Antitrust Alert: European Commission Issues Preliminary Report on Pharmaceutical Sector Inquiry

On Friday, 28 November 2008, the European Commission issued a preliminary report of certain facts and initial conclusions from its pharmaceutical sector inquiry, which the Commission launched in January 2008. The Report identifies practices that the Commission finds troublesome and invites stakeholders to submit their observations before a final report is being adopted in the spring of 2009.

The Commission undertook this sector inquiry with the basic premise that pharmaceutical markets are not working as well as they might, for which it cited two principal reasons: First, it surmised that there has been a decline in innovation, as measured by the number of novel medicines launched on the market. Second, it was concerned that market entry of generic medicines was being delayed, possibly by anticompetitive practices.

The sector inquiry began with dawn raids on the offices of a number of pharmaceutical companies in Europe and beyond. The Commission supplemented this fact-finding with numerous and sometimes extremely detailed questionnaires, which the Commission issued every Friday for the better half of 2008, in order to gather additional input, mainly from originator companies and generics manufacturers, but also from national competition authorities and other stakeholders such as consumer associations, patent offices, patient associations, and insurance companies.

Against this background, it may not come much as a surprise that the Commission’s Report concludes that the investigation confirmed its initial assumptions and found that there is evidence that originator companies have engaged in practices with the objective of delaying or blocking market entry of generic versions of the original patented medicines. The Report's main findings are summarized below.

First, the Commission found that originator companies are using a variety of strategies (which the Report describes as a “tool-box” of instruments) to delay or prevent the entry of generics. The Commission cites practices such as:

  • filing numerous patents on a single medicine (referred to as "patent clusters" or "patent thickets");
  • making "divisional patent" applications;
  • engaging in out-of-court disputes and patent litigation (most won by generic companies);
  • intervening in national procedures for the approval of generic medicines;
  • entering into settlement agreements with generic companies, in particular to restrict a generic’s ability to market its product and involving a value transfer from the originator company to the generic manufacturer by way of a direct payment, a license or distribution agreement or another "side-deal" (a so-called "reverse payment" settlement); and
  • launching second generation or follow-on medicines just prior to the loss of patent exclusivity for the first generation product.

According to the Commission, originator companies have in many instances resorted to a number of the foregoing practices involving a single product.

Second, as regards competition among originators, the Report finds that companies engage in “defensive patenting strategies” aimed at blocking the development of new competing products by other originator companies.

Third, the Report takes note of a significant number of comments on perceived shortcomings of the current regulatory regime, including the absence of a Community patent, lack of a unified and centralized patent judiciary in Europe, and delays in marketing authorization, as well as national pricing and reimbursement procedures.

While many of the regulatory imperfections quoted by the Commission might readily be accepted by most market participants, its conclusions on perceived delaying tactics by the research-based pharmaceutical industry against generics manufacturers, and preventive measures among originator companies themselves, no doubt will be very controversial. Perhaps not surprisingly, the Report does not examine competition among generic companies as such. Nor does it deal with parallel trade issues within the EU, as European competition law principles are well developed in this area and as the Commission at the time was awaiting the outcome of cases pending before the European Court of Justice.

By way of comparison, the United States Federal Trade Commission has pursued a similar course of broad-based sector inquiry. Although the FTC would agree with many of the European Commission’s conclusions with respect to patenting and litigation, it faces almost insuperable legal obstacles to challenging related practices because of U.S. legal doctrines protecting the right to engage in non-sham petitioning of government entities, including courts and the U.S. Patent & Trademark Office. The FTC has found success largely only when parties have agreed to consent decrees, but has lost when it has brought challenges in the courts. It remains to be seen whether the Commission will face similar constraints.

Stakeholders in the process have until January 31, 2009, to submit comments on the Commission's Report, and a final report is expected to be adopted in the spring of 2009. Given that the Commission based its findings on facts amassed for a sample of 219 medicines during 2000-2007, the comment period will provide an opportunity to critically ascertain to what extent these facts are indeed representative and sufficient to support the Commission's conclusions.

While the Commission states that the Report does not seek to identify wrongdoing by individual companies, certainly the information gathered during the sector inquiry may be used by the Commission to initiate investigations under Article 81 or 82 EC in areas now identified as troublesome. As if to reinforce this, the Commission already had embarked on a further series of dawn raids in the pharmaceutical industry on the Monday preceding its release of the Report.

Executive Summary
Preliminary Report

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