Canada: Pharmaceuticals

This is an Insight article, written by a selected partner as part of GCR's co-published content. Read more on Insight

The pharmaceutical industry has arguably never seen such rapid expansion, evolution and simultaneous diversification and consolidation as are currently shaping its 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 release of the Bureau's draft 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. The Bureau has also become more vocal in identifying the potential anti-competitive effects of specific conduct such as pay-for-delay settlements and product-switching, while fielding a significant number of merger review applications. These developments signify an intensifying focus on pharmaceuticals, meaning that 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 9 June 2015, the Bureau released updated draft Intellectual Property Enforcement Guidelines (IPEGs). The release of the latest draft is part of the Bureau's phased-in process of updating the IPEGs, which involved the release of initial revisions in April 2014 and a subsequent draft update in September 2014 following an initial public consultation process. A period of further public comment on the latest draft will end on 10 August 2015.

The IPEGs' primary focus is on the interface between IP law and competition law - 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 draft IPEGs explain that the circumstances in which the Bureau may apply the Act to anti-competitive conduct involving IP or IP rights fall into two broad categories: those involving anti-competitive 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.1 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.2

A core principle underpinning the Bureau's approach is that the unilateral exercise of an IP right is not an anti-competitive 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.3

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 guidelines 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 draft 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 investigation of Alcon Canada Inc

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 due to the minor reformulation of the original.4 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.5

The draft 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 under section 79 of the Act as a possible abuse of dominance.

In late 2013, the Bureau also held a workshop on ‘Antitrust Issues in the Pharmaceutical Sector' to discuss how certain strategies and practices employed by pharmaceutical firms may diminish competition between brand-name and generic pharmaceuticals, including pay-for-delay settlements and product switching and other ‘life cycle management strategies'.

The workshop featured international perspectives from the United States and Europe, jurisdictions that brought significant attention to the aforementioned practices under antitrust and competition laws. In Canada, the increased focus on the pharmaceutical sector suggests that the Bureau is moving toward a similar approach.

In May 2014, the Bureau announced that it had discontinued a product-switching inquiry into whether Alcon Canada Inc (Alcon), which was alleged to have held a dominant position in the supply of certain prescription drugs, had engaged in anti-competitive 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 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. Following the commencement of the inquiry, in January 2013 Alcon reintroduced Patanol into the Canadian market. Subsequently, competitors entered the market with generic versions of the drug and have since captured a significant market share from Alcon.

The Bureau discontinued its inquiry because Alcon had ceased the conduct that raised the initial concerns, and on the basis that the reintroduction of Patanol appeared to have restored the competitive dynamic in the market, and that 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 anti-competitive effects (at least under the abuse of dominance provisions of the Act), the Bureau's initiation of an inquiry in the first place reflects an increasingly firm commitment to monitoring activity in the industry and identifying concerns associated with industry-specific practices such as product switching.

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.6 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 IPEGs, through specific examples and corresponding 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 90.1 of the Act (reviewable agreements between competitors) or possibly section 79 (abuse of dominance).

•   Alternatively, a settlement may be reviewed under section 45 as a criminal conspiracy if there is evidence that the intent of the payment was to fix prices, allocate markets or restrict output.

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 which 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 which in all cases must be reported. While no such exclusivity period applies in Canada, the Bureau has 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 which 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.

Where a settlement agreement attracts scrutiny, the paper identifies three avenues through which it may be challenged under the Act: the provisions relating to criminal conspiracies (section 45), reviewable competitor collaborations (section 90.1) or abuse of dominance (section 79).

The possibility of enforcement under the criminal conspiracy provisions stands in apparent contrast to the recently confirmed 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. While there is no specific guidance on this point in Canada, the Commissioner's White Paper contemplates at a high level that such agreements could be assessed as criminal conspiracies under the Act where there is direct or circumstantial evidence indicating that the settlement is a vehicle for a ‘naked restraint' on competition.

Merger reviews in the pharmaceutical sector

Pharmaceutical sales in Canada have a 2.5 per cent share of the global market, making Canada the ninth-largest world market. From 2001 to 2013 total pharmaceutical sales in Canada have almost doubled, reaching C$22 billion in total sales.7 The growth and increased activity in the pharmaceutical sector in Canada has driven an increase in the number of mergers and acquisitions taking place within the industry.8 This means that the Bureau is reviewing an ever-growing number of pharmaceutical transactions, which lend themselves to particular substantive review considerations given the dynamics of the industry.

By the numbers: recent merger reviews

From February 2012 to May 2015, the Bureau reviewed some 15
proposed mergers involving companies in the pharmaceutical and medicine manufacturing industry. Of these, three reviews were concluded with the issuance of an Advance Ruling Certificate (ARC) and 12 were concluded by a No-Action Letter (NAL), which indicates that the Bureau did not intend to challenge any of the proposed mergers at the time they were reviewed. There were no cases in which the Bureau entered into a Consent Agreement with the parties, which requires that the merging companies take specific actions to remedy competition concerns related to their consolidation and is the usual means through which remedies are imposed. As such, no judicial decisions on pharmaceutical industry mergers were issued.

The data suggest that in the past three years, companies in the pharmaceutical industry have not typically engaged in mergers and acquisitions that would be considered to negatively impact competition. However, the Bureau's inclination to issue NALs rather than ARCs in the majority of cases would appear to signal a tendency against granting unconditional clearance to proposed mergers in the industry: through the issuance of a NAL, the Bureau reserves the right to challenge the merger on substantive grounds up to one year after completion.

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 will require 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 not applicable in Canada) 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.

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.

Case in point: the Bureau's approach to the GSK/Novartis deal

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 one recent case in the pharmaceutical industry, a proposed transaction between GlaxoSmithKline plc (GSK) and Novartis AG (Novartis) which resulted in the issuance of a NAL. The three-part, inter-conditional transaction involved the creation of a joint venture between GSK and Novartis for their over-the-counter (OTC) and consumer health-care products, the acquisition by GSK of Novartis' global vaccine business, and the acquisition by Novartis of GSK's portfolio of oncology products. Only the OTC joint venture was technically notifiable, although all three components were subject to substantive review by the Bureau.

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 through a loss of innovation as the evidence indicated that Novartis would likely abandon the development of a particular combination therapy which was further away from market than GSK's. However, the Bureau considered that a consent agreement entered into in the United States, which required Novartis to sell certain assets to another pharmaceutical industry participant, effectively resolved any potential competitive concerns in Canada.

The authors would like to thank Randeep Nijjar for his contributions to the chapter.


  1. ‘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.
  2. 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.
  3. 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'.
  4. Commissioner of Competition v Alcon Canada Inc, Federal Court of Canada, Court File No T-2223-12; supra, note 3 at para 4.
  5. ‘FTC Files Amicus Brief Explaining That Pharmaceutical ‘Product Hopping' Can Be the Basis for an Antitrust Lawsuit', Federal Trade Commission USA (27 November 2012).
  6. Highlights: Competition Bureau Workshop on Antitrust Issues in the Pharmaceutical Sector (13 November 2013), Competition Bureau.
  7. Canadian Pharmaceutical Industry Profile (2014), Industry Canada, Government of Canada.
  8. 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.
  9. In the case of the vaccine acquisition, this conclusion was largely based on price differences in the parties' offerings.

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