On July 8, 2009 the European Commission (the Commission) published its long-awaited final report on its inquiry into the pharmaceutical sector (the Final Report).
The Final Report lays out the Commission’s factual findings on the state of competition in the EU pharmaceutical sector and identifies a number of areas where the regulatory framework may be influencing the entry of generic drugs. The Final Report echoes many of the findings from its Preliminary Report, although the Commission has clearly retreated from its tone of criticism of the originator industry in that earlier report.
The Final Report points to broad areas of antitrust concern around practices allegedly used by pharmaceutical companies to delay the entry of generic and new innovative drugs, with patent settlement arrangements a subject of particular concern. While the Commission announced the opening of an antitrust investigation against an originator company and five generic companies at the time of publication of the Final Report, it remains unclear how many antitrust cases will be brought.
Somewhat disappointingly, the Final Report does not offer detailed guidance on the circumstances in which EC competition law may place limits on the ability of pharmaceutical companies to exercise their patent rights and when conduct before the regulatory authorities may be considered unlawful.
‘The publication of the final report is just the beginning of our work. With the help of the insights gained from the sector inquiry, the Commission will now step up its antitrust enforcement work with Member States to improve the regulatory framework and procedures for pricing and reimbursement and market authorization.’ (Neelie Kroes, EU Competition Commissioner)
This briefing comments on the Final Report and what it means in practice for companies operating in the pharmaceutical sector and beyond.
Background – the story so far
The Final Report represents the culmination of an eighteen month process, which began in January 2008 with a series of unannounced inspection visits on the premises of several European pharmaceutical companies to examine why fewer new medicines have been brought to the market and why generic entry appears to be delayed. This was the first time that the Commission used dawn raids in a sector inquiry which is indicative of the seriousness with which it views the issues.
A Commission sector inquiry is essentially an information gathering exercise that provides the Commission with in-depth knowledge about markets. The Commission launches a sector inquiry when it has concerns that competition may not be working effectively but it is not clear that individual companies are infringing the competition rules. The Commission uses sector inquiries to obtain a better understanding of the functioning of a specific market across the EU and between member states and to discover potential infringements of the competition law prohibitions in article 81 and article 82 of the EC Treaty.
Following the Commission’s consultation process, involving questionnaires to over one hundred industry participants, regulatory authorities and industry bodies, the Commission released its Preliminary Report on November 28, 2008. This was itself a widely publicized media event. At the time, many commentators criticized the Preliminary Report as undermining the recognition and enforcement of IP rights by suggesting that practices which are common to a number of industries, not just pharmaceuticals, could infringe EC competition law.
Generic companies have largely supported the Commission’s inquiry but originators maintain that there is no evidence that their practices hinder innovation or restrict generic entry. They state that other factors such as the long and risky investment cycle of pharmaceuticals, intellectual property law and regulation explain the market practices that have been the focus of the Commission’s inquiry.
The Commission has been at pains to emphasize the importance of the pharmaceutical industry to the EU economy, as well as the significance of intellectual property rights to protect and stimulate innovation. It finds, nevertheless, that the entry of generic drugs is being delayed and that the actions of originator and generic companies contribute to the problems, although there are impediments arising from the regulatory framework.
The Commission cites a number of facts in its conclusions. A selection of factual findings include that:
- on a sample of medicines that faced loss of exclusivity in the period 2000 to 2007 in 17 Member States, the inquiry found that citizens waited more than seven months after patent expiry for cheaper generic medicines, costing them 20 percent in extra spending; and
- generic products are on average 40 percent cheaper two years after market entry compared to the originator drugs.
It is remarkable how the Final Report differs in tone from the Preliminary Report. Although the Commission does perceive there to remain antitrust concerns, it has moderated its language and findings and taken a more complete and constructive view of the industry by acknowledging that changes need to be made to the regulatory framework.
The Final Report’s findings and conclusions are grouped in the following four main areas:
Competition law scrutiny and enforcement
The Commission has stated that it will apply the EC competition law prohibitions of restrictive agreements and abuse of dominance to target practices used by pharmaceutical companies to protect their inventions.
The Commission raises a concern that originators have extended the protection of their drugs, using tactics such as ‘patent thickets’, where one drug is hidden in a bush of patents or by creating ‘patent clusters’ with numerous additional patents around an original patent. These findings may not be unsurprising. The issue is whether this patenting activity - which is aimed at managing the effects of competition and an uncertain investment cycle - is legitimate or abusive under EC competition law.
The Commission has also expressed concerns where a follow-up invention or second generation product is patented to which it is intended patients will be ‘switched’ by promotion, before the expiry of the underlying or base patent. It is not clear that this extension of protection is unlawful. Small developments can, nevertheless, be inventive steps. Incremental improvement is often very significant and can bring with it large consumer benefits. For example, a new salt can dramatically reduce the side effects of a drug or improve its effectiveness.
An increase in patent litigation on the part of originator plaintiffs has also come under investigation. The Commission is concerned by differing approaches and judgments in various member states for related proceedings.
The Commission’s concern is that originator companies who can more easily fund litigation than their generic competitors may be using litigation for unlawful means. The strategic use of ‘deeper pockets’ is an enduring problem of any judicial system and is not unique to the pharmaceutical sector. If a company is in a dominant position such practices could be challenged as abusive. The leading EC case on this issue1 has made it clear that such a claim will be successful only in exceptional cases. In short, the litigation must be “manifestly unfounded”. To apply this approach in litigation brought by pharmaceutical companies may seem challenging because such cases tend to turn on complex evidential issues such as whether the generic product is the bio-equivalent of the patented drug.
One element identified as posing particular concern by the Commission is the use of patent settlements. A payment to a generic company to delay entry or keep out of the market may be unlawful. However, views differ as to whether this “reverse payment” should always be condemned under competition law.
The Commission’s focus on reverse payments resembles the renewed interest among U.S. regulators in this issue. Recently the Department of Justice (DOJ) has indicated that it regards reverse payment patent settlements between originator and generic companies as ‘presumptively illegal’. The DOJ’s view, expressed in a brief filed before the Second Circuit of Appeals, represents a change to its previous position. With the Commission stating in its Final Report that it will consider further focused monitoring of settlements with payments which it understands to limit generic entry, pharmaceutical companies stand to face increasing scrutiny on this issue in both the EU and U.S.
There was overwhelming support among stakeholders and the Commission for establishing a Community patent and a unified patent judiciary. Both of these have been long-held desires of regulators and industry.
However, a question arises as to whether change will come fast enough as action is needed at levels where the Commission does not have direct powers. The Report states that the Commission will make all efforts to have these measures adopted rapidly, yet progress on the Community patent and the European Patent Court has so far been slow. The French Presidency failed to get Member States to agree on a common position on these issues at the Competitiveness Council on December 1, 2008. The Community patent was not a priority of the Czech Presidency. All eyes will be on the Swedish Presidency beginning in July 2009 to see whether the renewed focus on this issue in light of the Final Report will bring about timely change.
The Final Report concludes that vexatious third party submissions and formal interventions in authorization processes should be discouraged as much as possible, with applicants being made fully aware of any intervention made by a third party. The Final Report calls on marketing authorization bodies to make all necessary efforts to ensure that interventions do not lead to delays for applicants. The Final Report also recommends that national authorities work towards increased mutual recognition of each other’s authorizations, and it makes clear its intention to push for harmonization of authorization processes between the EU and U.S.
Pricing and reimbursement
The Commission concludes that national authorities should consider the introduction of national provisions granting reimbursement status to generic products, without the need for detailed assessment, wherever the corresponding originator product benefits from reimbursement based on a higher price. The Commission recommends that member states should respect existing procedural time limits and exchange best practices in this area.
A key issue – quality of patents
A key issue linking the issues raised by the sector inquiry relates to the quality of the underlying patents. The suggestion that the filing of additional patents is anti-competitive amounts, in effect, to the Commission “second guessing” the patent system. A patent already granted must be presumed valid until a court has established that it is not. Any attempt to limit the absolute number of patents also gives rise to difficulties as there is no obvious and principled methodology to decide how many patents are “too many”.
However, although invalid patents are sometimes granted in all industries, this is not something that can be wholly resolved by better examination at the patent offices. This is really an issue that can only be addressed by specialist patent courts and expert evidence.
The need for clear guidance on permissible behavior
The Commission does not appear to envisage guidelines on the competition law analysis of the various practices that have come under scrutiny but, rather, sets out its factual findings and proposes to pursue individual infringement cases separately, where it considers appropriate. The Commission has mentioned cases which it is pursuing outside of the sector inquiry, including those relating to the raids on some companies in November 2008. In much the same way as the energy sector inquiry led to infringement cases against particular companies, the pharmaceutical sector inquiry has brought to light, or at least enhanced the Commission’s awareness of, practices in the industry which may infringe competition law.2
While guidance may need to address certain issues that are unique to particular industry contexts, it would seem preferable for there to be a consolidated statement of the legal framework rather than to let the law develop ad hoc in decided cases, some of which may take years to reach a final resolution of the issues. Without such a holistic approach, originator and generic companies, as well as national authorities and courts, are likely to find that there remains a degree of legal uncertainty as to the permissible conduct at the intersection of IP law and competition law.
Beyond the Final Report – implications for business
The Commission undoubtedly chose difficult legal and evidential issues to examine. Given that there remains a degree of legal uncertainty as to the permissible boundaries of activity, immediate actions that businesses could usefully take based on the Final Report include:
- a competition law audit of the business practices in the Commission’s focus areas (i.e. patenting activity, patent litigation, reverse payments, settlement and conduct before the regulatory authorities) to assess the level of risk and inform what adjustments may be required to existing procedures and practices;
- assembling data to develop the best defensive case in anticipation of action at the member state level and potential follow-on court action, again depending on the degree of risk identified by the audit. Such evidence could include a cost-benefit analysis of patent licensing and marketing strategy to develop a defensive case for patenting decisions, refusals or decisions to license, launch of own generics or the withdrawal of particular products; and
- reviewing existing antitrust compliance procedures, programs and training given the increased competition law scrutiny that is likely to result from the factual findings and Commission statements disclosed in the Final Report.
The pharmaceutical sector inquiry has sparked controversy and has been at the forefront of almost the entire pharmaceutical industry over the last eighteen months. Whether or not the competition law concerns raised are founded, the inquiry has given prominence to originator/ generic issues and provided a forum to inform both the Commission and national authorities about the challenges facing the industry.
The pharmaceutical sector inquiry has focused clearly on the specifics of the pharmaceutical sector. However, it concerns practices that are common not just to the pharmaceutical sector, but to all high-tech and R&D-intensive sectors, such as taking out numerous patents to protect an invention across its lifecycle, patent litigation and patent settlement. These issues have been discussed at length in the inquiry and experts across all industries have been concerned by suggestions that long-standing business practices may be incompatible with the competition rules. While the Final Report may disappoint those who anticipated a spate of infringement cases, the pharmaceutical sector has not been given a clean bill of health, and at least one infringement case has already been launched.3 Further infringement cases may be expected to follow, providing more guidance on the applicable legal framework, albeit developed piecemeal. The Final Report is not the final chapter in the evolving debate on the application of EC competition law to practices which are the connecting tissue of the pharmaceutical and many other research-based industries.