1. Summary of the Case and the Supreme Court’s Ruling
A Korean generic company, Hanmi Pharm, filed an invalidation action against the Eli Lilly’s patent relating to original drug of Olanzapine. Upon prevailing at the Patent Court, Hanmi Pharm advanced its scheduled generic drug rollout and pushed ahead with the immediate sale of the generic drug. Another Korean generic company, Myung In Pharm, also started selling its generic drug immediately after Hanmi Pharm’s Patent Court’s decision. After the rollout of these generic drugs, the Ministry of Health and Welfare (MOHW) announced the reduction of the upper price limit of Eli Lilly’s original drug to 80% of the previously set upper limit.
Thereafter, the Supreme Court overturned the Patent Court’s invalidation decision and ruled that Eli Lilly’s patent is valid. Based on this ruling, Eli Lilly filed claims for damages against the two generic companies, Hanmi Pharm and Myung In Pharm.
Although these damage claims commonly sought for compensation for the infringement of Eli Lilly’s patent, two contrary rulings were issued with respect to the damages related to the drug price reduction. The Seoul High Court, which heard the damage claim filed against Hanmi Pharm, ruled against the generic company’s liability for the drug price reduction, whereas the Patent Court, which heard the damage claim filed against Myung In Pharm, ruled that the generic company is liable for damages related to the drug price reduction.
In the appeals of the two lower courts’ contrary rulings, on November 26, 2020, the Supreme Court denied the generic company’s liability for damages related to the drug price reduction (see Supreme Court Case Nos. 2016 Da 260707 and 2018 Da 221676, both issued on November 26, 2020).
Specifically, the Supreme Court determined that the upper price limit of the original drug was reduced due to the MOHW’s determination of the reduction rate and the time for enforcing the reduction according to the related provisions, and not due to the generic companies’ manufacture and sale of their generic drugs. As such, the Supreme Court ruled that the reduction cannot be deemed attributable to the generic companies’ acts of manufacturing and selling the generic drugs.
The Supreme Court explained that “it is recognized that Eli Lilly was adversely affected by the reduced drug price. However, the generic companies legitimately applied for a change of the scheduled generic drug rollout by submitting the likelihood of invalidation of the original drug patent based on the Patent Court’s decision. Further, the MOHW reduced the upper price limit of the original drug according to the related law provisions. Considering the aspect of the public interest that the purpose of the relevant provisions is to ensure sustainable, smooth medical care benefits from the sound finance of the national health insurance, Eli Lilly ‘s disadvantage was only a result of the drug price reduction system in Korea.”
The Supreme Court concluded that Eli Lilly’s benefit from the upper price limit set for the original drug can be protected within the legal boundaries under the system. Further, although the reduction applied under the system may adversely affect Eli Lilly, such effect should not be attributed to the generic companies. Accordingly, the Supreme Court held there that there was neither an unlawfulness in the generic companies’ acts nor a significant cause relationship between the actions of the generic companies and the reduction in the upper price limit of Eli Lilly’s original drug.
2. Significance of the Supreme Court’s Ruling and Outlook of Korean Pharmaceutical Market
Putting an end to the prolonged lawsuits of last 10 years, the Korean Supreme Court rendered a first decision on damages for the price reduction of the original drug.
If the generic companies were to lose, they would have to bear the damages caused by the price reduction of the original drug, which would amount to tens of billions of Korean Won (KRW). Based on the Supreme Court’s ruling, Korean generic companies can now actively challenge the original drug patents for the early rollout of generic drugs.
Further, since July 2020, Korea newly adopted a stepwise drug pricing system for generic drugs, which provides differential drug pricing to prevent generic drugs from flooding into the market. Below is a summary of this system.
"The price of a generic drug will vary depending on whether a bioequivalence test has been performed and whether a drug master file (DMF) has been submitted. The price of a generic drug will be 53.55% of the original drug price if the above two requirements are met, 45.52% of the original drug price if one of the two requirements is met, and 38.69% of the original drug price if none of the requirements are met. In addition, generic drug prices will be set differentially depending on the order in which generic drugs are listed for reimbursement. From the 21st generic drug listed for reimbursement, 85% of the lower of (i) the lowest price for the same formulation or (ii) 38.69% of the original drug price will be applicable."
In the past, the price of every generic drug was set at the highest rate of 53.55% of the original drug price. The purpose of the stepwise drug pricing system is to differentiate generic drug prices depending on the generic company's drug development effort. The pharmaceutical industry predicts that reckless entry into the generic market will decrease in the future with the introduction of this system.
Since the price of a drug is also greatly affected by the order of the drug listing for reimbursement, generic companies hoping for early rollout of generic drugs will actively challenge the original drug patents. Now that generic companies are relieved of the burden of compensation for damages caused by the original drug price reduction, their challenges to patents are expected to increase further.
The original drug companies should be wary of the risk of drug price reduction as well as patent disputes.
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