Pay-for-Delay: The Economist roars

"Something Rotten", portentously announces The Economist in a pull-no-punches leader on patents and the cost of health care.

Right: Millie (courtesy of Jim Dennis) actually finds The Economist quite boring when compared to the exciting IP blogs ...

The article reads as follows:
"AS THE rich world’s governments struggle to contain the costs of health care, they are starting to scrutinise the price of drugs. This may seem unfair, when pharmaceuticals account for less than a fifth of their countries’ health-care costs, and misguided, because innovation will wither if not rewarded. However, a noisy chorus argues that the drug industry is making the prices of its products needlessly high by suppressing cheap generics [Well, that's one way of doing it ...]. Governments from Canada to Japan [are there many governments from Canada to Japan. There's always Alaska, supposes the Kat] are looking into this. And, in this case at least, the critics are on to something.

The most egregious offence is the “pay-for-delay” deal, under which a patent-holder pays a maker of generic drugs to delay its launch of a cheap copy. America’s Justice Department has called such deals “presumptively unlawful” and has vowed to prosecute them with vigour. The Federal Trade Commission estimates they cost Americans $3.5 billion a year [The IPKat wonders, has anyone worked out what the makers of generic drugs do with this money? Is it re-invested, paid out in dividends, taxed ...? It must surely benefit someone].

American officials are examining other tactics. One is a law intended to encourage generics that grants the first copy of a patented drug to win regulatory approval in America a six-month monopoly. Often, however, the first generic does not have a free run, because patent-owners have taken to selling “authorised” generic versions of branded pills. The big drug firms point out that authorised generics drive down the price of copies. Fine; but they also erode the value of the six-month prize and hence generics firms’ incentive to win it [This is curious: both invention and copying require incentives, it seems. Is this a zero sum game, or can both sides be winners?].

Regulators in the European Union are also concerned. The European Commission calculates that generic drugs arrive seven months after the relevant patent expires—a delay it says costs consumers more than €3 billion ($4.3 billion) a year. Competition authorities have pointed disapprovingly not only at pay-for-delay deals, but at other tactics used by big drug firms, including the filing of hundreds of patents on just one drug to thwart potential generic rivals [Merpel wonders, just how much would it cost to defend validity challenges to all those patents, if one or more generic manufacturer should fancy raising a challenge]. Neelie Kroes, the EU competition commissioner, has declared that “something is rotten” in the industry.

A pill for your thoughts
The big drugmakers have two responses: first, that the story is more complicated than antitrust officials claim; and second, that pay-for-delay deals in fact benefit consumers. Well, yes, the whole truth is complicated. It’s not all the big drugmakers’ fault. But on the second point, the industry is dead wrong.

In the EU, generics have been delayed by red tape. Unlike America, Europe is a patchwork of smallish markets with varying regulatory and economic barriers to entry, including a requirement to register new drugs in each EU country. Evidence suggests that a unified European patent and litigation procedure, a longstanding wish of innovative companies, would give generics a boost [There you are -- an easy solution. No need to bash the pharma companies then?]. Generics firms often seek to gain entry by challenging existing patents rather than by waiting for them to expire. A single patent, and hence a single challenge, would make that easier [If the challenge succeeds, yes. But if it's bungled, or fails on the merits?].

In America generics firms should also take some blame. They are happy to be paid for delays [This appears to be a natural consequence of competition. No wonder they're happy]. They also claim that these deals help consumers, by reducing legal uncertainties and hence the time it takes to bring generics to market.

Phooey—as the latest deals between drugmakers show. Some generics firms are now agreeing to delay their launches not for cash but for a promise from the patent-holder to delay or cancel the launch of its authorised generic [Naughty, says the IPKat]. Such machinations may suit brand-owners and generics makers whose old enmity is fading in other ways too. But they do little good for consumers’ physical or financial health".
The IPKat notes the furore regarding pay-for-delay in the pharma sector and wonders whether that device manifests itself in any other patent-driven sector of the economy. Merpel says, if The Economist is allowed to use terms like 'Phooey', why can't I?

The Economist View of Cats here
Pay-for-Delay: The Economist roars Pay-for-Delay: The Economist roars Reviewed by Jeremy on Thursday, August 06, 2009 Rating: 5


  1. In response to Merpel's question.

    Defending each patent on a drug can have significant litigation costs (several million dollars each).

    However, each day a blockbuster drug is on the market it can generate hundreds of thousands, or millions of dollars in profit to the patentee.

    If you can get an injunction while litigating (guaranteed in US and Canada) then the cost of defending your patent(s) is well worth it for any drug that the generic is likely to want to copy. (Considering the litigation is likely to last for several years), and the patentee enjoys a monopoly during that time).

    And of course, any patent that manages to get past the patent office has at least a reasonable shot at surviving a Court challenge. So if you have several patents,your chances of having a valid and enforceable claim (generally) increases.

    Using follow on patents,and in some cases, strong branding behind a good set of trade-marks, can lead to significantly extending the period of exclusivity, beyond the original founding patent.

  2. Do not forget that it is possible to revoke a European Patent in respect of all 34 EPC states if the challenge (opposition) is filed within nine months of the centralised grant of the European patent(Art.99 EPC). This is a considerably cheaper and preferred route for nullification over the myriad of national courts, of course provided that the challenge can be formulated and filed in time.

    The opposition procedure at the EPO obeys the 1:1:1 rule - that is for every patent maintained as granted one is maintained in limited form and one is revoked in its entirety. Consequently, there is 33% probability of being successful in removing all rights in a centralised procedure for all EPC states (which includes all EU states).

    In the previous proposal for the community patent (that elusive, even mythical creature), the possibility of challenging a European patent, in respect of a designation of the EU (rather than individual states, the EU could be designated as a block), could then be centralised according to Art. 138 EPC in a procedure common to all EU states. Of course this never came to pass because no agreement can be reached on the fundamentals of such a procedure (one big sticking point is whether to separate or unify nullification and infringement proceedings).

    Let us hope that further impetus is given to the creation of a Community patent by the initial Pharma report of the EU and also by articles such as this one.

  3. Someone correct me if my memory is failing, but isn't this line from the Economist:

    "other tactics used by big drug firms, including the filing of hundreds of patents on just one drug to thwart potential generic rivals"

    based on what turned out to be a completely misleading headline figure from the recent EU investigation into pharma-patents? The figure of "hundreds of patents" was reached because filing a PCT application was counted as filing "a patent" in each and every designated country - currently 140 odd. It's always amazing how the most misleading and unrealistic statistics are the most likely to get repeated.

    This quote is also amusing because it uses the completely erroneous "filing a patent" line. Nobody can or does "file a patent". You file a "patent application" and you can do so a million times without getting a single patent out of it. Once again, economists show that they're not really up to speed with patent law.

  4. What is so often missed in the debate about "pay-for-delay" deals is that the generics firm is not certain of winning its patent challenge.

    The theoretical lost savings to consumers assume that the generics company takes a huge commercial risk by launching - thereby potentially infringing the patent - before it has any certainty on the patent's validity or enforceability.

    Frankly, the debate misses the point. A granted patent is assumed to be valid. If legislators think innovators are enjoying monopolies that are too long, they should look at the quality of the patents being granted, and not rely on generics firms to knock down every dodgy patent.


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