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Life Sciences: Competition and Antitrust Newsletter 2 December 2010  

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Introduction By Robert F. Leibenluft

This issue begins with a discussion of the FTC's recent defeat in the District Court of Minnesota in its challenge to the acquisition by Lundbeck of the neonatal drug NeoProfen from Abbott Laboratories. The court's decision that the acquisition did not raise competitive concerns because Lundbeck's existing drug, Indocin IV, did not compete with NeoPro, demonstrates the continued importance of product market definition in antitrust cases.

The next article addresses two recent mergers in the pharmaceutical industry and the varying remedies obtained by competition agencies throughout the world. In a related article in the China Developments section, we provide an in-depth update on the Chinese Ministry of Commerce's recent merger review activities and imposed remedies.

The section on private litigation addresses continuing developments relating to patent litigation settlements, specifically the Second Circuit's refusal to grant a rehearing en banc as advocated by the FTC and other plaintiffs in the Cipro case. The second article discusses a district court's refusal to find a relevant market defined by a single manufacturer's goods.

The EU section covers several developments, including two cases involving alleged abuse of life cycle management strategies; the OECD's Competition Committee report on competition between brand and generic pharmaceuticals; and an update on the recent Azko Nobel ruling on legally privileged material before the European Commission.

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Developments at the U.S. agencies

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FTC loses challenge to Lundbeck drug acquisition on product market grounds

By Robert F. Leibenluft

In a stunning defeat for the FTC, Federal District Court Judge Joan Ericksen dismissed a challenge brought by the FTC and the State of Minnesota to the acquisition by Lundbeck, Inc. (previously known as Ovation Pharmaceuticals) from Abbott Laboratories of the U.S. rights of NeoProfen. The court ruled that the acquisition did not violate the Clayton Act because NeoProfen and Lundbeck's Indocin IV were not in the same product market, even though both drugs are approved by the FDA to treat to patent ductus arteriosus (PDA), a heart condition affecting premature babies. The FTC appealed the decision to the Eighth Circuit Court of Appeals in early November.

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Pharmaceutical mergers clear U.S. and international competition agencies with divestitures

By Leigh L. Oliver

Two recent transactions in the pharmaceutical space were scrutinized by various international competition agencies. Ultimately, both transactions were cleared in all jurisdictions, but in both instances, divestitures were required.

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U.S. private litigation

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Update on "reverse payment" patent settlements: split between FTC and courts continues as Second Circuit declines to reverse course By Nathaniel S. Boyer and Eric J. Stock

The FTC is continuing its longstanding effort to stop patent settlements with so-called "reverse payments," but the courts continue to analyze these settlements more leniently than the FTC. The FTC and advocates of its approach had hoped that the Second Circuit would reconsider its prior precedent setting a high standard for antitrust challenges to these patent settlements, but these hopes were recently dashed when the Second Circuit declined a motion for en banc review of a panel decision re-affirming the prior precedent. Meanwhile, legislative efforts that would have made it much easier to attack these patent settlements have stalled in Congress.

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Federal court dismisses antitrust claims based on single brand market By Eric J. Stock and Dennis Mendoza Quinio

On 26 August 2010, a federal court in Louisiana dismissed antitrust claims asserted against a medical device manufacturer and others finding, among other things, that the plaintiff's allegation that the defendants dominated a market limited to the manufacturer's own products was insufficient to plead a properly defined relevant market. Vaughn Med. Equip. Repair Serv., L.L.C., v. Jordan Reses Supply Co., No. 10-00124, 2010 WL 3488244 (E.D. La. Aug. 26, 2010). The decision is the latest in a line of cases refusing to permit antitrust plaintiffs to allege market power by artificially limiting the market to a single manufacturer's product.

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EU developments

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Reckitt Benckiser admits infringing UK and European competition law by withdrawing and de-listing Gaviscon Original Liquid from the NHS prescription channel

By Suzanne Rab

An investigation by the U.K. Office of Fair Trading (OFT) has highlighted whether certain practices associated with product development and regulatory and/or patent protection for successor drugs — so-called "lifecycle management" — can be challenged under UK and EU competition law. On 15 October 2010, the OFT concluded an investigation of Reckitt Benckiser (RB) with an announcement that the company had agreed to pay a fine of £10.2 million for abuse of dominance by withdrawing and de-listing Gaviscon Original Liquid from the National Health Service (NHS) prescription channel.

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OECD competition committee publishes report on generic pharmaceuticals policy roundtable

By Tim Capel

On 3 September 2010, the Competition Committee of the Organization for Economic Cooperation and Development (OECD) published a summary of its October 2009 roundtable discussion on generic pharmaceuticals. The report provides a helpful overview of the key issues concerning competition between generic and branded products, as well as the effect on competition of agreements to delay the entry of generics on the market. The report also contains the written submissions of the participating countries and the EU on the subject.

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AstraZeneca appeals judgment of the General Court on abuse of dominance

By Tim Capel

On 22 October 2010, details were published of AstraZeneca's appeal before the Court of Justice of the European Union (CJEU) of a judgment of the General Court, which had largely upheld the European Commission's 2005 decision finding that AstraZeneca had abused a dominant position.

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Legal professional privilege under EU law — navigating the unresolved questions following the Akzo judgment

By Suyong Kim and Matthew Levitt

On 14 September 2010, the Court of Justice of the European Union gave its ruling in Case C-550/07P Akzo Nobel Chemicals Ltd. and Akcros Chemicals Ltd. v Commission, confirming that the protection of legal professional privilege (LPP) does not extend under EU law to advice given by in-house lawyers. Accordingly it is now settled law that advice from and communications with in-house lawyers can be seized by the European Commission.

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China Developments

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MOFCOM clears second life sciences merger subject to conditions

By Adrian Emch, Andrew McGinty, and Jun Wei

On 13 August 2010, the Ministry of Commerce (MOFCOM), the agency in charge of merger control in China, showed new signals of activism. After ten months without imposing conditions on a merger clearance decision, MOFCOM granted conditional clearance of life sciences company Novartis' acquisition of a majority stake in rival Alcon. The Novartis/Alcon case is only the sixth MOFCOM decision involving remedies, but already the second in the life sciences field, after Pfizer/Wyeth.

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Full articles below

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In this issue

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FTC loses challenge to Lundbeck drug acquisition on product market grounds

Pharmaceutical mergers clear U.S. and international competition agencies with divestitures

Update on "reverse payment" patent settlements: split between FTC and courts continues as Second Circuit declines to reverse course

Federal court dismisses antitrust claims based on single brand market

Reckitt Benckiser admits infringing UK and European competition law by withdrawing and de-listing Gaviscon Original Liquid from the NHS prescription channel

OECD competition committee publishes report on generic pharmaceuticals policy roundtable

AstraZeneca appeals judgment of the General Court on abuse of dominance

Legal professional privilege under EU law — navigating the unresolved questions following the Akzo judgment

MOFCOM clears second life sciences merger subject to conditions

-------------------------------------------------------------------------------- Contacts

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Suyong Kim

Partner suyong.kim@hoganlovells.com +44 20 7296 2301

Robert F. Leibenluft

Partner robert.leibenluft@hoganlovells.com +1 202 637 5789

Matthew Levitt

Partner matthew.levitt@hoganlovells.com +32 2626 9245

Andrew McGinty

Partner andrew.mcginty@hoganlovells.com +86 21 6122 3800

Eric J. Stock

Partner eric.stock@hoganlovells.com +1 212 918 8277

Jun Wei

Partner jun.wei@hoganlovells.com +86 10 6598 8601 Adrian Emch

Counsel adrian.emch@hoganlovells.com +86 10 6582 9488

Suzanne Rab

Counsel suzanne.rab@hoganlovells.com +44 20 7296 2000

Nathaniel S. Boyer

Associate nathaniel.boyer@hoganlovells.com +1 212 918 3084

Tim Capel

Associate tim.capel@hoganlovells.com +44 20 7296 2000  

Leigh L. Oliver Associate leigh.oliver@hoganlovells.com +1 202 637 3648

Dennis Mendoza Quinio

Associate dennis.quinio@hoganlovells.com +1 212 918 3026

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Developments at the U.S. agencies

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FTC loses challenge to Lundbeck drug acquisition on product market grounds

By Robert F. Leibenluft

In a stunning defeat for the FTC, Federal District Court Judge Joan Ericksen dismissed a challenge brought by the FTC and the State of Minnesota to the acquisition by Lundbeck, Inc. (previously known as Ovation Pharmaceuticals) from Abbott Laboratories of the U.S. rights of NeoProfen. The court ruled that the acquisition did not violate the Clayton Act because NeoProfen and Lundbeck's Indocin IV were not in the same product market, even though both drugs are approved by the FDA to treat to patent ductus arteriosus (PDA), a heart condition affecting premature babies. The FTC appealed the decision to the Eighth Circuit Court of Appeals in early November.

In August 2005 Lundbeck acquired from Merck the exclusive worldwide rights to Indocin IV, and soon thereafter raised its price from $78 to $1500 per 3-vial course of treatment. Lundbeck acquired NeoProfen from Abbott in January 2006, and when the drug was approved by FDA for PDA in July, Lundbeck set its price at $1450 for a 3-vial package, about three times the price that Abbott had forecast. When the FTC challenged the NeoProfen acquisition in December 2008, it highlighted the large price increases for a treatment used for such critically ill patients. FTC Chairman Jon Leibowitz stated that "Ovation's profiteering on the backs of critically ill premature babies is not only immoral, it is illegal." The matter drew particular attention because FTC Commissioner Tom Rosch (joined by Chairman Leibowitz) suggested that Lundbeck's initial acquisition of Indocin IV was actionable under the Clayton Act — even though Lundbeck at that time did not own a competing product. See Life Sciences: Competition & Antitrust Update: Issue 12. Their theory was that Merck had not raised prices of Indocin IV out of concern that it would harm its reputation and the sale of other Merck products, and that because Lundbeck lacked such concerns, its acquisition of Indocin IV enabled it to charge monopoly prices, and thus could be subject to challenge.

Ultimately, however, the FTC and the Minnesota Attorney General only challenged the NeoProfen acquisition under a more conventional theory that Lundbeck, having already acquired NeoProfen, was eliminating its principal competitor in the sale of FDA-approved drugs to treat PDA. The FTC sought not only divestiture, but disgorgement of unlawful profits. The complaint pointed to the large price increase for Indocin IV and NeoProfen as evidence of competitive effects.

Often defendants in merger cases assert that the relevant product market is much broader than plaintiffs allege, and, therefore, post-merger they will continue to face many other competitors. In this case, Lundbeck took the opposite position, and argued that notwithstanding the fact that both Indocin and NeoProfen are used to treat PDA, there is little real-world competition between the two products, and they are not in the same product market. Judge Ericksen agreed. At the heart of her conclusion was her finding that the key decision makers as to what drug is purchased are not the hospitals that buy the drugs, but rather the physicians who prescribe them. Judge Ericksen found that neonatologists pick Indocin IV or NeoProfen based on perceived differences in the drugs' safety, side effects, or the presence or lack of long-term studies. Because these physicians would not switch their prescription from one drug to another in response to changes in relative costs, she concluded the two products were not in the same product market. In reaching this conclusion, Judge Ericksen noted, but ultimately rejected, the FTC's economist testimony that relied on Lundbeck's documents and the role of hospital formulary committees in making purchasing decisions.

Recent revisions to the Horizontal Merger Guidelines downplay the role of market definition, and highlight the importance of competitive effects evidence. This decision demonstrates, however, that market definition still plays a crucial role in merger litigation. The case is particularly important for the pharmaceutical industry since it highlights the importance of properly identifying the "customers" when considering market definition, and in healthcare this inquiry can be complicated because patients, doctors, hospitals, and health plans all may have a role in the purchasing decision. This will be an important case to watch as the appeal is heard in the Eighth Circuit.

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Pharmaceutical mergers clear U.S. and international competition agencies with divestitures By Leigh L. Oliver

Two recent transactions in the pharmaceutical space were scrutinized by various international competition agencies. Ultimately, both transactions were cleared in all jurisdictions, but in both instances, divestitures were required.

Novartis/Alcon On 4 January 2010, Novartis announced that it would acquire a controlling interest, an additional 52 percent, of the outstanding shares of Alcon for approximately $28.1 billion. Prior to the acquisition, Alcon's majority owner was Nestle S.A.; Novartis previously had held 25 percent of Alcon's shares. Given the size and scope of the acquisition, in addition to the FTC, several international competition agencies took an interest in the transaction, including the European Commission and agencies in China, Australia, and Canada.

The FTC issued a complaint on 16 August 2010 alleging that the acquisition would lead to a monopoly in the research, development, manufacture, and sale of injectable miotics in the United States. Injectable miotics are used during cataract surgery to reduce the size of the pupil to determine whether a rupture has occurred. The parties entered into a consent agreement with the FTC under which Novartis agreed to sell its injectable miotics product, Miochotol-E, to Bausch & Lomb. Novartis will retain the Alcon miotics product, Miostat. As part of the divestiture agreement, Novartis must transfer assets, third-party manufacturing arrangements, and technical assistance associated with the manufacture of Miochotol-E to Bausch & Lomb in order to ensure its competitiveness going forward.

The EC took issue with the combination with respect to a number of products: ophthalmological anti-infectives, anti-inflammatory/anti-infective combinations, anti-allergics, decongestants, antiseptics, mydriatics and cycloplegics, diagnostic agents, non-steroidal anti-inflammatories, injectable miotics, anti-glaucoma products, artificial tears, and multipurpose solutions for contact lenses, and required a divestiture in certain member states with respect to the related products. Canada also required divestitures in injectable miotics, multi-purpose contact lens solution, and an ophthalmic anti-allergy agent. Australia require divestiture only with respect to Novartis' injectable miotics product. See "MOFCOM Clears Second Life Sciences Merger Subject to Conditions" for more detail on China's review of this transaction and its disparate approach to the remedy for this transaction compared to its international counterparts.

Teva/Ratiopharm In another international pharmaceutical merger, Teva won the bidding for Merckle Group's Ratiopharm, the world's fourth-largest generic drug maker, headquartered in Germany. Teva agreed to pay nearly $5 billion for Ratiopharm in a purchase agreement signed in March of this year. Although the proposed transaction did not raise antirust issues in the United States, the transaction was scrutinized by various competition agencies, including the Canadian Competition Bureau and the European Commission (EC). The Competition Bureau required divestiture of certain Teva or Ratiopharm pain relievers — acetaminophen oxycodone tablets and morphine sulfate sustained-release tablets, while the EC required more significant divestitures. The EC found that the two companies had very high market shares in a number of products in the Netherlands that are used to treat anemia, hypertension, asthma, gout, inflammation, and pain. In addition, the EC found the combination would result in very high market shares in Hungary with respect to tramadol, a pain reliever. In order to satisfy the EC's concerns, Teva agreed to divest various Ratiopharm products in the Netherlands and Hungary, along with Ratiopharm's distribution system in the Netherlands.

The review of Novartis/Alcon and Teva/Ratiopharm by various competition agencies demonstrates the continued diligence and expansion of merger clearance processes throughout the world, as well increased cooperation between international competition authorities.

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U.S. private litigation

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Update on "reverse payment" patent settlements: split between FTC and courts continues as Second Circuit declines to reverse course By Nathaniel S. Boyer and Eric J. Stock

The FTC is continuing its longstanding effort to stop patent settlements with so-called "reverse payments," but the courts continue to analyze these settlements more leniently than the FTC. The FTC and advocates of its approach had hoped that the Second Circuit would reconsider its prior precedent setting a high standard for antitrust challenges to these patent settlements, but these hopes were recently dashed when the Second Circuit declined a motion for en banc review of a panel decision re-affirming the prior precedent. Meanwhile, legislative efforts that would have made it much easier to attack these patent settlements have stalled in Congress.

Cipro decision On 7 September 2010, the United States Court of Appeals for the Second Circuit denied a motion by the plaintiffs in In re Ciprofloxacin Hydrochloride Antitrust Litigation, 604 F.3d 98 (2d Cir. 2010) (Cipro) for an en banc rehearing of a panel decision dismissing their antitrust challenge to the settlement at issue in Cipro. The panel decision had applied the standards of the Second Circuit's prior decision in In re Tamoxifen Citrate Antitrust Litigation (Tamoxifen). In denying the motion, the Second Circuit rejected efforts by the Cipro plaintiffs, the FTC, and the members of the Cipro panel itself to overturn the rule established in Tamoxifen.

The FTC and DOJ, as well as private plaintiffs and other advocacy groups, have objected on antitrust grounds to settlements of patent litigation between a brand-name manufacturer and a generic manufacturer where such settlements include (1) a compromise date for generic entry, and (2) consideration flowing from the brand-name manufacturer to the generic. (The consideration provided to the generic is sometimes called a "reverse payment" because more typically intellectual property cases are settled with a payment from the alleged infringer to the IP holder; notably, this payment is often part of an ancillary business deal between the settling parties). According to the FTC and other challengers, such settlements are almost always anticompetitive because, in their view, one can assume that, absent the "reverse payment," the generic manufacturer would have insisted on an earlier entry date. The courts, however, have largely disagreed. In Tamoxifen (and now Cipro), the Second Circuit (like several other courts) has held that patent settlements with so-called "reverse payments" are lawful under the antitrust laws absent evidence that the settlement restricts competition outside the scope of the patents at issue in the underlying infringement action.

Although it is rare for the Second Circuit to grant petitions for rehearings en banc, denial of rehearing in this case is still notable. Rehearing had been encouraged via amicus submissions by the FTC, the DOJ, 39 state attorneys general, and numerous private organizations and academics. Additionally, the original Cipro panel had questioned the Tamoxifen precedent and called upon the full court to grant re-hearing en banc. On the other hand, the effort to overturn Tamoxifen was clearly swimming against the judicial tide. Numerous courts have held that antitrust challenges to patent settlements must show that the patent-holder's patents were somehow weak or baseless in order for there to be any evidence that the settlement impacted competition outside the scope of a lawful patent "monopoly." These courts have reasoned that, unless the generic manufacturer's product can be shown to be non-infringing (or the patent can be shown to be invalid), then the patent-holder has merely excluded competition from a competitor that was illegal in the first place. See, e.g., Schering-Plough Corporation v. FTC, 402 F.3d 1056 (11th Cir. 2005); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008). The plaintiffs are expected to appeal to the Supreme Court.

The FTC's continued efforts The FTC still continues to pursue its efforts against "reverse payment" patent settlements in several fronts. First, the FTC is pursuing a case challenging patent settlements relating to the drug Provigil in the Eastern District of Pennsylvania. Second, the FTC is appealing to the Eleventh Circuit a district court's dismissal of its case challenging a patent settlement relating to the drug Androgel. In each of those cases, the courts have issued rulings indicating that they disagree with the FTC's proposed strict standard for these patent settlements.

Finally, the FTC continues to seek passage of legislation that would require courts to apply stricter standards (although not an outright ban) to "reverse payment" patent settlements. That legislation passed the House earlier this year, but has been stalled in the Senate. With the Republican takeover of the House, the chances of this proposed legislation becoming law has decreased further.

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Federal court dismisses antitrust claims based on single brand market By Eric J. Stock and Dennis Mendoza Quinio

On 26 August 2010, a federal court in Louisiana dismissed antitrust claims asserted against a medical device manufacturer and others finding, among other things, that the plaintiff's allegation that the defendants dominated a market limited to the manufacturer's own products was insufficient to plead a properly defined relevant market. Vaughn Med. Equip. Repair Serv., L.L.C., v. Jordan Reses Supply Co., No. 10-00124, 2010 WL 3488244 (E.D. La. Aug. 26, 2010). The decision is the latest in a line of cases refusing to permit antitrust plaintiffs to allege market power by artificially limiting the market to a single manufacturer's product.

The plaintiff was a distributor of continuous positive airway pressure devices (CPAPs), products used to treat sleep apnea, some of which were manufactured by defendant Respironics, Inc. The dispute arose out of the plaintiff's desire to distribute Respironics' products to the Department of Veterans Affairs. The defendants took the position that only a different distributor was authorized to sell to VA medical centers.

In addressing the defendants' motion to dismiss, the court issued a series of rulings, dismissing some claims and upholding others. One key aspect of the decision was its evaluation of the claims under Sections 1 and 2 of the Sherman Act, each of which required proper allegations of "market power" to be sustained (the court held that the plaintiff had failed to plead any per se unlawful horizontal agreements). The court concluded that the plaintiff's complaint only alleged harm to a "market" limited to the sale of Respironics CPAPs to VA medical centers, and that such a market was too narrow to be sustained. The court stated that a market artificially confined to a single manufacturer's products was not proper under the law, and that a properly defined market had to include CPAPs sold by Respironics' competitors, as well as CPAPs sold to different types of customers (i.e., not only the VA).

This decision is consistent with prior rulings that have rejected attempts by plaintiffs to bring antitrust cases based on a defendant's alleged dominance of a "market" limited to its own products. While courts have sometimes permitted plaintiffs to allege markets limited to the "aftermarket" servicing of a single manufacturer's product (on the theory that the customers had already locked themselves into the manufacturer's product, see, e.g., Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 481 (1992)), in most cases such claims are not sustained. See, e.g., PSKS, Inc. v. Leegin Creative Leather Prods., Inc., 615 F.3d 412 (5th Cir. 2010) ("the [lower] court also correctly rejected the claim that Brighton products constitute their own market. In rare circumstances, a single brand of a product or service can constitute a relevant market for antitrust purposes .... But that possibility is limited to situations in which consumers are "locked in" to a specific brand by the nature of the product.").

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EU developments

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Reckitt Benckiser admits infringing UK and European competition law by withdrawing and de-listing Gaviscon Original Liquid from the NHS prescription channel By Suzanne Rab

An investigation by the U.K. Office of Fair Trading (OFT) has highlighted whether certain practices associated with product development and regulatory and/or patent protection for successor drugs — so-called "lifecycle management" — can be challenged under UK and EU competition law. On 15 October 2010, the OFT concluded an investigation of Reckitt Benckiser (RB) with an announcement that the company had agreed to pay a fine of £10.2 million for abuse of dominance by withdrawing and de-listing Gaviscon Original Liquid from the National Health Service (NHS) prescription channel.

Case background The OFT issued a Statement of Objections (SO) to RB in February 2010, alleging that RB had abused its dominant position in the market for the NHS supply of alginate antacid heartburn medicines. The OFT alleged that RB deliberately withdrew Gaviscon Original Liquid, which no longer has patent protection, from the NHS prescription channel before the product was assigned a generic name within the channel. As a result, doctors searching for Gaviscon would be presented with Gaviscon Advance Liquid — a second generation product still protected by a patent — rather than a competing generic product. When a patent for a drug has expired and a generic name has been assigned to it in the NHS channel, UK doctors are able to use the NHS prescribing software to search for a branded product and then provide a prescription that lists the generic name. The OFT considers that the choice given to pharmacies to dispense either the brand or the generic (i.e., cheaper) medicine is important for consumer choice and price competition in the UK.

RB cooperated with the OFT under the "early resolution" procedure and admitted to the commission of an infringement under UK and EU competition law. To reflect this cooperation, the fine imposed was reduced from an initial £12 million. This is the first time that the UK antitrust authority (OFT) has fined a company for abuse of dominance since 2003, when it imposed a £6.8 million penalty against pharmaceutical company, Genzyme. This fine was later reduced to £3 million on appeal.

Comment The Gaviscon case involves a novel theory of antitrust harm in the United Kingdom and in Europe, which was not specifically explored, or at least there was no definitive conclusion on the issues, by the European Commission (Commission) in its January 2008 – July 2009 inquiry into the pharmaceutical sector. The 2005 case involving AstraZeneca provides the only other example of the Commission finding conduct by an allegedly dominant pharmaceutical company to amount to an infringement of EU competition law. AstraZeneca was fined €60 million for two allegedly abusive practices: (1) making misleading representations to obtain Supplementary Protection Certificates in respect of Losec; (2) selective withdrawal of Losec so that generic suppliers did not have a reference product to support their authorization. On 1 July 2010, Europe's General Court rejected AstraZeneca's appeal against the fine for anti-competitive practices, but did reduce the penalty instead to €52.5 million. AstraZeneca's appeal to the Court of Justice of the EU is pending. See "AstraZeneca Appeals Judgment of the General Court on Abuse of Dominance."

While the use of successor drugs as a lifecycle management strategy has not been addressed specifically in final antitrust infringement decisions in Europe to date, there have been similar, albeit not final as to the antitrust merits, cases in the United States. These cases essentially involve allegations of shifting consumers from an old version of a drug to a new version, which results in undermining the ability of generic versions of the original drug to compete. However, such cases (e.g., Abbott Laboratories v. Teva Pharmaceuticals USA, Inc., 432 F.Supp. 2d 408, 415 (D. Del.) (2006) and Walgreen Co. et al. v. AstraZeneca Pharmaceuticals, 534 F.Supp. 2d 146 (D.D.C.) (2008)) have tended to revolve around the issue of whether the manufacturer has taken steps to make a prior version of the drug unavailable.

Conclusion The Gaviscon case will be important in defining the future direction, at least in the United Kingdom, of competition law probes into strategies by allegedly dominant firms to seek to extend the period of protection of their patented drugs through product development, seeking regulatory and/or patent protection and related practices. While the case was resolved under the early resolution procedure and reflects RB's cooperation and admission of infringement, it highlights the determination of the OFT to seek to prevent dominant companies from using their market position to restrict competition. The case adds to a growing body of investigations where the EU competition authorities have focused their attention on practices by pharmaceutical companies which risk hindering the availability of generic drugs.

In the short-term, it would not be surprising if this and other cases made the EU competition authorities bolder in their desire to pursue competition cases against allegedly dominant pharmaceutical companies. Nor can it be ruled out that social welfare bodies in the Member States affected would seek compensation through the national courts, in accordance with the principles laid down by the European Court, if infringement, loss and causation can be proven.

Ultimately, the Gaviscon case leaves open a key issue for UK and EU competition law purposes regarding what obligation, if any, a dominant pharmaceutical company may have to take steps to enable its (generic) rivals to compete, or to refrain from adopting a course of conduct that will foreclose rivals from the market. The sustained regulatory scrutiny does suggest, however, that pharmaceutical companies concerned about competition law challenges could minimize potential exposure by leaving an original product on the market and documenting the actual therapeutic or other benefits of their successor products.

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OECD competition committee publishes report on generic pharmaceuticals policy roundtable By Tim Capel

On 3 September 2010, the Competition Committee of the Organization for Economic Cooperation and Development (OECD) published a summary of its October 2009 roundtable discussion on generic pharmaceuticals. The report provides a helpful overview of the key issues concerning competition between generic and branded products, as well as the effect on competition of agreements to delay the entry of generics on the market. The report also contains the written submissions of the participating countries and the EU on the subject.

The following key points were expressed during the OECD roundtable discussion.

Competition between branded and generic pharmaceutical manufacturers can provide consumers with substantial savings. Although the actual effect of competition from generics varies substantially between jurisdictions, depending on the legislative framework and regulatory regime in place, there was no evidence that generic entry has a negative effect on consumers in pharmaceutical markets.

The use of incentives is central to encouraging increased generic entry — for example, improving distribution methods for generic pharmaceuticals, and encouraging doctors to prescribe and pharmacists to dispense the generic version of a product will spur generic entry.

The strategic use by brand name manufacturers of so-called "reverse payments" to keep generics from entering the market can harm consumers and cause significant welfare losses, which can be many multiples of the original payment from the branded firm to the generic firm.

Brand name manufacturers are also adopting other strategies designed to prevent generic entry, including the sale of "authorized generics" (where a generic version of a branded drug is issued by the brand name manufacturer) and "product hopping" (where brand name manufacturers introduce new patented products that have minor or no substantive benefits as soon as generic entry is imminent).

The Competition Committee noted that the benefits of generic competition should be balanced against the need to incentivize innovation and the continued investment in the development of new drugs. The above conclusions are consistent with those expressed by antitrust enforcers at the FTC. Note, however, that there is considerable debate about whether strategies involving so-called "reverse payments," product-hopping and authorized generics are anti-competitive, and where they have been challenged, the enforcers have met with mixed success.

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AstraZeneca appeals judgment of the General Court on abuse of dominance By Tim Capel

On 22 October 2010, details were published of AstraZeneca's appeal before the Court of Justice of the European Union (CJEU) of a judgment of the General Court, which had largely upheld the European Commission's 2005 decision finding that AstraZeneca had abused a dominant position.

AstraZeneca's appeal, only the latest step in a long running saga, invites the CJEU to rule on important questions of market definition in the context of pharmaceutical products and the circumstances under which the behavior of an allegedly dominant firm goes beyond legitimate competition on the merits and restricts competition from generic pharmaceuticals.

The Commission's case In its 2005 decision, the Commission concluded that AstraZeneca had abused a dominant position in the market for proton pump inhibitors (PPIs), contrary to Article 102 of the Treaty on the Functioning of the European Union (TFEU), by attempting to prevent or delay market access for generic versions of Losec, a drug used to treat gastrointestinal conditions.

The Commission fined AstraZeneca a total of € 60 million for two allegedly abusive practices:

Making misleading representations to regulatory authorities in order to obtain Supplementary Protection Certificates (SPCs) in respect of Losec (the "misrepresentation abuse"); and

The selective withdrawal of Losec so that generic suppliers did not have a reference product to support their marketing authorization in order to delay entry of generic products and to prevent parallel imports of Losec (the "withdrawal abuse"). Note, however, that subsequent changes in EU legislation would not now allow the same misuse of the relevant regulatory procedures and could not form the basis of the same allegation as the withdrawal abuse allegedly committed by AstraZeneca.

The General Court's judgment AstraZeneca brought an action before the General Court for annulment of the Commission's decision and/or a reduction in the fine. The General Court handed down its judgment on 1 July 2010, rejecting most of AstraZeneca's arguments and upholding the Commission's finding that AstraZeneca had abused its dominant position.

In particular, the General Court found:

Market definition: the evidence relied on by the Commission was sufficient to establish that H2 blockers did not exercise a significant competitive constraint over PPIs between 1993 and 2000. Misrepresentation abuse: AstraZeneca had made misleading representations to national patent offices, but that proof of the deliberate nature of the conduct or bad faith on the part of AstraZeneca was not necessary to find an abuse of dominance, which is an objective concept; and Withdrawal abuse: the fact that pharmaceutical companies are normally entitled to request the deregistration of marketing authorizations does not make such conduct immune from the prohibition on the abuse of a dominant position. Therefore, the Commission did not err in its finding of abuse. However, in relation to the alleged restriction of parallel trade, the General Court annulled the part of the Commission's decision concerning the deregistration of Losec in Denmark and Norway, but not in Sweden. The General Court determined that the Commission failed to establish that the de-registrations could prevent parallel trade in Losec in those countries and as a result had not proved that the reduction in parallel imports was a result of AstraZeneca's conduct. Accordingly, the General Court reduced the fine imposed on AstraZeneca to € 52.5 million.

AstraZeneca's appeal to the CJEU AstraZeneca's appeal claims that the General Court's judgment should be set aside and the Commission's decision annulled. In particular, it claims that the General Court made the following errors of law.

Market definition: AstraZeneca claims that the General Court erred by upholding the Commission's finding that, for the period 1993 to 2000, PPIs formed a separate relevant product market. In particular, AstraZeneca argues that the General Court erred:

By failing to conduct a temporal analysis of the evidence, which led to it making a finding as to the relevant product market in 1993 on the basis of the competitive situation between PPIs and H2 blockers in 2000; By ignoring the fact that the increase in use of PPIs was gradual, on the basis that the practices of prescribing doctors (characterized by "inertia") was irrelevant for the purpose of market definition; and

By failing to take account of the overall cost of treatment when considering price differentials between PPIs and H2 blockers. Misrepresentation abuse: AstraZeneca claims that the General Court was incorrect in dismissing the reasonableness of AstraZeneca's bona fide belief in its understanding of its legal rights when assessing whether AstraZeneca's representations were objectively misleading. AstraZeneca argues that a lack of transparency is insufficient for a finding of abuse and that there should be a requirement for deliberate fraud or deceit. Furthermore, AstraZeneca claims that the mere act of applying for an IP right that may be effective five-to-six years later could not be said to restrict competition because it is too remote from the allegedly affected market.

Withdrawal abuse: AstraZeneca claims that the General Court was wrong in its assessment of what constitutes competition on the merits. Specifically, AstraZeneca argues that the General Court was incorrect in its finding that the exercise of a legal right under EU law is a failure to compete on the merits or that it tends to restrict competition. Alternatively, if the CJEU were to consider that the exercise of such a legal right could in principle amount to an abuse, AstraZeneca argues that the Commission should be required to establish that the exercise of the right in question tends to eliminate effective competition (following the test that applies in compulsory licensing cases).

Level of fine: Astra Zeneca claims that the General Court erred in its assessment of the fine, in particular by failing to take proper account of the novelty of the alleged abuse.

Comment That AstraZeneca has appealed the General Court's judgment comes as little surprise, given the controversial and novel nature of the Commission's finding of abuse based on misuse of the regulatory framework. At the heart of the appeal lies the question of what constitutes "competition on the merits" by a dominant company, which is regarded under EU law as having a "special responsibility" not to distort competition. The General Court's judgment confirmed that a dominant company may be regarded as having abused its dominant position, even where the alleged infringing behavior was not based on the use of market power conferred by being dominant and where that strategy would otherwise have been acceptable if adopted by a non-dominant company. This raises difficult questions for innovator companies seeking to implement lifecycle-management strategies for pharmaceutical products in markets where they might be considered to be dominant and also places a considerable burden on them to ensure that they do not, even inadvertently, misinterpret the law when putting their views to the regulatory authorities.

Accordingly, the judgment of the CJEU will be awaited with considerable interest, not only by companies in the pharmaceutical industry, but also by companies operating in other regulated sectors. More specifically, the decision may be critical in determining the outcome of the Commission's ongoing investigation of Boehringer's alleged misuse of the patent system. Moreover, against the backdrop of the UK Office of Fair Trading's recent fining of Reckitt Benckiser, it may serve to embolden the Commission and other national competition authorities in the European Union to pursue cases involving allegedly abusive lifecycle management practices.

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Legal professional privilege under EU law — navigating the unresolved questions following the Akzo judgment By Suyong Kim and Matthew Levitt

On 14 September 2010, the Court of Justice of the European Union gave its ruling in Case C-550/07P Akzo Nobel Chemicals Ltd. and Akcros Chemicals Ltd. v Commission, confirming that the protection of legal professional privilege (LPP) does not extend under EU law to advice given by in-house lawyers. Accordingly it is now settled law that advice from and communications with in-house lawyers can be seized by the European Commission.

The Akzo judgment leaves unresolved a number of questions relating to the operation of LPP rules under EU law including questions of acute importance to U.S. companies, such as the treatment of communications emanating from U.S. lawyers. Suyong Kim, a partner in our London office, and Matthew Levitt, a partner in our Brussels office, in a recent article published by the BNA Antitrust & Trade Regulation Report, review the evolving EU case law on LPP to date and conclude that the circumscribed approach to LPP in the European Union gives rise to serious legal and practical difficulties for U.S. and multinational companies who also have operations within the European Union in obtaining confidential legal advice and communicating that advice within their business.

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China Developments

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MOFCOM clears second life sciences merger subject to conditions By Adrian Emch, Andrew McGinty, and Jun Wei

On 13 August 2010, the Ministry of Commerce (MOFCOM), the agency in charge of merger control in China, showed new signals of activism. After ten months without imposing conditions on a merger clearance decision, MOFCOM granted conditional clearance of life sciences company Novartis' acquisition of a majority stake in rival Alcon. The Novartis/Alcon case is only the sixth MOFCOM decision involving remedies, but already the second in the life sciences field, after Pfizer/Wyeth.

Introduction

Like the Hart-Scott-Rodino Act in the United States and similar provisions throughout the world, the Chinese Anti-Monopoly Law (AML) merger control regime requires pre-closing filing with MOFCOM for certain types of business transactions if the transaction exceeds specified thresholds. Under the AML, the filing thresholds only focus on sales revenues. The transaction cannot be closed until MOFCOM completes its examination.

In the first phase of the procedure, MOFCOM has 30 days after receipt of the complete set of notification documents to carry out an initial review. If it finds that an in-depth investigation is necessary, MOFCOM has up to 90 days to complete a second phase investigation. Under certain circumstances, the deadline can be extended for a maximum of 60 additional days, which is sometimes referred to as "phase 3."

The Novartis/Alcon transaction

The Novartis/Alcon transaction would give Novartis, one of the world's leading life sciences companies, a 77 percent majority stake in Alcon, which is a Texas-based life sciences company that specializes in eye care products. The transaction was subject to merger review in a number of jurisdictions worldwide, including the United States and the European Union. The EU and the U.S. antitrust agencies cleared the acquisition subject to conditions. Their clearance decisions were issued around the same time as MOFCOM's decision, on 9 and 16 August, respectively.

MOFCOM's decision

Novartis notified MOFCOM of the proposed transaction on 20 April 2010. After identifying competition concerns in the first phase of the procedure, MOFCOM began an in-depth investigation. MOFCOM found competition issues existed in two relevant product markets: the markets for ophthalmological anti-inflammatory/anti-infective products and for contact-lens care products.

In the ophthalmological anti-inflammatory/anti-infective product market, Novartis and Alcon have an aggregate market share of 55 percent worldwide and over 60 percent in China, yet Novartis' share alone is less than 1 percent in China. With respect to contact lens care products, the merged entity holds a global market share of nearly 60 percent and an approximately 20 percent share in China. With a share of more than 30 percent, the market leader in China is the Taiwanese company Ginko International, through its Hydron business. Novartis had a pre-existing agreement to appoint Hydron as exclusive distributor of its contact lens care products in China.

To address MOFCOM's competitive concerns, the parties had to offer certain concessions, which the Chinese regulators accepted after two rounds of negotiations. Although noting that Novartis had already made the strategic decision to withdraw from the ophthalmological anti-inflammatory/anti-infective product market, MOFCOM imposed an additional condition that barred Novartis from selling Infectoflam or similar ophthalmological anti-infective products in China for five years. To overcome MOFCOM's concerns with respect to the contact lens care product market, Novartis committed to terminate the distribution agreement with Hydron within the next 12 months.  

MOFCOM's continuing evolution regarding substantive analysis

The Novartis/Alcon decision is the first in which MOFCOM has imposed conditions to address "coordinated effects" arising from a merger.

Coordinated effects refers to the reduction of competition between the newly merged entity and another rival in the market — in this case, Hydron. Although the very short text of the published decision does not provide a full analysis of MOFCOM's reasoning, it seems that the regulator may have been concerned that the link between the new Novartis/Alcon entity and Hydron through the distribution agreement would align their behavior in the marketplace.

The coordinated effects theory complements the broad spectrum of theories of harm which MOFCOM has used so far. In most of the cases that ended with a published MOFCOM decision, the sole or main issue was "unilateral effects" (i.e., the elimination of competition between the merging parties). Sometimes, however, MOFCOM simply did not explain its legal or economic thinking in detail at all. When examining unilateral effects, MOFCOM has taken into consideration a variety of factors, the most important of which is market share. Judging from past cases, such as the Panasonic/Sanyo transaction, it appears that combined market shares of 45 percent and above are potentially problematic.

In addition to unilateral effects, MOFCOM has used the "conglomerate effects" theory to evaluate whether a transaction would cause competitive harm. MOFCOM blocked the Coca-Cola/Huiyuan transaction because of concerns that the parties' product portfolios would give rise to conglomerate effects. That said, some observers have voiced the view that the real issue in that case was industrial rather than antitrust policy.

A final theory MOFCOM has used, in both Mitsubishi Rayon/Lucite International and General Motors/Delphi, to evaluate transactions is that of "vertical effects." In General Motors/Delphi, MOFCOM's concern was that the vertical integration between General Motors as a car maker and Delphi as a car parts supplier would have negative impacts on their competitors at both levels in the production chain. In Mitsubishi Rayon/Lucite International, the acquiror already operated at both levels within the supply chain. MOFCOM essentially found that the addition of the target's business on the upstream market would increase the merged entity's ability to foreclose downstream competitors.

Focus remains on remedies

While the Novartis/Alcon decision illustrates the gradual expansion of MOFCOM's "toolbox" for substantive assessment — to some extent in alignment with international practice — other aspects of the decision depart from the approach of antitrust agencies in other jurisdictions. With less than a 1 percent market share, Novartis' addition to the 60 percent share of Alcon in the Chinese ophthalmological anti-inflammatory/anti-infective product market seems negligible and would hardly justify the imposition of remedies, no matter what their nature or extent.

A few weeks before the Novartis/Alcon decision, on 8 July, MOFCOM issued a regulation on the implementation of divestiture remedies. Although the regulation came into force with immediate effect, MOFCOM did not rely on it in the Novartis/Alcon case. Instead, MOFCOM imposed behavioral remedies to address the miniscule overlap in the ophthalmological anti-inflammatory/anti-infective product market.

While it is difficult to interpret the link between the adoption of the new regulation on divestiture remedies and the Novartis/Alcon decision, the combination of these two developments may at least convey one message, which is that MOFCOM continues to focus on a variety of remedies, including the increasingly detailed practical issues of implementing them. Some observers believe that, especially in cases where the U.S. and EU antitrust agencies have imposed or, in MOFCOM's view, are likely to impose remedies, MOFCOM is keen to also require remedies in China even though the remedies are those seemingly tailored for the Chinese market.

Conclusions

The Novartis/Alcon decision is only the sixth decision in which MOFCOM has imposed conditions, out of a total of over 140 notified transactions. While the high number of relatively routine transactions currently going into the phase 2 procedure is clearly unsatisfactory, the fact that the vast majority of cases are being cleared unconditionally shows a certain degree of restraint on the part of MOFCOM.

In any event, the Novartis/Alcon decision evidences MOFCOM's continued willingness to intervene in foreign-to-foreign transactions which it believes raise competition issues in China. All foreign investors should take note of the increasing sophistication of MOFCOM's scrutiny of business transactions subject to the AML.