I. Introduction and summary of conclusions1

1. On 8 July 2009, the Competition Directorate of the European Commission (‘DG COMP’) published its Final Report on the pharmaceutical sector inquiry (‘the Final Report’).2 Like the Preliminary Report published on 28 November 2008,3 the Final Report concludes that the entry of generic medicines onto the market is being delayed (compared to the perfect competition scenario of generic entry immediately upon patent expiry) and that there has been a decline in the number of new chemical entities (‘NCEs’) reaching the market.4

2. While recognising that DG COMP’s powers under Regulation 1/2003 are narrower than, for example, the UK Competition Commission, and focus almost solely on the conduct of undertakings,5 we were critical of the fact that the Preliminary Report had missed a key part of the picture by failing to examine the crucial role played by the regulatory framework in the pharmaceutical industry. We suggested this was an undetected “elephant in the room.”6

3. The Final Report goes a long way to remedying this omission – certainty as far as delayed generic entry is concerned. While the Final Report suggests that the conduct of R&D-based pharmaceutical companies (‘originator companies’7) may be one of the causes of delayed generic entry and of the decline in NCEs reaching the market, it accepts that shortcomings in the regulatory framework may also explain and be a significant cause of these phenomena.

4. The question therefore arises as to how significant the regulatory impact is compared to the impact of conduct by originator companies. Or to pursue the elephant analogy: how big is the elephant is in the room? We explore this below.

First, we analyse the data and the findings in the Final Report as to the impact of regulation on generic entry. The Final Report now seems to recognise that the primary cause of the delays to generic entry identified by the sector inquiry is regulatory in nature and not practices of originator companies.

Second, we assess the reasons put forward by the Final Report for the decline in the number of NCEs. We note that the Final Report falls short of engaging in a full-blown analysis of all the regulatory factors that may explain this decline, with the result that DG COMP is unable to properly evaluate “whether the behaviour of originator companies might be among the reasons for the difficulties to bring new medicines to the market.”8 It is therefore difficult to escape the conclusion that regulation may again be the primary reason for the decline in NCEs.

II. Why did DG COMP open a sector inquiry into the European pharmaceutical sector?

5. On 15 January 2008, DG COMP opened9 a sector inquiry into the pharmaceutical industry by way of unannounced inspections – the first time that dawn raids have been used in a sector inquiry. At that time, DG COMP said it had started the inquiry to examine (a) delays to generic entry and (b) the reasons behind fewer new pharmaceutical products being brought to market, as the Competition Commissioner’s words made clear: “Individuals and governments want a strong pharmaceuticals sector that delivers better products and value for money. But if innovative products are not being produced, and cheaper generic alternatives to existing products are being delayed, then we need to find out why and, if necessary, take action.”10

6. DG COMP was therefore interested in investigating causation when the sector inquiry was opened (“we need to find out why”).

III. The 426-page Preliminary Report of 28 November 2008: What about the elephant?

7. The Preliminary Report claimed that originator companies had recourse to a “toolbox” of practices11 in order to delay the entry of generic medicines onto the market and that these practices, where successful, “may increase the likelihood of delays to generic entry” and “may significantly increase legal uncertainty to the detriment of generic entry and can cost public health budgets […] significant amounts of money.”12

8. The Preliminary Report also claimed that originator companies applied defensive patenting strategies, primarily aimed at blocking other originator companies in the development of new medicines. In relation to the overlap between the patents of one company and patent/R&D programme of another, the Preliminary Report concluded that this “creates significant potential for originator companies to find their research activities blocked, with detrimental effects on the innovation process.”13

9. However, on the key issue of the effect of regulation, the Preliminary Report was almost entirely silent. Similarly, the Preliminary Report did not address the issue of causation. The quotes set out in the preceding two paragraphs were typical of the Preliminary Report as a whole: the use of “may” and “creates significant potential” rather than “will” or “does”. The analysis was thus speculative and there was no finding that any of the practices by originator companies caused generic delay or a drop in innovation.

IV. An elephant which was the subject of much critical comment during the public consultation after the publication of the Preliminary Report

10. The failure to address the regulatory environment was the subject of much critical commentary by stakeholders during the public consultation following the publication of the Preliminary Report.14 Many stakeholders pointed out that the failure to take this factor into account meant that no meaningful conclusions on causation could be drawn – in other words, there was no causal link between the practices by originator companies which the sector inquiry identifies and generic delays / reduction in innovation.

11. In relation to delays to generic entry, a number of stakeholders argued that national regulatory measures better explain the significant disparities as to the average time for generic entry amongst the different EU Member States than the “toolbox” – since there was no evidence that the elements of the “toolbox” were applied differently in different countries. In particular, it was said that the way in which Member States incentivise generic entry and the regulatory delays that generic producers incur during the process of bringing a product to market suggest that regulation was the major element at work.

12. Similarly, in relation to the lack of new innovative products reaching the market, a number of regulatory reasons were put forward to explain why there has been a drop in the number of NCEs. These included national pricing and reimbursement systems, cost-containment strategies, ever-higher requirements that need to be met in order to obtain a marketing authorisation and the increased costs of clinical trials.

V. The 533-page Final Report of 8 July 2009 spots the elephant

13. These comments appear to have been taken on board by DG COMP in preparing its Final Report, which adopts a markedly different tone and emphasis to the Preliminary Report. While the “primary focus” remains “on those practices which companies may use to block or delay generic competition as well as to block or delay the development of competing originator products” (¶ 15), the Final Report accepts that “as the industry is strongly regulated and the behaviour of the company needs to be assessed in the context of the existing regulatory framework, the sector inquiry also looked in broad terms at aspects of the regulatory framework” (¶ 16).

1. Regulation and delays to generic entry

14. The Final Report now recognises that “a number of regulatory variables play an important role” (¶ 190) in relation to how generic entry takes place:

  • First, INN prescription by doctors and mandatory generic substitution by pharmacists. Where Member States encourage doctors to prescribe an active substance rather than a specific product and oblige pharmacists to dispense the cheapest generic available from those covered by a doctor’s prescription, “generic entry in the first year appears to be more prevalent” (¶ 190) and “the number of entrants tends to be higher” (¶ 206);
  • Second, the imposition of mandatory discounts (in comparison to the pre-existing originator price) or price caps on generic products. In Member States which use such mechanisms, “the speed of entry appears to be lower” (¶ 197) as these measures “may remove some of the advantage of first-movers into the market (the first generic entrant to enter the market has to give a mandatory discount, whereas otherwise it might be able to offer mild price reductions compared to the originator company until the point in time that other generic companies enter the market as well)” (¶ 190). The number of entrants also “appears to be lower” (¶ 206).

15. These findings are not surprising as a 2006 report by Simeons and De Coster,15 commissioned by the European Generics Association, had similarly found that generic entry depends, to a large extent, on the approach adopted by the Member States:

“Penetration of generic medicines is more successful in countries that permit (relatively) free pricing of medicines (e.g. Germany, Netherlands, United Kingdom) than in countries that have pricing regulation (e.g. Austria, Belgium, France, Italy, Portugal, Spain). This is because countries that adhere to free market pricing generally have higher medicine prices, thereby facilitating market entry of generic medicines and a higher price difference between originator and generic medicines.”

“In Italy and Spain, the limited volume of generic medicines consumption in combination with low medicine prices due to certain supply-side measures has undermined the economic viability of the generic medicines market.”

“Countries that have promoted generic medicines for 10-15 years naturally have a more mature generic market than countries that have only recently implemented measures to stimulate generic medicines use.”

16. The Final Report also acknowledges that the hurdles which generic producers face when getting through the regulatory process also contribute to delays:

  • First, marketing authorisation bottlenecks. The Final Report finds ¦¦that bottlenecks – due to delays in procedures and accessibility of slots, with some agencies already “fully booked” until 2010 – “may lead to delayed access for European patients to […] generic medicines” (¶ 1372);
  • Second, national pricing and reimbursement systems. The Final ¦¦Report calls for Member States to fully comply with the time-limits set out in the Transparency Directive (Directive 89/105) “in order to avoid delays to the benefit [detriment]16 of patients and applicant companies” (¶ 1432). It also invites all Member States “to consider the introduction of national provisions granting automatic/immediate pricing and reimbursement status to generic products […] where the corresponding originator product already benefits from reimbursement based on a higher price” as this would lead to “faster access of generic products” (¶ 1434).

17. These national regulatory factors do indeed appear to explain why generic entry may be delayed more in some countries than in others. They certainly explain the disparities in generic entry between different EU Member States much better than the original thesis, namely that practices of originator companies were to blame – a hypothesis that was suggested at the outset of the investigation but which was not confirmed in the Preliminary Report, as it never came to any conclusion on causation. The Final Report therefore sets the record straight and concludes that “the Preliminary Report did not suggest that the observed delays were exclusively due to company behaviour, but emphasised that practices employed by originator companies may contribute to the delays” (¶ 1512).

2. Regulation and the lack of new innovative products reaching the market

18. The Final Report also considers certain regulatory aspects which may explain the decline in the launch of new NCEs:

  • External reference pricing. The use by certain Member States of ¦¦mechanisms whereby a price is set on the basis of the prices in other Member States “can lead to delays in market entry” (¶ 1443) because new products will not be launched in lower-priced Member States until prices have been obtained in higher-priced Member States;
  • The fragmentation of national pricing and reimbursement ¦¦systems. The fact that pricing and reimbursement decisions are increasingly taken at a regional/local or even hospital level also “has an impact on the transaction costs to market the products” (¶ 1445) and delays the launch of new products.

19. However, the Final Report falls short of engaging in a full-blown analysis of all the regulatory factors which may explain the decline in the number of innovative products reaching the market in recent years. For example, there is no consideration of the fact that regulatory requirements for the approval of NCEs are higher now than they were a decade ago.17 If there is a higher regulatory failure rate, this in itself could explain part of the trend of lower numbers of NCEs reaching the market.

20. Similarly, the impact of the increased costs of clinical trials is also ignored by the Final Report. While originator R&D budgets continue to grow,18 costs are also growing. Clinical trials have become more complex, due to increased difficulties in enrolling patients, because patients already have treatments for many diseases and because diseases are more complex.19 The increased cost of clinical trials may also make certain research projects uneconomic, notably when viewed in combination with the impact of pricing and reimbursement and cost-containment strategies.

21. These regulatory factors therefore also plausibly explain the decline in the number of NCEs reaching the market, yet, as the Final Report admits, they were not considered by DG COMP:

“the sector inquiry did not analyse which other important factors – apart from company behaviour – could have contributed to a decline in innovation as measured by less novel medicines reaching the market. Reasons given by the industry include increased scientific complexities, high attrition rates in late state development due to regulatory risk aversion and uncertainty about financial awards.”20

22. This gap in the analysis means that DG COMP is unable to reach any hard conclusions as to whether the conduct of originator companies has had any impact on the number of NCEs reaching the market. This is presumably why DG COMP has decided to focus only on relatively narrow conduct which – presumably – it views as being potentially anti-competitive: “defensive patenting strategies that mainly focus on excluding competitors without pursuing innovative efforts and/or the refusal to grant a license on unused patents will remain under scrutiny in particular in situations where innovation was effectively blocked.”21 Given the relative rarity of defensive patenting,22 and the consequent unlikelihood that defensive patenting could come close to explaining the considerable decline in NCEs identified by DG COMP, it is difficult to escape the conclusion that regulation may again be the primary factor in operation here.

VI. Conclusion

23. Regulation is one of the most relevant and important elements in the pharmaceutical sector. The Final Report gives this element the consideration it deserves. It concludes that regulation goes to the heart of the question of why generic entry is delayed, significantly in certain Member States. The Final Report does not, however, explicitly reach any conclusions on the impact of regulatory factors in relation to the decline in NCEs, but the implicit conclusion in the report is the same – regulatory factors are again at the heart of the issue.

24. DG COMP is to be congratulated for having taken the time between the Preliminary and Final Reports to undertake this analysis of the impact of regulation. Hopefully, the resulting focus on regulatory improvements will enable faster generic entry and greater innovation to the benefit of all patients in Europe. It is now time to give the elephant a bit more attention – and politely ask it to leave the room.