Preliminary Report of the EC Pharma Sector Enquiry
Today the Commission has published the Preliminary Report on its investigation into competition in the pharmaceutical sector. It follows hard on the heels of a series of dawn raids across the EU on 24 November. It concludes that market entry by generics occurs on average seven months after patent expiry, resulting in very substantial costs across the EU. Action by originator companies and deficiencies in the regulatory framework are identified as contributing to this delay; however, the Commission, at this stage reaches no conclusions about whether these actions amount to infringements of EU competition law. However, in introducing the Report, Commissioner Kroes stated clearly that the Commission would not hesitate to initiate proceedings if it identified evidence of infringements - a message underlined by this week's dawn raids.
Background It is just over nine months since the European Commission took the unprecedented and controversial step of launching a sectoral investigation with a flurry of unannounced on-site inspections at the premises of various pharmaceutical companies. Since then, both originator and generic companies have been the recipients of a number of waves of detailed questionnaires. Information has also been sought from other stakeholders in the industry. The administrative burden in terms of time and cost to the industry in responding to the investigation has been substantial.
In launching the investigation in January, the Commission expressed concern that fewer novel medicines were reaching the market and that entry by generic suppliers was, on occasion, delayed. In focussing on the importance of generic entry as a means of securing lower drugs prices, the investigation reflected a shift in the Commission's focus away from parallel trade to generics as a means of imposing its view of competition on the market.
A sector investigation looks at whether competition is functioning optimally in a market place. Unlike investigations launched under Article 81 EC Treaty (anti-competitive agreements) or Article 82 (abuse of a dominant position), a sector investigation is not an investigation into suspected infringements of the EC competition rules by specific businesses. However, the Commission always has the option at a later stage to decide to open investigations against individual companies if the sector investigation produces evidence suggesting that breaches of Article 81 or 82 have occurred.
Significantly, however, the Commission indicated from the outset that this enquiry was looking into possible breaches of:
- Article 81 EC Treaty resulting from agreements between companies - a particular focus is settlement agreements in patent litigation between innovative and generic companies - an area already of considerable interest to the FTC in the US; and
- Article 82 arising from mis-use of patent rights or the regulatory process, vexatious litigation or other forms of abusive conduct. The Commission noted, as an example of the potential concerns, its 2006 decision fining Astra Zeneca 60 million Euros for abusing the patent system and marketing authorisation procedure to inhibit generic entry.
The depth and breadth of information requested by the Commission into companies' policies and practices in terms of patent applications, extensions, enforcement and settlement, as well as commercial strategies as patents approach expiry, has furnished the Commission with a unique and extensive database from which to "cherry pick" appropriate material for test cases. Given the difficulties experienced by the FTC in its settlement cases and the inherent challenges in prosecuting Article 82 cases, the Commission will find the strongest cases to send out its policy message.
Dawn Raids
This was further evidenced by the further dawn raids undertaken by the Commission on 24 November. Reports indicate that the targets were generics companies based in the EU. The Commission noted that, whilst these raids were not directly related to the sector inquiry, "...the knowledge acquired during the sector inquiry has allowed the Commission to draw conclusions in where Commission actions based on competition law could be appropriate and effective."
The Report
The Report studied evidence from a sample of 43 originator and 27 generic companies, and looked in detail at 219 molecules. These products accounted for 47% of the total turnover of prescription medicines in the EU in 2007.
The main finding of the Report is that "competition in this industry does not work as well as it should". There is evidence that originator companies have undertaken certain activities which delay generic entry, notably:
- multiple patents covering the same product ("patent clustering"; in one case, 1300 such patents covering one medicine) particularly those patents which are intended simply to inhibit competitors developing similar compounds;
- initiation of disputes and litigation (noting that generic companies ultimately won 60% of these cases which were litigated to final judgment);
- patent settlement agreements with generic companies (of which more than 10% of the sample studies were "reverse payment settlements", where the originator company makes a payment to a generic company competitor and the agreement limits entry of the generic medicine onto the market). Interestingly, in the conference at which the Report was presented, one of the members of the Task Force responsible for the Inquiry suggested that patent settlement agreements which do not involve "value transfer" from the originator company are unlikely to be regarded as anti-competitive - even where they limit generic entry. This may give some relief to both parties to such agreements; and
- intervening in national approval procedures for a significant number of generics, leading to an average delay to entry of generics medicines of four months. Indeed, on an average weighted basis, it took seven months for generic medicines to enter the market which, based on the sample, led to 3 billion Euros in potential "lost savings" to EU health systems in the period 2000-2007 in 17 Member States.
Not surprisingly, the Report finds that generic medicines make a significant contribution to lowering the total health costs of Member States; in the sample studied, the average cost of a medicine dropped by 20% in the year following first generic entry, and these savings to health systems totalled over 14 billion Euros. Thus, "without these savings, total expenditure for the medicines analysed would have been over 25% higher."
Recommendations
Most industry stakeholders involved in the inquiry process (both innovator and generic companies) supported the creation of a single Community Patent and "a unified and specialised patent judiciary in Europe"; the Report supports these calls, noting that apparently 11% of final judgements in patent cases were contradictory (in that different courts in two or more Member States delivered final judgements on the same issue which were conflicting), and also that patent litigation studied in the sample cost approximately 420 million Euros. It is believed that these contradictions and costs could be avoided, or at least reduced, by these measures.
There is a wide-spread feeling amongst many innovator companies that regulatory review of Marketing Authorisation Applications by generic companies is not subject to the same degree of procedural and substantive rigour as those submitted by innovator companies. Whilst the EU competition authorities may regard matters such as these as outside their direct remit, there may be disappointment that this concern is not reflected in the Report.
For all the concerns expressed by the Commission in this Report, it is noteworthy that the Commission makes no claim that it has found evidence of wide-spread, systematic anti-competitive behaviour by the innovative companies studied. It made clear, however, that this is work in progress. Given the database that the Commission has assembled and the overall tone of the interim report, it is inevitable that there will be follow-on actions.
The tensions at the interface of intellectual property rights and competition law have been highlighted by a number of recent cases and investigations on both sides of the Atlantic. Any follow-up action by the Commission will provide further opportunities for these issues to be addressed:
- can applications for multiple patents amount to abusive behaviour?
- when does using the regulatory framework to advance commercial interests become abusing?
- how weak does a patent case have to be to amount to abusive vexatious litigation?
- what circumstances will make patent enforcement litigation an abuse of dominance, in terms of the objective strength of the case, the subjective intentions of the patent owner and, possibly, whether interim relief is sought.
Wider considerations
The investigation has added further fuel to the ongoing controversy over the scope of legal privilege in European Commission investigations. The lack of privilege advice from in-house counsel and non-EU qualified lawyers was again an issue during some of the dawn raids. In addition, the Commission's focus on patent litigation strategy meant that advice received from patent agents is central to the investigation. Whether such advice should be covered by legal privilege thereby preventing the Commission from both reviewing and copying such documents remains to be resolved.
What happens next?
The Commission has invited views on the preliminary findings in its interim report with a view to publishing its final report in the Spring of 2009. However, if the Commission finds evidence of infringement of the EC competition rules (or their national equivalents), there is a possibility of the Commission or national competition authorities starting enforcement actions against individual companies even before the final report is published, in addition to the dawn raids announced earlier this week.
The political pressure from Member States to reduce healthcare costs, means that this is one sector investigation that is unlikely to die quietly away.
If you would like to follow up on any of the issues discussed in this newsletter, please contact one of the partners named above or your usual contact at Lovells.