MEMO/09/321

Brussels, 8 th July 2009

Antitrust: shortcomings in pharmaceutical sector require further action – frequently asked questions

What is the focus of the pharmaceutical sector inquiry?

The inquiry has a double focus:

• the competitive relationship between originator companies and generic companies (in this respect potential delays of market entry of generic companies were examined and whether company behaviour is amongst the reasons for this) and

• the competitive relationship amongst originator companies (relating to impact on innovation)

Competition issues were examined side-by-side with wider regulatory issues. They are inseparable.

What is a sector inquiry? Why not just open a case to deal with the problem?

The Commission suspected a potential systemic problem, so it is both more efficient and more effective to tackle such issues with a sector inquiry. The legal basis for a sector inquiry is Article 17 of Regulation 1/2003 on the application of the EC Treaty competition rules (Articles 81 and 82).

In seeking to improve the Commission's knowledge of a sector, sector inquiries are 'upstream' of any antitrust proceedings in specific cases, which may or may not follow.

A sector inquiry also provides empirical evidence that may be useful in reviewing the regulatory framework governing a sector.

Is this the Commission's first sector inquiry?

No. Since 2004 the Commission has conducted sector inquiries in the areas of energy and financial services. More information is at:

http://ec.europa.eu/comm/competition/antitrust/sector_inquiries.html

What were the underlying reasons for starting this inquiry?

Several trends led the Commission to worry about the state of the market, including:

• a decline in novel medicines reaching the market (average 27 per year in the 2000s compared to 40 per year between 1995 and 1999)

• delays of generic market entry which can lead to significant extra costs for consumers.

Why is the pharmaceutical sector a priority?

The pharmaceutical sector is vital to the health of Europe's citizens and medicines are a major expense. In Europe, we spend €214 billion per year - in retail prices - on pharmaceuticals, i.e. 2% of our GDP. This means around €430 per year for every man, woman and child. Europe's ageing population will only increase the financial constraints on public health budgets. At the same time many patents for the best selling medicines are due to expire in the next few years.

We need to ensure that Europe's patients have access to innovative, affordable and safe medicines without undue delay.

What are the main findings of the sector inquiry?

The main finding is that competition does not work as well as it should. The Commission found delay in the market entry of generic drugs and a decline in innovation as measured by less novel medicines reaching the market. Both company behaviour and regulation play a factor in this. This adds up to extra costs for all parties, and can be fixed, partly through implementing the recommendations of this report.

Documents found by the Commission during the sector inquiry on originator strategies vis-à-vis competing originator and generic products include:

• "We identify options to obtain or acquire patents for the sole purpose of limiting the freedom of operation of our competitors... Rights covering competitive alternatives are maintained in major markets until risk of competing products appearing is minimal."

• "I suppose we have all had conversations around 'how can we block generic manufacturers.' (...) Don't play games in patenting new salt forms too late, the generics are starting earlier and earlier. Get (...) claims on key intermediates that cover a number of routes. Process patents are not the biggest block but can put generics off if a superior chemistry job is done."

• "Interchangeability issues were used in (several countries) to limit generic erosion. (...) Outcome: extra (...) sales of USD 61 m compared to expected generic erosion."

The report highlights several different specific delaying strategies, including the following aimed at generic companies:

• originator companies filed so-called “patent clusters” - a large number of EU-wide patents and pending patent applications for a single medicine (up to 100 patent families and 1300 patents)

• there were also nearly 700 cases of reported patent litigation with generic companies, which on average lasted nearly three years. The generic companies ultimately won more than 60% of these cases. Originator companies obtained injunctions restraining generic entry in 112 cases. In 46% of these cases the case ended with either a judgement favourable to the generic company or with a settlement which appeared to be favourable to the generic company as it allowed early entry and/or a value transfer to the generic company.

• originator companies also concluded more than 200 settlement agreements with generic companies in the EU, in which they agreed on the terms for ending an ongoing litigation or dispute. In approximately 50% generic entry was restricted and in approximately half of these there was a value transfer from the originator to the generic company. More than 10% of the settlements were so-called “reverse payment settlements” which provided for direct payments. These payments amounted in total to more than €200 million.

• originator companies intervened in national procedures for the approval of generic medicines in a significant number of cases, which on average led to four months of delay for the generic medicine.

Further information is contained in the fact sheets, which are available here:

http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/index.html

What are the reasons for delayed market entry of generic medicines?

There are several reasons for delayed market entry of generics, some of which originate from the regulatory framework of the market and some of which that originate from company behaviour. Thus, the regulatory framework can cause delays through its lengthy marketing authorisation and its pricing and reimbursement procedures. Company behaviour such as the use of certain patent application and enforcement strategies, certain patent settlements aiming at the restriction of generic market entry as well as interventions in marketing authorisation procedures concerning generic medicines can also contribute to delays.

What are the solutions to the problems you highlight?

• Applying increased scrutiny under EC Treaty antitrust law to the sector and by bringing specific cases, where appropriate. The use of specific instruments by originator companies in order to delay generic entry 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. Defensive patenting strategies that mainly focus on excluding competitors without pursuing innovative efforts will remain under scrutiny. To reduce the risk that settlements between originator and generic companies are concluded at the expense of consumers, the Commission undertakes to carry out further focused monitoring of settlements that limit or delay the market entry of generic drugs. In the case of clear indications that a submission by a stakeholder intervening before a marketing authorisation body was primarily made to delay the market entry of a competitor, injured parties and stakeholders are invited to bring relevant evidence of practices to the attention of the relevant competition authorities.

• Reaching agreement on a Community Patent and a specialised patent litigation system.

• Levelling the playing field for generic medicines through actions such as:

• ensuring that third party submissions do not occur and in any event do not lead to delays for generic approvals

• encouraging Member States to provide an automatic/immediate pricing and reimbursement status for generic medicines that are equal to the original products

• introducing legislation that facilitates generic uptake, such as prescription by substances rather than brands

Will the Commission launch antitrust cases against particular companies?

Enforcement action is already under way, but we are unable to comment further at this stage.

The knowledge gained during the sector inquiry will allow the Commission to focus its antitrust action in this sector.

Which stakeholders were consulted during the inquiry?

• 70 pharmaceutical companies from the originator and generic industry

• Industry associations at the European level: such as the European Federation of Pharmaceutical Industries and Associations (EFPIA) representing the originator companies and the European Generic Medicines Association (EGA) representing the generic companies.

• consumer and patients associations

• insurance companies

• doctors and pharmacists

• wholesalers,

• hospitals,

• parallel traders

• government bodies such as patent offices – in particular the European Patent Office (EPO)

• competition authorities

• national and European bodies responsible for the approval of medicines and for setting their pricing and reimbursement status.

How representative is the sample of companies and products selected for the sector inquiry?

It is highly representative, and far in excess of standard scientific sampling sizes.

In total, 43 originator companies and 27 generic companies cooperated actively with the Commission. They represented over 80% of the total turnover generated with prescription medicines in the pharmaceutical sector of the EU in 2007. The 219 molecules selected for the analysis in the sector inquiry accounted for 47% of the overall turnover of prescription medicines in the EU in 2007. The generic medicines studied represent over 90% of recently new generic medicines.

How did you choose the products under investigation?

219 products were selected for in-depth investigation mostly because patent protection expired in recent years and/or generic entry had recently occurred for the first time. For reasons of comparison, some top selling medicines were also investigated. Many of them still benefit from exclusivity, but expiry is expected to end in the coming years.

What is the geographic scope of the inquiry?

The inquiry covers all 27 EU Member States. In certain instances the Commission also asked for an international comparison, in particular with the US.

How does the sector inquiry fit with other Commission initiatives in pharmaceuticals?

The Competition department worked very closely with other Commission departments to draw on expertise and to assist their efforts in initiatives such as the creation of the Community Patent and a specialised patent litigation system, research activities including the Innovative Medicines Initiative (IMI) and the reinforced cooperation with national pricing and reimbursement bodies in the Pharmaceutical Forum. All of these initiatives are aimed at enhancing innovation, improving the affordability of medicines for patients and addressing the challenges of the public health systems.

What is the role of patents in the pharmaceutical sector?

Patents are essential for protecting intellectual property rights of inventors so that they can make a profit on their innovation and will continue to invest and work in the field.

For how long can a medicine be patent-protected?

Up to twenty years from the date of the first application, with extensions available if the approval process is delayed (as can be the case in the complex pharmaceutical sector). In 2009, the effective protection period from product launch to the first generic launch is over 14 years, up from 10 years in 2000.

Is there a Community Patent?

No, but significant efforts continue to achieve its realisation. Further details are available under the following website:

http://ec.europa.eu/internal_market/indprop/patent/index_en.htm

Given that 30% of patent court cases are parallel proceedings between the same parties, and that in 11% of cases national courts reach conflicting judgements, it is essential to reduce these burdens and uncertainties.

Under the current regime companies can file for patents centrally at the European level (European Patent Office, EPO). However the patents ultimately granted by the EPO are a bundle of national patents that need to be enforced/challenged nationally.

Is it really the job of the Commission's competition department to address patent problems? Are you not substituting yourself for the patent office?

The Commission has worked very closely with the European Patent Office and has no intention of taking on its role. Europe can be proud to have one of the best patent offices in the world. However, if misuses of the patent system and other regulatory processes are affecting competition, the Commission has an obligation to apply the antitrust rules at its discretion. This is in line with the decisions of the European Court of Justice. The OECD Roundtable on Patents, Innovation and Competition has already in 2006 and recently in June 2009 held intensive discussions amongst its members about possible negative effects of the use of patents on innovation and competition and how to address them. Further details are available under:

http://www.oecd.org/dataoecd/26/10/39888509.pdf

Does the pharmaceutical sector inquiry deal with parallel trade?

No, the sector inquiry does not deal with parallel trade.

Stakeholders have invested a lot of time responding to the Commission's questions. Has this effort been worthwhile?

Yes. Without the information supplied by stakeholders, the inquiry would have discovered less, and would go on to resolve fewer issues.

What impact do you think the financial crisis will have on the pharmaceutical sector?

The Commission does not expect any significant impact on the consumption of medicines. That said, all downward pressure on prices is welcome at this time of strain on household and government budgets.

The main effect of the financial crisis is likely to be felt by innovative biotech firms, which rely on venture capital investments (where funding may dry up). The UK Economic and Social Research Council has already warned about such a development, which is most likely more pronounced for SMEs.

The Commission will not be changing its tough approach to antitrust enforcement as a result of the crisis.