Competition Bureau statement regarding its proactive monitoring of potentially anticompetitive patent litigation settlement agreements between branded and generic drug manufacturers

Position Statement

See the news release that corresponds to this position statement.

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GATINEAU, May 20, 2022 — Promoting and protecting competition in the Canadian health care sector is a priority for the Competition Bureau. As part of those efforts, the Bureau proactively monitors patent litigation settlement agreements between branded and generic pharmaceutical manufacturers using publicly available information.

The Bureau’s Intellectual Property Enforcement Guidelines (IPEGs) identify that patent litigation settlement agreements may be anticompetitive, such as when payments (whether monetary or non-monetary) are made to delay the entry of generic drugs into the market.

Where preliminary information indicates that such agreements may contravene the Competition Act (the Act), the Bureau will open investigations to obtain and review them. The Bureau recently investigated two such agreements under sections 79 and 90.1 of the Act. In both cases, the Commissioner of Competition closed the investigations after concluding that the Act was not contravened. However, patent litigation settlement agreements may pose serious competition risks and the Bureau will take appropriate enforcement or advocacy action in the future, if warranted.

The following statement summarizes the Bureau’s general approach to reviewing these agreements and areas of concern.

On this page:

• Background
• Recent investigations
• Conclusion
• Footnote

Background

Pharmaceutical drugs play a key role in the Canadian health care system. In Canada, the total value of pharmaceutical sales have increased by 35.3% from 2011 to 2019, representing $29.9 billion in drug spending.^{Footnote 1} Maintaining competition and innovation for these drugs – which are essential to many Canadians – is crucial.

Given the significant spending on pharmaceutical drugs, the Bureau remains focused on supporting Canadians’ access to safe, effective and affordable medicines. Generic drugs are often less expensive than the original branded drug. As such, generic drugs help to control prescription drug costs and make drugs more accessible to Canadian patients and payers.

1. The first option is to agree to wait until the relevant intellectual property rights have expired.
2. The other option is for the generic manufacturer to claim that the brand manufacturer’s patents are invalid and/or not infringed by the generic drug in accordance with the PMNOC regulations. Upon receiving such a claim, the brand manufacturer decides whether to start legal proceedings under these regulations.

In some instances, a legal proceeding started under the PMNOC regulations may be dropped with the consent of both parties through a patent litigation settlement agreement. Parties to patent litigation proceedings may have strong incentives to settle rather than risk an adverse decision by the court. In addition, patent litigation proceedings can be costly and unpredictable. The Bureau recognizes that settlement agreements may benefit society by easing the burden on the court system and saving limited public resources.

However, in some cases, settlement agreements can include terms that delay generic entry and harm Canadians. The Bureau’s IPEGs identify situations where these settlement agreements may contravene the Act. Specifically, the Bureau is concerned with settlement agreements that go “beyond what is reasonably necessary to reach a settlement, for example including a payment to delay generic competition”.^{Footnote 2} Such agreements may create economic harm if the payment serves to delay the entry of the generic drug into the Canadian market. Additionally, a payment received by a generic manufacturer may represent a share of the brand manufacturer’s monopoly profits. This is because the brand manufacturer would typically be expected to make more profit as a monopolist than the brand and generic manufacturers combined would make as competitors.

To protect competition and innovation in the pharmaceutical industry, the Bureau has moved towards proactive enforcement through various information-gathering efforts.^{Footnote 3} For example, this has included actively monitoring PMNOC litigation to identify legal proceedings that have been closed with the consent of the parties. To determine whether such cases may contravene the Act, the Bureau gathers information on the product market, including: generic market entry, active patents, litigation outside of Canada, sales and market shares in Canada, and other relevant factors.

Recent investigations

During two recent investigations, the Bureau gathered potentially anticompetitive patent litigation settlement agreements from discontinued PMNOC legal proceedings concerning two pharmaceutical drugs. The Commissioner ultimately closed these investigations as the evidence suggested that the agreements did not contravene the Act.

In accordance with the IPEGs, the Bureau will not further investigate agreements under sections 79 and 90.1 if:

• They provide for generic drug entry prior to patent expiry; and
• They do not include a payment or other compensation from the brand manufacturer to the generic manufacturer.

The Bureau’s view is that if no payment exists, then the entry date in the agreement likely reflects a compromise between the manufacturers that is based on their expectations of succeeding in the PMNOC litigation.

Agreements that do include a payment from a brand to a generic manufacturer, despite early market entry of the generic drug, will prompt further review by the Bureau under the abuse of dominant position (section 79) and the civilly reviewable competitor collaborations (section 90.1) provisions of the Act.

Under section 79, the Bureau is relatively more likely to consider the brand manufacturer to be dominant in markets where it holds patent protection for a drug. An agreement intended to delay or prevent the entry of a competitor to preserve the brand manufacturer’s market power will likely be considered as a practice of anticompetitive acts.

Under section 90.1, the Bureau will generally consider patent settlement agreements between brand and generic manufacturers as agreements between competitors.

Both of these sections require the Bureau to establish that the settlement agreement has the likely effect of causing a substantial prevention or lessening of competition. This requires the Bureau to consider what would likely have occurred in the absence of the settlement agreement, including the likelihood of the generic drug entering the market earlier than the entry date in the existing agreement.^{Footnote 4}

The Bureau will look at various factors set out in the IPEGs to determine whether a payment likely had the effect of delaying entry of the generic drug into the market. Where the evidence indicates that a payment is within a reasonable estimate of the brand manufacturer’s expected remaining legal costs and other relevant costs discussed in the IPEGs, the Bureau will conclude that the agreement does not pose an issue under the Act. This is because the payment likely did not have the effect of delaying the generic drug’s entry into the Canadian market. Where the evidence suggests that a payment is above that reasonable estimate, the Bureau will take appropriate enforcement action, which may include seeking administrative monetary penalties under the abuse of dominance provisions of the Act.

Conclusion

Protecting competition in the pharmaceutical industry remains a priority for the Bureau, hence the importance of its active monitoring of such agreements between brand and generic manufacturers.

The Commissioner recently decided to close two investigations as the evidence suggested that the agreements under review did not contravene the Act. However, the Bureau is of the view that this type of conduct has the potential to bring about significant anticompetitive effects.

Should new and compelling evidence of harm come to light, as a result of such an agreement, the Bureau will take action.

The Competition Bureau is an independent law enforcement agency that protects and promotes competition for the benefit of Canadian consumers and businesses. Competition drives lower prices and innovation while fueling economic growth.