Pharmaceutical sector in focus: Decoding recent antitrust enforcement – Part 3 of 3

Part 3: When monopoly agreements cross the line – A global antitrust perspective

In Part 3, we explore antitrust minefields commonly found in the pharmaceutical sector – the kind of issues that keep competition authorities on their toes.

Reverse payment agreements

Reverse payment agreements remain a top antitrust concern in pharmaceuticals.

Below is an overview of the key enforcement frameworks:

1. US: Rule of reason analysis

In Federal Trade Commission (FTC) v Actavis (2013), the US Supreme Court established that reverse payment arrangements are not immune from antitrust scrutiny.¹1 Rejecting both presumptive legality and illegality (the “quick-look” approach), the Court applied the rule of reason framework, requiring an effects-based analysis.

• Case background: Solvay Pharmaceuticals reached patent settlements with three generics including Actavis, who delayed market entry in exchange for substantial payments. Actavis alone received between USD 19–30 million annually.²2
• Key court finding: The Supreme Court noted that large reverse payments could indicate the brand’s attempt to protect its monopoly by sharing profits with potential competitors. Such payments may serve as a “surrogate for the patent’s weakness”, suggesting “an unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival.”³3
• Enforcement challenge: Nevertheless, under the rule of reason, plaintiffs need to demonstrate actual anticompetitive effects – creating a significant evidentiary burden that limits successful enforcement actions in the US.

2. EU: a “customised” by object approach

In contrast, the EU takes a more categorical stance. In Lundbeck (2013), the European Commission (EC) issued its first decision on reverse payment agreements by fining Lundbeck (EUR 93.8 million) and generics (EUR 52.2 million).⁴4

• Case background: Although Lundbeck’s primary patent had expired, it still held secondary process patents. To delay generic entry, Lundbeck paid the generics in exchange for postponing market launch.⁵5
• Key insight: the EC treated these agreements as restrictions of competition “by object” – presumed anti-competitive by nature. This was due to the presence of potential competition and the size of the value transfers, without requiring a full market effects analysis.
• Key court finding:

This approach was upheld by the European Court of Justice (ECJ).

While the ECJ clarified that “by object” restrictions must be interpreted narrowly – not all patent settlements are automatically anticompetitive, it confirmed that such agreements can restrict competition by object when the value transfer can only be explained by a mutual interest in avoiding competition.⁶6Key ECJ criteria for identifying “by object” infringement:

• • Potential competition: Generics must be able and willing to enter the market within a certain time – demonstrating “real and concrete possibilities”. Relevant factors include: investments, regulatory steps, availability of stock, legal challenges to the originator’s patents and marketing efforts.
  • No insurmountable barriers: For example, in Lundbeck, some patents had expired, leaving a pathway open for generics. A generic’s readiness to take on patent litigation supports its status as a potential competitor. Importantly, uncertainty over patent validity does not disqualify this status.⁷7
  • Sufficient incentive to stay out of the market: The payment must be significant enough to dissuade market entry. A large payment can indicate the patent’s weakness.⁸8
  • Lack of objective justification: The payment lacks a plausible explanation other than common interest in avoiding competition on merit.⁹9

3. Lessons for Mainland China from international practices

• A common red flag approach: Across jurisdictions, reverse payments are a key antitrust focus. A typical warning sign is when generics are (potential) competitors, large payments to delay their market entry can invite competition scrutiny.
• Mainland China’s balanced approach: As explored in Part 2 of this series, Mainland China places significant emphasis on the strength of the challenged patent. If a generic’s patent challenge is unlikely to succeed, the payment may not be actually delay market entry and thus may less likely be found anti-competitive.

Overall, Mainland China’s position strikes a middle ground – stricter than the EU’s “by object” approach, which focuses on the possibility of entry, but less burdensome than the US “rule of reason,” which requires a more in-depth factual assessment. These differences highlight the importance for companies operating across jurisdictions to align their compliance strategies with local enforcement standards to effectively manage antitrust risks.

Research and development (R&D) cooperation agreements

1. Key insights from EU framework

Pharmaceutical companies often collaborate to research and develop new drugs by combining their expertise in specialised arenas.

For instance, smaller innovators generate new drug ideas, with larger firms providing funding, manufacturing or clinical trial capacity and market access.

To encourage such cooperation, the EU’s R&D Block Exemption Regulation (“R&D BER”) shields certain collaborations from antitrust scrutiny, including¹⁰10

• Joint R&D collaborations on product or technologies, with or without joint exploitation
• Paid-for R&D arrangements where one company finances another’s R&D work.

To qualify the exemption, agreements must meet essential conditions:

• Full access to results: All parties must receive full access to final research outcomes (including IP and know-how developed during the project), although limited exceptions exist.
• Access to background know-how: In research-only agreements, each party must have access to the other party’s pre-existing (background) know-how if it is essential for using the results.
• Limits on joint exploitation: If the parties jointly exploit the R&D outcomes (e.g. by producing or marketing products together), they may only use the IP or know-how that is strictly necessary for making the agreed products or applying the agreed technologies.

When the exemption applies:

Between non-competitors:

• During R&D phase: exemption applies with no market share limits.
• If joint exploitation is involved: exemption continues for seven years after market launch

Between competitors:

• Exemption applies only when all agreement parties’ combined market share is ≤25% at signing.
• Exemption applies during the R&D phase; if joint exploitation is involved, then the exemption extends to seven years from when the R&D results are first launched in the EU.
• After the seven-year period, the exemption can continue if the combined market share remains below 25%. If it exceeds this threshold, the exemption does not end immediately – a two-year grace period is granted.

Important limitations (where exemption does not apply)

• Hardcore exemptions: including with exceptions exist:
  • restrictions on unrelated (in a completely different field or in the same or related field but after the joint R&D ends) R&D projects of agreement parties;
  • limiting output or sales, or fixing prices for external customers;
  • blocking passive sales or unfairly blocking active sales;
  • unfairly refusing to sell or making parallel sales difficult.
• Excluded restrictions: These restrictions must be carved out if they are severable:
  • No challenge clauses (preventing parties from contesting IP rights after the agreement ends; exception exists)
  • Restrictions on licensing to third parties, with certain exceptions.

2. What can we learn from the EU’s approach?

As discussed in Part 2 of this series, Mainland China’s antitrust guidelines for pharmaceutical sector (the “Guidelines”) highlight that R&D cooperation agreements under certain circumstances can qualify for exemptions from the Anti-monopoly Law (AML).

Although the Guidelines are less detailed than the EU, they reflect a similarly pragmatic – and arguably more lenient – approach to R&D agreements.

Mainland Chinese authorities may assess factors such as the parties’ combined market share, necessity of cooperation and duration and scope of any restrictions. Exemptions could be easier to obtain for collaborations between non-competitors, provided the agreement does not involve price-fixing or other hardcore AML violations. Cautions should also be exercised regarding:

• Non-challenge clauses: these can suppress legitimate patent challenges, potentially reducing innovation.
• Bans on third-party licensing: unless at least one party is actively exploiting the R&D results vis-à-vis third parties, blanket bans may hinder the dissemination of innovation and limit consumer benefits.

Agreements on price terms

Price restrictions is a key enforcement focus for regulators globally.

Two important points stand out:

1. Cartels remain a core enforcement priority:

Cartels facilitated by intermediaries

In the US, FTC investigations uncovered cartels operated through intermediaries within the distribution chain.

For instance, in the FTC’s Coopharma case (2012), around 300 independently pharmacies in Puerto Rico used a cooperative to collectively fix reimbursement rates with insurers and pharmacy benefit managers.¹¹11

Key insights:

• Used a cooperative to coordinate pricing across members.
• “Single-signature” contracts – one entity signs on behalf of all the members – blocked individual negotiation.
• Extensive reach: The cooperative represented a third of Puerto Rico’s pharmacies, enabling it to leverage its market power to fix higher rates.

API-related cartel

In October 2023, the EC imposed hefty fines of EUR 13.4 million over a cartel involving an active pharmaceutical ingredient (“API”) N-Butylbromide Scopolamine/Hyoscine – a key ingredient in abdominal antispasmodic (anti-cramp) drugs.¹²12

The cartel operated between 2005 and 2019, involving agreements to fix minimum sales prices to distributors and generic manufacturers, as well as market allocation. This was the Commission’s first cartel fine involving an API, underscoring its enforcement focus in API-like concentrated pharmaceutical segments.

2. “Most favoured nation” (“MFN”) clauses:

The FTC’s RxCare of Tennessee case (1996) found that (wide) MFN clauses (also known as wide parity clauses) restricted competition¹³13:

• RxCare’s network covered 95% of pharmacies in the state, requiring any lower rate offered to another payer to be extended to RxCare.
• RxCare’s MFN clause discouraged pharmacies from offering discounts elsewhere, chilling price competition.

Wide MFNs are highly sensitive in agreements. In the pharmaceutical sector and beyond, they are a clear antitrust red flag. Narrow MFN clauses need a case-by-case analysis, but pose greater risks when applied in schemes with broad market coverage.

3. Lessons for Mainland China’s pharmaceutical sector 

• Commercial insurance may expose risk: While in Mainland China, prices for medicine under the public medical insurance system are centrally negotiated, limiting coordination risks, the evolving and decentralised commercial insurance markets may expose the risk of collective rate negotiations by pharmacy networks, associations or other collective entities on behalf of providers, this could raise antitrust concerns similar to those seen in US cases involving intermediary-facilitated price fixing.
• Vertical price restrictions: As explored in Part 2 of this series, vertical price restrictions pose notable antitrust risks under the Guidelines. Beyond resale price maintenance, MFN clauses – such as those seen in the RxCare of Tennessee case – are also a red flag.

Wide MFNs carry high antitrust risk and should generally be avoided. When one party holds a certain degree of market power, narrow MFNs can also raise concerns.

• Price cartels in concentrated markets: In concentrated pharmaceutical markets, like API provision markets, pricing restrictions face strict antitrust scrutiny in China and globally. Companies remain vigilant about any conduct suggesting on price coordination, and consider leniency programmes early to mitigate penalties.

Key takeaways

Across our three-part analysis of antitrust rules in pharmaceuticals – a highly monitored industry, one message stands out: beyond the “hardcore” restrictions, companies must be especially mindful of any price-related terms, reverse payment settlements and R&D cooperation restrictions that may unduly limit competition.

The bottom line? Proactive compliance and smart contract planning is not optional – it is essential. As China’s antitrust enforcement continues to evolve and align with global trends, pharmaceutical companies need regular competition law reviews tailored to China’s unique market dynamics to avoid costly penalties and ensure sustainable operations.