The European Commission fines Cephalon and Teva €60.5 million in its fourth “pay-for-delay” decision

The European Commission (EC) has fined Teva and Cephalon a total of €60.5 million for concluding a “pay-for-delay” settlement agreement that delayed the market entry of a generic version of modafinil (a drug used for sleep disorders).

“Pay-for-delay” agreements, whereby a generic company agrees to restrict or delay its independent entry into the market in exchange for benefits transferred by the originator company (a so-called “reverse payment”), have been the subject of intense scrutiny by the EC and national competition authorities for over a decade.  The EC’s decision issued yesterday in the modafinil case concludes an investigation that lasted almost 10 years and marks the fourth time the EC has fined companies for entering pay-for-delay deals.

The distinguishing feature of this case is that the arrangements went beyond lump sum payments and involved a wide range of “side deals” (e.g. a distribution agreement, access to valuable clinical data for another drug).  In her statement, Competition Commissioner Vestager noted that the payment mechanism in this case was much more “sophisticated” as it relied on cash payments but also certain “seemingly standard commercial deals”.  She added that the decision sends a “clear signal” that pay-for-delay agreements will not be tolerated irrespective of the form of the payments at issue.  The decision places pharmaceutical companies on notice that the EC will consider the cumulative effect of an array of commercial arrangements and deals and this should be taken into account when considering settlement agreements.

The EC decision

Modafinil was Cephalon's best-selling product under the brand name “Provigil”.  While the main patents protecting modafinil had expired in Europe by 2005, Cephalon still held some secondary patents in relation to the pharmaceutical composition of modafinil.  Teva held its own patents relating to modafinil's production process and was ready to enter the market with its own generic version; and it had even started selling its product in the UK.  Cephalon then brought legal actions against Teva alleging that Teva had infringed its secondary modafinil patents.  According to the EC, both Cephalon and Teva had doubts as to the strength of Cephalon’s patents.

The EC found that in 2005, the parties concluded a patent settlement whereby Cephalon induced Teva to not enter the market and not challenge Cephalon’s patents in exchange for certain cash payments and a package of commercial “side-deals” that were beneficial to Teva – these included a distribution deal; the acquisition by Cephalon of a licence on certain Teva modafinil patents (which Cephalon never used); purchases of raw materials from Teva (which Cephalon did not actually need); and granting by Cephalon of access to clinical data that were highly valuable to Teva for a different medicine.  Pursuant to the agreement, Teva could have started selling generic modafinil as of October 2012 on the basis of a licence granted by Cephalon in return for significant royalty payments by Teva.  However, Teva's limited entry under that licence did not eventually materialise, as Teva acquired Cephalon in October 2011 and the two companies became part of the same group.

The EC concluded that the settlement eliminated Teva as a competitor and violated Article 101 TFEU (which prohibits anti-competitive agreements) noting that the only reason why Teva agreed to settle and not compete was because it was induced by cash payments and “side-deals”.  The EC considered that, absent the agreement, Teva could have entered the market earlier bringing down prices for modafinil (it noted in this regard that when Teva entered the UK market for a short period in 2005, it offered a 50% lower price than the price of Cephalon's Provigil).  According to the EC, the infringement lasted – for almost all EU/EEA Member States – from December 2005 to October 2011 (when Teva acquired Cephalon).

Bigger picture

In its press release, the EC acknowledges that patent settlements can be legitimate, which is also in line with the findings of its monitoring exercises conducted in previous years (see the EC’s Report on competition enforcement in the pharmaceutical sector (2019)).  However, it emphasises that the agreement between Cephalon and Teva was anticompetitive as Teva agreed to stay out of the market not on the basis of the strength of Cephalon's patents but because of the substantial value transferred to it by Cephalon.  In line with previous pay-for-delay cases, the EC relied on the parties’ internal documents to conclude that the package of transactions was a value transfer to Teva to keep it out of the market.

To date, the EC has fined companies in three other pay-for-delay cases, i.e. in relation to citalopram, perindopril and fentanyl.  The parties in the Citalopram and Perindopril cases appealed the EC’s decisions and both cases are currently pending before the European Court of Justice (ECJ) (see e.g. our blog post on the Advocate-General’s Opinion in Citalopram).  In addition, in January this year, the ECJ issued its judgment on a preliminary reference by the UK courts in the Paroxetine case (see our blog post).  The EU courts’ rulings in those cases clarified the criteria and set out a framework for the assessment of pay-for-delay deals.  Those judgments confirmed that, where the value transfer by the originator to the generic cannot be otherwise justified, the agreement at issue will be anticompetitive by its very nature (i.e. by object); and also that commercial arrangements (e.g. distribution deals) may also constitute a value transfer.  These judgments have clearly encouraged the EC to impose fines in the modafinil case.  Teva is reportedly planning to appeal the EC decision and therefore, the EU Courts will likely have the opportunity to consider whether the criteria set out in the previous judgments have been correctly applied by the EC in this case.

In her statement, Commissioner Vestager also underlined that competition law has an important role to play in the EC’s wider efforts to keep medicines affordable.  In this regard, she referred to the EC’s wide-ranging and ambitious Pharmaceutical Strategy for Europe and Intellectual Property Action Plan adopted earlier this week.  The Pharmaceutical Strategy stresses the importance of accessible, innovative and affordable medicines for EU citizens, to which competition significantly contributes, whilst the Intellectual Property Action Plan promotes the need for effective IP protection to stimulate competitiveness (see our blog post).