The European, Middle Eastern and African Antitrust Review 2018

European Union: Pharmaceuticals

14 August 2017

Covington & Burling

Both the EU national competition authorities (NCAs) and the European Commission (Commission) have been very active in the pharmaceutical sector this year. While there has been debate about the European Commission's approach to assessing concentrations in innovation markets, the NCAs have led in the behavioural context. In addition, there have been a number of important European Court judgments, not only in the Lundbeck reverse patent settlement case, but also in relation to royalty obligations. The Commission's recent opening of an excessive pricing investigation against Aspen, the UK Competition and Markets Authority's (CMA's) ongoing cases against Actavis and Concordia, and the pending judgments in Servier and in relation to the Lucentis/Avastin referral, suggest that similar levels of activity can be expected in the coming year.

Mergers and acquisitions

Market definition

As noted last year, the conventional approach of defining markets using the relevant ATC category and indication is no longer used for certain therapeutic areas (including oncology and respiratory). Because, for example, cancer treatment regimes vary depending on the type, location and stage of the cancer, patient responsiveness and the mode of operation,1 the Commission may consider entire treatment regimes. In Novartis/GSK Oncology Business, the Commission defined markets by reference to product characteristics and intended therapeutic use to assess pipeline-to-pipeline competition.2 It found that new generation immunotherapies and targeted therapies are complements, not substitutes, because they are used in different lines of treatment depending on various factors including line of treatment, mechanism of action, oncogenic driver, patient characteristics, and morphological differences between cancer types (eg, low-grade versus high-grade serious ovarian cancer).3

In parallel, and as discussed below, the Commission's approach to assessing competitive effects on development programmes is also evolving. In Novartis/GSK Oncology Business, the Commission examined clinical research programmes by assessing pipeline-to-pipeline competition, looking at the mechanisms of action (eg, immunotherapies and targeted therapies) and the forms of cancer on which the competing programmes focused.4

Beyond these developments, the questions referred to the ECJ in Roche-Novartis5 have the potential to further complicate the approach to market definition. While that case relates to alleged anticompetitive conduct under article 101 TFEU, two of the questions to the Court are particularly significant in the market definition context:

  • Must the relevant market be primarily framed by reference to regulatory authorisation, or can NCAs use a different approach?
  • In defining relevant markets, in addition to showing that pharmaceutical products are substitutes, is it important to establish whether those products have been supplied in accordance with the regulatory framework?

If the ECJ concludes that off-label use should fall within the same relevant market as other originator drugs that are authorised for a particular indication, that will likely add a further dimension to the market definition analysis.

Finally, in relation to genericised drugs, the approaches taken in the article 102 TFEU assessments in both Aspen6 and Pfizer/Flynn7 suggest that the molecular assessments seen in the Teva cases8 and the other assessments considering the concentration of generics will continue.

As these disparate approaches suggest, even the fundamental analytical framework for market definition is becoming context-specific.

Competitive assessment of ‘innovation'

The Commission's recent Dow/DuPont decision has triggered a discussion about the assessment of innovation in merger reviews.9 In that case, the Commission's analysis centred on the transaction leading to a reduction of innovation in the industry ‘as a whole'. While the Horizontal Merger Guidelines refer to the potential for effective competition to be significantly impeded by a merger between two important innovators,10 this reasoning has generally been applied in relation to the potential to reduce R&D for specific foreseeable product applications (either in the context of assessing competing pipelines or removing a potential entrant). In contrast, the theory of harm in Dow/DuPont did not focus on specific product markets or pipelines for particular innovative products. Rather, it focused on whether the intensity of competition for innovation in crop protection would be reduced.

This approach arguably goes beyond the Commission's recent approach in the pharmaceutical sector, where the Commission routinely looks at market-to-pipeline competition (eg, the Commission looked at competition between Phase III and existing products in Covidien/Medtronic, Novartis/GSK Oncology Business and Pfizer/Hospira)11 and pipeline-to-pipeline competition (traditionally looking at products in Phase III).12 Novartis/GSK Oncology Business expanded the scope of the Commission's assessment of pipeline-to-pipeline competition, looking at entire development programmes (at least back to Phase I targets). While the overlaps in the early-stage pipeline programmes related to a limited number of cancer indications, the Commission concluded that the transaction would lessen competition in innovation by limiting the parties' R&D efforts, because one of the parties' clinical trial programmes would likely be abandoned.13

Novartis/GSK Oncology Business may be distinguishable in future cases, given the potential for new generation immunotherapies and targeted therapies to be indicated for a broad range of cancer types. Nonetheless, the decision is important because of what it shows about the Commission's view of innovation in the pharmaceutical sector. First, the Commission was sceptical that the acquirer had an interest in maintaining both programmes, notwithstanding evidence that small differences in the design of the development programmes for these types of inhibitors can have a significant impact on outcomes. Second, it only took into account indications being considered for initial clinical trials, ignoring the material likelihood that the targets might fail or be indicated for other types of cancer as the programmes develop. Third, development strategies for the particular targets vary materially across the sector, and a number of companies changed course during their research programmes.

Beyond this, and in contrast to the Dow/DuPont approach, Novartis/GSK Oncology Business focused on innovation incentives in relation to defined current and future markets, such that the competition concern related to how concentration would affect innovation by the parties to the transaction.

However, a number of earlier decisions in the sector did arguably consider the impact of a concentration on third parties' incentives to innovate. For example, in Glaxo/Wellcome, the Commission considered the potential impact of the concentration on R&D for HIV/AIDS treatments generally, not just for the parties.14 The Commission's analysis was more constrained than in Dow/DuPont in one key respect: it concluded that, where potential therapeutic solutions had not yet been identified, the concentration was unlikely to significantly inhibit other competitors' research for an effective treatment. However, it clearly considered the impact of the concentration on third party incentives.

Similarly, in Glaxo/SmithKline, the Commission assessed the impact of the concentration on ‘R&D markets', specifically whether it would reduce overall R&D potential in relation to the development of COPD treatments (albeit having concluded that there was a lack of foreseeable therapies), because there was considerable unmet clinical demand and there were no pipeline products that would be an effective single treatment for COPD.15

Finally, in Syngenta/Monsanto Sunflower, the Commission concluded that the concentration would negatively affect innovation by eliminating the competitive constraint that Monsanto's breeding programme and germplasm exerted on Syngenta and other competitors, such that they regularly brought new varieties to market. While the Commission identified Monsanto as a strong, innovative market player, its analysis also expressly considered the impact of the concentration on other competitors.16

In short, although the Commission has no history of defining distinct upstream ‘innovation markets', it has considered the impact on third parties' incentives to innovate on a number of occasions.

That said, the key issue in the pharmaceutical sector is arguably the Commission's presumption that ‘parallel path R&D' would be abandoned, absent regulatory intervention. This does not meet the Tetra Laval standard of review.17 The Commission cannot simply assume that the combination of development programmes reduces the need or incentives for innovation. It must actually examine innovation capabilities and incentives of both the parties and their remaining competitors.

Behavioural investigations

Excessive pricing

After years of limited focus on, and appetite for, excessive pricing investigation, there were a number of cases this year.

European Commission

On 15 May 2017, the Commission opened an investigation into Aspen Pharma's pricing in the EEA (outside of Italy) of ‘niche medicines' used to treat various cancers (including leukaemia, non-Hodgkin lymphoma and multiple myeloma).18 Aspen had acquired the drugs from GSK in 2009, after their patent protection had expired. According to the Commission, Aspen threatened to (and did) withdraw the drugs in certain member states in order to increase prices.

While this is the Commission's first probe into excessive pricing in the pharmaceutical industry, it is not surprising, given Commissioner Vestager's comments on the subject in November 2016 and March 2017.19 The Commissioner acknowledged that excessive pricing investigations may be perceived as price regulation, but said that ‘this is the risk that we are really, really trying to avoid because this is not our role'.

In February 2017, the Spanish National Authority for Markets and Competition separately began to investigate whether Aspen and its distributor, Deco Pharma, limited distribution of the drugs to deliberately create a supply shortage in Spain (a low-cost jurisdiction) with a view to increasing prices by importing drugs from other member states, such as France, Italy or the Netherlands.

Below we list other notable cases at a national level.

Aspen in Italy

The Italian Competition Authority issued a decision on 29 September 2016 relating to the exclusive commercialisation (and trademark) rights that Aspen acquired to the GSK oncology drugs described above.20 The Italian Competition Authority's €5.2 million fine related to price increases of between 300% and 1,500% for the drugs. In Italy, Aspen sought to have the drugs reclassified into a new reimbursement class. When the Italian Medicines Agency refused to reclassify the drugs, Aspen demanded a significant increase in the prices and threatened to reduce or terminate supply to Italy if the Italian Medicines Agency refused.

Aspen appealed, noting that pricing for the drugs in Italy had not changed for nearly 50 years and that the 1,500% increase identified by the AGCM was ‘misleading' because the base price was ‘exceptionally' low (the average price per tablet was approximately €2). In February 2017, the Council of State rejected Aspen's request to suspend the AGCM's order that Aspen lower its prices while the appeal was pending.21 In June 2017, Aspen's appeal was dismissed.

Pfizer/Flynn Pharma in the UK

On 7 December 2016, the CMA fined Pfizer and Flynn (£84.2 million and £5.2 million, respectively) for charging excessive and unfair prices for phenytoin sodium capsules, and ordered the companies to reduce their prices.22 Both companies have appealed.

Prior to September 2012, Pfizer sold the phenytoin sodium capsules under the brand Epanutin. Because the capsules were branded, Pfizer's price was regulated under the Pharmaceutical Price Regulation Scheme (the PPRS). In September 2012, Flynn acquired the UK distribution rights to Epanutin, and debranded the product, taking it outside the PPRS. Having deregulated the prices, Flynn began to supply phenytoin sodium capsules at prices that were 2,300% to 2,600% higher than Pfizer's pre-September 2012 prices. Pfizer's prices (to Flynn) were linked to Flynn's, increasing by between 780% and 1,600% over Pfizer's previous price to pharmacies.

In concluding that these increases were excessive and abusive, the CMA highlighted a number of key facts. First, the phenytoin sodium capsules had been on the market for many years, and had not recently been the subject of substantial investment or development work. Pfizer argued that, because Epanutin was loss-making prior to September 2012, its prices had to increase. The CMA dismissed that argument, noting that Pfizer would have recouped the losses in a matter of months, given the magnitude of the increases.

Both companies have appealed, arguing that the prices of the phenytoin sodium capsules were below those of many alternative epilepsy drugs in the UK. In addition, Flynn argued that the CMA's method of determining whether the prices were excessive, by using the margin that a generic could have made as a reference, was novel.

Actavis in the UK

In December 2016, the CMA issued a statement of objections (SO) alleging that Actavis' pricing for hydrocortisone tablets after it acquired and debranded the drugs is excessive and unfair.23 The CMA alleges that the price of 10mg packs rose by over 12,000% between April 2008 and March 2016, and for 20mg tablets by almost 9,500% over that period. A related SO was issued in March 2017 alleging that Actavis had entered into agreements under which Concordia was incentivised not to enter the market with its own competing hydrocortisone tablets (rather, Actavis supplied Concordia at an allegedly very low price).24 On 31 May, the CMA decided to proceed with an excessive pricing investigation of Concordia's pricing.

While it is noteworthy that this number of excessive pricing cases have been pursued in the last year, it is not clear that this reflects a shift in policy, as distinct from a reaction to particular conduct by non-originator suppliers. There are a number of common features of the cases:

  • The drugs had been on the market for a number of years, and had not seen significant R&D or other investment for an extended period (such that costs had been recouped).
  • The drugs were commercialised by an entity other than the originator.
  • The price increases followed steps to take the drug outside the pricing regimes (albeit unsuccessfully by Aspen in Italy). As a result, there are some echoes to the decisions in AstraZeneca and Reckitt Benckiser25 (and the Italian Pfizer Xalatan decision)26 which entailed a use of the regulatory regimes that the agencies considered to be abusive.
  • The significant price increases occurred over relatively short periods, enabling benchmarking of the new prices against the prior prices.
  • The markets were defined narrowly, by reference to molecules and mode of delivery (enabling dominance findings).

Reverse payment patent settlement agreements

Since the sector inquiry, the Commission has monitored patent settlement agreements and taken decisions in the Lundbeck and Servier cases.27 In its latest report, the Commission concluded that the number of ‘settlements which restrict generic entry and show a value transfer from the originator to the generic company and which might attract competition law scrutiny, have stabilised at a low level.'28 Commissioner Vestager commented that ‘this concern is now under control'.29 That said, there are still cases pending before the European and national courts.

On 8 September 2016, the General Court (GC) delivered its judgment in Lundbeck, confirming the Commission's decision that Lundbeck's settlement agreements relating to its citalopram drug restricted competition ‘by object' and infringed article 101 TFEU.30

  • Potential competitors: Lundbeck and the generic companies were at least potential competitors, taking into account various factors including the steps taken and investments made by the companies to obtain marketing authorisations and supplies of active pharmaceutical ingredients. The GC rejected the argument that a generic company could not be a potential competitor because Lundbeck's process patent was still valid: the ‘presumption of validity cannot be equated with a presumption of illegality of generic products validly placed on the market which the patent holder deems to be infringing the patent.'31 Finally, the significant payments made to the generic companies showed that Lundbeck saw them as a competitive threat, reinforcing the conclusion that they were potential competitors.
  • Value transfer: reverse payments - by their very existence and disproportionate nature - replaced uncertainty over generic entry with the certainty that they would not enter (during the term of the agreements).32 That said, the GC noted that reverse payments in the context of patent settlements are not always problematic, particularly where the payment is: linked to the strength of the patents (as perceived by each party); necessary to enable the parties to find an acceptable and legitimate solution to their dispute; and not accompanied by restrictions intended to delay market entry.33
  • Restriction of competition ‘by object': the agreements were equivalent to market-sharing agreements, and rejected Lundbeck's argument that, following Cartes Bancaires, the Commission should have carried out an effects assessment.34 The case has been appealed to the ECJ.

The appeal against the Commission decision in Servier is still pending before the GC, and may provide additional guidance on the effects assessment of settlement agreements, since the Commission found that the settlement agreements restricted competition both by object and effect (and that Servier's commercial strategy was also an abuse of dominance under article 102 TFEU).

In the UK, the CAT's judgment in the Paroxetine case is pending, following appeals by GSK, Merck, Actavis and Alpharma of the CMA's decision.35 Like the Commission in Servier, the CMA conducted both by object and effect analyses under article 101, and found that GSK had abused its dominant position under article 102.

Generic denigration

The French Supreme Court recently confirmed that originators should take care promoting products, particularly where the conduct could be construed as ‘denigrating' entering generics.

In 2013, the FCA fined Sanofi-Aventis €40.6 million for implementing a strategy intended to convince healthcare professionals of the differences between Plavix and entering generic clopidogrel products. The Paris Court of Appeal and the Court of Cassation confirmed that Sanofi had abused its dominant position and foreclosed generic entry.36 The Supreme Court found that Sanofi's communications were cumulatively misleading and had a dissuasive effect. It also noted the unusual evolution of generic substitution (Sanofi's own generic systematically maintained a market share over 30%) resulting from the ‘non-substitutable' reference that doctors were encouraged to include on Plavix prescriptions.

The UK Supreme Court also recently rejected Reckitt Benckiser's appeal of the 2013 decision fining Schering-Plough and Reckitt Benckiser for impeding entry of cheaper versions of Subutex through participation in an anticompetitive agreement.37

More generally, pharmaceutical companies should take care in their communications relating to other drugs, including off-label use that would compete. One of the questions referred to the ECJ in Roche-Novartis relates to whether an agreement under which the parties spread negative information about a drug on the basis of safety concerns (that were not scientifically proved) is a restriction by object.38

Royalties on expired or invalid patents

The ECJ's 2016 Genentech judgment confirms that an obligation to pay royalties for the use of patented technology for the duration of a licence agreement remains valid in the event that the patents protecting the technology are revoked.39

In 1992, Hoechst licensed Genentech to use a technology protected by three patents, one of which was revoked in 1999 by the European Patent Office. After Genentech terminated the licence, Hoechst initiated arbitration over non-payment of the agreed running royalty. The arbitrator concluded that Genentech was liable to pay the running royalty. Genentech challenged this award before the Paris Court of Appeal, which referred a preliminary question to the ECJ.

The ECJ referred to its Ottung judgment, where it found that article 101(1) TFEU does not prohibit contractual requirements providing for payment of a royalty for the exclusive use of a technology that is no longer covered by a patent, if the licensee is free to terminate the contract.40 Since Genentech was free to terminate the agreement at any time, the royalty obligation was not anticompetitive.

Notes

  1. In addition, as new therapies focus on a particular mode of operation (eg, restricting blood supply to cells), rather than the type of cancer.
  2. Commission decision of 28 January 2015 in Case COMP/M.7275 - Novartis/GlaxoSmithKline Oncology Business, paragraphs 25-31.
  3. Novartis/GlaxoSmithKline Oncology Business, paragraph 29.
  4. Novartis/GlaxoSmithKline Oncology Business, paragraphs 91-92.
  5. Request for a preliminary by the Council of State, section VI, decision of 11 March 2016, No 966. Case C-179/16 F Hoffmann-La Roche and Others.
  6. Italian Competition Authority, decision of 29 September 2016, Case A-480 - Incremento Prezzo Farmaci Aspen (Aspen).
  7. CMA decision of 7 December 2016 in Case CE/9742-13 - Phenytoin sodium capsules: suspected unfair pricing (Pfizer/Flynn).
  8. Commission decision of 1 August 2010 in Case COMP/M.5865 - Teva/Ratiopharm and Case COMP/M.7746 - Teva/Allergan Generics.
  9. Commission decision of 27 March 2017 in Case COMP/M.7932 - Dow/DuPont. See European Commission, ‘Commission clears merger between Dow and DuPont, subject to conditions', Press Release IP-17-772 of 27 March 2017.
  10. Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings OJ C 31, 05.02.2004, p. 5-18, paragraph 38.
  11. Commission decision of 28 November 2014 in Case COMP/M.7326 - Medtronic/Covidien; Novartis/GlaxoSmithKline Oncology Business; and Commission decision of 4 August 2015 in Case COMP/M.7559 - Pfizer/Hospira.
  12. Phase III products are at a ‘sufficiently advanced stage of development to be considered as a possible competitive constraint'. See Commission decision of 9 August 2010 in Case COMP/M.5778 - Novartis/Alcon, paragraph 111.
  13. Novartis/GlaxoSmithKline Oncology Business, paragraphs 112-113.
  14. Commission decision of 28 February 1995 in Case IV/M.555 - Glaxo/Wellcome, paragraphs 31 and 33.
  15. Commission decision of 8 May 2000 in Case COMP/M.1846 - Glaxo Wellcome/SmithKline Beecham, paragraphs 179-188.
  16. Commission decision of 17 November 2010 in Case COMP/M.5675 - Syngenta/Monsanto's Sunflower Seed Business.
  17. Case C-13/03 P Commission v Tetra Laval BV [2005] ECR I-01113.
  18. European Commission, ‘Commission opens formal investigation into Aspen Pharma's pricing practices for cancer medicines', Press Release IP-17-1323 of 15 May 2017.
  19. Commissioner Vestager, ‘Protection Consumers from Exploitation', Chillin' Competition Conference, Brussels, 21 November 2016. See also Commissioner Vestager's comments at ABA Antitrust Law 2017 Spring Meeting, Washington, DC, 29-31 March 2017.
  20. Italian Competition Authority decision in Aspen.
  21. Council of State decision of 13 February 2017, No. 00117.
  22. CMA decision in Pfizer/Flynn.
  23. CMA decision of 16 December 2016 in Case Hydrocortisone tablets: suspected excessive and unfair pricing (Actavis). See CMA, ‘Pharmaceutical company accused of overcharging NHS', Press Release of 16 December 2016.
  24. CMA, ‘CMA Alleges Anti-Competitive Agreements for hydrocortisone tablets', Press release of 3 March 2017.
  25. Commission decision of 15 June 2005 in Case COMP/A. 37.507/F3 - AstraZeneca and Office of Fair Trading, decision of 12 April 2011 in Case CE/8931/08 - Abuse of a dominant position by Reckitt Benckiser Healthcare (UK) Limited and Reckitt Benckiser Group plc.
  26. Italian Competition Authority, decision of 17 January 2012, Case A-431 - Farmaci: sanzionata Pfizer con una multa di 10,6 milioni di euro per abuso di posizione dominante. This decision was confirmed by the Council of State, decision of 12 February 2014, No. 693/214.
  27. Commission decision of 19 June 2013 in Case AT.39226 - Lundbeck and Commission decision of 9 July 2014 in Case AT.39612 - Perindopril (Servier).
  28. European Commission, seventh report on the Monitoring of Patent Settlements, 13 December 2016, paragraph 49.
  29. Commissioner Vestager, ‘Restoring trust in our economy', Association of the Danish Pharmaceutical Industry New Year Conference, Copenhagen, 27 January 2017.
  30. Case T-472/13 H. Lundbeck A/S and Lundbeck Ltd v European Commission [2016].
  31. Case T-472/13, paragraph 121.
  32. Case T-472/13, paragraph 369. See also paragraph 355.
  33. Case T-472/13, paragraph 350.
  34. Case T-472/13, paragraphs 436 and 438. See, Case C-64/13 P Cartes Bancaires v Commission [2014].
  35. CMA decision of 12 February 2016 in Case CE-9531/11 - Paroxetine. Summaries of the appeals are available on the CMA's website at www.catribunal.org.uk/237-9158/1252-1-12-16-GlaxoSmithKline-PLC.html.
  36. French Competition Authority decision 13-D-11 of 14 May 2013, confirmed by the Paris Court of Appeal in judgment No. 13/23748 of 18 December 2014 and by the Court of Cassation in judgment No. 890 FS-P+B of 18 October 2016.
  37. Decision 13-D-21 of 18 December 2013, confirmed by the Paris Court of Appeal in judgment No. 2014/03330 of 26 March 2015 and the Cour de Cassation in judgment No. 33 FS-P+B of 11 January 2017.
  38. Council of State, section VI, decision of 11 March 2016, No. 966.
  39. Case C-567/14 Genentech Inc v Hoechst GmbH and Sanofi-Aventis Deutschland GmbH [2016], paragraph 40.
  40. Case 320/87 Kai Ottung v Klee & Weilbach A/S and Thomas Schmidt A/S [1989] ECR 1177, paragraph 11.

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