The European Commission has published its preliminary report on its inquiry into the European pharmaceutical sector, concluding that competition "does not work as well as it should".
The Commission's preliminary report on its inquiry into the pharmaceutical sector was published on 28 November 2008. Whilst being merely factual in nature and not identifying any specific wrongdoing by individual companies, the 400 page report concluded that originator pharmaceutical companies have designed and implemented strategies which may have the effect of delaying generic entry after the expiry of the primary patents protecting the originators' medicinal products. These strategies, described as "a 'tool-box' of instruments", include:
- filing significant numbers of secondary patents in relation to a single medicine (so-called patent clusters);
- the initiation of disputes and litigation with generic companies;
- entering into patent settlements with generic companies to delay generic entry; and
- intervening in national procedures for the approval of generic medicines.
The Commission also found that the originator companies have developed "defensive patenting strategies" in order to block the development of new products by other companies. In addition the Commission identified concerns about the regulatory framework and, in particular, the absence of a Community patent and the lack of a united and specialised patent judiciary in Europe.
The preliminary report also found that if generic entry had been permitted to take place without delay between 2000 and 2007, the savings from earlier generic entry could have been much larger, to an estimated value of €3 billion. The Commission will be conducting a public consultation on its preliminary findings until 31 January 2009. The final report of the sector inquiry is expected in the spring of 2009.
- Although the Commission will be publishing its final report next year, the preliminary report provides detailed evidence of the Commission's current position on a range of identified sector issues. It is clear that the Commission will be prioritising its examination of the pharmaceutical sector going forward and will be taking active steps across a range of areas, including but not limited to competition law, in order to enhance competition in the market.
- Commissioner Neelie Kroes made clear in her statement announcing the results that the Commission will not hesitate to open anti-trust cases against companies where there are indications that the anti-trust rules may have been breached. Consequently we would expect there to be further investigations initiated against individual companies. We note in this context that the Commission has recently undertaken several dawn raids, which it says were not part of the sector inquiry but in respect of which it also indicated that the knowledge acquired during the sector inquiry allowed the Commission to draw conclusions on where Commission action could be appropriate and effective.
- In respect of actions against originator companies, our view is that the use of the terminology of "tool box" strategies might suggest that the Commission will be looking at the commercial policies of companies taken as a whole, and the framework within which they take commercial decisions, rather than simply at specific identified conduct. It might also suggest that the Commission considers it may be difficult to identify specific conduct which would on its own infringe competition rules outside of an on-going "anti-competitive" strategy.
- The Commission has not concluded at this stage that any of the practices identified are infringements of Article 81 or Article 82. The Commission may have comments on its assessments in the final report and subsequently may provide further guidance. However, these practices are more closely linked to the existence and enforcement of IP rights than issues that the Commission has considered previously. Until the final report is published (and also possibly after that), there will be a degree of uncertainty as to what practices are and are not permissible.
- The European Federation of Pharmaceutical Industries and Associations (the "EFPIA"), which represents a number of originator companies, considers the practices identified – particularly patent portfolios (patents being examined prior to grant), patent litigation and the release of improved medicines – to be perfectly lawful and essential for innovators to protect their huge investments in R&D. The EFPIA also considers that the report overstates the level of, as well as the reasons for, delays in generic market access.
- Whilst this inquiry is being led by the Competition Directorate General within the Commission, the comments on the regulatory framework highlight that the issues go beyond those of competition and encompass issues associated with the creation of the internal market and the harmonization of patent rights across the EU. Whilst the Commission's thinking on this point appears to be at a more provisional stage, it seems to us that the Commission is looking to build support for the harmonization of the EU patent system and it is likely that further legislative proposals to bring about such harmonization will be put forward on this in due course. Proposals for harmonization of the EU patent system have been sought by the Commission for years, but though brought forward, have never been approved and implemented due to disagreements between Member States on issues such as languages and jurisdiction. It remains to be seen whether this time will be any different.
The Commission's use of Sector Inquiries
The Commission uses sector inquiries (under Article 17 of Regulation 1/2003) where it has concerns that a market is not working effectively and wishes to conduct a further investigation to understand the reasons why. Sector inquiries are therefore in the first instance an information gathering exercise that provides the Commission with in-depth knowledge about the markets it has concerns about. The knowledge gained about the market can form the basis of specific enforcement initiatives at a later stage. Following the Commission's energy sector inquiry for example, the Commission proposed a package of regulatory measures aimed at dealing with the issues identified in the inquiry. To the extent that an inquiry confirms the existence of anti-competitive agreements or abuses of a dominant position by individual companies, the Commission or the national competition authorities can use the information collected to investigate and open specific proceedings in respect of the potential infringements of competition law.
Background to the pharmaceutical sector inquiry
The Commission launched the pharmaceutical sector inquiry on 15 January 2008, on the basis that there are a number of indications that competition may not be working well in this sector. The inquiry was stated to be focused in particular on two issues:
- whether certain agreements between pharmaceutical companies, such as settlements in patent disputes, infringe Article 81 EC Treaty (prohibition on anti-competitive agreements); and
- whether companies may have created artificial barriers to entry, whether through the misuse of patent rights, vexatious litigation or other such practices which may infringe Article 82 EC (on abuse of dominance).
Unusually for sector inquiries, this investigation was launched by a number of unannounced inspections at the premises of several large pharmaceutical companies. These inspections did not indicate, as would be the case with standard competition dawn raids, that the Commission suspected that these companies had committed competition law infringements. In this case, the inspections aimed to ensure that the Commission had immediate access to all relevant information, which would have been seen by companies as highly confidential and which the Commission believed may have been at risk of being withheld, concealed or destroyed.
The Commission sent substantial questionnaires to approximately 100 producers of originator and/or generic medicines in March and May 2008, as well as numerous supplemental questions on an almost weekly basis since.
Moreover, approximately 100 questionnaires were sent to other stakeholders in April and May, including marketing authorisation authorities, companies involved in parallel trade, wholesalers and national competition authorities.
Pharmaceutical associations, such as the EFPIA and the European Generics Medicines Association, also sent detailed submissions to the Commission.
The preliminary report sets out the Commission's main findings in respect of three broad issues – competition between originator companies and generic companies, competition between originator companies and the regulatory framework.
Competition between originator companies and generic companies
The Commission found that originator companies "use a variety of strategies to extend the commercial life of their medicines for as long as possible". In doing so the Commission considers that originator companies have designed and implemented strategies (referred to in the report as "a 'tool box' of instruments") with the objective of ensuring the continuation of the revenue streams for their medicines after the primary patents protecting them have expired. The instruments are said to include:
- Filing a substantial number of secondary patents EU-wide regarding a single medicine (referred to as "patent clusters" or "patent thickets"): The preliminary report notes that documents received during the course of the inquiry "confirm" that the objective of the patent clusters is to delay/block market entry by generic products.
- Engaging in patent-related disputes with generic companies: The Commission found that the majority of court cases analysed were initiated by originator companies, but generic companies won a majority of the cases (over 60%).
- Reaching settlement agreements with generic companies: In almost half of the settlement agreements examined, the ability of a generic company to market its medicine was restricted, and in addition to this, a significant proportion of settlement agreements further provided for a direct payment from the originator to the generic company (via licence, distribution agreement or "side deal").
- Intervening in national procedures for the approval of generic medicines: Originators intervene when generic companies apply for marketing authorisation and pricing/reimbursement status for their medicines, claiming that the generic products are less safe, less effective and/or of inferior quality.
- Launching "second generation" or follow-on medicines before loss of exclusivity: The Commission found that originator companies undertake intensive marketing efforts with the aim of switching a substantial number of patients to the new medicine prior to market entry of a generic version of the first generation product. If successful, the likelihood that the generic product will gain significant market share falls significantly.
The Commission found that the result of these strategies is the delay or blocking of entry by generic companies and that generic entry occurs later than could be expected "in many instances". They also result in legal uncertainty as to generic entry and cost to public health and consumers. The preliminary report also finds that if generic entry had been permitted to take place without delay between 2000 and 2007, the savings from generic entry could have been much larger, to an estimated value of €3 billion.
Competition between originator companies
The preliminary findings suggest that the originator companies engage in "defensive patent strategies" to block the development of new competing medicines. The inquiry found that the aim of these patents was not to bring a new medicine to market but instead to block the development of a competing medicine, by preventing competitors from developing the subject matter of that patent and creating prior art that prevents the competitors from getting patent protection for their development.
The Commission noted that the originator companies engage in litigation against other originator companies, with the patent holders losing the majority (77%) of cases where final judgments were given.
In respect of regulatory issues, the preliminary report merely summarises the key comments provided during the inquiry. The Commission notes that:
- the preliminary findings support the need for a single Community patent and the creation of a specialised patent judiciary in Europe, for cost and efficiency reasons. It notes that national patents are costly and burdensome and that both generic and originator companies agree on this point;
- there appear to be bottlenecks in the approval and marketing of medicines, which delay bringing products to market. For example, some agencies lack adequate resources and there are discrepancies in assessment criteria; and
- national pricing and reimbursement procedures create delay and uncertainty.
The Commission will be conducting a public consultation on its preliminary findings until 31 January 2009. The final report of the sector inquiry is expected in the spring of 2009.