European Commission Publishes the Final Report on Its Pharmaceutical Sector Inquiry

Background
The European Commission (EC) launched a sector inquiry into the pharmaceutical market on January 15, 2008, under Article 17 of Regulation 1/2003, to investigate possible anti-competitive conditions in the sector. In particular, it examined the reasons why fewer new medicines were brought to the market and why generic entry seemed to be delayed in some cases. The inquiry concerns only a sample of 219 prescription medicines for human use. It relates to the 2000 – 2007 period and its geographic scope includes only the 27 EU Member States. After preliminary results were published in November 2008, stakeholders were invited to submit their comments. The final report was published on July 8, 2009.

The focus of the inquiry is company behavior, particularly those practices that companies may use to block or delay generic competition as well as to block or delay the development of competing originator products. Thus, the inquiry concentrates on the competitive relationships among originator companies and between originator companies, which are active in research, development, manufacturing, marketing, and supply of innovative medicines and generic companies, which generate a large part of their turnover from the sale of medicines whose patent exclusivity has expired. As the pharmaceutical sector is extremely regulated, the inquiry also looked at the regulatory framework, in particular, the legislation governing patents, marketing authorizations, and pricing and reimbursement. The inquiry did not look at the distribution chain or at the barriers to parallel trade in the pharmaceutical sector.

Key Findings
Regarding the relationship between originator and generic companies, the EC has found that originator companies use a variety of instruments to extend the commercial life of their products without generic entry for as long as possible. Generic entry took, on a weighted-average basis, more than seven months after the originator medicines lost exclusivity. According to the EC, immediate generic entry could have led to savings up to 20 percent higher.

The final report suggests that a number of instruments are used by originator companies to delay or block the entry of generic medicines. The strategies cited include:

• The formation of so-called “patent clusters” or “patent thickets,” which involves the filing of numerous patent applications for the same medicine. Individual medicines can be protected by up to 1,300 patents and/or pending applications across the Member States (it will be recalled that there is not yet a community patent, but only national patents), which leads to uncertainty for generic competitors.
• Numerous legal disputes between originator and generic companies. Although the right to enforce patent rights in court is a fundamental right, it also can create obstacles for generic companies. The EC identified nearly 700 cases of patent litigation, most of which were initiated by originator companies and that lasted, on average, 2.8 years. The generic companies ultimately won 62 percent of the cases in which final judgment was given. In addition, in approximately one-half of the cases that settled, a restriction of the generic company’s ability to enter the market had been included as part of the settlement. Many of these agreements also included a value transfer from the originator company to the generic company (either in the form of direct payment, license, distribution agreement, or “side-deal”).
• Originator companies intervening in national procedures for market authorization of generic medicines. Originator companies often claim that generic products are less safe, less effective, and/or of inferior quality. However, these claims were upheld in only two percent of the cases, suggesting that their primary goal, according to the EC, is to delay the market entry of competing generic products.

On the relationship between originator companies, the EC report suggests that companies practice “defensive patent strategies” to interfere with the development of a competing medicine. These strategies focus mainly on excluding competitors without pursuing innovative efforts and they may help explain why fewer new medicines were brought into the market.

Conclusions
The final report is mostly viewed by the EC as a factual basis that will help identify specific needs for action and not as a legal assessment of the competitive relations described. In fact, there is no indication as to what conduct the EC perceives as constituting a competition infringement. Nevertheless, the report contains some useful indications on the EC’s likely enforcement actions in the future.

The EC indicates that it will follow with great attention the current trend of consolidation in the pharmaceutical industry, particularly regarding mergers between originator companies. The use of specific instruments by originator companies in order to delay generic entry also will be subject to competition scrutiny if used in an anti-competitive way, which may constitute an infringement under Article 81 or 82 of the EC Treaty. Particular attention will be given to settlements that limit or delay the market entry of generic drugs at the expense of the consumers. Concerning these agreements, the EC notes that U.S. antitrust enforcement authorities have already expressed their skepticism regarding the legality of such agreements and identifies “reverse payments” as a particularly problematic strategy.  (It should be noted that U.S. courts have generally upheld such reverse payments and that legislation to deal with this issue may be the most likely solution in the United States.)

Defensive patenting strategies that mainly focus on excluding competitors without pursuing innovative efforts also will remain under scrutiny. Additionally, the EC invites injured parties and stakeholders to come forward with evidence, where they believe that a submission by a stakeholder intervening before a marketing authorization body was primarily made to delay the market entry of a competitor.

Finally, the EC also recognizes the need for regulatory changes. It calls for the establishment of a community patent and a unified, specialized patent litigation system in Europe to reduce administrative burdens and uncertainty for companies, as the report showed that a full 30 percent of patent court cases are conducted in parallel in several Member States, and in 11 percent of cases, national courts reach conflicting judgments. The EC also calls for the streamlining of the marketing authorization process and the improvement of the pricing and reimbursement systems to better encourage generic uptake.

While the exact extent of the EC’s future enforcement actions is not clear, it is prepared to act quickly. The release of the report coincided with an announcement that the EC had opened an investigation against Les Laboratoires Servier, and a number of generic companies, on suspicion that they conspired to delay generic competition to one of Servier’s cardiovascular drugs, in addition to other ongoing investigations in the sector.

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Howard W. Fogt, Jr.
Washington, D.C.
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Sophie Lignier
Brussels, Belgium
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Isabel Alves
Brussels, Belgium
[email protected]