Comments for ‘Pay for delay’ deals in the pharmaceutical industry

Research & Development in pharmaceutical industry are often characterized by many important expenses from big companies called princeps product companies. Indeed, drug market is very particular because it forces actors to concentrate their profits on a relatively short period of time: when a molecule is patented, it is protected during 20 years but is not the only step, industrials must again incur expenses to obtain a market authorization. It exists many others protection which delay the arrival of drug on the market, in average the period of exclusivity conferred by the patent is 15 or 10 years.

That’s why pharmaceutical groups use the “pay-for-delay” deals: this method consists to an agreement between princeps product companies and generic producers to delay the arrival on the market of generic products against financial compensation. In fact, what is happening on the market is, at the expiry of all protections on molecule, generic producers can use molecule without having incurred the research & development costs. Industrials may be tempted to delay the generics arrival on the market by unenforceable means.

“Pay-for-delay” agreements is one of these means and are tracked by competition authorities at national and European level. They consider these deals as restrictions of competition which eliminate the competitive pressure exerted by generic producers on the big pharmaceutical firms. For example, the 19th June 2013, Lundbeck (Danish pharmaceutical firm) has been condemned by the European Commission to a fine of 93,8 million of euros for concluding 6 “pay-for-delay” deals with 4 generic producers to delay the arrival of citalopram molecule. The size of payment made by Lundbeck amounted the profit of generic producer if he had been able to penetrate the market. This disproportionate nature of payments shows that financial compensation wasn’t only to settling a dispute on property rights and it is like a market exclusion agreement.

Beyond the effects on competition, these deals have negative effects on the well-being of consumers at short and long term. In a short term, because at his output, a generic drug is commonly sold at a lower price than the princeps product. So, as long as “pay-for-delay” deal takes effect, consumers don’t have access to the generical product which is cheaper. But the paradox is that the reduction of monopoly period for pharmaceutical companies doesn’t give incentives to produce new drugs and so to contribute to the health care improvement.

To conclude, I can say “pay-for-delay” deals increases princeps product companies’ power market by allowing them to recover their costs. But in the other hand, but despite the rise of generic producers and the resulting tightening of competition, no significant change has disrupted the pharmaceutical giants ranking. Which distorts competition and increases prices, it is a bad new because we know that disease and poverty go hand in hand, so the more drugs are expensive and it not exists generic, the more the poor will not be able to heal themselves. In France for example, the paracetamol is the drug the most consumed and it is not patented since 2003 but because of the pharmaceutical industry lobbying the generic of paracetamol has still not been authorized.

http://www.parismatch.com/Actu/Societe/Medicaments-generiques-pourquoi-la-France-est-en-retard-655260
http://www.elexica.com/fr-FR/legal-topics/antitrust-and-merger-control/27-linterdiction-des-accords-de-pay-for-delay-confirmee
https://www.statnews.com/pharmalot/2016/11/07/supreme-court-pay-delay-glaxo-teva/
http://unctad.org/meetings/fr/SessionalDocuments/tdrbpconf8d3_fr.pdf

In my comment on “pay-for-delay” deals, I will attempt to highlight its relevance in the world today, bring out the incentives of the major stakeholders and provide a recommendation on the way forward for policy makers.

Relevance of “pay-for-delay” deals in today’s context:
• Global
With both US Presidential Candidates mentioning the banning of reverse payment patent settlements or “pay-for-delay” deals, in their bids to make the pharmaceutical industry more competitive[1], we can see that this critical issue, despite FTC and Supreme Court rulings, is still yet to be fully ironed out by regulators and Government officials. Additionally, it is expected that pay-for-delay deals are still expected to cause a deadweight loss of ~$21 billion over 25 years, despite a sharp fall in pay-for-delay deals since 2013, based on a study by Helland & Selbury of the University of Southern California, suggesting that the incentive structure for pharmaceutical industries has not been adequately fixed to rein in the proliferation of “pay-for-delay” deals and the losses sustained by consumers[2]. With the FTC charging Endo Pharmaceuticals in 2016 for alleged pay-for-delay violations, we can see that this is still a pressing global issue.[5]
• EU
With Merck, Arrow, Ranbaxy and a host of other pharma companies who were in partnership with Denmark’s Lundbeck losing their appeal to the top court, an important precedent has been set for future lawsuits, making policy decisions at this point of time critical to impose a strong regulatory standard[3][4]

Analysis of “pay-for-delay” deals and its potential pitfalls
• Big Pharma’s Point of View
Given the risks involved in the innovation and production of drugs from its inception to the time it is ready-for-market, the high uncertainty and long waiting periods faced by Big Pharmaceutical companies like Merck, Pfizer, Allergan, Sun Pharma and so on, justify their eagerness to hedge risks via acquisitions and a pipeline of innovation. Their need to extend their period of exclusivity for as long as possible means that there is always an incentive for them to engage in private deals with generic firms in a bid to limit their entry. Simplying outlawing “pay-for-delay” deals would only shift their incentive to less obvious means of payment, such as access to funding for drug research and availability of marketing and distribution facilities to generic drug makers.
• Generic Firm’s Point of View
While it doesn’t seem like a generic firm has an obvious incentive to even deal with Big Pharma, the short-run possibility of profits does not outweigh the long-run risks of competing with Big Pharma companies, who have the resources to attract the best talent – a crucial point of growth for generic firms. Additionally, the existence of an authorized generic drug provider gives generic firms a nefarious incentive to engage with their theoretical competitors in Big Pharma to gain access to the exclusive right to sell a drug, even if it is delayed by a couple of years.
• Consumer’s Point of View
Despite overt regulation by the FTC, we can see that the consumer still suffers either from having to pay unreasonably high prices for drugs due to the lack of competition to Big Pharma companies’ drugs, or suffer from a lack of quality drugs as no incentive exists for Big Pharma to innovate and produce affordable, quality drugs. It is not easy to resolve this dilemma between competition and innovation and undoubtedly, the reservation price of consumers and the actions of generic drug makers does have a major role to play in this area. For instance, companies like La Roche and Novartis have been stung by Indian courts ruling against the validity of their patents in favor of generic manufactures like Cipla. [6] This reduces their willingness to invest in research facilities in India and other developing countries. In both cases, the average consumer stands to suffer the most

Recommendation going forward – Removing the concept of authorized generic drugs

While currently, the policies being discussed include establishing guidelines to determine what settlements between generic and Big Pharma companies are legitimate and what terms and conditions are acceptable, I posit that the underlying incentive given to generic providers of exclusive authorized access is the real problem.

By removing the concept of one generic player gaining access earlier to the drug when its patent expires and opening it up instead to the free market, the incentive for Big Pharma to pay off generic firms is drastically reduced as the low barriers of entry to the pharmaceutical industry mean that millions of boutique pharmaceutical companies can start up to claim their share of the settlement offered by Big Pharma. As even the largest of these companies cannot afford to pay off all generic providers, and a strong incentive exists for generic firms to compete amongst themselves to produce the fastest and most effective replica, the primary motive for collusion is minimized. If this regulation can be combined with effective maximum price regulation by the relevant authorities, then the possibility of price retaliation by Big Pharma in a bid to maximize profits also reduces. Their need to innovate still exists as the volume of drugs sold in a period of time will become as relevant, if not more, than the profits earned, during the period of exclusivity. [7]

While there are more nuances that need to be looked into, such as the possibility of innovation shifting only towards treatment drugs and not curing diseases, the removal of an authorized generic drug maker policy is one that is sure to benefit consumers the most.

References

[1] https://www.statnews.com/2016/09/28/pay-for-delay-deals/

[7] http://competitionpolicy.ac.uk/documents/8158338/8368036/15-5+CCP+Working+Paper+complete.pdf/8491723f-4c10-469c-8271-d0d0b6636c37

From my point of view, competition within the pharmaceutical market would be more convinient from consumers’s perspectives and, thus, should be implemented. Of course this issue involves a lot of other points of view for which is not easy to simply conclude like that. What is not convincing, in my opinion, is the justification of a monopolist structure to guide the pharmaceutical market because of its ability of re-investment in R&D. That seems quite a devise to get more profits from that market for only few of business men. I do not want to say that the pharmaceutical sector is not a peculiar kind of market, of course it is: the humankind wealth is concerned. What I am trying to stress is that, in fact, the market of medecins and the research about drugs should not be considered as activities to be done only and solely by the same actor. I think business sometimes may have different incentives and objectives to follow from those of medecins’ research field and final consumers interest.
Along with restrictions and bans of “pay-for-delay” systems, maybe would be more efficient to implement plans of investement in research by part of the state to let centers of drugs’ research, universities and also branded drug makers work but with funds coming not necessarily from the companies’ profits. We cannot solve the problem by only ban these deals, we need concrete incentives to invert the system.

In my opinion, though, it would be desirable for the state to take a role within this business to let the competition work in this particular market with prices becoming more accessible and, at the same time, the incentives and capabilities of organizations to do research being preserved and boosted separately. Both the short and long run perspectives of consumers’ well-being have to be settled. The society welfare is a public interest and medecins may be seen as a public good in this sense. It is essential that the investments and investigations in this field are preserved and stimulated but, on the other side, this should not turn to be the justification of higher prices (and costs for health service) to sustain in the short-run.

Having personal desires to pursue a career in the pharmaceutical industry, I would like to acknowledge that I innately have a bias towards these topics. With that being said, I have tried to maintain neutral and think critically and rationally on this topic – I have taken a devil’s advocate stance and will approach it as such.

The role of a multinational pharmaceutical company is much more than just an enterprise that makes drugs for consumers. This specific type of MNE has a role that is more intricate and sensitive when compared to another MNE of its respective size. Along with creating positive relations within their departments that other MNE’s have (ie. marketing, sales, data analytics, HR, finance etc.) they also have to incorporate the opinions of researchers, physicians and the general public – considering the sensitivity of what they are dealing with, human health. MNE pharma companies have more parties to involve in their business model and therefore require more resources to support this supply chain. To maintain adequate, cutting-edge R&D is not cheap and they can therefore use this argument to legitimize their monopolistic marketing scheme.

Now, on the other hand of the coin is the healthcare accessibility argument, whereby these raised drug prices are limiting access for certain marginalized communities. If generic companies did not contribute to the monopoly of certain pharma companies, drugs may be more accessible for all and improve QOL for more populations in the world.

Now, personally I do not think that completely banning these pay-for-delay deals will benefit mankind nor the pharma companies. These smaller scaler generic companies do still have a bottom line and if and when prices are reduced because there is more competition in the market, the market entry barriers will be reduced and even more competitors will make a foray. Subsequently, increasing drug prices again and the cycle starts all over again. This would also de-incentivize the drug companies from investing heavily into R&D and ultimately limiting the progression of healthcare diversity. But that’s not to say this current system is without its flaws.

I am confident that if we introduce another party into the system then we will come closer to an equilibrium for consumers and the MNEs alike. If the third party we introduce is more rational and understands both parties’ needs – we can come closer to a solution that accounts for everybody. For example, if we incorporate organizations such as the World Health Organization or the International Dispensary Association we can satisfy all parties. As opposed to having the government strictly determine the fate of this dilemma, these non-governmental organizations can introduce a perspective that is for the betterment of global health, whilst still understanding the necessity for the bottom line and R&D.

I think this problem is a complex problem of collective-action, one of those situations that are deeply studied in Game Theory.
We have two kinds of firms who share the production of one good: the human’s wealth.
These two agents want to maximize their profit, but they start from different conditions: the branded drug makers must face an higher level of expenditure due to R&D, while the generic groups acts like “free riders”, cause they don’t have to pay money for the scientific research but, after a defined period, they can benefit from the same results.
These two firms have found a solution to solve their game: the “Pay for delay deals”, that we may define as a Pareto Optimal Equilibrium of this game.
But now the problem is that there is a third actor, that actually is included also in the two other ones: people. People are worse off, because after the pay for delay deals the will pay higher prices for their wealth than before. But what would have happened without these deals? Probably there would be a lower level of research, due to less incentives for the branded drug makers, therefore a lower level of human wealth.
So now the questions are: how do we solve this complicated kind of game? How do we consider human wealth? Is it a public product, a private product or something else? What are the real actors of this game?
I think that the last question is the most important. The real actor is one: people, because the consumers are persons, but the producers are persons too. Starting from the director of the most branded firm, till the last worker that constructs the containers of the less expensive generic medicine. A worker that probably will be penalyzed by the pay for delay deals.
We should try to start thinking seriously that there are products that cannot be exchanged in a market in which are applied the same reasoning that we apply for the other products.
Anyway since that’s seems to be impossible, we must solve this game in an alternative way, that will maintain the same incentives for R&D and low prices of the medicines for the people.
This is one of the most important government’s duty, the creation of one or more focal points that must be able to converge the interests of all the agents.
I try to make an example, let’s imagine two different norms made by the goverment to solve this specific problem.
The first norm positively correlates the duration of the exlusivity period with the level of investement in R&D made by the branded drug maker. So the more you invest, the more you’ll monopolize the market.
The second norms negatively correlates the medicine’s price with the duration of the exclusivity period. The more you’re the only actor in the market, the less you sre free to raise up the price of your medicine.
Obviously this is a simple example and there all some other variables that must be included, but I hope it could give an idea and a starting point for further reasoning and studies.

Allow me to broaden the ongoing debate on pay-for-delay-deals in the pharmaceutical industry by focusing on the economics of generic drugs in developing countries. As Anup Malani rightly pointed out in his Forbes article most patients in North America and Europe are covered by health insurance schemes and thus only pay a small fraction of the real costs of drugs themselves. In developing countries this is quite different which leads, in my opinion, to different results when thinking about generic drugs and originators´patents.
Using the distinction by Towse et al( 20011) in their paper on the economics of drugs and vacccines in developing countries, both ” global diseases” ( such as diabetes, cancer etc) and ” neglected diseases( e.g. Malaria, Ebola,..) exist in developing countries.
I will first focus on the ” global diseases” ( which are also common in develped countries). Many drugs and therapies exist nowadays to treat theses diseases efficiently. However the originators´products are in most cases simply not attainable or affordable for the majority of the population in third world countries due to financial and logistical constraints. At the same time a multitude of cheap and untested generic drugs( in most cases imported from China or India or home-made) do exist and are sold at only small fractions of the price in developed countries. As these generic drugs are often introduced into these markets irrespective of patent existence in developed countries( due to lack of patent legislature or filing in the developing countries), these generic drugs are not only much cheaper but also often untested for efficiency of treatment or possible side effects. In many cases there is a lack of control of the ingredients and properties of these generics and they are thus also highly welcoming to fraud. This author himself has seen simple antibiotics being sold as malaria drugs in Ghana( which are completely in fighting the effects of malaria). Allowing for a quicker introduction of tested generic drugs in rich countries, these generics will also spread in developing countries and can thus help fight many of the above- mentioned problems with untested generics. The pay- for- delay policy from pharmaceutical firms in rich countries therefore directly impacts on the distribution of drugs in developing countries as well but with completley different implications and consequences. Allowing for the spread of untested and possibly ineffective drugs in developing countries by the reasoning of a higher profit share of originators seems highly questionable from a normative point of view when thinking about developing countries.
The economics of “neglected diseases” is however different. What sets these diseases apart is that they are prevalent in developing countries. For many of these diseases no drugs for treatment exist which can partly be explained by only small amounts of R&D of pharmaceutical companies being used on development of possible cures and drugs to these third-world specific diseases. The reason is that the expected revenue( even with working patent legislation in these countries) would be too low to make up for the huge R&D costs.
This can best be illustrated by the outbreak of Ebola in different West African countries last year. At the outbreak, no drugs against Ebola existed and only after the promise of the WHO and different governments to support financially pharmaceutical research was a first drug developed in only a few months. While the first cases of Ebola were already registered in the 1980s it was at the time not feasible to direct big fractions of R&D spending on finding drugs to treat supposedly few( and poor) patients. After the huge outbreak last year, however, much more money was poured into research of this disease and it took pharmaceutical companies less than a year to develop a drug which halfed the mortality rate of new patients.
Regarding neglected diseases, it might be in the interest of governements( and the WHO)- at least from an ethical point of view- to even support monopolies financially in order to increase the chances of developing a public good. In this cases natural monopolies will exist and allowing for competititon for public funds will probably not increase efficiency.
Taking into account the direct consequences of competiton from generic pharmaceutical companies also for developing countries shows that a quicker introduction of genric drugs may be welcome for ” global diseases, while natural monopolies will prevail in the market for drugs to treat ” neglected diseases”. Of course these results are not unkonown to the WHO and that is a reason why it has been demanding the faster introduction of generic drugs in developing countries for many years.

Sources:
http://www.forbes.com/2010/07/15/drug-patents-pharmaceuticals-opinions-contributors-anup-malani.html
Drugs and vaccines for developing countries. Office of Health Economics Research( 2011). Towse et al,
retrieved from: https://faculty.fuqua.duke.edu/~dbr1/research/developing-Oxford.pdf

WHO programmes, under http://www.who.int/trade/glossary/story034/en/

EU Commission recently fines a large French pharmaceutical company Servier to pay 427 million euro fee for a “Pay for delay” case(1). Indeed, the EU Commission bans collusion including cartels as it claims to be damageable for economy, innovation and consequently to social welfare.

At first sight, we might thought that pharmaceutical cartels are preventing the initiators to innovate by keeping their monopolies on a molecule for a longer run than legally permitted. However an incentive from firms to establish such a cartel would resides in the non-efficiency of the patent length.

It is obvious that the time-frame of a patent encourages strategic innovation. However, a too short patent period also limit the content of the innovation. As it happens with the pharmaceutical industry, firms has to find molecules that are complex enough not to be easily copied by means such as reverse engineering. Indeed the innovative firm has to generate from its new product an sound return on its R&D investments, to have an incentive to further innovate contrary to a generic drug producer, who do not support innovative costs including risks (investment on the research,validation from the authority, consumer claims…). This implies, pharmaceutical firms have to spend time searching for a cure and for a cure that will be protected from competitors know-how. In other words, if some diseases could be easily cured with easy-to-imitate molecules, there would be no profit for the discovering firm which would have an incentive to either look for a more elaborated drug or to search to prevent from a different disease. Another option to counter the patent time-frame issue is to put a further premium on the product price which would make early adopter of the drug supporting more costs of it. As such, competition and reveals of patent, according to this example, do not increase social welfare but short-termism vision contrary to “industry-made” patent horizon which leads to a win-win situation for both firms from an innovative and a social welfare point of view.

Source:
(1) http://euobserver.com/news/124917

« Pay for delay » deals are extended to several domains: we can consider it as an economic, a politic, a social and a legal issue, and that makes this subject’s complexity. Let’s analyse to what extent consumers, policy makers and pharmaceuticals entreprises are concerned by the banning of this kind of settlement.

Firstable, in my opinion, we can clearly say that this form of settlement is a case of cartel. The two sides of the market decide together to find an agreement in order to avoid competition and the market rules. Branded drug makers and generic groups act like two entities working together to maximize their profit, and consequently, consumer’s welfare. Of course, it is well known that anticompetitive relations between firms like cartels are prohibited by the european legislation. Nevertheless, according to Oliver L., Roush C. and Breed L., « as long as the brand name manufacturer’s patent are valid and being infringed, a settlement agreement restricting the entry date for the generic drug does not have any impact on lawful competition.

Furthemore, the typical case of pay for delay according to professor Belleflamme is simple: «branded drug makers pay generic groups to delay the launch of lower-cost version of their drugs». Let’s see the positive and the negative impacts of these settlements on different market’s actors.
Pay for Delay practices allow branded drug maker’s to put high prices on their products (monopoly case) more time. Of course, this aspect of the settlement represent a economic advantage.
After, keeping a patent during more time could be an incentive for companies to invest in R&D in that they can make more money on their innovations. Of course, the first people enjoying these innovations are the consumers. Acoording to this aspect of the problem, Pay for Delay practices are benefic for firms and consumers as well.

After, banning this kind of situation would spur an hyper competition on the pharmaceutical market (after patent’s life). Of course, generic groups will lower prices and this competitive situation can be synonym of bankruptcy for some firms which don’t have the same technology or the same means. Maybe entry barriers can be promoted by the shortening of patent’s life. In this case, Pay for Delay’s forbidding can have a negative effect on some firms.

Acoording to the pro’s and the co’s, we could simply say that this kind of cartel is generally benefic for the market. But can these advantages compensate the diminution of consumers’ welfare ? It is an economic problem, but also an ethic problem. In Belgium, drugs are partly paid bu social security and insurances, we think thus consumers are not really affected by these kind of settlements. But the government have to pay these extra costs, and they have to fill the gaps by creating new taxes. At the end, the consumer will indirectly pay for this cartel. In my opinion, these economic uncertainties and ethic issues are sufficient to ban these deals.

As a conclusion, I would say that through these readings, I learned a lot about the pharmaceutical market, the legislation about patents, and relation between entities concerned, and the several domain affected by these Pay for Delay deals make this debate really complex.

The 19th June 2013, the European Commission fined Danish pharmaceutical company, Lundbeck, and eight generic drug producers a total of €146 millions for delaying the supply of a cheaper version anti-depressant drug, Citalopram (marketed as Celexa or Cipramil) to consumers.
First of all, we can see “pay-for delay” as a strategic entry barrier. Big pharmaceutical firms share part of their monopoly profits with their competitors.
The explanation given in 1982 by Richard Gilbert and David Newbery can be completed with Furderben and Tirole taxonomy (1984) (1).
According to Funderben and Tirole taxonomy, the big pharma firms have decided an entry accommodation strategy called “the fat-cat”. They decided to overinvest (paying big amounts to their competitors) in order to accommodate entry by committing as incumbent to play less aggressively later.
Secondly, social welfare effects of this strategy are clearly the deadweight loss for the patients (consumers) and the risk of increase the deficit of social security national systems. But all the citizens, included patients, pay thanks to our taxes.
Finally, what will be the effect of forbidden the pay-for- deals over the innovation of the pharma firms? The big pharmaceutical companies would afford the sunk cost of paying the fine and according with Funderben and Tirole taxonomy we would expect maybe underinvestment.

(1) The fat-cat effect, the puppy-dog ploy, and the lean and hungry look. Fundenberg and Tirole (1984)
http://www.nuff.ox.ac.uk/users/klemperer/IO_Files/Fudenberg%20and%20Tirole.pdf

In my opinion this debate entails the analysis of two broad issues. First, whether pay-for-delay effectively provides further incentives for innovation. Secondly, as raised by Douglas Clement, whether monopolistic structures forward better performance in terms of innovation output. I will focus on the former issue: altogether, I strongly believe that the costs of allowing pay-for-delay in the pharmacy industry do not counteract its costs.

From a social view, pay-for-deal equals prolonging patents length. Theoretically, we would expect dynamic efficiency to be enhanced at the expense of static efficiency. Yet, I believe that it is highly likely that such a policy would not have a positive net effect for two reasons: the present discounted value of firms profits are low, while social costs seem to be higher.

Firstly, 20-years patents on drugs are already providing effective exclusion for other competitors. As we have seen, the pharmaceutical industry is within the small group of those reporting that patent protection is effective in terms of exclusion –while in other sectors it may operate as a sort of coordination device or as a measure of output. In other words, despite fixed costs on R&D in this industry are especially high, it seems that firms are able to capture the returns of their investments. Crucially, stretching a 20-year patent length would not provide too much further innovation incentives since additional compensation occurs many decades in the future. Its present value is, therefore, small.

On the side of costs, as we know, providing further monopolies on inventions generates a deadweight loss. Importantly, here, the outcome should not be measured as “abstract” social welfare loss but –as the World Health Organization says- disability-adjusted life years. Again, bearing the discounting factor, the present value of this innovation from a social perspective is rather small, since it takes place many decades in the future. Still, “life years” deadweight loss and a reduced social value of invention are not the only costs. On top of that, patenting drug products and processes block competitors from innovation “based” on previous research. Provided the pharmaceutical patents actually assure exclusion, further development on the basis of past research is delayed.

Anyways, if the previous reasoning is wrong, I don’t see the point in allowing pay-for-delay. If it is seen as an effective innovation incentives enhancer, then policy makers should just increase patent length. The point of having a regulatory framework establishing a patent length is that policy makers have a tool to weight the dynamic versus static efficiency trade off. Allowing pay-for-delay means that part of that trade-off is solved not from the policy perspective but from the market perspective.

However, as I have argued, this does not seem to be the case: there is a high social cost associated to increasing patent length –which, by the way, may be underestimated- and due to discounting on future flows of profits of both innovators profits and social welfare. Finally, the debate linking market structure to innovation incentives needs for a deep, sectorial analysis. However, at this stage, most of empirical research outlines that competition is associated to higher innovation and productivity. Theories outlying the mechanisms through which monopolistic structures have greater incentives seem to be discarded due to the existence of the so-called “replacement-effect”.

Firts of all, let’s take a look about what happens today in Europe. Around 2008, there was a high competition level between pharmaceutical firms. They were used to practice the Pay for delay with generic firms. The European Commission identified a huge number of those practices. Some of them are illegal. Following the Commission approach (on competition law aspects) in some cases this practice is a breach in the European competitive rules. If for example it is seen as patentee’s payments, there is no illegal element and the Pay for delay is possible.

So, the point here is that the European Commission is currently trying to limitate this phenomen but doesn’t succed as well as it could. The Commission wants to encourage social welfare. And as the article here says, Pay for Delay practicies reduce the social welfare on a short and long run. So, in their role of European Commission, searching for this kind of objective, they do have to develop solutions in order to avoid those practices.

However, we have to consider the impacts of definitively stopping such practices. If all the eneric firms would start to launch their own cheap version of pharmaceutical products, it will lead to more competition in this sector. A good point for the consumers, and the social welfare in general. But what about the risk of seeing a lot of generic firms launching themself in big production, high competition level and so takin risks. The fact is that they don’t have the same dimensions and experiences that bigger monopolistic pharmaceutical firms have. Managing an innovation is not as simple as it may look. What about the consequences of such failures of those generic firms ?

In the US, they adopted this law that forbid Pay for delay. But in the US, they don’t have the same concept of failure than in Europe. Tey are risk takers and we’re less so. Is this application in Europe going to fit with our market ?

Of course it could also lead to more innovation in this sector, because they will not develop something that could be delayed anymore (and so that will not be used). But developing the project is not launching it on the market. In case of failure, the generic firm disappear and less other firms will have the incentive to try to follow that way. The Pharmaceutical sector is really important for the whole population so if we put this sector in a bad position, we will all suffer from it. We need innovations, we need to improve them and of course competition will lead to more innovation that the actual “monopolist” situation. But there are other elements to take into account. Are we willing to take a risk of pharmaceutical crisis just to allow cheaper products on the market ?

According to the Federal Trade Commission, Pay-for-Delay is one of the top priorities that US have to deal with. Indeed, a study reveals that these anticompetitive deals cost consumers and taxpayers $3.5 billion in higher drug costs every year. For the record, Pay-for-Delay involve branded drug makers paying generic groups to delay the launch of lower-cost versions of their drugs. In other words, branded drug makers pay to their potential concurrent in the purpose of soften competition.
Everythink has two side, and the Pay-for-Delay is clearly not an exception. That’s why I will discuss the advantage and disadvantage of prohibiting such a method. Then, I will try to express my point of view, in particularly, by bringing out potential solutions.

On one hand, prohibiting drug companies from using the pay-for-delay method could lead to a drop of costs for generic drugs in the market more quickly. So, Consumers and government could beneficiate of savings. Then, from an ethical view, it could also ameliorate patient health. In fact, generic drugs would increase medication adherence. Therefore, for patients who rely on multiple medications to help them stabiliza and manage their conditions.

One the other hand, for pharmaceutical companies, agreements such as pay-for-delay are a cheap way to subtitute patent lawsuits. As a result, there are a quickly solution, it could avoid a paralisie of the market. An other advantage, it’s that it create incentives for branded drug maker to invest in research and development which is a need for the welfare of the consumer.

So, as far as I’m concerned, I would say that pay-for-delay is a good way to create incentives to innovate and invest in research for branded drug makers. Nonetheless, I think that it would be forbidden a few years after patents end up.

“Pay for delay agreements” also known as “reverse payment patent settlements” occur especially in the chemical and pharmaceutic industry, presumably due to easier imitation possibilities of innovations than in other industries. Therefore firms in this markets are lend to patent innovation more often than to keep it secret which causes the mentioned phenomenon that again can be seen as a natural monopolist behavior to prolong the respective hegemony. In the following comment I would like to discuss the different views on the topic out of an overall welfare maximization perspective.

Firstly, on the one hand, one has to point out that the “Pay for delay” practices, as we can see from the article, are part of an incentive system which is connected with the patent. Hence as a reaction of a ban that prohibits this possibility, firms could be deterred to create new innovations in the mentioned markets. E.g. in the USA – indeed, at first glance, since the time of the first bigger debates about the “Pay for delay agreements” and the finally ban we can observe a distinct decrease in pharmaceutical patents (see sources). Of course there might be other factor which influence the statistic which can be mainly found in a well-defined analysis, it is just to get some impressions in the first place.

On the other hand supporter of the ban may assume that a monopolist will put more effort in building market entry barriers (lobbying, rent seeking) than to create innovation compared with a firm that is situated in a perfect competition market – that might be an interesting approach for another discussion.

Nevertheless one has to mention that “Pay for delay agreements” are kind of collusion between the monopolist and potential firm which want to enter the market e.g. of a particular medicine. Therefore numerous states declared that behavior as illegal.

Furthermore due to such arrangements the deadweight loss(DWL) over time increases. In fact the monopolist offers a part of its producer surplus to the potential rival. It is a “win-win” situation for both on the expense of the consumer surplus. On the one hand the monopolist prolong its state of hegemony which involve the consequences of DWL. On the other hand the potential rival gets a granted amount of money without facing the risk of litigation and market entry costs. According to this the amount of money the potential rival will earn depends on its bargaining power and the risk behavior of the agents.

To sum up in an overall view the disadvantages might outweigh the advantages. Moreover there are a few sophisticated approaches with the goal to provide incentives for the potential rival to enter the market without the need to ban „Pay for delay agreements” like the “Hatch-Waxman Act”. Therefore a ban can only be seen as an ultima ratio.

Sources:
http://www.insidecounsel.com/2012/08/15/supreme-court-may-decide-whether-reverse-payment-s
http://epub.ub.uni-muenchen.de/12734/1/Gratz-Economic_Analysis_of_Pay-for-delay_Settlements_and_Their_Legal_Ruling.pdf
http://stats.oecd.org/Index.aspx?DataSetCode=PATS_IPC

The issue of the “pay for delay” deals in the pharmaceutical company is a truly complicated one. Before starting reading the materials which is proposed in this blog, I was outraged by this practice which seemed to me identical to price fixing agreement. Now, my thought are much more mitigated. Therefore I choose to express two views that seemed equally valuable to me. The first one will defend the practice of “pay for delay” while the second will do the opposite.
Let’s start with the elements that support the “pay for delay mechanism”. Here, it is useful to explain how particular is the patent system in the drugs market. A new drug developped by a company will usually be patented before starting its experimentation on human beings. As a consequence, there is an important period of time between the patenting and the commercialisation of a new drug. Therefore, the effective period of time during which a drug company can charge monopoly prices is greatly reduced compared to the theoritical length of a patent (20 years). In practice this means that a drug company has, on average, 8 years to cover its very high R&D costs before having to cut its prices by 80% because of the entry of generic drugs.
Another important particularity of the drugs market, at least in the US, is that the federal authorities promote challenging of drugs patent. Indeed the first generic firm that can prove the invalidity of a patent will obtain a 6 month monopoly in the commercialization of this drug.
When you take into account all of these elements, drugs companies doesn’t look like priviliged at all. The effective length of their patents is extremely short (8 vs. 90 years in the case of cultural products such as movies, books…) and they have to spend a lot of money in the court defending them against generic companies which are encouraged to challenge them. The “pay for delay” deals seems therefore unaccaptable. Not because this practice is a form of trust. But because innovative drugs producers have to pay their competitors to get what they righfully desserved, i.e. those 8 years during which they can truly benefit from their efforts in R&D. In the real life, those deals are the only way to make the developement of new drugs profitable. In this way, they increase the total social welfare as they boost the panel of new drugs that are brought to the market.
Now, let’s switch to the other point of view according which those deals should be forbidden. Why would drug companies owning a valuable patent make a settlement with a competitor that is challenging it? The only valid explanation is that this patent is highly likely to be invalid. Indeed, no one would try to sue a drug company that has been winning all its lawsuits so far.
The existence of those deals allows companies to charge high prices for products which are not innovative at all. At the end, the total social welfare is smaller.
As you can see, the issue of “pay for delay” is quiet messy. Strong arguments can be put forwards to defend both view. It would be interesting to study further how the profitability of those innovative drugs firms has evolved since those kinds of deals are strucked. If it is shrinking then “pay for delay” deals should be considered as a the only way for innotive drugs companies to get some return on their high R&D costs. On the other hand, if the profitability is growing they should be seen as a form of cartel and be prohibited.
Source : file:///C:/Users/benoit/Documents/UCL%20master2/Economics%20of%20innovation/contribution2/patent_settlements_-_bennett.pdf and
http://www.ipwatchdog.com/2013/06/18/supreme-courts-actavis-decision/id=41999/

I agree with what most people posted regarding these 2 facts:
– the welfare loss, especially to the huuuuge part of the market that can’t afford the brand-name drugs, is too high to ever justify pay for delay
– this basically constitutes a cartel that results in monopoly, higher prices, and by definition should be illegal

But there is another possibility of welfare loss. Historically speaking, innovations throughout history have come from a large number of people, all working in different areas and facing different constraints and problems. If we limit the number of firms and people working on a specific line of drugs, we are effectively lowering the probability that any significant innovations will be made in a given time.
This is a very general evolutionary principle, for instance, look at Australia… the smallest and most isolated continent, and life there is generally less evolved than life on the other continents, which were larger and connected.

The big pharmaceutical companies say that this is the only way for some drugs to be profitable enough to warrant such high investments to make the innovations in the first place. But we have to remember something: their objective isn’t to innovate and provide good healthcare products to the masses, their priority is to make money.
And speaking of making money, big pharmaceutical firms aren’t incentivized to find cures for diseases, just treatments. The most logical move for them is to have patents for cures, and only release them on the market as punishment for other firms releasing theirs. This means that the only firms with an incentive to find cures for major persistent diseases (like HIV) are smaller firms (besides non-profit organizations).

So while there is not way to predict what-ifs in the future, there can only be a loss, and no gain, from pay to delay deals.

The issue of the-pay-for delay can appear when a patent is «weak». If the patent is invalidated in court, the protection of the monopolist ends prematurely. Instead of solving the problem in court, holders of “weak” drug patents offer an amount of money to generic companies in exchange for promises to stay off the market. In other words, they settle their disputes out of court by the pay-for-delay agreement. It seems obvious that the generic producers accept such a deal if it provides them with a sum of money as large as if they had entered the market.

Before june 2013, several appeals courts in the USA did not consider the pay-for-delay as anticompetitive if the settlement agreements fell «within the scope of the patent»(1).
Recently, however, two decisions of justice have sanctioned the pay-for-delay, one in the USA, U.S. Supreme Court decision in FTC v. Actavis, and, another in EU; both have considered that the pay-for-delay is anticompetitive. «The European Commission has imposed a fine of € 93,8 million on Danish pharmaceutical company Lundbeck and fines totalling € 52,2 million on several producers of generic medicines. In 2002, Lundbeck agreed with each of these companies to delay the market entry of cheaper generic versions of Lundbeck’s branded citalopram, a blockbuster antidepressant. These agreements violated EU antitrust rules that prohibit anticompetitive agreements (Article 101 of the Treaty on the Functioning of the European Union – TFEU)»(2).

In such litigations, two interests are to be placed in balance. On the one hand, giving the incentives to spur research and development to innovate and on the other hand, respecting the laws that protect competition. In my opinion, the second interest must dominate the first one otherwise big drugs companies play in the market according to their own rules pretexting they have deep pockets. Moreover, the goal of the antitrust law is to promote competitive markets and thus improve the consumers welfare. We can find a tradeoff between these two requirements without violating competition law. From an anti-trust perspective one of the possible solutions is to deliver «production licenses to the generic drugs producer»(3).

In my opinion, the pay-for-delay agreement gives «extra time» of protection to the brand name companies by paying the generic drugs producers off the market. This practice is clearly anti-competitive because a monopoly exists despite a «weak» patent that would probably be invalidated by a court.

In conclusion, we would not see this problem appear in the case of «strong patents»(4) because in this case, the brand drugs producers would have a valid patent, then they would legally act as monopolists. Therefore, the pay-for-delay would not be seen as violating the competition rules. The question of pay-for-delay brings us back to a preliminary issue, it is the issuance of “weak” patent itself. In fact, if the patent applicant is examined more carefully upstream, we could possibly minimize problems downstream.

(1) RUDOLPH J.R. PERITZ, Taking antitrust to patent school: The instance of pay-for-delay settlements,The antitrust bulletin, Vol. 58, No. 1, Spring 2013, p.159.

(2) http://europa.eu/rapid/press-release_IP-13-563_en.htm

(3)http://mjlst.umn.edu/prod/groups/ahc/@pub/@ahc/@mjlst/documents/content/ahc_content_457227.pdf

(4) http://cblr.columbia.edu/archives/12723

While assessing « pay for delay » deals’ effect on society welfare, we are again facing the tradeoff between static and dynamic efficiency.

Giving incentives to drug companies by allowing the extension of the monopoly period is the main argument in favor of these complementary practices. How far should the society go to increase dynamic efficiency? Are the profits generated during the patent period not enough to motivate the companies? Do we have to “strengthen” the incentives? At which cost?

The nature of the product is important here because it involves health. Consumers’ price elasticity of drug demand is likely to be low (even, relatively inelastic). Most of them would certainly be willing to pay the price of the branded drug to make sure they are getting the best chance to recover from (or prevent) a disease. Consumers that would turn to generic drugs would mainly be the ones that cannot afford buying the branded drugs, therefore, prolonging the monopoly situation would impede their access to the most basic condition towards welfare: health.

In countries where citizen benefits from good health care system reimbursement (e.g. EU countries), this may be a less important issue but the drug companies – having their headquarters in those countries – are producing the only solution for consumers other countries (e.g. Developing countries). Should we allow the diffusion delay there too?

From my perspective, “pay for delay” deals in the pharmaceutical industry are not only inefficient from a static point of view but also unethical!

I believe that the long term “gain” from the dynamic point of view are far from compensating the losses in the short and middle term. It is regrettable that those deals are common practices in the industry and, for me, legislators are right to try to prohibit them.

By reading the press about the subject, it appears that lately the goal has been to ban «Pay- For-Delay» settlements. The main reason metionned in articles is that these deals and high drugs’ prices that follow would cost consumers and taxpayers an average of $3,5 billion per year (1).
Nowadays, these settlements are said uncompetitive and therefore are more and more forbidden in the pharmaceutical industry. To my mind, banning them is not necesseraly a good thing because it might have the consequence of lowering incentives to invest in R&D, research, and innovate in this sector. That would mean less new medicines which obvisously is not a good news for the welfare of the population.

By giving money to generic medicines’ makers to prevent them from entering the market, innovators stay in a position of monopoly. This position leads them to earn more money than if a competitor was on the market selling the same but cheaper drug. The extra money earned also may reimburse the costs involved in the innovation path and patent filing of the drug. If enough earnings were not garanteed at the sale of the new medicine, and if other companies can make medicines’ duplicates without having to invest in R&D or pay for licences, why would innovators bother in creating new ones?
What’s more, it has been found that with the entry of cheaper generic drugs in the market, the number of drugs sold does not increase (2). It can be easily understood with the fact that health care systems reimburse in most case some or the full price of the drugs. As a consequence, I believe that monopolies and higher prices are not a valid arguments for not allowing settlements.

I think that the pharmaceutical system can not be compared to another industrial sector. It does not work the same way. Giving innovators incentives to create new medicines is even more important in this sector. Moreover, health care system are supposed to be there to help the consumers taking care of them. So a good idea maybe to let innovative firms be in a position of monopoly for some time to enable them to reimburse their former expenses in R&D and make enough profits to incentivize their researchers to keep looking for new ones. Then, once enough money is gained, the generic drugs could enter the market which will decrease the costs paid by the health care system, taxpayers and citizens.

(1) FTC [Federal Trade Comission] (2010) “Pay-for-Delay: When Drug Companies Agree Not to Compete”.
(2) Malani A. (2010) “Pay-For-Delay Or Pay-For-Innovation?”, Forbes.

The balance between incentivising innovation and promoting competition in the pharmaceutical drug development sector is permitted by the grant of a patent. As long as the patent holds, the innovator enjoys monopoly profits but as soon as the protection ends, generic producers are free to enter the market. In order to extend the exclusivity period, branded pharmaceutical companies opt for pay-to-delay (or reverse payment) deals which are agreement between the pharmaceutical company holding a drug patent and its generic challenger. The generic firm not only receives a payment but it also gets an authorized licensed entry at a later date, but before the expiration of the patent itself (Bokhari, 2013). In other words, reverse payments are used to preclude generic competition by means of a privately negotiated agreement, rather than relying on enforcement of the patent in courts. In this context, they can be seen as “out-of-court” settlements. Generic companies agree to preserve the branded drug company’s monopoly in return for a share of the monopoly profits, so they can make more money from the settlement than they would from sales of the drug during that time period.

By delayering the entry of generic drugs on the market, such agreements cause welfare loss for consumers because they have to pay supra-competitive prices. If there was perfect competition, i.e. there are generic and branded drugs on the market, the competition with the generics would drive down the price of the brand name drugs and thus reduce the sales of branded drugs as well as decreases their prices which in turn lower the profits of the branded pharmaceutical companies. In other words, pay-to-delay agreements restrain competition from lower-cost generic medicines. They are an attempt of the branded drug company to maintain market exclusivity and to set monopoly prices. They also affect consumer well-being in the long run. In fact, drug patents are different from other patents in terms of granting. The drug patent is granted before the research is completed, and serves as an incentive to conduct clinical tests in order to prove the safety and effectiveness of the drug. So without the patent, the drug could not enter the market. In this context, banning pay-for-delay settlements, i.e. shortening the period during which the branded pharmaceutical companies enjoys monopoly position, could reduce pharmaceutical innovation because some firms may not have the needed incentives to spend in R&D in order to produce new drugs.

It should be noticed that the presence of generics can also have positive effects on branded drugs. According a study published by the National Bureau of Economic Research, generics increase the total volume of drug sales – both the brand and the generic – when the patent expires and generics start to enter the market. The researchers also found that generic competition actually prompted drug companies to raise prices on branded drugs.

According to Holman (2006), “courts find reverse payment settlement in violation of the antitrust laws to the extent that the agreement contains restrictions on competition that exceed the exclusionary potential of the patent”. In June 2013, the EU Commission has fined for the first time companies on the grounds that reverse payment settlements contravene EU competition law. The EU Commission fined Danish pharmaceutical company Lundbeck for entering into reverse payment settlements with several generic producers (Alpharma, Arrow, Merck KGaA/Generics (UK) and Ranbaxy). In their view, Lundbeck paid the generic companies not to compete, and these agreements delayed the entry of generic medicines on the market at the expense of patients and public health systems.

References:
– Bokhari, F. A. (2013). What is the price of pay-to-delay deals?. Journal of Competition Law and Economics.
– Holman, C. M. (2006). Do Reverse Payment Settlements Violate the Antitrust Laws. Santa Clara Computer & High Tech. LJ, 23, 489.

According to my opinion, we should ban the « pay for delay deals ». Indeed, this deals are providing a situation of monopoly to the pharmaceutical firms and this situation costs consumers of drugs a lot.

But we have to keep in mind that those deals are incentives for pharmaceutical firms to invest in R&D. A situation where the incentives are too small would lead to a worst situation than those with the deals because some drugs would simply not be product. « Pay for delay deals » insure the profitability of the drugs since the patent is not long enough to cover costs and to make profit to do some more R&D.

To solute this situation, I think we should extend the lifetime of patent to be sure that firms are profitable and can support the cost of their R&D. This solution is, according to me, the ideal compromise between the situation of monopoly that provide enough profit to pharmaceutical firms to do some R&D (theoretically very long with the « pay for delay deals » because those deals are reapplicable) and the situation of competition (with generic drugs) that provides low-cost drugs.

First, we can say that we are clearly in the case of a “cartel”. The two sides agree not to compete and find agreements. We know that generic drug are cheaper, this is the aim. In a cartel, the two sides find agreement to improve their welfare to the detriment of consumers (patients) that the majority think but this is not the case at all…
Since June 2013, the European commission forbids this type of agreements and some manufacturers have received fines.

In one side manufacturers lose a lot of money when generic drug are introduce and in the other side, patient save a lot of money. As generic manufacturers sell their drugs really less costly than the brand drug, the amount of money perceived to postpone the launch represents a higher amount than the one of sales.

Then, the power in this industry is in the brand manufacturer hand because, they have money to put in R&D department and they have a brand name around the world. The innovation comes from their side.

To me, if we place in the patient side, the long-term welfare is more important than the short term, indeed, we all want to have the best medicine to solve each possible problem. But to that, we need inventors or researchers…
In the side of investor: they don’t want to invest in a sector that bring nothing or less profitable than before.

– In the short term, patient can obtain drug cheaper but brand manufacturer lose a lot of sales and fire employee. It represents a lot of people. (http://www.agoravox.fr/actualites/economie/article/les-licenciements-dans-l-industrie-128602)
– In the long term, brand manufacturer lose money and don’t search anymore new innovation so it’s a drastic problem for patient. In addition, generic manufacturer will not have enough money to invest in R&D. The conclusion is very bad and the future of this sector not glorious unfortunately, we all crucially need pharmaceutical sector!!

Finally, the “pay for delay” was not so bad. The patient or people interesting by medicine (now or in the future) represent the majority of the world, the entire welfare will be very low with this decision to ban “pay for delay”. Industry worked well and brought what all wanted: good medicine. I don’t know the best solution but the one take here is critical because the perspective is worrying.

http://www.bloomberg.com/news/2013-06-17/drugmakers-opened-to-pay-for-delay-suits-by-high-court.html