€3bn Delays?
The inquiry found that originators maintain revenue streams, in particular those from 'blockbuster' drugs, for as long as possible, thereby delaying generic entry. This has led to healthcare systems and consumers paying at least €3bn more than they would otherwise have done. Those revenues may represent a considerable opportunity for generic companies.
Five Tools
The Commission has highlighted five main areas of concern in relation to originators and generic firms.
Strategic patenting
The Commission identified patent 'clusters' or 'thickets' as obstacles to the market entry of generic medicines - one blockbuster was apparently protected by up to 1,300 separate filings EU-wide. Divisional patent applications (instruments allowing the applicant to split an initial parent application) are another way to extend the validity of originators' original filings.
Given the increasing number of applications, and the limited resources of patent offices, generic firms might consider challenging trivial or non-inventions. As the legal costs of both originators and generic companies represent only a small proportion of what is at stake, generic firms are effectively invited vigorously to challenge any patents to which they object. The benefit of winning such proceedings may be diluted, however, by other 'free rider' producers entering the market once legal action has cleared away the obstacles.
Patent litigation
Where generic firms have litigated patent disputes with originators, the Commission's report indicates that they won 62% of the cases where a final judgment was given. Generic firms also prevailed in around 75% of final decisions rendered by the European Patent Office involving secondary patents. While the total cost of patent litigation in the period 2000-2007 was estimated at €420m, the figures suggest that, even where the originators initiate proceedings to exploit their 'strong dissuasive effect' on generic entry, it is worth the generic firms' while to fight back. However, these figures may not reflect those cases where generic firms concede their ground to more powerful originators.
Patent settlements
Originators and generic firms often choose to settle their disputes out of court, thereby saving the costs of lengthy and complex litigation, and avoiding uncertainty. Accompanying 'value transfers' can include direct payments, licences, distribution agreements or 'side deals', all of which can restrict market entry by generic medicines. The Commission's report details over €200m in direct payments made by originators to generic companies.
Some generic firms may consider approaching the Commission (or a national competition authority) with evidence of restrictive settlement agreements, and this could ultimately increase generic sales in Europe. However, there may be legal risks for generic firms that are party to settlements with originators, if the Commission subsequently regards those settlement agreements as infringing the competition rules. The Commission has the power to impose fines, declare agreements unenforceable and issue decisions that can be used by third parties in 'follow-on' damages actions.
Interventions before national regulatory authorities
Originators often intervene against applications by generic firms for marketing authorisations. Some regulatory bodies expand the narrow scope of such assessments by considering arguments by originators that the generic product may infringe the originator's patents (patent linkage). The report says that patent linkage is considered 'unlawful' under European law. Generic firms can therefore resist arguments regarding the violation of patent rights, which often delay generic market entry by an average of four months. The report states that, where such cases resulted in litigation, originators won only 2%, indicating that generic firms have every incentive to counter such arguments.
Life cycle strategies for 'second generation' products
Generic firms can react to originators' attempts to launch 'second-generation' medicines by carefully monitoring the originators' marketing and patent filing efforts. The Commission found that if generic medicines enter the market before patients are switched to the originators' second-generation products, the originators have difficulties in convincing doctors to prescribe the product and/or in obtaining a high price. Generic firms may also be able to challenge second generation products by arguing that they only contribute a marginal (if any) improvement.
Conclusion
Competition Commissioner Neelie Kroes has warned that 'the Commission will not hesitate to open antitrust cases against companies where there are indications that the antitrust rules may have been breached'. The Commission clearly believes it has identified serious issues in the sector which should put originators on notice of the serious risk of regulatory enforcement action, while at the same time likely spurring on regulatory intervention actions by generics companies.
The Pharmaceutical Sector Inquiry Preliminary Report, DG Competition Staff Working Paper, published 28 November 2008, is available at:http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf
By Dave Anderson, partner, Adrian Magnus, partner, and Simon Albert, associate, Berwin Leighton Paisner LLP.E-mail: david.anderson@blplaw.com; adrian.magnus@blplaw.com;simon.albert@blplaw.com.