/ Po l ic y To o l s in D ea lin g wi th An t i - Co mp et it ive Pra c ti ce s in th e Ph a r m a ceu t ica l I n d u s t ry a n d th e H ea l th D el ive ry S ys tem , R ep o rt P r ep ared Fo r W o r ld H eal t h O r ga ni za tio n b y C u t s Ce n tr e Fo r Co mp et it io n, I n v es t me n t & E co no mi c Re g u la tio n, 2 0 0 6 .

5 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

a multitude patents. 10 A handful of transnational corporations dominate with the top twent y-five of them having accounted for 64.5 percent of the world market in 2003. 11 Significant proportions of smaller companies produce off-

patent/generic drugs; or have licenses from a patentee. At the risk of over-simplification, it can be stated that a new drug is essentiall y an information good. 12 As its formula is understood, the drug can be produced without commensurate research and development costs. Hence,

pharmaceutical firms , in contrast to innovators in other sector s, cannot monetise their R&D efforts merel y by means of a first mover advantage. New drug development is a costl y and risky process. The firm must find a molecule to treat the targeted condition a nd also display its safet y and efficacy to cross the regulatory gateways to the marketplace. 13 Intellectual propert y rights are rightl y awarded as a key incentive to promote and sustain innovation.

A. The Economics of Pharmaceutical Market

In a conventional product market, market players seek to maximise revenues and profits by reducing prices. However, conventional logic does not always appl y to the pharmaceutical market, especiall y in respect of formulations. Consumption o f pharmaceuticals tends to be pri ce inelastic (due to the indispensable nature of drugs) and companies have little reason to maintain low prices. 14 The consumption pattern , especiall y in developed nations, is independent of prices not merel y due to the essentiality of drugs , but also as consumers are covered by insurance (which may be public or private in nature) and they do not
10

Ni t ya N a nd a a nd A mi r ul la h K ha n, Co mp e ti tio n Po li cy fo r th e Ph a r m a ceu t ica l s S ecto r in In d ia , C UT S I nt er na tio n al i n P r ad e ep Me ht a (ed .), T o ward s a F u n ct io na l Co mp e ti tio n P o li c y fo r I nd ia, 2 0 0 4 , p . 1 8 9 . 11 Ib id . 12 C. Sco t t He mp h il l, Pa yin g fo r D ela y : Ph a rma ceu t ica l Pa ten t S e tt lem en t A s A R eg u la to r y De sig n Pro b le m , 8 1 N.Y .U. L. Re v. 1 5 5 3 (2 0 0 6 ). 13 Or ga ni s atio n fo r Eco n o mic Co -o p er at io n a nd De ve lo p me n t, Po lic y Ro u n d ta b le s - Gen e r ic Ph a r ma ceu tica l s , D AF/ CO MP ( 2 0 0 9 ) 3 9 , 2 0 0 9 . 14 Co mp et it io n I s su e s in Th e Ph a rma ceu t ica l I n d u st ry , I nd ia Co mp et i tio n a nd Re g u la tio n Rep o r t (I C R R 2 0 0 7 ) .

6 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

have to incur out -of-pocket expenses. However, in India and most other developing countries, the situation is quite different. Majority of the people are covered neither by public nor private insurance. 15 Therefore, competition between innovating and generic pharmaceutical manufacturers is vital to keep a check on prices. For instance , studies of pharmaceutical markets in the United States show that generic entry in a market takes place at prices which are 20 to 30 percent lesser compared to the equivalent brand-name counterpart. 16

B. Indian Pharmaceutical Sector Snapshot

Indias pharmaceutical industry is peculiar in nature. Branded generics are dominant players co mprising up to 70 -80% of the retail market. Competition is from localised players who are entrenched due to earl y investments and the

15 16

Ib id . Or ga ni s atio n fo r Eco n o mic Co -o p er at io n a nd De ve lo p me n t, Po lic y Ro u n d t a b le s - Gen e r ic Ph a r ma ceu tica l s , D AF/ CO MP ( 2 0 0 9 ) 3 9 , 2 0 0 9 .

7 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

advantages

of

flourishing

in

product

patent

free

regime. 17 Prices

have

traditionall y remained low. An important development that has taken place in the sector is that with the opening up of the Indian econom y, domestic firms no longer enjoy a monopol y over the market. After 2001, 100 percent foreign ownership is permitted in the pharmaceutical sector via automatic approval rou te and the law now treats multinationals are treated at par with Indian firms . 18 From the current market size of USD 12.6 billion, McKinsey estimates 19 that the Indian pharmaceutical market will expand to USD 55 billion by 2020 in a base case scenario. In t he pessimistic scenario, it will be reach the size of USD 35 billion and become USD 70 billion in an optimistic scenario. Popular estimates of the number of companies operating in the

pharmaceutical industry put the figure around 20,000. Curiousl y, the Mashelkar Committee, rel ying on the number of licensed production facilities in India, was able to verify onl y 5877 companies . 20 The organised sector, contributing majorl y to the formulations segment, consists of 250-300 players and has 70 percent of the market share in revenue terms, the largest of which has a market share close to 6 percent. 21 The top ten firms represent 30 percent of all sales. The individual market shares of companies are small. 22 However, these statistics by themselves cannot lead us to beli eve that there is plent y of competition in the market. Pharmaceuticals are not single category
17

Vi ka s B h ad o r i a et a l., I n d ia n Ph a r ma 2 0 2 0 - Pro p e ll in g Acce s s a n d Ac cep ta n c e, Rea li sin g Tru e Po ten t ia l , M cK i ns e y & Co mp a n y. 18 P rab o d h M al ho tr a a nd Ha n s Lo f gr e n, In d ia s P h a rma ceu t ica l In d u st r y: Hyp e o r Hig h T ech Ta ke - Of f? , Au s tr a li a n H eal t h Re v ie w, Vo l. 2 8 , No . 3 , p . 1 8 3 . 19 Ib id . 20 Rep o rt o f th e Exp er t Co m mi tt ee o n A Co mp r eh en s iv e E xa m in a t io n o f D ru g Reg u la to ry Is su e s, in c lu d in g th e P ro b l em o f S p u r io u s D ru g s, Mi n is tr y o f H ea lt h and F a mi l y W el fa re, Go ver n me n t o f I nd ia, 2 0 0 3 p .3 , p ar a g rap h 1 3 . 21 Co mp et it io n I s su e s in Th e Ph a rma ceu t ica l I n d u st ry , I nd ia Co mp et i tio n a nd Re g u la tio n Rep o r t (I C R R 2 0 0 7 ) . 22 Ib id .

8 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

of homogenous goods; there are several relevant markets within the sector, referred to as therapeutic segments . High degree of concentration of market power is prevalent in some of the relevant markets . Estimates suggest that these segments constitute 80 percent of the entire formulations market. 23

C. Changes in the Consumer Spending Pattern

The Indian pharmaceutical industry is set to benefit from the demographic changes taking place. U.N. estimates project the rise in population from 1.2 billion currentl y to 1.4 billion by 2020. Comparisons suggest that by 2020 the number of children born in India would be the equivalent of the number of people living in Germany, France, the UK and Ital y together. 24 By 2025, India will probabl y have surpassed China as the world's most populous country. 25 The average annual economic growth in India is expected to be in the range of 6-7% for the next 15 years . 26 Such growth will broaden the countrys middle class, which due to its greater disposable incomes , forms an important group for foreign drugs manufacturers. 27 Research indicates that the average annual spend on drugs by a t ypical middle class famil y of four has multiplied five-fold, to EUR 170 (approximatel y Rs 11,000) . Peoples improved income situation has also led to a growing desire to insure against illness. Currentl y, just 4% of the population has some form of health insurance and the figure is onl y expected to increase . The consumption of

23 24

Ib id . In d ia s Ph a rma c eu t ica l I n d u s t ry o n co u r se fo r G lo b a l i sa t io n , D e ut sc he B a n k Re sear c h, Ap r i l 9, 2008, Ava il a b le at ht tp : // www. d e ut sc heb a n k.c o .i n /j cr /p d fge n /p d f/I nd i a_ s_ p har ma ce u tic al_ ind u s tr y_ o n_ co ur se_ f o r_ g lo b al .p d f . 25 Cen su s Of I n d ia , Feb r u a r y 1 3 t h, 2011, Av ai lab l e at ht tp : //p h il at el yn e ws .co m/ 2 0 1 1 / i nd ia /c e ns u s -o f - ind ia / 26 B erg h ei m, S te fa n et al. ( 2 0 0 5 ) . Glo b a l Gro w th Cen t re s 2 0 2 0 : Fo rm el - G fo r 3 4 Eco n o m ie s , De ut sc h e B a n k R es ear c h . 27 S up ra no te 2 4 .

9 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

drugs is forecast to rise as insured patients shall be keener to obtain prescriptions than those without the cover. 28

3. Pay-for-delay/Reverse Payment Agreements

Manufacturers of patented drugs can have a lot of downside due to generic entry. It can greatl y impact their market share and profits . Naturall y, there is a powerful motivation to prevent market entry of generics. The incumbent patentee can respond conventionall y or conduct itself in an anti -competitive fashion. 29 Judicial proceedings resulting in settlements where the innovator company provides net consideration to the generic company ha ve been commonl y referred to as reverse payment settlements. 30 These have been termed as reverse payment settlements as under the terms of a conventio nal settlement agreement, the plaintiff receives compensation from the defendant. However, the reverse transaction takes place here, as the plaintiff (usuall y an originator drug company) makes a payment to the defendant (the generic company) to settle the litigation initiated by it, in lieu of the generic delaying its market entry and extending the monopol y position enjoyed by the originator company. Thus, in a reverse payment or a pay-for-delay settlement there is a transfer of economic value from a branded manufacturer to the potential generic competitor to delay its market entry. In the absence of such an agreement , the generic firm would be in a capacit y to make an earl y entry into the market . 31

28

In d ia s Ph a rma c eu t ica l I n d u s t ry o n co u r se fo r G lo b a l i sa t io n , D e ut sc he B a n k Re sear c h, Ap ri l 9, 2008, Ava il a b le at ht tp : // www. d e ut sc heb a n k.c o .i n /j cr /p d fge n /p d f/I nd i a_ s_ p har ma ce u tic al_ ind u s tr y_ o n_ co ur se_ f o r_ g lo b al .p d f . 29 Or ga ni s atio n fo r Eco n o mic Co -o p er at io n a nd De ve lo p me n t, Po lic y Ro u n d ta b le s - Gen e r ic Ph a r ma ceu tica l s , D AF/ CO MP ( 2 0 0 9 ) 3 9 , 2 0 0 9 . 30 B ret D ic ke y et al ., A P re li min a ry Eco n o mic An a ly si s o f t h e Bu d g eta ry Eff ect s o f Pro p o sed Res t ric tio n s o n R eve r s e Pa y men t S et tle men ts , Au g us t 1 0 , 2 0 1 0 . 31 Or ga ni s atio n fo r Eco n o mic Co -o p er at io n a nd De ve lo p me n t, Po lic y Ro u n d ta b le s - Gen e r ic Ph a r ma ceu tica l s , D AF/ CO MP ( 2 0 0 9 ) 3 9 , 2 0 0 9 .

10 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

By virtue of such an agreement, the innovator and the generi c producer are able to apportion the consumer surplus 32 between them. A U.S. Federal Trade Commission study has evaluated that prohibiting such agreements can cause $3.5 billion in cost savings per annum to the consumers . It is also postulated that the social welfare losses would invariabl y be in excess of the settlement amount that changes hands between the two firms . It is so as this is not a zero-sum game where the loss of one market player would be the gain for another. Due to market asymmetry, a notable gap exists between the loss suffered by the innovator company from generic competition and what the gains enjoyed by the generic company as a result of market entry. 33 These agreements have emerged as a persistent means of inhibiting competition in the pharmaceutical market in the U .S., and have led to concern in Europe as well. 34

4. Artificial Barriers to Competition

Artificial barriers to prevent generic competition in the pharmaceutical industry comprise means to stretch the market exclusivit y of a drug post patent expiration like: 35 Obtaining injunctions litigation is a way to of block legal challenges patent to patents, by as

dispossessing

rights

generic

manufacturers

32

An eco n o mi c mea su r e o f co n su m er sa t is fa c t io n , wh ich i s ca lcu la te d b y a n a ly zin g th e d iff e ren c e b et w een w h a t co n su me r s a re wi ll in g to p a y fo r a g o o d o r s er vi ce re la t ive to it s ma r ket p r ice. A co n su me r su rp lu s o ccu r s wh en th e co n su me r i s w il lin g to p a y mo r e fo r a g iven p ro d u c t th a n th e cu rr e n t ma rke t p r ice. D efi ni tio n ta ke n fro m In ve s to p ed i a.co m, Av ai l ab le at h ttp :/ / www. i n v e s to p ed i a.co m/ t er ms /c /co n s u mer_ s urp l us .a sp . 33 Ib id . 34 Ib id . 35 Co mp et it io n I s su e s in Th e Ph a rma ceu t ica l I n d u st ry , I nd ia Co mp et i tio n a nd Re g u la tio n Rep o r t (I C R R 2 0 0 7 ) .

11 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

Suing generic producers (with or without a legitimate cause of action) for patent infringement, thereby adding to the market entry cost for generics Collusion between players in the Indian pharmaceutical industry has not yet been found. But to say that there may be a propensit y towards collusive behaviour in certain relevant markets , where onl y few players exist , cannot be dismissed as an impossible assertion . An example of such a situation was the presence of an international cartel in bulk vitamins at the global level . The vitamins cartel is supposed to have over -charged India by approximatel y US$25mn in the 1990s. 36 In the backdrop of increasing evidence of multinationals engaging in anti competitive practices , coupled with the fact that their presence in the India is on the rise, it can lead to instances abusive practices in the Indian m arket. 37

5. Patent Litigation as a Bargaining Strategy

Patents serve as an entry barrier to potential competitors. The strength of the patent sets the height of this barrier . Patents that are regarded as formidable or patents that have overcome judicial scrutiny represent a tough barrier for prospective competitors seeking to co-exist in the marketplace with the patent holder. But the uncertaint y of a patent's validit y is not factored in while evaluating the entry barrier. 38 Also, the deleterious effect of th e increasing costs to pursue patent litigation claims is that it artificiall y discourages judicial examination of patent validit y. 39 Patent litigation can thus be part of a strong-arm tactic designed to bring a potential competitor on the bargaining table t o strike a delayed market entry
36 37

Ib id . Ib id . 38 J ud ge T .S. E ll i s, I I I ( U.S . D is tri ct Co ur t, Eas ter n Di st ric t o f V ir gi n ia, Ale x a nd ri a), Di sto r tio n o f Pa ten t Eco n o mic s b y Li tig a tio n Co st s , C AS R IP P ub lic at io n Ser ie s: S tre a ml i ni n g In t 'l I nte ll ec t ual P r o p er t y. 39 Ib id .

12 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

deal, favourable to both the patentee and the possible challenger who could have become a potential competitor.

6. Indian Competition Law: Enforcing TRIPS-plus Obligations?

The Agreement on Trade Related Intellectual Propert y Rights (hereinafter TR IPS ) became operational as on 1 January 1995 and remains to this day the most comprehensive multilateral agreement on intellectual propert y. 40 Article 40 of TRIPS is regarded as the intersection of intellectual propert y standards and competition law . 41 It provides for an important exception from the application of the agreement. Article 40.2 reads as follows: Nothing in this Agreement shall prevent Members from specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market. What constitutes a nticompetitive practices for the purposes of TR IPS has not been defined by it . The standards fo r testing anticompetitive behaviour have been left to the discretion of the member nations, who are in a position to adopt appropriate measures to tackle anticompetitive conduct. A bare reading of Article 40 makes it evidentl y clear that the protection of intellectual property rights must co -exist with competition law, and that competition law is necessary in arriving at a balance of rights and duties under TRIPS. 42 Considering the existence of such pro -competition enabling provisions , the presence of section 3(5)(i) of the Competition Act of 2002 (reproduced at the
40

W o rld T r ad e Or g an i sa t io n, Ov er vie w: th e TRI PS Ag re e men t , Av ai lab l e at ht tp : // www. wt o .o r g /e n g l is h /tr ato p _ e /t rip s_ e /i n te l2 _ e. ht m . 41 UN CT AD, Th e T RI PS Ag r ee men t a n d Dev el o p in g Co u n t r ie s , UN C T AD /IT E/1 , Ge n e va (1 9 9 7 ). 42 C.M. Co r r e a, Rev ie w o f th e T rip s Ag re emen t : Fo st er in g th e Tra n s fe r o f Te ch n o lo g y to Deve lo p in g Co u n t ri es , Av ai lab le a t h ttp :/ / www .t wn s id e.o r g. s g/ ti tl e/ fo s ter. h t m.

13 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

end of this paragraph) , which carves out a specific exception for holders of intellectual property rights and provides a blanket exemption from the provisions prohibiting anti-competitive agreem ents, becomes hard to justify and can lead to the presumption that India is seeking to offer greater protection to holders of intellectual propert y rights than is necessary under TRIPS or can be afforded by a developing nation such as ours. Nothing contained in this section 43 shall restrict (i) the right of any person to restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred upon him under (a) the Copyright Act, 1957 (14 of 1957); (b) the Patents Act, 1970 (39 of 1970); (c) the Trade and Merchandise Marks Act, 1958 (43 of 1958) or the Trade Marks Act, 1999 (47 of 1999); (d) the Geographical Indications of Goods (Registration and Protection) Act, 1999 (48 of 1999); (e) the Designs Act, 2000 (16 of 2000); (f) the Semi-conductor Integrated Circuits Layou t-Design Act, 2000 (37 of 2000) Another aspect that needs to be considered by competition law for its potential adverse impact on the state of competition is with respect to intellectual propert y rights related licensing agreements, which can contain restrictive provisions that are patentl y unreasonable and/or arbitrary. The Act

43

Se ctio n 3 ( 5 ) ( i) o f t h e C o mp e ti tio n Ac t, 2 0 0 2 .

14 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

has not provided for any remedy if the conditions imposed on the licensee are devoid of reason. 44 It is also believed that the implementation of the Act may benefit multinational firms as they have better experience of regulatory compliance and in defending competition cases in various jurisdictions . 45

7.

Instances

of

Conduct

Indicative

of

Anti-competitive

Tendencies in the Pharmaceutical Industry

Aventis Pharmaceuticals Inc. has been indicted in the United States on the charges of instituting patent infringement suit against a generic competitor with the intention to delay the market entry of the generic counterpart of its blockbuster heart drug Cardizem CD and then entering into an agreement with the generic firm to prevent market access. To put things in an Indian perspective, Aventis has the third largest market share amongst the multin ational pharmaceutical companies operating in India. 46 Bristol-Myers Squibb, present in India as Bristol- Myers Squib India Pvt. Ltd., has been charged in the United States for indulging in practices which blocked the availabilit y of cheaper generic counterpart of Taxol, which is used to treat breast and ovarian cancer. 47 While these cases have originated abroad, such practices may come to be identified in the Indian marketplace also.

44

Op tio n s fo r U sin g C o mp et it io n La w /Po lic y To o l s in Dea lin g wi th An t i - Co mp e ti ti ve Pra c ti ce s in th e Ph a r m a c eu t ica l I n d u s t ry a n d th e H ea l th D el ive ry S ys tem , R ep o rt P rep ared Fo r W o r ld H eal t h O r ga ni za tio n b y C u t s Ce n tr e Fo r Co mp et it io n, I n v es t me n t & E co no mi c Re g u la tio n, 2 0 0 6 . 45 Ad it ya B h at tac h ar j ea, Do Awa y With F la w s Be fo r e En fo rc emen t , Fi na n cia l E xp re s s, J a n uar y 2 8 t h, 2 0 0 5 46 Aven ti s Ph a rma G ro w th S u rg e s 1 6 .5 % In 5 Mo n th s O f Fi sca l , T he Fi na nc ia l E xp re s s, T hur sd a y, J u n 2 0 , 2 0 0 2 . 47 Su sa n n a h Mar k a nd ya and J a me s Lo v e, T im e lin e o f Pa cl ita xel Di s p u te s , Ava il ab le a t ht tp : // www. c p te c h.o r g/ i p /h ea lt h /ta xo l/ ta xo l -t i m eli n e2 0 0 1 . ht ml .

15 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

8. Legality of Pay-for-delay Style Agreements in India at Present

Section 27 of the Indian Contract Act, 1872 declares as void any agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind . Emphasis must be laid on the restriction of restraint of trade practices for a lawful busin ess. But since the issue to be determined in litigation between the patent -holders and patent -challengers is with regards to the validit y of patents and legalit y sale by the alleged infringer, arguabl y, the applicabilit y of section 27 is questionable. Moreover, such agreements have confidentialit y clauses or provisions regarding non -disclosure and are part of an out of court settlement process. Challenge under the Indian Contract Act may not take place under those circumstances.

16 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

9. Recommendations
The present framework of competition law in India does not envisage the possibilit y of anti -competitive agreements to settle patent litigation . It is essential to suitabl y amend section 3(5) of the Competition Act, 2002 to bring such agreements within the purview of the Competition Commission of India. In m y opinion, agreements involving transfer of economic value and accompanied by a delay in market entry of generics should, as and when they take place, be submitted to the Commission for ex post review. Such a process can function in a manner s imilar to the provision for merger control , which are to be shortl y notified by the Commission. A legal fiction may be created, which can regard such agreements as presumptivel y unlawful, and imposing the burden of proof on th e parties to the agreement to exhibit a justification to allow the agreement to take effect . 48 From a practical standpoint , the mere fact that there was a transfer of economic value between the innovator and the generic company cannot lead us to an adverse conclusion that the payment caused the delay in market entry of the generic drug. 49 A rigid per se rule against pay-for-delay agreements can be counter productive as it can lead to inhibiting innovation by d enying a generic a source of income by means of a settlement. 50 A rule of reason anal ysis must be conducted and the appreciable adverse effects on competition test may be applied to the agreement that can take place between firms in the pharmaceutical industry.

48

Geo ffr e y A. Ma n n e a n d J o s h ua D. W r i g ht, R eve r se Pa ymen t S e tt le m en t s a n d Up co m in g Co n g re s sio n a l Ac tio n , N e w Fed er al I nit ia ti v es P ro j ect, Au g u s t 2 0 , 2 0 0 9 . 49 B ret D ic ke y et al ., A P re li min a ry Eco n o mic An a ly si s o f th e Bu d g eta ry Eff ect s o f Pro p o sed R es t ric tio n s o n R eve r s e Pa y men t S et tle men ts , Au g us t 1 0 , 2 0 1 0 . 50 Ro b er t G. P l u ta, P ro mo t in g th e P ro g re s s o r Pa y in g fo r De la y? B a la n cin g Pa ten t a n d An ti tru s t La w in th e Ag e o f H ea l th Ca re R efo rm , En g a ge : Vo l u me 1 1 , I ss ue 1 .

17 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

10. References
ARTICLES, REPORTS AND WORKING PAPERS:

Adit ya Bhattacharjea, Do Away With Flaws Before Enforcement Aventis Pharma Growth Surges 16.5% In 5 Months Of Fiscal , The Financial Express Bergheim, Stefan et al., Global Growth Centres 2020: Formel -G for 34 Economies Bret Dickey et al., A Preliminary Economic Analysis of the Budgetary Effects of Proposed Restrictions on Reverse Payment Settlements C. Scott Hemphill, Paying for Delay: Pharmaceutical Patent Settlement As A Regulatory Design Problem C.M. Correa, Review of the Trips Agreement: Fost ering the Transfer of Technology to Developing Countries Census Of India , February 13th, 2011 Competition Issues in The Pharmaceutical Industry , India Competition and Regulation Report Dr. Geeta Gouri, Competition Issues in the Generic Pharmaceuticals Industry in India Geoffrey A. Manne and Joshua D. Wright, Reverse Payment Settlements and Upcoming Congressional Action

18 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

Indias Pharmaceutical Industry on course for Globalisation , Deutsche Bank Research Judge T.S. Ellis, III, Distortion of Patent Economics by Litigation Costs Nikhil Bhatnagar et al., Measuring and predicting competitiveness of Indian firms in Pharmaceutical Industry Nit ya Nanda and Amirullah Khan, Competition Policy for the

Pharmaceuticals Sector in India , CUTS International in Pradeep Mehta Options for Using Competition Law/Policy Tools in Dealing with Anti Competitive Practices in the Pharmaceutical Industry and the Health Delivery System , Report Prepared For World Health Organization by Cuts Centre For Competition, Investment & Economic Regu lation

Overview: the TRIPS Agreement, World Trade Organisation Policy Roundtables Generic Pharmaceuticals, Organisation for

Economic Co-operation and Development Prabodh Malhotra and Hans Lofgren, Indias Pharmaceutical Industry: Hype or High Tech Take-Off? Report - Indias Pharmaceutical Industry , Corporate Catal yst India Report of the Expert Committee on A Comprehensive Examination of Drug Regulatory Issues, including the Problem of Spurious Drugs, Ministry of Health and Famil y Welfare, Government of In dia

Robert G. Pluta, Promoting the Progress or Paying for Delay? Balancing Patent and Antitrust Law in the Age of Health Care Reform

19 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA

PAY-FOR-DELAY: A POTENTIAL COMPETITION CONCERN IN THE INDIAN PHARMACEUTICAL INDUSTRY

Shubham Chaudhuri et al., Estimating the Effects of Global Patent Protection in Pharmaceuticals: A Case Study of Quinolon es in India Susannah Markandya and James Love, Timeline of Paclitaxel Disputes The TRIPS Agreement and Developing Countries, United Nations

Conference on Trade and Development Vikas Bhadoria et al., Indian Pharma 2020 - Propelling Access and Acceptance, Realising True Potential

STATUTES:

The Competition Act, 2002 The Indian Contract Act, 1872 The Indian Patents Act, 1970

WEBSITES:

http://www.financialexpress.com http://investopedia.com http://wikipedia.com

20 RESEARCH PAPER FOR THE COMPETITION COMMISSION OF INDIA