On July 8, 2009 the European Commission (EC) published its long-awaited final report on its inquiry into the pharmaceutical sector (Final Report).
The Final Report lays out the Commission’s factual findings on the state of competition in the EU pharmaceutical sector and identifies a number of areas where the regulatory framework may be influencing the entry of generic drugs. The Final Report echoes many of the findings from its Preliminary Report, although the Commission has clearly retreated from its tone of criticism of the originator industry in that earlier report. (See Hogan & Hartson LLP Antitrust Update, Dec. 1, 2008) The Final Report points to broad areas of antitrust concern around practices used by pharmaceutical companies to delay the entry of generic and new innovative drugs. The Commission stops short of naming any infringements by specific companies in its Final Report, although the first cases are underway.
While the Final Report does not promise follow up action by specific dates, it does indicate increased and sustained scrutiny of interaction between regulators, generic companies and originator companies. With antitrust authorities in the US signalling a much more sceptical approach to patent settlement agreements, companies active in the pharmaceutical sector face future challenges on both sides of the Atlantic.
The Final Report represents the culmination of an eighteen month process, which began in January 2008 with a series of unannounced inspection visits on the premises of several European pharmaceutical companies, with the Commission releasing its Preliminary Report on November 28, 2008. At the time, many commentators criticised the Preliminary Report as undermining the recognition and enforcement of IP rights by suggesting that practices which are common to a number of industries, not just pharmaceuticals, could infringe EC competition law.
The Commission has been at pains to emphasise the importance of the pharmaceutical and originator industry to the EU economy, as well as the significance of intellectual property rights to protect and stimulate innovation. It finds, nevertheless, that the entry of generic drugs is being delayed and that the actions of originator and generic companies contribute to the problems, although there are impediments arising from the regulatory framework.
The Final Report’s findings and conclusions are grouped in the following four main areas:
- Competition law scrutiny
The Commission maintains that competition law scrutiny and enforcement will continue. The Final Report consolidates the content of the Preliminary Report and highlights several practices as potentially raising competition concerns, including patent strategies, litigation and settlements, as well as conduct before the regulatory authorities.
On patent strategies, the Commission raises a concern that originators have extended the protection of their drugs, using tactics such as ‘patent thickets’, where one drug is hidden in a bush of patents or by creating ‘patent clusters’, involving numerous additional patents around an original patent. The Commission has also expressed concerns where a follow-up invention or second generation product is patented and its intended patients are ‘switched’ by promotion prior to expiration of the underlying or base patent. It is not clear that this extension of protection is unlawful, and it is unclear whether the Commission has fully taken into account the significant consumer benefits which can come from incremental improvements.
In terms of litigation strategies, an increase in patent litigation on the part of originator companies has come under investigation. The Commission is concerned by differing approaches and judgments in various member states for related proceedings and the Final Report sets out concerns that originator companies who can more easily fund litigation than their generic competitors may be using litigation for unlawful means. If a company is in a dominant position such practices could be challenged as abusive, but according to the leading case law on this issue, litigation must be “manifestly unfounded” in order for any claim of abuse of dominance to succeed. To apply this approach in litigation brought by pharmaceutical companies may seem challenging because such cases tend to turn on complex evidential issues such as whether the generic product is the bio-equivalent of the patented drug.
The Final Report emphasizes the Commission’s concerns over patent settlements. A payment to a generic company to delay entry or keep out of the market may be unlawful. However, it is not clear that this “reverse payment” should always be condemned under EC competition law. If the payment genuinely reflects the opportunity costs for abandoning litigation that would have been resolved in favour of the originator, it may reflect the market outcome that would otherwise have resulted.
This position can be contrasted with the approach in the US where the antitrust authorities have recently indicated that reverse payment patent settlements between originator and generic companies are ‘presumptively illegal’. With the Commission stating in its Final Report that it will consider further focused monitoring of settlements with payments which it understands to limit generic entry, pharmaceutical companies stand to face increasing scrutiny on this issue in both the EU and US.
- Patent framework
The Commission recognises that there are regulatory factors which also influence the entry of generic drugs. The Final Report concludes that there are issues in relation to the granting of patents, and recommends strongly the introduction of a Community patent and a unified and specialised patent judiciary in Europe.
- Market authorisations
In relation to marketing authorisations, the Final Report concludes that vexatious third party submissions and formal interventions in authorisation processes should be discouraged as much as possible, with applicants being made fully aware of any intervention made by a third party.
- Pricing and reimbursement
On pricing and reimbursement, the Commission concludes that national authorities should consider the introduction of national provisions granting reimbursement status to generic products, without the need for detailed assessment, wherever the corresponding originator product benefits from reimbursement based on a higher price.
It is unclear as to what action the Commission proposes to take on the regulatory issues identified in the Final Report, beyond continued monitoring of regulatory and authorisation activity in the Member States. The Final Report states that the Commission will make all efforts to have measures such as the Community patent and unified patent judiciary adopted rapidly, yet progress on the Community patent and the European Patent Court has so far been slow. The Commission does not face an easy task in regulating national regulatory systems, not least because of the political aspects of such an undertaking.
The pharmaceutical sector inquiry has sparked controversy and has been at the forefront of almost the entire pharmaceutical industry over the last eighteen months. Whether or not the competition law concerns raised are founded, the inquiry has given prominence to originator/ generic issues and provided a forum to inform both the Commission and national authorities about the challenges facing the industry. The pharmaceutical sector inquiry has focused clearly on the specifics of the pharmaceutical sector. However, it concerns practices that are common not just to the pharmaceutical sector, but to all high-tech and R&D-intensive sectors, such as taking out numerous patents to protect an invention across its lifecycle, patent litigation and patent settlement. These issues have been discussed at length in the inquiry and experts across all industries have been concerned by suggestions that long-standing business practices may be incompatible with the competition rules. While the Final Report may disappoint those who anticipated a spate of infringement cases, the pharmaceutical sector has not been given a clean bill of health, and at least one infringement case has already been launched. Further infringement cases at least may be expected to follow, providing more guidance on the applicable legal framework, albeit developed piecemeal. The Final Report is not the final chapter in the evolving debate on the application of EC competition law to practices which are the connecting tissue of the pharmaceutical and many other research-based industries.