Conference report: Innovation and Competition in Life Sciences Law - Part I

On Friday, an international conference on “Innovation and Competition in the Life Sciences Law” organized by the Center for Intellectual Property and Competition Law (University of Zurich) and the Center for Life Sciences Law (University of Basle) was held in Basle. The speakers were an interesting mix of academics, practitioners and industry representatives from both sides of the Atlantic, including Dominik Schnichels (European Commission, DG SANTE, Head of Unit Medical Products), Prof Murat Mungan (Antonin Scalia School of Law at George Mason University ), Prof Andreas Heinemann (U of Zurich), Angela Staunton (Vice President, Bayer AG), Prof Claudia Seitz (U of Basle), Alesch Staehelin (Research Counsel Europe, IBM), Simon Hirsbrunner (Steptoe & Johnson LLP) and Prof Daryl Lim (The John Marshall Law School, Chicago).

Dominik Schnichels opened the conference with his presentation on the regulatory framework promoting innovation in the pharmaceutical sector. He reminded everybody that regulatory policy in the pharma sector must not only ensure incentives for innovation, but also access to pharmaceuticals. Currently, a lot of EU Member States were struggling to make ends meet and were concerned about the cost of essential drugs. Of a list of 80 orphan drugs, around 75 were available in large Member States such as Germany, but none in smaller Member States because they could simply not afford them. The political pressure to lower prices was increasing. Namely the orphan drug regulation was increasingly seen as being abused by pharmaceutical companies subdividing indications to create ever more “orphans” (called “orphanizing”…). Some of these “orphan” drugs later even became blockbusters (creating revenues in excess of EU 1 billion).

Preparing the ground for the other speakers, Dominik gave an overview of the regulatory framework providing incentives for innovation in the pharmaceutical sector. With regards to market exclusivity through regulatory data protection, he remarked that in his opinion, the extension of the market exclusivity by one year for an additional indication was insufficient, as it was only granted once. This prevented the development of further additional indications.

Sleeping pat... cat

Prof Mungan gave an overview on the evergreen topic of “reverse payment settlements” from an economist’s perspective. While the static costs of reverse settlement payment are rather obvious – increased price leads to deadweight loss – the dynamic benefits are less obvious. Reverse payments allow innovative companies to avoid “betting the company” litigation, avoiding chilling effects on R&D investments. Whether the dynamic benefits (if any) outweigh the static costs is an undecided question, likely to remain open for the foreseeable future. With regards to generic market entry, the Hatch-Waxmann Act in the US provides an asymmetric incentive for the first generic to enter the market, providing it with a 180 days period of exclusivity. Reverse payments to delay generic market entry are judged post-Actavis under the “rule of reason”. There is, however, little guidance in the US Supreme Court judgment on how to apply the rule of reason to such payments. The EU approach, on the other hand, establishes a per se rule that payments for delayed market entry are anti-competitive (note that during the discussion, it was disputed whether Lundbeck actually establishes a per se rule against reverse payments). This Kat annoyingly questioned whether a prohibition of reverse payments was necessary at all, since allowing reverse payments would induce more potential market entrants to threaten entry, thereby making reverse payments a losing proposition for the patentee (backward induction leading to the conclusion that no reverse payments will be offered in the first place).

After the coffee break, Prof Heinemann wondered whether “blocking patents” are ever an abuse of the patent system. “Blocking” patents are defined as unused patents, i.e., patents that protect a technical teaching that is not practiced, either by the patentee or a licensee. To be distinguished from “blocking” patents are “sleeping” patents, which cover a technology for which there exists no market (yet). Finally, some “unused” patents are used to defend freedom to operate in neighbouring technology. While their technical teaching may not be practiced, they serve to ensure market access for future developments of related technology. For Prof Heinemann, competition law should take into account why “unused” patents are obtained. Problematic are principally blocking patents as defined here, while sleeping and “FTO” patents seem fine.

In the Boehringer case, a competitor accused Boehringer of filing unmeritorious patents to block entry of a generic to its blockbuster Spiriva drug. In a settlement approved by the Commission, Boehringer agreed to withdraw the bothering patents. The Servier case (pending before the General Court, T-691/14), involved both reverse payments as well as the acquisition of blocking patents (called “paper patents” or “blocking patents” by Servier internally. Servier also acknowledged that they involved “zero inventive activity”…). Servier’s strategy was to block all potential routes to industrialize the (since 2003) unprotected active ingredient of Perindopril by acquiring all patent applications circumventing Servier’s method of manufacturing patents.

While the Commission found the acquisition of competitors’ patents anti-competitive in the Servier case, the case did not deal with the filing of blocking patents by the originator itself. It is (still) highly contested whether using patents to enjoin others can ever be anti-competitive, this being the very purpose of patents. Others hold that using patents contrary to the purpose which IPRs are granted for may be anti-competitive. Prof Heinemann proposes the following test for assessing whether a patent strategy is abusive. Under this test, abusive blocking occurs if

• the patents are not exploited (internally or externally);
• the patents exclude competition by substitution (as opposed by competition by imitation);
• the patent owner effectively uses them to block competitors’ innovations;
• the patents do not defend their owner’s freedom to operate (e.g. by securing further avenues of research).

The following factors are not constitutive for an abuse, but may form additional arguments:

• intention to block
• low patent quality

These rather strict conditions make the finding of abuse a rare exception. The remedy should be the revocation of the patent(s), not merely compulsory licensing. A participant in the discussion pointed out that he increasingly saw generic companies literally “copy-pasting” patent applications of originator companies and filing them with minor amendments in their own name, thereby seeking to prevent protection of follow-up innovation by the originator. This, if anything, was an abuse of the patent system. The discussion of abusive patenting seemed to be based on the assumption that originator companies were out to harm consumers, which was false.

Angela Staunton (Bayer) explained the limits competition law places on R&D cooperation. She pointed out that any uncertainty whether the R&D cooperation fell under Article 101(1) TFEU could stop the project, given the massive investments required to bring a drug to market. Notably, it can be unclear whether the R&D BER or the Technology Transfer BER applies. Do, e.g., the R&D BER apply where an identified contract product exists at the date of signature and a license to produce that product (even after further development) is granted? If you want to be on the safe side, ensure that the contract terms are in accordance with both block exemption rules.

Stay tuned for a second post on the afternoon sessions.