This article summarises the key findings laid out in the European Commission's Pharmaceutical Sector Inquiry Preliminary Report, which was published on Friday 28 November 2008. At the same time a full day a presentation of the Report was held in Brussels.  

The purpose of the Report is to survey the competition landscape in the pharmaceuticals industry.  

The Report confirms the Commission's concerns in relation to delays in generic market entry and apparently low levels of innovation. The Commission attributes these largely to the behaviour by companies on the market, and in particular competitive strategies adopted by originator pharmaceutical companies.  

As a result, these originators are the prime targets of the sector enquiry, and are most likely to be affected by the Commission's final report, which is expected in spring 2009. The prime focus for the report is on medicinal products whose data exclusivity expired during the seven-year period 2000-2007 and involves a detailed examination of 219 medicines. These individual medicinal products represent 53% of the total pharmaceutical market, and included a high number of products where marketing exclusivity was lost during the period examined.  

The Report estimates that generic entry accounts for approximately €14 billion savings in health service expenditure during the above period, but that these savings could have been approximately €3 billion more in the absence of the delay factors identified in the Report.  

There is now a period of consultation until the end of January 2009, before the final report is published in the spring of 2009. The purpose of the final report will be to provide the Commission with a factual basis to determine whether further action is needed, in the form of proposals for legislative or regulatory change, and/or anti-trust action in individual cases. In the short term, it is more likely that individual antitrust investigations will be launched as a result of the types of practices and agreements that have been uncovered by the Commission's investigation, though the Report may also cause further debate on possible longer term modifications to marketing authorisation systems in Member States to remove bottlenecks.  

In terms of immediate action on the Commission's Preliminary Report, stakeholders should consider the comments they wish to submit to the Commission on the Report by the deadline of 31 January 2009. In this way, stakeholders at all industry levels can seek to influence the outcome of the Commission's final report. Bird & Bird are happy to discuss these issues with also where appropriate to include responses on behalf of companies in a separate submission to the Commission.  

Summary of key findings of the Report  

The key delay factors which the Commission found to be affecting generic entry are the following:  

  • Legal uncertainty caused by originators' "patent clusters" or "patent thickets" and the filing of divisional patent applications;  
  • Patent enforcement litigation by originator companies not based on the merits of the case but as a strategy to deter generic entry: the Report stated that the number of patent litigation cases between originator and generic companies increased by a factor of four between 2000 and 2007, most of the cases being initiated by originator companies, but the majority of the cases in which final judgment was given, 62% were won by generic companies;  
  • Delays to generic entry caused by the need to oppose and overcome secondary patents obtained by originator companies in the European Patent Office: generic companies were found to have prevailed in approximately 75% of final decisions rendered by the European Patent Office, including the Board of Appeal, during 2000 to 2007, yet 80% of these decisions took more than two years;  
  • Delays caused by intervention and litigation by originator companies interfering in marketing authorisation and pricing/reimbursement proceedings for generic medicines: it was found that originator companies had a low success record on patent and data exclusivity matters, but that such interventions delayed generic entry by an average of four months;  
  • Originator companies' strategies of launching second generation products of questionable innovative value, in order to switch a substantial number of patients to the new product prior to market entry of a generic version of the first generation product;  
  • Patent dispute settlement agreements deterring or restricting generic entry: a significant proportion of such agreements involved value transfers from the originator company, and in many cases, licence or distribution agreements for the sale of generic medicines concerned originator medicines which still benefitted from exclusivity; and  
  • In many cases, the parallel use of two or more of the above strategies.  

In addition, the Report considers various factors affecting competition between innovators themselves (for example "defensive patent strategies"). It also sets out various comments, but not conclusions, concerning the patent system and pharmaceutical regulatory framework, in particular with regard to delays and discrepancies in assessment criteria on the part of national marketing authorisation agencies and delays and uncertainties created by national pricing and reimbursement procedures. These aspects of the Report are summarised further below.  

Possible Commission competition law action against individual companies  

As mentioned, the Commission may pursue individual companies in relation to possible Article 81 and Article 82 infringements.  

With regard to infringements of Article 81 (the prohibition of restrictive agreements), the Commission has stated that it will focus primarily on settlement agreements where there has been a value transfer from the originator company to the generic company.  

Regarding unilateral anticompetitive conduct, the Commission would need to show an abuse of dominant position contrary to Article 82, for which purpose the Commission will first have to show that the company in question is dominant in a relevant market, which will in turn depend on the market definition. Such actions will follow the cases of AstraZeneca (appeal pending before the European Court of First Instance, Case T321/05) in which the Commission found abuses in the form of misuse of the patent system (concerning supplementary protection certificates) and misuse of the marketing authorisation system, and also the Commission's current investigation of Boehringer Ingelheim for alleged misuse of the patent system.  

It will be challenging for the Commission to prove abuse of dominant position through multiple patent applications ("patent clusters"), or litigation actions as a deterrent strategy against generic entry, as there would be a heavy evidential burden on proving an anti-competitive strategy as the motivation and reason for the action as distinct from the substantive merits of the applications or actions. Such types of practices that concern the Commission can be characterised as legal or illegal depending on the intent of the company, including the creation and also the enforcement of intellectual property rights. There is limited precedent regarding this type of abuse, and there is no actual finding as yet on an abuse of this nature, though the possibility of abuse of dominant position through vexatious litigation has been confirmed in principle by the European Court of First Instance in a case outside the pharmaceuticals sector but concerning intellectual property enforcement, ITT Promedia v Commission (Case T- 111/96). However, recent developments suggest that the Commission may be more inclined to initiate actions of this nature in the future.  

Moreover, it should be noted that the Commission has announced that it has conducted additional dawn raids on 24 and 25 November, of a "number of pharmaceutical companies" in several European Union Member States, suspecting them of having operated a cartel or of abuses of their dominant market position. Therefore, it seems likely that there will be a focus on the activities of the pharmaceutical industry for some time to come.  

Competition issues as between different originator companies  

The report suggests that originator companies develop defensive patenting strategies primarily to block the development of new competing products. Typically this is to protect compounds closely related to their candidates, which would be of interest to competitors. This can lead to higher costs to the second originator company e.g. having to pay royalties or in delays. There were 1,100 examples of an overlap between the R&D of one originator company and the patents of another originator company. In contrast, the European Consumers Association's representative, in her presentation to the hearing on 28 November criticised "me too" medicines, which she considered stifled innovation.  

The Commission stated that a large number of agreements (over 1,450) between different originator companies will be analysed more fully during the second phase of the enquiry.  

Potential future regulatory developments  

The Commission has acknowledged that company behaviour does not account for all of the problems it has identified. Based on the Preliminary Report, we can expect recommendations on changes to the regulatory framework to make it more consistent and coherent throughout the EU.  

All sides of the industry supported the creation of a Community patent, and the creation of unified and specialised patent judiciary in Europe to replace the fragmented and expensive national court systems. These developments have been under discussion for some time, but some speakers at the 28 November hearing predicted that the specialised patent court is likely to be in place sooner than a single Community patent. A European patent court would determine pan- European judgments of EPOgranted patents, and then eventually cases on the Community patent. At present, the courts of different EU Member States sometimes give conflicting judgments on the same issue of patent validity or infringement, as seen in 11% of the final judgments reported in the sample.  

Companies, industry associations and agencies reported bottlenecks in the marketing authorisation procedures, which were alleged to be due to a lack of adequate resources in certain agencies (competent authorities). Originator companies particularly support harmonisation of marketing authorisation procedures, especially between the USA and EU, as the current differences lead to additional costs and delays.  

However, how speedily the regulatory initiatives are taken forward will depend on the will of the Commission as a whole and not just the Competition Directorate- General, and more importantly on the support and priority given to such recommendations by the EU Member States. Commission Directorates-General such as Internal Markets and Enterprise and the EU Member State governments will be prime targets for lobbying by originator pharmaceutical companies on these issues.  

Parallel imports  

Although there was a question at the Commission's presentation and hearing on 28 November from a European association of parallel traders, the Commission representatives made it clear that the current investigation does not include the issues of parallel imports in its scope. It was, however, made clear that national pricing and reimbursement procedures cause problems for all pharmaceutical companies, primarily the delays that they cause in marketing a medicinal product.