Competition Law Patent

Part I: European Commission’s Competition Inquiry into the Pharmaceutical Sector

The investigation into the anti-competitive conditions in the pharmaceutical sector was begun by the European Union Commission on January 15, 2008. The Preliminary Report was released in December 2008 (Refer to previous post titled “Prelim report points to anti-competitive practices in EU’s Pharma industry”). The investigation; “Pharmaceutical Sector Inquiry” launched by the Commission under Article 17 of Regulation 1/2003 (of 16 December 2002) on the implementation of the rules on Competition laid down in Articles 81 and 82 of the Treaty. Article 17 provides for investigations by the Commission into sectors of the economy and into types of agreements. An inquiry is conducted when the trend of trade between Member States, the rigidity of prices or other circumstances suggest that competition may be restricted or distorted within the common market.

The report aims to improve the access of patients to medicines which are safe, innovative and affordable. The inquiry specifically focused on the (1) reasons for observed delays in the entry of generic medicines to the market and (2) the apparent decline in innovation which is measured by the number of new medicines entering the market. The inquiry concentrates on practices which the companies may use to block or delay generic competition as well as to block or delay the development of competing originator products. In other words the report primarily focuses on the competitive relationship between the originator and generic companies and amongst originator companies.

The report begins with recognising intellectual property rights as a key element in the promotion of innovation and competition particularly by generic medicines as essential to keep public budgets under control and to ensure widespread access of medicines. Thus, stressing the importance of ensuring that generic medicines reach the market without any delay. In this context the report examines some recent changes in the pharmaceutical sector. The report points out that a large number of blockbuster drugs have gone off patent in recent years and that more will follow making originator companies increasingly dependent on revenues from existing products. And the firms are willing to employ every trick in the book to extend their existing patents on drugs. The report also notes the recent trends of consolidation in the industry, whereby originator companies are acquiring other originator companies and generic companies. This has enabled larger originator companies to invest in the fast growing generic market. Mergers among generic companies are also not rare in order to increase their economies of scale and expand into other geographic markets.

While analysing the trends in the pharmaceutical industry, the Report points out that it took more than seven months, on a weighted average basis, for generics to enter the market after the patented medicines lost exclusivity. This trend is disturbing as prices at which generic companies enter the market are on an average, 25% lower than the price of the originator medicines, before the loss of their exclusivity. It must also be noted that the prices of originator products fall following the entry of a generic equivalent into the market. Delayed entry of generic equivalents into the market adversely impacts public spending on health and the consumers.

The report makes known the numerous ways in which originator companies extend the commercial life of their products. These practices cause legal uncertainty which has a negative impact on generic entry. They are often used cumulatively with respect to blockbuster drugs. At this juncture it is categorically pointed out that the “use of several instruments that are in themselves legitimate does not necessarily render their combination contrary to competition rules.” In this way the report refuses to lay down and legal guidelines or recommendations. It leaves it to the adjudicating body to lay down specific guidelines in the area of competition law and stresses on a case specific analysis to establish the precise effects of company behaviour on generic entry. The technical annex to the Report provides illustrations and evidence without specifying that the behaviour in question in contrary to competition law.

(a) Filing of numerous patent applications for the same medicine, forming “patent clusters” or “patent thickets”.
(b)Filing of voluntary “divisional patent” applications: This leads to an extension of the examination period of the patent office as the examination continues even if the parent application is withdrawn or revoked (the European Patent Office has taken measures to limit possibilities and the time period during which the voluntary divisional patent applications can be filed)
(c) Using litigation to deter generic companies.
(d) Filing of oppositions, which take approximately two years to conclude (including the appeal procedures). The duration limits the ability of the generic companies to clarify the patent situation.
(e) Settlement agreements between originator and generic companies. Significant proportion of these settlements contained in addition to a restriction on the generic company’s ability to market its medicine, a value transfer from the originator company to the generic company; in the form of a direct payment, licence, distribution agreement or a “side-deal”.
(f) Other agreements between originator companies and generic companies concerning the sale/distribution of generic medicines.
(g) Originator companies intervened before marketing authorisation and/or pricing and reimbursement bodies when generic companies applied for marketing authorisation and pricing/reimbursement status for their medicines.
(h) Marketing strategies of originator companies that questioned the quality of generic medicines, as part of a marketing strategy.
(i) Attempt by originator companies to influence wholesalers preparing for the supply of generic products and interventions by generic companies at supply sources for the active pharmaceutical ingredients needed to produce the generic medicines in question.
(j) Launching of second generation products by originator companies (the actual improvement of certain categories of changes, particularly with respect to therapeutic benefits has been questioned by generic companies and consumer associations). The companies undertake marketing strategies to aimed towards switching patients to the new medicine prior to the market entry of a generic equivalent of the first generation product.

The report also examines whether the behaviour of originator companies could be one of the factors hindering innovation. Companies employ patent strategies with the sole reason of interfering with the development of a competing medicine by a rival company thus hindering innovation. These strategies which mainly focus on excluding competitors without pursuing innovative efforts are termed as “defensive patent strategies”. These strategies also include introduction of voluntary divisional patent applications. It must be noted that originator companies opposing the patents of other originator companies have prevailed in 70% of the final decisions and in 19% of the cases, the scope of the patents was reduced. The originator companies also concluded agreements with other originator companies in the European Union for the resolution of claims with respect to patent disputes, oppositions or litigation. The fact that a majority of the agreements which were concluded were in relation to the commercialisation phase rather than the Research and Development phase was emphasised by the report.

The conclusions and recommendations of the Commission are as follows:
(1) Intensification of competition law scrutiny by the Commission under antitrust rules, merger control and State Aid control.
(2) Analysis of market concentration underway in the pharmaceutical sector involving both generic companies and originator companies.
(3) The report says that the Commission in cooperation with the national authorities will not hesitate to make use of its enforcement powers under the competition law, where there are indications of practices that have the potential to restrict or distort competition in the market.
(4) Working towards a rapid establishment of the Community Patent and creation of a unified litigation system.
(5) Adoption of high quality standard by the European Patent Office and acceleration of procedures.
(6) Streamlining of the market authorisation process; recommendations to national agencies and Member States to make better use of the possibility of mutual recognition; stronger coordination between national agencies to avoid discrepancies in the application of the legal framework. Documentation of and transparency of submissions made by third party in market authorisation procedures. Commission urges Member States to take action on the basis of Article 97 of directive 2001/83/EC, against campaigns of originator companies questioning the quality of generic medicines.
(7) Improvement of pricing and reimbursement systems; Commission invites Member States to consider the introduction of natural provisions enabling automatic granting/immediate pricing and reimbursement status to generic products, where the corresponding originator product already benefits from reimbursement.
(8) Commission points out that it considers the pricing and reimbursement procedures as bilateral proceedings between the applicant and the administration. Thus, originator companies should not intervene before the pricing and reimbursement authorities and raise bioequivalence issues or potential patent violation by the generic.
(9) Facilitation of cooperation between the Member States and the exchange of best practices.

The inquiry report restricts itself to providing the Commission “with reliable data on how competition functions in the pharmaceutical sector as regards the competitive relationship between the originator and generic companies and amongst originator companies”. The report put the onus on the Commission to rely on the facts exposed in the inquiry to identify specific needs for action and to set priorities thus falling short of making any recommendations. The report recognises that the situation can see improvement in the light of not merely better enforcement of competition law but improved implementation of intellectual property and regulatory systems.

Part II of this post will deal with follow up action that has been undertaken by the Commission in the form of initiation of formal proceedings against Les Laboratories Servier and a number of generic pharmaceutical companies and lessons for India from the Report.

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