Ongoing expansion and development in the pharmaceutical sector is shaping, and transforming, the competitive landscape globally. The industry’s markedly dynamic nature is reflected in a range of activity, from the development of innovative products that are redefining pharmaceutical markets to large-scale mergers with potential competitive effects in multiple jurisdictions. Not surprisingly, this has attracted the attention of competition authorities worldwide.
For its part, the Canadian Competition Bureau (the Bureau), in its administration and enforcement of the federal Competition Act (the Act), has turned its eye to the competitive implications of activity in the industry in Canada. Key recent developments include the finalisation of the Bureau’s updated Intellectual Property Enforcement Guidelines, which cover the interface with intellectual property (IP) laws generally but now include extensive guidance specific to the pharmaceutical industry. Through these guidelines and other commentary, the Bureau has become more vocal in identifying the potential anticompetitive effects of specific conduct such as pay-for-delay settlements and product-switching, while fielding a significant number of merger review applications. In addition to providing much-needed clarity on the Bureau’s approach to IP, these developments signify an intensifying focus on pharmaceuticals, even as the Bureau pursues a stated interest in supporting innovation. The Bureau has continued to signal its intent to focus on the industry, and the inclusion of reference to the pharmaceutical industry in a recent parliamentary report calling on the Bureau to investigate industry practices may mean that a higher percentage of complaints will result in investigations in future.As such, the potential for scrutiny under competition laws will continue to be a key consideration for stakeholders as the industry evolves.
IP and the Competition Act: the Bureau’s updated Intellectual Property Enforcement Guidelines
On 31 March 2016, the Bureau released final updated Intellectual Property Enforcement Guidelines (IPEGs). The release culminates the Bureau’s phased-in process of updating the IPEGs, which involved the release of initial revisions in April 2014, subsequent draft updates in September 2014 and June 2015, and public consultations.
The IPEGs’ primary focus is on the interface between IP law and competition law – a common theme in recent public statements by the Bureau,and an acknowledgment that IP laws are fundamentally about recognising private property rights and the right to exclude others. The stated purpose of the IPEGs is to explain the Bureau’s approach to dealing with competition issues involving IP, which includes a consideration of the conduct itself, the relevant market, the market power of the firm under scrutiny, the impact on competition in the relevant market and any relevant rationales or justifications. The updates are intended to reflect amendments to the Act in recent years, to take into account the experience of the Bureau and to ensure consistency with the Bureau’s other enforcement guidelines.
As a preliminary matter, the IPEGs explain that the circumstances in which the Bureau may apply the Act to anticompetitive conduct involving IP or IP rights fall into two broad categories: those involving anticompetitive conduct that is something more than the mere exercise of the IP right, and those involving the mere exercise of the IP right and nothing else. The general provisions of the Act relating to cartels and horizontal agreements, pricing and distribution practices, abuse of dominance and mergers address the former, while section 32 (special remedies) addresses the latter.
A core principle underpinning the Bureau’s approach is that the unilateral exercise of an IP right is not an anticompetitive act in itself. Indeed, the Act does not prohibit the exercise of IP rights generally. Rather, it imposes limitations on the IP owner under the general provisions of the Act when IP rights form the basis of agreements or arrangements between independent entities and when competitive harm stems from such an agreement.
The IPEGs serve as an important notice to stakeholders in the IP-centric pharmaceutical industry of how their activities may be assessed under the Act. Notably, the IPEGs include guidance on the Bureau’s approach to settlement agreements reached pursuant to proceedings under the Patented Medicines (Notice of Compliance) Regulations (PMNOC Regulations). They also include specific examples relevant to the pharmaceutical sector, including product-switching activities, patent pooling and payments by brands to generics either before or after patent expiry for the purpose of delaying the generic’s entry (in the former case) or potentially for the purpose of allocating markets (in the latter case).
Pharmaceutical industry focus areas: product switching and settlement agreements
‘Product switching’ or ‘product hopping’ and settlement agreements are two areas of conduct that are, increasingly, drawing the Bureau’s attention to the pharmaceutical industry. The Bureau has shown an interest in these areas, which feature prominently in the updated IPEGs, indicating that the Bureau is actively working to identify and address the potential concerns that may arise from such conduct.
Product switching and the Bureau’s investigation
Product switching or hopping generally refers to the introduction by a brand-name pharmaceutical manufacturer of a new product with limited or no therapeutic advantage over its original product (eg, a change in dosage or form), where the drug’s characteristics are modified enough to qualify for a new patent while maintaining enough of the original characteristics to rely on previous clinical trial results for the purpose of pharmaceutical regulatory approval. Prior to the expiry of the original patent, the brand drug company withdraws its original product from the market, either by recalling its supply or by raising its price significantly higher than the reformulated drug, causing physicians and consumers to switch over to the reformulated brand drug. As a result, generic versions of the original product cannot be automatically substituted for prescriptions written for the new product.The strategy is considered to be a means of enabling the brand company to maintain its market exclusivity by preventing generic manufacturers from entering the market.
The updated IPEGs include an example involving product switching by a pharmaceutical company, indicating that where such conduct is engaged in for the purpose of excluding a generic pharmaceutical firm, the Bureau may investigate the innovator’s conduct under section 79 of the Act as a possible abuse of dominance. As a qualification to this commentary, however, the IPEGs also indicate that ‘soft’ product hopping, referring to the circumstance where a brand pharmaceutical company does not withdraw a pre-existing product from the market entirely but instead stops promoting it to physicians when a new product is introduced, would not necessarily raise an issue provided it does not undermine the prescription base of the original product.
In late 2013, the Bureau was already showing a growing interest in the strategies and practices employed by pharmaceutical firms such as pay-for-delay settlements, product switching and other ‘life cycle management’ strategies when it held a workshop (‘Antitrust Issues in the Pharmaceutical Sector’) featuring international perspectives from the United States and Europe, jurisdictions that had already brought significant attention to these practices.
In May 2014, the Bureau announced that it had discontinued an inquiry into whether Alcon Canada Inc (Alcon), an allegedly dominant firm in the supply of certain prescription drugs, had engaged in anticompetitive conduct by disrupting the supply of a drug soon to be off-patent, Patanol, and replacing it with a successor drug, Pataday, for which there was initially no generic substitute.
The Bureau had commenced an inquiry in November 2012 as a result of concerns that Alcon’s behaviour would delay or prevent entry of generic versions of Patanol and instead lead patients to buy Pataday at a higher price. After the inquiry had been commenced, Alcon reintroduced Patanol into the Canadian market. After it had done so, competitors entered the market with generic versions of the drug and subsequently captured a significant market share from Alcon. The Bureau ultimately discontinued its inquiry because Alcon ceased the conduct that raised the initial concerns, the reintroduction of Patanol appeared to have restored the competitive dynamic in the market, and the temporary ‘product-switching’ strategy employed by Alcon did not appear to have actually delayed any generics from entering the Canadian market.
The Alcon case marked the Bureau’s first public investigation of unilateral practices in the pharmaceutical industry. While the case suggests that remedies will not be applied in the absence of actual or likely anticompetitive effects, the Bureau’s initiation of an inquiry in the first place reflects its willingness to investigate concerns associated with industry-specific practices.
Settlement agreements and the Bureau’s White Paper
‘Pay-for-delay’ describes a form of patent settlement (sometimes referred to as ‘reverse payment settlements’) whereby a brand-name pharmaceutical manufacturer and a generic manufacturer agree that the generic will delay the launch of a competing generic product in exchange for a value transfer, such as a direct payment, lucrative agreement for services, or other form of compensation. The brand-name company thereby effectively delays potential generic competitors from entering the market.
The Bureau comments extensively on pay-for-delay and certain other settlement agreements in the updated IPEGs. Recognising that there are ‘significant differences’ in the regulatory regime in Canada relative to other jurisdictions and that these may have implications for the incentives behind and content of settlements, the IPEGs outline three ‘unique’ features governing settlements reached under the Canadian PMNOC Regulations: the absence of a six-month exclusivity period for the first generic filer, a feature that may limit the ability of settlements involving the first generic challenger to delay the entry of subsequent firms; the possibility of claiming ‘section 8’ damages against the patentee under the PMNOC Regulations, which is relevant to the evaluation of a brand’s payment to the generic firm in a settlement agreement; and the possibility of ‘dual’ or follow-on litigation (in the form of an infringement action against a generic firm after it has successfully defended a prohibition proceeding if it chooses to launch prior to patent expiry, or proceedings against a brand firm for impeachment of its patent after it has succeeded in a prohibition application).
The IPEGs also include specific examples reflecting the following enforcement approaches to settlements reached under the PMNOC Regulations:
• ‘Entry-split’ settlements, which do not involve the payment of consideration from a brand to a generic other than allowing the generic to enter the market before the patent expires, generally will not raise any concerns under the Act.
• Settlements with a payment to the generic firm pursuant to which the generic enters the market prior to patent expiry will be reviewed under section 90 of the Act (reviewable agreements between competitors) or possibly section 79 (abuse of dominance).
• A settlement will be reviewed under section 45 as a criminal conspiracy only in ‘very limited circumstances’, if there is evidence that the intent of the payment was to fix prices, allocate markets or restrict output.
Prior to the release of the updated IPEGs, on 23 September 2014, Canada’s Commissioner of Competition released a White Paper (the White Paper) discussing patent litigation settlement agreements between brand-name pharmaceutical manufacturers and generic pharmaceutical manufacturers. The White Paper expresses particular concerns with pay-for-delay agreements, referencing recent legal developments in the United States that have brought such arrangements more closely under the eye of the antitrust agencies, partly owing to a 180-day exclusivity period that temporarily prevents other generics from entering after the entry of the first generic filer, and that in all cases must be reported. While no such exclusivity period applies in Canada, the Bureau indicated through the white paper that this type of agreement, while not subject to mandatory notification, nonetheless raises potential competitive concerns.
The White Paper indicates that agreements between brands and generics will generally attract the Bureau’s scrutiny only where there is a transfer of payment that is significant – if the payment to the generic exceeds the potential profit the generic could have made by competing in the market, if the payment exceeds any damages that the generic could have obtained through litigation, or if the payment exceeds the brand’s expected litigation costs.
Merger reviews in the pharmaceutical sector
Pharmaceutical sales in Canada represent approximately 2 per cent of the global market, placing Canada among the 10 largest world markets. From 2001 to 2016, total pharmaceutical sales in Canada doubled, reaching C$25.5 billion. The growth and increased activity in the pharmaceutical sector in Canada have driven mergers and acquisitions, and the Bureau has been involved in reviewing an ever-growing number of pharmaceutical transactions.
Recent merger reviews
In April 2016, the Bureau entered into a consent agreement with the world’s largest generic pharmaceutical company relating to its proposed acquisition of another company’s generic pharmaceuticals business, having found that the proposed acquisition would likely have resulted in a substantial lessening or prevention of competition for the sale of two pharmaceutical products in Canada. The consent agreement requires the purchaser to divest either its own or the target’s Canadian assets relating to the two products.
In December 2016, the Bureau entered into a consent agreement with the Canadian subsidiary of the largest wholesaler of pharmaceutical products in Canada, and a large pharmacy retail chain. The purpose of the consent agreement is to resolve concerns related to the wholesaler’s proposed acquisition of the retail chain’s corporate group, which also owns a healthcare claims adjudication business.The consent agreement requires the wholesaler to divest retail chain locations in 26 markets that are at issue, as well as the establishment of firewalls to restrict the transmission of commercially sensitive information among the wholesale business, the retail chain business and the claims adjudication business.
Otherwise, from January 2013 through May 2018, the Bureau reviewed some 19 proposed mergers involving companies in the pharmaceutical and medicine manufacturing industry. Of these, the majority were cleared through a no-action letter (NAL, confirming that the Bureau has no present intention to commence an application to challenge the transaction on substantive grounds, but reserving the right to do so up to one year after completion) and a small number were cleared through the issuance of an advance ruling certificate (ARC, comprising a full waiver of the notification requirement).
The April 2016 and December 2016 consent agreements notwithstanding, on balance the data suggest that companies in the pharmaceutical industry have not typically engaged in mergers and acquisitions that raise obvious competition law concerns, even though the Bureau’s inclination to issue NALs rather than ARCs would appear to signal a tendency against granting unconditional clearance. Moreover, even where a consent agreement has been negotiated, the Bureau can (and does) subsequently agree to modify such prior agreements to reflect situations where circumstances have changed.
What the Bureau wants to know: relevant considerations in pharmaceutical mergers
In practice, the Bureau’s close examination of proposed transactions in the ever-evolving pharmaceutical industry generally requires detailed arguments and disclosures relating to the merging parties’ current and prospective offerings in the marketplace.
For example, the Bureau will typically seek detailed information on products currently supplied by the parties in Canada, so as to assess any overlaps and their possible implications for competition in the relevant markets. Given the increasing sophistication of the pharmaceutical industry, parties may need to disclose information not only on a product category level but also on a product molecule basis, taking into account differences in presentation, indication, method of administration or other factors. The ongoing development of off-brand products, particularly generics and the burgeoning category of biosimilars (generic biologic drugs, known as subsequent entry biologics in Canada) creates a further level of nuance and complexity.
In addition to detailed disclosures regarding sales and customers, the Bureau will seek to understand the role of key opinion leaders and prescribing physicians. Information on the parties’ respective market shares locally or (if applicable) globally may be required to facilitate the Bureau’s assessment of the competitive implications of a proposed merger, even where any potential overlaps in the Canadian market remain largely theoretical.
The Bureau will typically seek information on products in development, with a view to identifying potential overlaps involving these pipeline products. Where this is the case, parties may be required to provide information on anticipated launch dates or other details of the products’ development, including any specific commercial plans (or the absence thereof).
The Bureau may also scrutinise the parties’ involvement in the manufacture and supply of active pharmaceutical ingredients both in Canada and globally, including those currently or previously sold and those in development.
As many pharmaceutical industry mergers are global and often trigger filings in multiple jurisdictions, the Bureau usually will also want to access the contents of these foreign filings, and may request waivers from the parties to share information relating to the transaction with its counterpart authorities in those jurisdictions. One benefit of such coordination is that the Bureau may also take into consideration any remedies that have already been applied in those jurisdictions as part of its assessment of the appropriate remedy, if any, to address competition concerns in Canada.
Moreover, the December 2016 consent agreement reflects the particular concerns that may arise in the context of the distribution of pharmaceuticals in Canada, when an upstream purchaser such a distributor acquires a downstream target such as a retailer. Such transactions may entail traditional competitive analyses regarding both the ‘unilateral effects’ and ‘coordinated effects’ of a proposed merger, as discussed further below.
In summary, transactions involving pharmaceutical companies often mean an involved notification and review process, requiring lengthy disclosures of granular and commercially sensitive information as well as ongoing dialogue with the Bureau. This potentially time-consuming process calls for a careful consideration of the analysis and strategy for presenting relevant product offerings and competitive interactions in the applicable markets, including where such information may not be readily available or obvious, even to the parties themselves.
Cases in point: recent transactions
In addition to publishing the ultimate result of its review, in select cases the Bureau also publishes position statements summarising its analysis of completed complex merger reviews. It has done so in recent cases in the pharmaceutical industry, including one involving a proposed transaction between two innovative drug companies, which resulted in the issuance of a NAL. Two others involved the proposed transactions discussed above, which were cleared pursuant to consent agreements in April and December 2016 respectively.Another proposed transaction involving pharmacy distribution and franchising services in Quebec also resulted in a consent agreement in April 2018.
The former case comprised a three-part, inter-conditional transaction involving the creation of a joint venture between the parties for their over-the-counter (OTC) and consumer healthcare products, the acquisition of one party’s global vaccine business and the acquisition of the other party’s portfolio of oncology products. Only the OTC joint venture was technically notifiable, although all three components were subject to substantive review by the
According to the Bureau’s position statement, the review examined the effects of the proposed transaction on the parties’ products that are currently marketed, as well as pipeline products. The Bureau’s focus was on whether the proposed transaction was likely to increase prices in the relevant markets or decrease another dimension of competition, such as innovation.
Ultimately, the Bureau concluded that neither the OTC joint venture nor the vaccine acquisition would result in a substantial lessening or prevention of competition in Canada on the basis that products offered by the companies to treat similar ailments were not close substitutes. In the case of the oncology product acquisition, the Bureau found that the acquisition was likely to have a substantial effect on competition. However, the Bureau considered that a consent agreement entered into in the United States, which required the acquiring party to sell certain assets to another pharmaceutical industry participant, effectively resolved any potential competitive concerns in Canada.
The April 2016 consent agreement led to a different result. The Bureau’s statement in that case took the position that where parties’ products contain the same molecule or active ingredient and are supplied in the same format, in general they should be considered within the same relevant product market, but that it may be appropriate to differentiate products based on other factors such as dosage strength. The Bureau took a forward-looking approach by considering both the remaining suppliers of equivalent generics and any likely future generic suppliers in its assessment of whether there would be effective remaining competition after closing. In keeping with its collaborative approach to international deals, the Bureau indicated that it cooperated with a number of its international counterparts (including the US Federal Trade Commission and European Commission), in addition to engaging in extensive market contacts and consultations with Health Canada.
Regarding the December 2016 consent agreement, the Bureau has commented that the deal was ‘largely vertical in nature’ and that for this reason the Bureau sought to address the potential unilateral effects of the proposed merger (in particular, the acquiring wholesaler’s ability to influence independent pharmacies operating under its retail banners). Additionally, the Bureau sought to address the potential coordinated effects of the proposed deal given that the acquiring party obtains commercially sensitive information in serving its wholesale customers including direct rivals to the target retail chain, and the Bureau’s determination that the combined competitive intelligence of the merged entity would likely enable it to ‘alter the competitive dynamics’ and ‘significantly increase the likelihood of coordination among retail pharmacies’ in the retail markets in which the target competes.
Finally, in April 2018 the Bureau entered into a consent agreement relating to the proposed acquisition by a food retailer and distributor which also (through a wholly owned affiliate) provides distribution and franchise services to independent pharmacists in Quebec, of a provider of distribution and franchise services to pharmacies in that province that also owns a generic pharmaceuticals manufacturer. The Bureau’s analysis focused on the companies’ competing pharmacy distribution and franchise services. As the Bureau concluded that the transaction would likely result in higher prices or decreases in services for consumers, under the consent agreement the acquiring company agreed to sell certain properties or leases to another supplier of distribution and banner services and to take steps to terminate agreements relating to pharmacies located in the relevant markets in Quebec.
Looking ahead: supporting competition and innovation in a changing industry
Industry trends point to continued ground-breaking changes in the pharmaceutical sector, which the government of Canada has referred to as ‘one of the most innovative industries in Canada’. For example, recent reports reflect ongoing significant R&D expenditures, even as shifts in the industry’s business model mean that relatively more R&D is being conducted externally and through partnerships rather than directly by Canadian pharmaceutical companies.In this context, the Bureau’s sharpened focus on pharmaceuticals, notably through its approach to the interface between IP and competition law in the updated IPEGs, suggest that increased enforcement in the industry may be on the horizon. At the same time, the Bureau has repeatedly expressed an interest in supporting the development of both competition and innovation in its most recent Annual Plan and public comments, and in committing to regularly reviewing (and updating, as needed) the IPEGs in order to keep apace of the changing ‘IP environment’ and business conduct. These developments seem to ensure that pharmaceuticals will remain top of mind going forward as both the industry, and the Bureau’s approach, continue to evolve.
The authors would like to thank Yana Ermak, Randeep Nijjar and Sarah Mavula for their contributions to the original and updated versions of this chapter.
1 ‘Pharmacare Now: Prescription Medicines Coverage for All Canadians’, Report of the Standing Committee on Health (House of Commons, April 2018).
2 For example, ‘Intellectual property & competition law: innovation in the 4th industrial revolution’ (Remarks by John Pecman, Commissioner of Competition, 10 June 2016), online:www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04103.html.
3 ‘Mere exercise’ is defined as the exercise of the owner’s right to unilaterally exclude others from using the IP or the owner’s use of the IP.
4 The possibility of enforcement under the criminal conspiracy provisions in any circumstances stands in apparent contrast to the approach in the United States, where a Federal Court held in December 2014 that pay-for-delay agreements are subject to a ‘rule of reason’ (competitive effects-based) analysis rather than being considered a potential per se criminal violation. Separately, section 32 enables the Attorney General’s intervention in a range of conduct involving statutory IP rights, such as (among others) a refusal to license IP where the particular circumstances of the refusal warrant a special remedy.
5 According to the IPEGs, the ‘mere exercise’ of IP rights may be scrutinised under section 32 where specific conditions are met, but in practice this section will apply only in ‘rare circumstances’.
6 As explained in ‘Competition Bureau Statement Regarding the Inquiry into Alleged Anti-Competitive Conduct by Alcon Canada Inc.’ (Position Statement, 13 May 2014).
7 ‘FTC Files Amicus Brief Explaining That Pharmaceutical ‘Product Hopping’ Can Be the Basis for an Antitrust Lawsuit’, Federal Trade Commission USA (27 November 2012).
8 As explained in the Bureau’s backgrounder on the workshop held in late 2013 (Competition Bureau, ‘Highlights: Competition Bureau Workshop on Antitrust Issues in the Pharmaceutical Sector’).
9 Pharmaceutical Industry Profile (2018), Industry Canada, Government of Canada.
10 According to the Bureau, in 2014–2015, pharmaceutical transactions represented 3.3 per cent of its mergers case load, ranking among the top five industry sectors for merger review in Canada. This represents a shift from the previous year, when the industry was not among the top five. (Pharmaceuticals were not in the top five in 2015–2016, 2016–2017 or 2017-2018, although this in part was due to an increase in the proportion of transactions in other sectors.)
11 Commissioner of Competition v Teva Pharmaceutical Industries Limited, Consent Agreement, CT-2016-002. The relevant products were tobramycin inhalation solution and buprenorphine/naloxone tablets.
12 Commissioner of Competition v McKesson Canada Corporation and Rexall Pharmacy Group Ltd, Consent Agreement, CT-2016-016.
13 ‘Competition Bureau Statement Regarding the Three-Part Inter-Conditional Transaction between GlaxoSmithKline plc and Novartis AG involving their Consumer Healthcare, Vaccines and Oncology businesses’ (Position Statement, 23 February 2015); ‘Competition Bureau statement regarding McKesson’s acquisition of Katz Group’s healthcare business’ (Position Statement, 16 December 2016).
14 ‘Competition Bureau Statement Regarding Teva’s Acquisition of Allergan’s generic pharmaceuticals business’ (Position Statement, 18 April 2016).
15 Competition Bureau statement regarding METRO Inc.’s acquisition of The Jean Coutu (PJC) Group Inc.’ (Position Statement, 16 May 2018).
16 In the case of the vaccine acquisition, this conclusion was largely based on price differences in the parties’ offerings.
17 According to the Bureau, this approach has been taken consistently in its recent merger reviews involving generics.
18 Government of Canada, ‘Pharmaceutical industry profile’, online: www.ic.gc.ca/eic/site/lsg-pdsv.nsf/eng/h_hn01703.html.
19 The focus of the Bureau’s 2017–2018 Annual Plan is ‘Competition is key – Creating the conditions for innovation’ (18 May 2017), online: www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04241.html. See also footnote 1, supra, and ‘Competition Bureau: Innovating to Succeed’ (Remarks by John Pecman, Commissioner of Competition, 19 May 2016), online: www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04090.html.
Baker McKenzie’s global antitrust and competition group comprises over 300 antitrust lawyers and professionals in over 40 countries, a broader antitrust network than any other law firm. The Toronto office remains unique in the Canadian market in its membership in a leading global antitrust practice, with an established long-term presence in every key international region, including Asia-Pacific and Latin America, in addition to the US and Europe.
Baker McKenzie’s Canadian antitrust and competition practice team acts for Canadian and international clients on merger control and foreign investment, antitrust compliance counselling on sales and distribution arrangements, as well as contentious matters before Canadian judicial and enforcement authorities. The team frequently works for well-known domestic and international pharmaceutical clients.
181 Bay Street, Suite 2100
Ontario M5J 2T3
Tel: +1 416 863 1221
Fax: +1 416 863 6275