Antitrust Alert: European Commission Sector Inquiry Report Signals Future Antitrust Actions in Pharmaceuticals

The pharmaceuticals sector in the European Union will remain under close antitrust scrutiny in the coming years.  This is confirmed by the Communication the European Commission released yesterday in which it summarizes the main conclusions from its sector inquiry that started in January 2008.  Whilst the Commission identifies specific practices which it says have caused market distortions, and which are therefore likely to attract attention of antitrust enforcers, the Commission does not give further legal guidance on the application of competition law principles in this field.  The most significant legal changes are rather related to the (national) regulatory environment which already has proven to be deficient and where reforms at EU level are in the making. 

A sector inquiry is a policy tool, which has been used increasingly over the last years by the Commission, to examine specific sectors of the economy that are characterized by an apparent lack of competition.  They generally lay the ground for subsequent individual enforcement actions.

In this case, the Commission wanted to understand the "reasons for observed delays in the entry of generic medicines to the market and the apparent decline in innovation as measured by the number of new medicines coming to the market."  The findings of the Commission are that these market failures can, at least in part, be attributed to practices that can be contrary competition law.  The Commission therefore announced that "[t]he Commission in cooperation with the national authorities will not hesitate to make use of its enforcement powers under competition law, where there are indications of practices that have the potential to restrict or distort competition in the market."  Compared to its Preliminary Report of December 2008, however, the Commission appears to have toned down its initial assessment which suggests that it also saw convincing evidence to justify specific practices.

In parallel, the Commission also announced other regulatory reforms, aimed at increasing the efficiency of the patent regime at Community level, streamlining the national marketing authorization processes, and improving the pricing and reimbursement systems, as it found that these various regulatory layers constitute further obstacles to entry for generics.  These proposals will have to be implemented through legislative interventions, which are currently being discussed at EU level.

Turning back to competition law enforcement, the Commission will in particular seek to facilitate entry of generics and further innovation by scrutinizing the following types of practices.

1. Mergers.  The pharmaceuticals industry is currently undergoing a significant consolidation, and competition authorities can therefore intervene through ex ante merger control review.  The sector inquiry confirms that the Commission will pay particular attention to mergers where original manufacturers are acquiring manufacturers of generic products or smaller biotech firms.  These mergers are likely to be viewed as affecting the "competitive structure and process" and therefore face opposition.  The reference to the "competitive process" rather than efficiencies and consumer benefits as the main driver of a merger review shows that the Commission feels strengthened in its traditional analysis.

2. Pricing practices.  The Commission does not report the existence of wide-spread pricing practices that have delayed generic market entry, but refers to the NAPP case in the UK as an example of a practice that delayed generics market entry.  In this case, the UK authorities condemned a pricing practice of a drug manufacturer that was applying significantly lower prices to hospitals than pharmacists.  The Commission considers that this practice was discouraging the use of generics since it lead hospitals to purchase the (non-generic) drug, and, as a result, also induced doctors to prescribe this drug to the patients.  The Genzyme case (again in the UK) also confirms that predatory practices (such as a price squeeze) are likely to be subject to scrutiny on the basis of abuse of dominant position provisions.  Finally, the GSK case, which is currently under review by the European Court of Justice, confirms that even non-dominant market players may be restricted in the setting of prices for export when they restrict cross-border trade.  

3. Refusal to license.  The standard for mandating a compulsory license in IP rights is very high in Europe, as confirmed in the Microsoft case.  The Commission is not suggesting to review this case law and has recently confirmed the high standard in its Article 82 Guidelines.  However, the Commission also reports a case involving GSK, in which a refusal to license the production of an ingredient, needed by producers of generic medicines, was condemned by the Italian competition authority.  The Commission also states that the refusal to license unused patents will remain under scrutiny.

4. Misuse of regulatory proceedings.  The Commission reports that both originator and generic companies complained about various regulatory obstacles for obtaining market authorizations for their products.  The Commission appears to be particularly concerned about attempts by original manufacturers to exploit the regulatory processes to increase the impact of these artificial barriers to entry.  The Commission identifies the patent application, market authorization, and reimbursement authorization processes as processes that are rendered artificially cumbersome or not transparent by original manufacturers.  It refers in particular to the filing of numerous patents on a single medicine (referred to as "patent clusters"), the making of divisional patent applications, engaging out of court disputes, and patent litigation and interventions to delay certification processes of generic drugs.  Again, compared to the Preliminary Report, the Commission appears to have taken a more balanced approach, emphasizing that these regulatory processes should also allow affected manufacturers to effectively defend their rights and only abusive practices should be pursued.

5. Settlement agreements.  The intended intensification of scrutiny will also include a "monitoring" of settlements between originator and generic drug companies.  Procedurally, the Commission has not indicated how it intends to implement the proposed "monitoring," but apparently it will not require an individual notification obligation, which is considered to be too burdensome after proposed in the Preliminary Report.  On the substance, little guidance is provided, but surely the Commission will be particularly skeptical of settlement agreements that limit or delay generic entry and include a value transfer to a generic company.  Whilst the Commission appears to have softened its initial assessment by leaving scope of individual assessments of these agreements, certainly the threshold will be high.

A number of individual infringement proceedings are already being investigated following surprise inspections conducted in January 2008 and concern some of the practices set out above.  These proceedings are likely to be used by the Commission to encourage national competition authorities to follow suit.  The risk is that these national competition authorities may follow an even more aggressive approach than the European Commission, as the oversight by courts over these authorities can be less intrusive in national Member States and little further guidance is given by the European Commission in its Communication.

Read more on Commission's pharmaceutical industry inquiry at the EC's website.


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