A new EU Regulation on financial penalties for infringements relating to marketing authorizations granted by the EMEA ("the Penalties Regulation") will be adopted in the very near future.

Summarized in one sentence, the effect of the Penalties Regulation is to transpose to the pharmaceutical field many of the powers that the Commission has when enforcing Competition law. The procedure under the Penalties Regulation is closely modeled on that under Regulation 1/2003 and the method of setting penalties is also similar — although not identical — with Commission being able to fine the holder of a marketing authorization up to 5% of its total EU turnover under the Penalties Regulation (compared to 10% of total worldwide turnover under Regulation 1/2003). This new law therefore has the potential to lead to penalties on the same scale as those currently imposed for competition infringements (regularly in excess of €100 million). This article will briefly set out these new rules and analyse what they may mean in practice.

Procedure leading up to the adoption of the Regulation 

The Commission was granted the power to adopt these rules in 2004 by Article 84(3) of Regulation 726/2004 (the Regulation that establishes the powers of the EMEA). It issued an initial draft in February 2005, then engaged in a lengthy consultation process, leading to the final draft Regulation that was approved by the two responsible Standing Committees on 11 January 2007. The European Parliament's Environment Committee did not raise any objection to that draft during its 30-day window to comment. This means that the Regulation has passed through all the necessary steps and it will become law once it is formally published in the Official Journal (the rules will enter into force 20 days after publication). The Regulation will not have retroactive effect.

The offences covered by the Regulation

The Regulation provides for seventeen different types of punishable infringements, which can be grouped in four different categories: (i) inaccurate submissions to the EMEA, (ii) breach of conditions and obligations contained in the marketing authorization, (iii) breach of post-marketing obligations, and (iv) infringements of the pharmacovigilance rules. Fines may only be imposed on the marketing authorization holder ("MAH").

  • Article 1(1) of the Regulation contains probably the most important provision: companies will be punished if they fail to provide complete and accurate information to the EMEA, both as regards the application for marketing authorization and any subsequent communication to the EMEA under Regulation 726/2004. Although Article 1(1) is phrased in terms of strict liability, penalties can only be imposed on companies that either negligently or intentionally break the rules (Article 16(1)), so there is room for a company to defend itself based on absence of negligence or intention.
  • The second category of infringements, contained in Articles 1(2) and 1(3) of the Regulation, concerns non-compliance with the restrictions and conditions contained in the marketing authorization, including those for safe and effective use.
  • The third and largest group of infringements, in Articles 1(4) to 1(11), relates to post-marketing obligations. Among these are the obligation to introduce variations to take account of technical and scientific progress (Article 1(4)), the placing on the market in accordance with the product characteristics and the labeling and packaging leaflet as contained in the marketing authorisation (Article 1(8)), and notification of the date of actual marketing, of the date when the product ceases to be on the market, and of volumes of sales and prescriptions (Article 1(11)).
  • The fourth group of infringements (Articles 1(12) to 1(17)) concerns pharmacovigilance obligations, for example the obligations to record all suspected adverse reactions and to report any serious adverse reactions.Although the list of infringements is considerable, it is much reduced compared to the Commission's initial draft proposal, which provided that fines could also be imposed for infringements of the conditions for compassionate use, the rules on manufacturing and importation, as well as those on information/advertising. These areas are now outside the scope of the Penalties Regulation, but remain subject to national law.

Procedure under the new rules

The procedure has two stages: the investigating stage conducted by the EMEA, and the decision/penalty stage under the control of the Commission. This separation of roles is an improvement over the procedure in competition law, where the same Commission officials are both investigator and decision maker.

a) Initiation of procedure

Only the EMEA may initiate an investigation. However, the Commission and Member States may request (but not force) the EMEA to do so (Article 5). And, unlike competition law, third parties have no formal right to request an investigation by way of a complaint – though they could act informally and bring information to the attention of the Commission, the EMEA or Member States.

The EMEA has discretion whether or not to initiate a case under Article 5. Recital three states that "action at Community level should only be taken" when the interests of the Community are involved. Article 1 speaks about action being taken "where the infringement concerned may have significant public health implications in the Community, or where it has a Community dimension." This test is somewhat vague – and relatively easily met: a case with a "Community dimension" is one which takes place or has effects in more than one Member State.

b) Investigating stage

The investigation is in the hands of the EMEA, and the EMEA has the right to request information from Member States authorities (Article 3) and from the MAH (Article 6 and Article 8), both of which must cooperate with the EMEA. If the MAH does not cooperate or provides the EMEA with incorrect information, this may be sanctioned by fines of up to 0.5% of annual turnover in the EU, or in the case of periodic infringements (e.g. continued non-cooperation by a MAH), daily fines of up to 0.5% of daily turnover in the EU.

c) Access to file and right to be heard before the EMEA

While the Penalties Regulation gives the MAH the right of access to the EMEA's file (Article 21), there are no express provisions for the access of third parties. But third parties may be able to claim access to the file under the general regulation on access to Commission documents, once the case is before the Commission. The MAH has the right to submit written observations to the EMEA, prior to the EMEA adopting its report to the Commission (Article 9).

d) Procedure leading to a Decision, starting with the EMEA's report

After the EMEA has concluded its investigations, it sends a report with its findings to the Commission and to the MAH. The EMEA must adopt its report within 18 months of opening the investigation. If the report concludes that an infringement has been committed, the report will also contain an assessment of the seriousness of the infringement – something that the Commission may later take into account in setting a fine.

The Commission then decides whether to continue the infringement procedure. If it does, it sends a statement of objections to the MAH setting out the allegations and the evidence and announces whether it intends to impose fines if the allegations are proven (the Commission bears the burden of proof under Article 4). The Commission can also seek further information from the MAH. After the statement of objections, the MAH has the right to submit comments in writing and the right to request an oral hearing in a procedure that closely resembles that for competition law infringements. The Commission then takes its decision.

The punishments

The Commission has the right to impose financial penalties on the MAH of up to 5% of community turnover in the preceding business year and periodic penalties of 2.5% of daily turnover if it finds that the MAH has intentionally or negligently committed an infringement. In case of continuing infringements, the Commission may impose daily fines of up to 0.5% of daily turnover. The first draft proposed even higher fines of up to 10% of annual worldwide turnover and periodic fines of 5% of daily turnover (the same as under the competition rules).

Article 18 of the Penalties Regulation contains a long list of factors which the Commission has to take into account when determining the fine. These include the seriousness and the effects of the infringement (effect on patients, risk to public health and the gravity of the infringement), the presence or absence of good faith on the part of the MAH, the degree of diligence and cooperation, the repetition or duration of the infringement, the need by Commission or Member States to suspend the use of product as a matter of urgency; prior sanctions imposed on the same MAH (repeat offender); and the turnover of the medicinal product concerned. The Commission thus has considerable discretion since the Regulation imposes no set method on how it must weigh these factors. The Regulation merely provides that the Commission should be "guided by the principles of effectiveness, proportionality and dissuasiveness."

Appeals

The general rules on appeals against Commission decisions apply, which means that the MAH has 2 months and 10 days from the date of receiving the decision to lodge an action for annulment before the Court of First Instance.

Analysis and comment:

What impact will the Penalties Regulation have on the pharmaceutical industry? Will it be as serious as the maximum fines might suggest?

On the one hand, there are at least two reasons to think it will not. First, it is likely that the Commission will adopt a limited number of decisions. The Commission's DG Competition, with over a hundred officials, and with dozens of confessions by guilty parties under its leniency programme, only adopts between 5 and 10 cartel decisions per year, with the average cartel case lasting 3 years or more (in some cases, considerably more). The EMEA and the Commission's pharmaceuticals unit do not have the same resources as DG Competition, and cases under the Penalties Regulation are likely to be technically complicated, meaning significant time is needed per case. Second, the industry is used to being subject to a high regulatory and moral burden and has a positive history of compliance. That would tend to indicate that the new penalties will only become relevant in rare cases when something went seriously wrong.

On the other hand, once officials have a new power, they are likely to want to make use of it. The parallels with competition law are troubling, as they suggest that officials may see the imposition of large fines in controversial cases as the best way to demonstrate to the public at large that they are doing their job effectively. And to take the parallel one stage further: might we see one day commercially-driven complaints (albeit that they could not formally have this status) by rivals of the sort that one sees in the competition sphere? One would hope not.

A more fundamental question is whether these new sanctions are the right way to proceed? They impose a different magnitude of regulatory sanctions on pharmaceutical companies compared to any other industrial sector. Why should the pharmaceutical industry be singled out more than the chemicals industry or the oil industry or the marine transport sector? One might legitimately ask if the Penalties Regulation was not "inspired" by the AstraZeneca case, where the company was penalized under the competition rules for having supplied regulators with inaccurate data. But the fact that the Commission was able to punish AstraZeneca under the competition rules suggests that there was no need for special sectoral rules. It will be interesting to see whether the Commission would use competition law or the Penalties Regulation in a future case similar to AstraZeneca.

There is a risk of double jeopardy due to the overlap between Commission and Member State procedures. The EMEA and the Commission have to take into account an investigation under national law "for the purposes of the initiation and the conduct of the infringement procedure" as long as the investigation is "based on the same legal grounds and the same facts" (Article 2). However, a procedure in a Member State is no obstacle to a parallel procedure before the EMEA and the Commission, and the fact that a national regulator has imposed a penalty does not prevent the Commission from imposing a second fine for the same legal ground and the same facts: Article 18(3) only specifies that the Commission must take such previous fines into account. The risk of double jeopardy is thus a real one. And given the significant differences in the maximum fines (e.g. Germany foresees currently a maximum penalty of €25,000 for infringements of pharmacovigilance obligations ), the Commission and EMEA may well feel justified in pursuing cases that are already being dealt with in a national procedure.

It will therefore be interesting to see how the 27 Member States react. Will they raise the penalties under national law to a similar level to those in the Penalties Regulation? In the area of competition law, most Member States have increased the level of fines to a level approaching those imposed at the EU level. So one consequence of the new rules may be that national laws also get more severe.

Overall, the jury is out as to whether there will be a significant number of decisions by the Commission. The Penalties Regulation may prove to be a big stick that is rarely used.