On 28 November 2008, the European Commission issued the preliminary report of its Pharmaceutical Sector inquiry.  

History  

In 2005 the Commission fined Astra-Zeneca €60 million for misusing the patent and pharmaceutical regulatory systems to block generic competitors of its ulcer drug Losec. Some of the documentary evidence discovered in the course of that case was quite damning and showed that, in certain cases, these product lifecycle management tools were being used with the intention of distorting competition and not the enhancement of patient care. The Commission had a new focus and was emboldened by such a high profile victory.  

In January 2008 the Commission announced that it had launched the inquiry in response to concerns that competition in the sector may be stifled other than by parallel trade restrictions, highlighting the fact that there had been a decline in the number of new products reaching the market and instances of delays in the launch of generic medicines. The Commission stated that it was eager to establish if there were agreements restricting competition or abuses of dominant position and particularly blocking patents or settlements in patent disputes being used to delay the entry of generics.  

The Commission took the unusual step of conducting unannounced inspections (“dawn raids”) at several pharmaceutical companies, including GlaxoSmithKiline, AstraZeneca, Pfizer and sanofi-aventis, the first time this instrument has been used in a Commission sector inquiry.  

In addition, the Commission initially sent questionnaires to approximately 100 companies that produce originator and/or generic medicines and then widened its inquiry to include other stakeholders. It also spoke to European industry associations, including the European Federation of Pharmaceutical Industries and Associations (EFPIA) (representing the originator companies) and the European Generic Medicines Association (EGA) (representing the generic companies).  

The Report  

The Report makes clear that it does not seek to identify wrongdoing, rather that it provides information for the Commission to decide what further steps might be taken. However, its findings will cause concern that further action can indeed be expected. Indeed, the Commission press release is headed “Preliminary report on pharmaceutical sector inquiry highlights cost of pharmaceutical companies' delaying tactics” (such delay was said to be on average six months from end of originator’s exclusivity to generic launch, at a cost of €3 billion between 2000 and 2007 in respect of the sample of medicines investigated in the Report) and the FAQ page on the Commission’s website states “The main findings are that competition in this industry does not work as well as it should. According to the preliminary report there is evidence that originator companies have engaged in practices with the objective of delaying or blocking market entry of competing medicines.”

The Report considers competition and dealings between originator companies and generic companies, as well as competition between originator companies (as one member of the audience to the presentation of the report last Friday noted, it does not specifically deal with competition between generics companies). The Report is based on a sample of medicines investigated and all figures referred to in it, and in this note, are based on that sample in the period 2000 to 2007.  

Perhaps one of the most important aspects of the Report is that the Commission has found evidence of so-called “reverse settlement” agreements, whereby, in the course of settling a dispute between them, an originator company imposes a restriction on a generic company’s ability to market its product and makes a direct payment to the generic company. Further, the Commission found clear evidence of a number of agreements between originators and generic companies concerning the sale or distribution of generic medicines. In a third of cases, these related to originator medicines which were still covered by subsisting patents - so-called “authorised generics” arrangements - whereby an originator enters into a licence or other agreement with a generics company to allow it to sell generic versions of the originator product prior to patent expiry.  

Otherwise, some of the other findings of the Commission in relation to dealings between originators and generics companies include:  

  • Patents are essential to the viability of the pharmaceutical industry
  • Blockbuster medicines’ patent portfolios show a steady increase in patent applications throughout the lifecycle of a product, sometimes with a steeper increase towards expiry of the first patent which contrast markedly with a standard lifecycle patent strategy where most secondary patents are fled before launch;  
  • Originator companies file numerous patents for single products (referred to as patent “clusters” or “thickets” – one product has around 1,300 patents or applications) which leads to uncertainty for generic competitors as to when they may begin development;  
  • Originator companies may also, after filing an original application, file divisional applications which allow them to split the original application, and which survive the withdrawal of it, which again leads to uncertainty on the part of generic competitors;  
  • At the patent prosecution stage, generic companies almost exclusively oppose secondary patent applications and are successful in around 75% of those oppositions  
  • While it says that enforcing patent rights in court is generally legitimate, the Commission noted that between 2000 and 2007 there were at least 1,300 patent-related contacts and disputes relating to the launch of generic products, and a fourfold increase in patent litigation cases between originators and generics in that period;
  • While most such cases were brought by originators, they were mostly won by generic companies – although in around half of the cases where injunctions were applied for by originators, they were granted;  
  • Originators intervene in the pharmaceutical regulatory process when generics companies apply for marketing authorisations and/or pricing approvals, often arguing that generic versions are less safe or effective;
  • The Commission found evidence that in the course of marketing their own products to doctors and healthcare professionals, originators may question the quality of generics to doctors and healthcare professionals;  
  • There is evidence that some originator companies seek to influence the supply chain by exerting pressure on wholesalers and API suppliers  

The Commission refer to these various practices as the “tool-box” of instruments available to originator companies and note that in many instances, two or more are used in parallel to prolong the life cycle of products.  

As the Commission says, it regards the consequences of these practices as important for patients and taxpayers because generic entry to the market leads to significant decreases in the prices for medicines. Based on its sample, average price levels for medicines decrease by almost 20% after the first year following generic entry (and up to 90% in rare cases). For the sample under analysis, total savings gained by generic entry amounted to at least €14 billion over the period. Without these savings, total expenditure for the sample would have been over 25% higher.  

As well as dealing with competition between originator companies (which has produced other findings in relation to patent application strategies, oppositions and patent litigation) the Commission also made a number of general comments in respect of the pharmaceutical regulatory framework. First, it took every opportunity to promote the importance of the creation of the Community patent and a unified patent judiciary in order to mitigate against the cost and uncertainty of the current system. Second, a number of stakeholders commented on the bottleneck caused by lack of resources in certain agencies. Third, it found that a number of agencies do consider whether a generic product may infringe the originator’s patents even though such practice (“patent linkage”) is considered unlawful under European pharmaceutical legislation. Fourth, originators and generic companies complained about delay in pricing and reimbursement.  

Next Steps  

While this interim report gives no advice to the Commission as to how to proceed, it is clear that some of the findings will give considerable food for thought when the Commission considers the matter further. There is now a further consultation period until the end of January, after which the Commission will prepare a final report, expected in the spring of 2009. Competition Commissioner Neelie Kroes has said “the Commission will not hesitate to open antitrust cases against companies where there are indications that the antitrust rules may have been breached”.  

In addition, beyond the inquiry itself, it should be noted that, during her speech given when the report was presented, the Competition Commissioner read out quotes from a number of potentially damaging documents found in the course of the dawn raids, and specifically said that this type of evidence shows the importance of carrying out investigations in this way. This may well indicate that while this was the first sector enquiry to be started in this way, it is unlikely to be the last.  

Footnote: A sector inquiry is an information gathering exercise that provides the Commission with in-depth knowledge about a particular market, to better identify obstacles to competition. The Commission will open a sector inquiry when it has concerns about competition working on a market but the reasons for this are not clear.