Introduction and comment
On 8 July the European Commission (Commission) published its long anticipated report on its pharmaceutical sector inquiry (Final Report).
The Final Report identifies lengthy delays to the market entry of generics, leading to inflated costs for public health authorities and consumers across the EU. A significant part of the Final Report examines the various practices used by originator companies to extend the commercial life of their products, including the filing of patent clusters, lengthy litigation and patent settlement agreements. The Commission has announced that pharmaceutical companies will in future face increased scrutiny, in particular where there is evidence of the use of defensive patent strategies that do not pursue innovation and/or where companies have refused to grant licenses resulting in innovation being blocked.
This Final Report is more balanced than the interim report published in November 2008, which appeared to target the apparently legitimate use of IP rights by originator companies. The Commission states that it remains committed to the promotion of innovation through intellectual property rights, and recognises in the Final Report that a number of factors, for which pharmaceutical companies cannot be blamed, contribute to delayed market entry for generics, including the underlying regulatory framework and the lack of a unified EU patent system.
The Commission launched its sector inquiry back in January 2008. Its purpose was to examine concerns that competition in the pharmaceutical industry was not functioning well. In particular, there were indications of unnecessary delays in generic medicines reaching the market and of an apparent decline in the number of new medicines being released.
To assess whether there was any substance behind these claims, the Commission focused its examination on the competitive relationships between the main players in the pharmaceutical industry. As a result of raids on premises and subsequent information requests to some 100 companies, the Commission obtained thousands of documents and related information from undertakings active in the industry. In November 2008, it published its preliminary findings on which stakeholders were invited to comment and a public hearing was held in Brussels. This Final Report therefore reflects not only the results of the Commission’s investigation but also the views of industry stakeholders.
Findings of the Final Report
Although the Final Report recognises the unique position of the pharmaceutical industry, it confirms that competition in this sector is not working as well as it should. The Commission found that there were delays to the market entry of generic drugs, identifying potential savings of up to €3 billion if generic entry was immediate. A decline in the number of new medicines reaching the market was also observed.
The Final Report highlights a number of difficulties facing the industry. The lack of a unified patent litigation system means parties are often required to initiate parallel proceedings in several Member States. This results in increased costs, delays and in some instances divergent judgments across jurisdictions. The Commission also identifies problems with existing market authorisations procedures, in particular discrepancies with national implementation of the EU regulatory framework.
However, the Final Report is mainly focused on the behaviour of pharmaceutical companies. In particular, the Commission found that originator companies use a variety of instruments with the aim of extending the life of their patents and thereby blocking generic entry. These practices include the filing of so-called patent clusters, engaging in patent related litigation, intervening before national authorities to block generic products and entering into patent settlement agreements that may have the effect of delaying generic entry. Originator companies were also found to resort to so-called defensive patenting strategies to block the development of new medicines by their competitors.
The Final Report has four main policy recommendations:
- Intensify competition law scrutiny. While the Final Report recognises the importance of rewarding innovation by pharmaceutical companies through intellectual property rights, the Commission has made it clear that, in co-operation with national authorities, it will not hesitate to make full use of its enforcement powers where it suspects these are being used to restrict or distort competition in the market. In the Final Report the Commission invites market participants who suffer from anticompetitive practices or have information about such practices to inform the Commission and other relevant national authorities. It notes also that particular scrutiny will be given to originators undertaking defensive patenting strategies focusing on excluding competitors without pursuing innovative efforts, and to anticompetitive efforts by originators to delay generic entry, including behaviour such as intervention before a marketing authorisation body primarily to delay the new applicant’s entry.
- Establishment of a Community patent and unified litigation system. The introduction of a Community patent and the creation of a unified patent litigation system is not a new idea, but the Final Report provides further impetus to the Commission’s calls. Such measures could bring about significant cost savings and efficiency improvements. Despite this, there is still no clear timeframe in sight for their implementation. The Commission also supports the European Patent Office in its recent initiatives to “raise the bar”. This includes shortening the opposition and appeal procedure times, and the recent decision to limit the time period during which voluntary divisional patent applications can be filed.
- Streamline marketing authorisations. The Commission has stressed that Member States must ensure that the new legislative framework which takes effect in 2013 is effectively implemented and enforced, in particular in relation to the issue of patent linkage. The Final Report also contains support for international harmonisation between the EU and the USA in this area.
- Improve pricing and reimbursement systems. The Commission would like to see immediate or automatic pricing and reimbursement status for generic drugs and urges Member States to respect the time limits set out in the existing legislation.
How will these measures effect pharmaceutical companies?
The Commission’s commitment to intensify its competition law scrutiny of pharmaceutical companies makes it almost inevitable that enforcement action will follow. Indeed, on the day the Final Report was published, it was announced that proceedings had been launched against Les Laboratoires Servier (an originator company) and a number of generic companies for suspected infringements of EC competition law rules relating to agreements which may have hindered the market entry of a generic drug perindropil (a cardio-vascular medicine originally developed by Servier).
Unfortunately, the Final Report does not offer any guidance on the compatibility of the practices identified by the Commission with EC competition rules, creating significant uncertainty for pharmaceutical companies. The Commission has indicated informally that the following practices are likely to receive its further attention: defensive patent strategies when used to block the developments of medicines by competitors; patent settlements, in particular those which attempt to prevent market entry for generic drugs; and negative information campaigns intended to dissuade consumers from purchasing generic products.
The most controversial practice identified is the use of reverse payment settlement agreements, i.e. those involving a form of value transfer by an originator to a generic company. This is an issue which has attracted significant attention from competition authorities in other jurisdictions, in particular in the USA. The Commission has indicated that it would like to monitor such agreements in the future, although it is not clear how exactly this would be done. However, it is unlikely that any general guidance will be issued, leaving companies to await the outcome of infringement proceedings for further information on what practices the Commission considers acceptable.
As indicated above, it remains unclear exactly how the Commission will intensify competition law scrutiny in the pharmaceutical sector, as no further guidance has been or is likely to be issued to provide legal certainty to companies active in this sector. Pharmaceutical companies are entitled to exercise their intellectual property rights for legitimate purposes, however they cannot rely on these rights for the aim of restricting or distorting competition in the market. The outcome of the proceedings against Les Laboratoires Servier and a number of generic companies should be monitored closely, as these proceedings are likely to be the only indication in the coming months on how the Commission intends to enforce its findings.