Arlan Gates, Nancy Hamzo and Eva Warden, Baker McKenzie

This is an extract from the 2021 edition of the Americas Antitrust Review published by Global Competition Review. The whole publication is available here.

In summary

The competitive implications of fast-paced activity in the pharmaceutical industry have, unsurprisingly, continued to attract the attention of the Canadian Competition Bureau. Key recent developments include the release of updated Intellectual Property Enforcement Guidelines (IPEGs) and a number of recent high-profile abuse of dominance investigations and large-scale merger reviews. Through these activities, the Bureau has become more vocal and active in identifying anticompetitive activity in the industry, even as it pursues a stated interest in innovation. This focus on pharmaceuticals will, moreover, likely continue in light of the covid-19 pandemic.

Discussion points

  • Updated IPEGs (2019) address the interface between intellectual property and competition law
  • Bureau’s concerns regarding brand-name drug manufacturers
  • Off-label use of vaccines and drugs
  • Pharmaceutical transactions remain top-of-mind
  • Covid-19 implications

Referenced in this article

  • Competition Act
  • Competition Bureau Canada
  • Intellectual Property Enforcement Guidelines
  • Alcon and other cases detailed on the Bureau’s website

Ongoing expansion and development in the pharmaceutical sector is shaping, and transforming, the competitive landscape globally. The industry’s markedly dynamic nature is reflected in a range of activity, from the development of innovative products that are redefining pharmaceutical markets to large-scale mergers with potential competitive effects in multiple jurisdictions. Not surprisingly, this has attracted the attention of competition authorities worldwide.

These industry trends point to continued groundbreaking changes in the pharmaceutical sector, which the government of Canada has referred to as ‘one of the most innovative industries’ in the country. For example, recent reports reflect ongoing significant research and development (R&D) expenditure, even as shifts in the industry’s business model mean that relatively more R&D is being conducted externally and through partnerships rather than directly by Canadian pharmaceutical companies. 

Specific reference to the pharmaceutical industry in a 2018 parliamentary report calling on the Canadian Competition Bureau (Bureau), which administers and enforces the Competition Act (Act), to investigate industry practices may mean that a higher percentage of complaints will result in investigations in future. Indeed, in this context, the Bureau’s sharpened focus on pharmaceuticals, notably in its updated Intellectual Property Enforcement Guidelines (IPEGs), as well as a considerable number of investigations and merger control reviews in the industry, suggest that increased enforcement in this area may be on the horizon. At the same time, the Bureau has repeatedly expressed an interest in supporting the development of both competition and innovation in recent publications and public comments, and in committing to regularly reviewing (and updating, as needed) the IPEGs to keep apace of the changing ‘IP environment’ and business conduct. These developments seem likely to ensure that pharmaceuticals will remain top-of-mind going forward as both the industry and the Bureau’s approach continue to evolve, not least in light of the implications of the covid-19 pandemic.

IP and the Act: the Bureau’s updated IPEGs

On 13 March 2019, the Bureau released final updated IPEGs, which were first published in 2000 and substantially updated in 2016.

The IPEGs’ primary focus is on the interface between IP law and competition law – a common theme in recent public statements by the Bureau, and an acknowledgment that IP laws are fundamentally about recognising private property rights and the right to exclude others. The stated purpose of the IPEGs is to explain the Bureau’s approach to dealing with competition issues involving IP, which includes a consideration of the conduct itself, the relevant market, the market power of the firm under scrutiny, the impact on competition in the relevant market and any relevant rationales or justifications. The 2016 and 2019 updates are intended to reflect amendments to the Act in recent years, to take into account the experience of the Bureau and to ensure consistency with the Bureau’s other enforcement guidelines.

As a preliminary matter, the IPEGs explain that the circumstances in which the Bureau may apply the Act to anticompetitive conduct involving IP or IP rights fall into two broad categories: those involving anticompetitive conduct that is something more than the mere exercise of the IP right, and those involving the mere exercise of the IP right and nothing else. The general provisions of the Act relating to cartels and horizontal agreements, pricing and distribution practices, abuse of dominance and mergers address the former, while section 32 (special remedies) addresses the latter. In a recent decision involving the Toronto Real Estate Board, the Federal Court of Appeal further confirmed that a defence under a separate provision of the Act, which protects acts engaged pursuant ‘only’ to the exercise of an IP right, does not allow a party to rely on its IP right to shield ‘what would otherwise be an anticompetitive act’. That is, this defence is unavailable in circumstances involving something more than the mere exercise of an IP right.

A core principle underpinning the Bureau’s approach above is that the unilateral exercise of an IP right is not an anticompetitive act in itself. The Act does not prohibit the exercise of IP rights generally. Rather, it imposes limitations on the IP owner under the general provisions of the Act when IP rights form the basis of agreements or arrangements between independent entities and when competitive harm stems from such an agreement. 

The IPEGs serve as an important notice to stakeholders in the IP-centric pharmaceutical industry of how their activities may be assessed under the Act. Notably, the IPEGs include guidance on the Bureau’s approach to settlement agreements reached pursuant to proceedings under the Patented Medicines (Notice of Compliance) Regulations (the PMNOC Regulations). They also include specific examples relevant to the pharmaceutical sector, including product switching activities, patent pooling and payments by brands to generics either before or after patent expiry for the purpose of delaying the generic’s entry (in the former case) or potentially for the purpose of allocating markets (in the latter case).

Pharmaceutical industry focus areas: product switching and settlement agreements

Product switching or ‘product hopping’ and settlement agreements are two areas of conduct that continue to draw the Bureau’s attention to the pharmaceutical industry. The Bureau has shown an ongoing interest in these areas, which feature prominently in the updated IPEGs, indicating that the Bureau is actively working to identify and address the potential concerns that may arise from such conduct.

Product switching and the Bureau’s investigation

Product switching or hopping generally refers to the introduction by a brand-name pharmaceutical manufacturer of a new product with limited or no therapeutic advantage over its original product (eg, a change in dosage or form), where the drug’s characteristics are modified enough to qualify for a new patent while maintaining enough of the original characteristics to rely on previous clinical trial results for the purpose of pharmaceutical regulatory approval. Prior to the expiry of the original patent, the brand drug company withdraws its original product from the market, by either recalling its supply or by raising its price significantly higher than the reformulated drug, causing physicians and consumers to switch over to the reformulated brand drug. As a result, generic versions of the original product cannot be automatically substituted for prescriptions written for the new product. The strategy is considered to be a means of enabling the brand company to maintain its market exclusivity by preventing generic manufacturers from entering the market. 

The updated IPEGs include an example involving product switching by a pharmaceutical company, indicating that where such conduct is engaged in for the purpose of excluding a generic pharmaceutical firm, the Bureau may investigate the innovator’s conduct under section 79 of the Act as a possible abuse of dominance. As a qualification to this commentary, however, the IPEGs also indicate that ‘soft’ product hopping, referring to the circumstance where a brand pharmaceutical company does not withdraw a pre-existing product from the market entirely but instead stops promoting it to physicians when a new product is introduced, would not necessarily raise an issue, provided it does not undermine the prescription base of the original product.

In late 2013, the Bureau was already showing a growing interest in the strategies and practices employed by pharmaceutical firms, such as pay-for-delay settlements, product switching and other ‘life cycle management’ strategies, when it held a workshop (‘Antitrust Issues in the Pharmaceutical Sector’) featuring international perspectives from the United States and Europe, jurisdictions that had already brought significant attention to these practices.

In May 2014, the Bureau announced that it had discontinued an inquiry into whether Alcon Canada Inc (Alcon), an allegedly dominant firm in the supply of certain prescription drugs, had engaged in anticompetitive conduct by disrupting the supply of a drug soon to be off-patent, Patanol, and replacing it with a successor drug, Pataday, for which there was initially no generic substitute.

The Bureau had commenced an inquiry in November 2012 as a result of concerns that Alcon’s behaviour would delay or prevent entry of generic versions of Patanol and instead lead patients to buy Pataday at a higher price. After the inquiry had been commenced, Alcon reintroduced Patanol into the Canadian market. After it had done so, competitors entered the market with generic versions of the drug and subsequently captured a significant market share from Alcon. The Bureau ultimately discontinued its inquiry because Alcon ceased the conduct that raised the initial concerns, the reintroduction of Patanol appeared to have restored the competitive dynamic in the market, and the temporary product switching strategy employed by Alcon did not appear to have actually delayed any generics from entering the Canadian market.

The Alcon case marked the Bureau’s first public investigation of unilateral practices in the pharmaceutical industry. Although the case suggests that remedies will not be applied in the absence of actual or likely anticompetitive effects, the Bureau has clearly demonstrated its willingness to investigate concerns associated with industry-specific practices in this instance and in more recent inquiries discussed further below.

Settlement agreements and the Bureau’s White Paper

‘Pay-for-delay’ describes a form of patent settlement (reverse payment settlements) whereby a brand-name pharmaceutical manufacturer and a generic manufacturer agree that the generic will delay the launch of a competing generic product in exchange for a value transfer, such as a direct payment, lucrative agreement for services or other form of compensation. The brand-name company thereby effectively delays potential generic competitors from entering the market.

The Bureau comments extensively on pay-for-delay and certain other settlement agreements in the IPEGs. Recognising that there are ‘significant differences’ in the regulatory regime in Canada relative to other jurisdictions and that these may have implications for the incentives behind and content of settlements, the IPEGs outline three ‘unique’ features governing settlements reached under the PMNOC Regulations:

  • the absence of a six-month exclusivity period for the first generic filer, a feature that may limit the ability of settlements involving the first generic challenger to delay the entry of subsequent firms;
  • the possibility of claiming ‘section 8’ damages against the patentee under the PMNOC Regulations, which is relevant to the evaluation of a brand’s payment to the generic firm in a settlement agreement; and
  • the possibility of ‘dual’ or follow-on litigation (in the form of an infringement action against a generic firm after it has successfully defended a prohibition proceeding if it chooses to launch prior to patent expiry, or proceedings against a brand firm for impeachment of its patent after it has succeeded in a prohibition application).

The IPEGs also include specific examples reflecting the following enforcement approaches to settlements reached under the PMNOC Regulations.

  • ‘Entry-split’ settlements, which do not involve the payment of consideration from a brand to a generic other than allowing the generic to enter the market before the patent expires, generally will not raise any concerns under the Act.
  • Settlements with a payment to the generic firm pursuant to which the generic enters the market prior to patent expiry will be reviewed under section 90 of the Act (reviewable agreements between competitors) or possibly section 79 (abuse of dominance).
  • A settlement will be reviewed under section 45 as a criminal conspiracy only in ‘very limited circumstances’, if there is evidence that the intent of the payment was to fix prices, allocate markets or restrict output.

Prior to the release of the first update to the IPEGs, on 23 September 2014, Canada’s Commissioner of Competition released a White Paper (the White Paper) discussing patent litigation settlement agreements between brand-name pharmaceutical manufacturers and generic pharmaceutical manufacturers. The White Paper expressed particular concerns with pay-for-delay agreements, referencing recent legal developments in the United States that had brought such arrangements more closely under the eye of the antitrust agencies, partly owing to a 180-day exclusivity period that temporarily prevents other generics from entering after the entry of the first generic filer, and that in all cases must be reported. Though no such exclusivity period applies in Canada, the Bureau indicated through the White Paper that this type of agreement, although not subject to mandatory notification, nonetheless in its view raised potential competitive concerns.

The White Paper indicated that agreements between brands and generics would generally attract the Bureau’s scrutiny only where there is a transfer of payment that is significant – if the payment to the generic exceeds the potential profit the generic could have made by competing in the market, if the payment exceeds any damages that the generic could have obtained through litigation or if the payment exceeds the brand’s expected litigation costs.

Abuse of dominance: other recent investigations in the pharmaceutical sector

Beyond cases specific to product switching and pay-for-delay agreements, the Bureau actively investigates other potential competitive concerns in the pharmaceutical industry under the abuse of dominance provisions.

Inquiries relating to companies’ approaches to generic and biosimilar drugs

Two recent inquiries, which closed in late 2018 and 2020, focused on manufacturers of brand-name drugs and their interactions with generic drug manufacturers. In both cases, the Bureau considered whether the firms’ activities could constitute an abuse of a dominant market position.

The first inquiry involved attempts by three brand-name drug manufacturers to restrict access to samples of drugs required to prove the bioequivalency of generic products. The Bureau eventually closed the investigation, but stated that evidence it obtained supported the generic manufacturers’ position that they faced barriers impeding their access to the branded drugs. The second inquiry involved similar conduct by another brand-name manufacturer, and was resolved after the Bureau became involved and the company began supplying its brand-name product to the generic manufacturer whose access had previously been restricted.

A third inquiry, which closed in early 2019, focused on manufacturers of biological drugs and their interactions with manufacturers of biosimilar drugs (generic biological drugs, previously known as ‘subsequent entry biologics’ in Canada). Specifically, this third inquiry involved the possible predatory or exclusionary impact of various activities on the part of a biological drug manufacturer with regard to biosimilar firms. 

In its statements following the closure of these investigations, the Bureau indicated that it would continue to monitor practices and dynamics within the pharmaceutical industry, particularly where the activities of brand-name or biological drugs are involved, and that such conduct may warrant further enforcement or advocacy in the future. Given its concerns over what it now views as repeated and persistent conduct in the industry, the most recent investigation in particular prompted the Bureau to emphasise that it will not hesitate to take action going forward, including through the imposition of administrative monetary penalties (potentially even where the brand-name product is ultimately supplied to a generic after an initial delay), and encouraged generic drug manufacturers to bring any concerns to its attention early on. 

Inquiry into approaches to off-label use of vaccines

The Bureau also recently investigated a vaccine manufacturer’s attempt to include a clause in a procurement contract restricting public health authorities’ off-label use of the vaccine, which was to be used for a provincial public immunisation programme. According to the Bureau, the restriction would have had the potential result of prohibiting provinces from implementing public immunisation programmes contemplating ‘off-label’ use; for example, by administering fewer doses than approved in the market authorisation, or mixing a particular vaccine with competing products contrary to the market authorisation, thereby causing such programmes to incur higher costs. 

Although the Bureau found no contravention of Canadian competition law in this case (as the alleged conduct never materialised), and recognised that health and safety issues may give rise to legitimate concerns on the part of manufacturers, prohibitions on off-label use of vaccines (and drugs) potentially may contravene the abuse of dominance provisions of the Act. Specifically, the Bureau has cautioned against strict prohibitions on off-label use that could restrict public health authorities’ jurisdiction and discretion in this context, especially where there is a resulting foreclosure of competing products that might have been used in conjunction with the vaccine or drug in question. Here again, the Bureau also noted that it will not hesitate to engage in enforcement and advocacy in relation to similar conduct involving vaccines and pharmaceutical drugs in future. 

Merger reviews in the pharmaceutical sector

Pharmaceutical sales in Canada represent approximately 2 per cent of the global market, placing Canada among the 10 largest world markets. From 2002 to 2017, total pharmaceutical sales in Canada doubled, reaching C$27 billion. The growth and increased activity in the pharmaceutical sector in Canada have driven mergers and acquisitions, and the Bureau has been involved in reviewing an ever-growing number of pharmaceutical transactions.

Recent merger reviews

In April 2016, the Bureau entered into a consent agreement with the world’s largest generic pharmaceutical company relating to its proposed acquisition of another company’s generic pharmaceuticals business, having found that the proposed acquisition would likely have resulted in a substantial lessening or prevention of competition for the sale of two pharmaceutical products in Canada. The consent agreement required the purchaser to divest either its own or the target’s Canadian assets relating to the two products.

In December 2016, the Bureau entered into a consent agreement with the Canadian subsidiary of the largest wholesaler of pharmaceutical products in Canada and a large pharmacy retail chain, to resolve concerns related to the wholesaler’s proposed acquisition of the retail chain’s corporate group, which also owns a healthcare claims adjudication business. The consent agreement required the wholesaler to divest retail chain locations in 26 markets that are at issue, as well as the establishment of firewalls to restrict the transmission of commercially sensitive information among the wholesale business, the retail chain business and the claims adjudication business.

Otherwise, from January 2013 to May 2020, the Bureau reviewed some 25 proposed mergers involving companies in the pharmaceutical and medicine manufacturing industry. Of these, the majority were cleared through a no-action letter (NAL) (confirming that the Bureau had no present intention to commence an application to challenge the transaction on substantive grounds, but reserved the right to do so up to one year after completion) and a small number were cleared through the issuance of an advance ruling certificate (ARC) (comprising a full waiver of the notification requirement and prohibiting substantive challenge post-closing).

The April 2016 and December 2016 consent agreements notwithstanding, on balance, the data suggest that companies in the pharmaceutical industry have, as a general rule, typically avoided engaging in mergers and acquisitions that raise obvious competition law concerns, even though the Bureau’s inclination to issue NALs rather than ARCs would appear to signal a tendency against granting unconditional clearance. Moreover, even where a consent agreement has been negotiated, the Bureau can (and does) subsequently agree to modify such prior agreements to reflect situations where circumstances have changed.

What the Bureau wants to know: relevant considerations in pharmaceutical mergers

In practice, the Bureau’s close examination of proposed transactions in the ever-evolving pharmaceutical industry generally requires detailed arguments and disclosures relating to the merging parties’ current and prospective offerings in the marketplace.

For example, the Bureau will typically seek detailed information on products currently supplied by the parties in Canada, so as to assess any overlaps and their possible implications for competition in the relevant markets. Given the increasing sophistication of the pharmaceutical industry, parties may need to disclose information not only on a product category level but also on a product molecule basis, taking into account differences in presentation, indication, method of administration or other factors. The ongoing development of off-brand products, particularly generics and the burgeoning category of biosimilars, creates a further level of nuance and complexity.

In addition to detailed disclosures regarding sales and customers, the Bureau will seek to understand the role of key opinion leaders and prescribing physicians. Information on the parties’ respective market shares locally or (if applicable) globally may be required to facilitate the Bureau’s assessment of the competitive implications of a proposed merger, even where any potential overlaps in the Canadian market remain largely theoretical.

The Bureau will typically seek information on products in development, with a view to identifying potential overlaps involving these pipeline products. Where this is the case, parties may be required to provide information on anticipated launch dates or other details of the products’ development, including any specific commercial plans (or the absence thereof).

The Bureau may also scrutinise the parties’ involvement in the manufacture and supply of active pharmaceutical ingredients both in Canada and globally, including those currently or previously sold, and those in development.

As many pharmaceutical industry mergers are global and often trigger filings in multiple jurisdictions, the Bureau usually will also want to access the contents of these foreign filings, and may request waivers from the parties to share information relating to the transaction with its counterpart authorities in those jurisdictions. One benefit of such coordination is that the Bureau may also take into consideration any remedies that have already been applied in those jurisdictions as part of its assessment of the appropriate remedy, if any, to address competition concerns in Canada.

Moreover, the December 2016 consent agreement reflects the particular concerns that may arise in the context of the distribution of pharmaceuticals in Canada, when an upstream purchaser, such as a distributor, acquires a downstream target, such as a retailer. These transactions may entail traditional competitive analyses regarding both the ‘unilateral effects’ and ‘coordinated effects’ of a proposed merger, as discussed further below.

In summary, transactions involving pharmaceutical companies often mean an involved notification and review process, requiring lengthy disclosures of granular and commercially sensitive information as well as ongoing dialogue with the Bureau. This potentially time-consuming process calls for a careful consideration of the analysis and strategy for presenting relevant product offerings and competitive interactions in the applicable markets, including where such information may not be readily available or obvious, even to the parties themselves.

Cases in point: recent transactions

In addition to publishing the ultimate result of its review, in select cases the Bureau also publishes position statements summarising its analysis of completed complex merger reviews. It has done so in recent cases in the pharmaceutical industry, including one involving a proposed transaction between two innovative drug companies, which resulted in the issuance of an NAL. Two others involved the proposed transactions discussed above, which were cleared pursuant to consent agreements in April and December 2016, respectively. Another proposed transaction involving pharmacy distribution and franchising services in Quebec also resulted in a consent agreement in April 2018.

The first of these cases comprised a three-part, inter-conditional transaction involving the creation of a joint venture between the parties for their over-the-counter (OTC) and consumer healthcare products, the acquisition of one party’s global vaccine business and the acquisition of the other party’s portfolio of oncology products. Only the OTC joint venture was technically notifiable, although all three components were subject to substantive review by the Bureau.

According to the Bureau’s position statement, the review examined the effects of the proposed transaction on the parties’ products that are currently marketed, as well as pipeline products. The Bureau’s focus was on whether the proposed transaction was likely to increase prices in the relevant markets or decrease another dimension of competition, such as innovation.

Ultimately, the Bureau concluded that neither the OTC joint venture nor the vaccine acquisition would result in a substantial lessening or prevention of competition in Canada on the basis that products offered by the companies to treat similar ailments were not close substitutes. In the case of the oncology product acquisition, the Bureau found that the acquisition was likely to have a substantial effect on competition. However, the Bureau considered that a consent agreement entered into in the United States, which required the acquiring party to sell certain assets to another pharmaceutical industry participant, effectively resolved any potential competitive concerns in Canada.

The April 2016 consent agreement led to a different result. The Bureau’s statement in that case took the position that where parties’ products contain the same molecule or active ingredient and are supplied in the same format, in general they should be considered within the same relevant product market, but that it may be appropriate to differentiate products based on other factors such as dosage strength.The Bureau took a forward-looking approach by considering both the remaining suppliers of equivalent generics and any likely future generic suppliers in its assessment of whether there would be effective remaining competition after closing. In keeping with its collaborative approach to international deals, the Bureau indicated that it cooperated with a number of its international counterparts (including the US Federal Trade Commission and the European Commission), in addition to engaging in extensive market contacts and consultations with Health Canada.

Regarding the December 2016 consent agreement, the Bureau commented that the deal was ‘largely vertical in nature’ and that for this reason the Bureau sought to address the potential unilateral effects of the proposed merger (in particular, the acquiring wholesaler’s ability to influence independent pharmacies operating under its retail banners). Additionally, the Bureau sought to address the potential coordinated effects of the proposed deal given that the acquiring party obtains commercially sensitive information in serving its wholesale customers, including direct rivals to the target retail chain, and the Bureau’s determination that the combined competitive intelligence of the merged entity would likely enable it to ‘alter the competitive dynamics’ and ‘significantly increase the likelihood of coordination among retail pharmacies’ in the retail markets in which the target competes.

Finally, in April 2018, the Bureau entered into a consent agreement relating to the proposed acquisition by a food retailer and distributor, which also (through a wholly owned affiliate) provides distribution and franchise services to independent pharmacists in Quebec, of a provider of distribution and franchise services to pharmacies in that province, which also owns a generic pharmaceuticals manufacturer. The Bureau’s analysis focused on the companies’ competing pharmacy distribution and franchise services. As the Bureau concluded that the transaction would likely result in higher prices or a decrease in services for consumers, under the consent agreement the acquiring company agreed to sell certain properties or leases to another supplier of distribution and banner services and to take steps to terminate agreements relating to pharmacies located in the relevant markets in Quebec.

Looking ahead: managing the competition aspects of industry responses to covid-19

In light of the global outbreak of covid-19, the Bureau issued a statement on 8 April 2020 acknowledging that the exceptional circumstances surrounding the pandemic may call for crisis-specific business collaborations to help ensure the supply of critical products and services in Canada. The Bureau has emphasised that provided firms are acting in good faith with a clear view to contributing to crisis response, it does not intend for competition law enforcement to have a chilling effect on such endeavours. The Bureau may, however, still scrutinise conduct that goes further than what is needed to achieve such short-term goals or that seeks to achieve a ‘competitive advantage’ in violation of the Act (for example, where the behaviour takes advantage of this flexibility in an attempt to cover activities that contravene the restrictions on collusive conduct). Where companies are unsure of the legal implications of a proposed course of conduct, they may request informal guidance from the Bureau.

Pharmaceutical companies looking to work together in their response to the pandemic, for example by engaging in voluntary cooperation schemes to target the risk of shortages of medication needed for the treatment of coronavirus patients in hospitals, or other critical medications or healthcare supplies, will need to weigh the relative risks of such conduct in light of the Bureau’s updated guidance and, where appropriate, may wish to seek informal comfort or guidance from the Bureau. Equally, any joint initiatives to develop new medications or vaccines in such extraordinary circumstances will still need to be undertaken with the limits of acceptable competitor collaborations in mind. Moreover, the recent investigation into the terms applicable to the rollout of vaccines in the context of public immunisation programmes further indicates that attempts by manufacturers to restrict legitimate off-label use of vaccines and drugs should be approached with caution.

*The authors would like to thank Yana Ermak and Sarah Mavula for their contributions to this article.

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