Originally published 1 December 2008

Keywords: European Commission, EU Pharmaceutical Sector, Pharmaceutical Sector Inquiry, generic medicines, cheaper generic medicine, EC competition rules, EFPIA, patent strategies

On 28 November 2008, the European Commission ("Commission") presented a Preliminary Report on its Pharmaceutical Sector Inquiry at a public workshop held in Brussels.1 In her opening remarks, EU Competition Commissioner Neelie Kroes announced: "we find that competition in this industry does not work as well as it should."

According to the Commission, pharmaceutical companies are blocking or delaying the entry of cheaper generic medicines into the EU. This delay has allegedly resulted in a loss of EUR 3 billion in savings for national healthcare systems between 2000 and 2007 across the EU Member States. The Commission also suggests that pharmaceutical companies use defensive patent strategies to block or delay the development of new medicines by innovators. However, it recognises that there may be other concurrent causes for the delay of generics' entry and the reduced number of new medicines on the market.

The Commission has invited all stakeholders to submit their written observations on the Preliminary Report by 31 January 2009 and will not decide what action to take until next Spring. Possible outcomes may include guidelines on how to assess certain types of practices under EC competition rules, investigations against individual companies whose conducts were suspected to breach EC competition rules, or industry-wide legislative proposals. Commissioner Kroes warned her audience that "the Commission will not hesitate to open antitrust cases against companies where there are indications that the antitrust rules may have been breached."

Background

The pharmaceutical sector inquiry relates to the period 2000-2007 and involves the investigation of a sample of 219 molecules2 used for prescription medicines for human use across all EU Member States. The Commission maintains that the aim of the inquiry is to identify the reasons why fewer novel medicines were introduced into the market since 2000 and why generic versions of such medicines were delayed in some instances. It does not cover medicines sold over the counter (OTC) and products for animal use. In addition, it does not deal with competition between generics themselves or with the issue of parallel trade.

The Commission launched its sector inquiry in the pharmaceutical sector on 15 January 2008 with unannounced inspections (so-called "dawn raids") at the premises of a number of major pharmaceutical companies. This was the first time that a sector inquiry was launched with dawn raids. The Commission has been strongly criticised for conducting dawn raids in the absence of any allegation of wrongdoing.

The on-site inspections were followed by extensive and detailed questionnaires to pharmaceutical companies, generic producers, wholesalers, national regulatory and competition authorities. In this respect, some stakeholders have also criticized the Commission for requesting too much information and giving little time to respond.

The Commission uses sector inquiries (under Article 17 of Regulation 1/2003) when it wants to improve its knowledge about a particular sector with a view to better identifying possible obstacles to competition. Previous sector inquiries have been launched in the telecommunications, energy and financial services sectors.3 Some of these inquiries have resulted into investigation against individual companies and fines being imposed on them. Others have resulted in legislative proposals aimed at tackling industry-wide spread issues.

Key Findings

The Preliminary Report exceeds 400 pages and is based on confidential information obtained from various pharmaceutical companies across the EU. The Commission's main findings are summarised under four headings: (i) Market features; (ii) Competition between originator and generic; (iii) Competition between originators; and (iv) The regulatory framework.

Market Features

The Commission recognises that the pharmaceutical sector is a R&D driven and highly regulated one, in which patent protection is key to reward and stimulate innovation by originator companies.

The Commission divides the cycle of a new medicine in three phases:

  • Phase I: from R&D to market launch;
  • Phase II: between launch and loss of exclusivity (patent expiry); and
  • Phase III: following the loss of exclusivity, generic companies can copy the medicine (generics' entry usually takes between four and seven months from the date in which a patent expires).

Competition Between Originators And Generics

The Commission believes that originators use a variety of strategies to extend Phase II of the life cycle of their medicines as long as possible (so-called "tool box"). These strategies include:

  • Patent clustering, whereby a company forms a dense network of patents around a medicine (up to 1,300 separate patent filings, across the EU, for a single medicine). The Commission also implies that some of these secondary patents would be weaker than the primary patent.
  • Patent disputes and litigation cases brought by originator companies against generic companies. The Commission notes that, on average, these cases took three years to resolve, and originator companies lost a number of cases.
  • Patent settlements, which involve licensing or direct payments from originator companies to generic companies. In total, these payments amounted to more than € 200 million. The Commission said to have found 45 potentially problematic settlement agreements.
  • Interventions before regulatory bodies, which have to approve generic products and decide on their pricing and reimbursement status. These interventions could slow down the approval process by four months on average.
  • "Follow-on products" tactics, whereby originators companies try to convince doctors to switch a substantial number of patients to a new medicine prior to market entry of a generic version of the older medicine.

The Commission remarks that the cumulative use of one or more of these instruments would result in additional delays for generics' market entry.

Competition Between Originators

The Commission also believes that originators use a variety of strategies to block or delay the introduction of new medicines by other innovators. These strategies include:

  • Defensive patent strategies to block R&D of a new medicine;
  • Litigation for patent infringement during R&D of a new medicine;
  • Oppositions and appeals against other originators' patents; and
  • Settlement agreements concerning the commercialization of a medicine.

The Commission said that there is a higher use of such strategies in certain Member States (such as Germany, Italy, Portugal and Spain) and intends to investigate why.

The Regulatory Framework

The three main sets of rules regulating the pharmaceutical sector are: (i) patents, (ii) marketing authorisations and (iii) pricing/reimbursement systems. The Commission notes that these rules vary to some extent across Member States, despite EU harmonisation efforts. The majority of originators and generic companies alike consider that the current regulatory framework could be improved by:

  • the creation of a single Community patent replacing the current national patents; and
  • a unified and specialised patent judiciary in Europe replacing the existing national patent litigation systems.

Other shortcomings of the current regulatory systems which the Commission says have been identified by the sector inquiry include:

  • existing bottlenecks in the marketing authorisation system; and
  • delays and uncertainties created by national pricing and reimbursement procedures.

Comment

The types of practices identified by the Commission in its Preliminary Report relate to the enforcement of patent protection and other intellectual property rights ("IPRs") in the pharmaceutical industry.

It is settled case law that the exercise of IPRs can be assessed on the basis of EC competition rules. However, the application of such rules to the pharmaceutical industry is less straightforward. The European Courts have recently affirmed that the Commission should be cautious in applying EC competition rules to the pharmaceutical industry and that, in doing so, the Commission should take into account the specific characteristics of the sector. In 2005, the Commission issued a decision alleging that AstraZeneca misused the patent system and the procedure for marketing medicinal products with the effect of blocking or delaying market entry for generic competitors.4 However, that decision is currently under appeal before the Court of First Instance.5

There is therefore little guidance as matter of EC case law as to how to assess the tool-box identified by the Commission. By contrast, the US jurisprudence offers various examples of potentially anti-competitive conduct in the pharmaceutical industry, such as:

  • enforcement of fraudulently or inequitably procured patents;
  • sham litigation;
  • reverse payment settlements; and
  • abusive licensing or refusal to deal.

The Commission has made clear that it will draw inspiration from the US jurisprudence, when setting out its own guidelines to assess the tool-box. It is noteworthy in this context that the Commission's decision against AstraZeneca is at odds with the US jurisprudence from which the Commission is saying that it is drawing on for inspiration and, if upheld on appeal, would represent a dramatic extension of US jurisprudence. The European Federation of Pharmaceutical Industries and Associations ("EFPIA") argued that the tool-box contains practices that are perfectly lawful and "are essential to protect the huge investment in R&D."

According to EFPIA, the Commission has missed the opportunity to tackle the real issues facing the pharmaceutical industry (e.g., competition between generic companies), pointing out that Europeans pay more for generic medicines than US citizens. On 24 November 2008, the Commission inspected a number of generic pharmaceutical companies in Europe on suspicion of a possible cartel activity. In the press release confirming the dawn raids, the Commission stated that the inspections were not related to the pharmaceutical sector inquiry, but confirmed that knowledge acquired during the sector inquiry has allowed it to draw conclusions on where the Commission's action could be appropriate.

Next Steps

The Preliminary Report comes at a time of mounting pressure on the global pharmaceutical industry.

It is difficult to foresee what will be the ultimate outcome of the sector inquiry, which could include guidelines on how to assess certain types of practices under EC competition rules, investigations against individual companies whose conducts were suspected to breach EC competition rules, or industry-wide legislative proposals.

The Commission has invited comments from all stakeholders by 31 January 2009. It expects to conclude the sector inquiry in the Spring of 2009 at the earliest, when it plans to adopt a final report in the form of a Commission Communication. It also intends to take action against individual companies where it deems it appropriate.

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Footnotes

1. See http://ec.europa.eu/comm/competition/sectors/pharmaceuticals/inquiry/index.html.

2. The selected molecules account for EUR 57 billion, i.e. 47% of the overall turnover.

3. See http://ec.europa.eu/comm/competition/antitrust/sector_inquiries.html.

4. Case COMP/37.507, available at: http://ec.europa.eu/comm/competition/index_en.html.

5. Case T-321/05.

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