On July 8th, 2009, the European Commission reported on its 18-month inquiry into competition in the pharmaceuticals sector. Bill Batchelor of Baker & McKenzie's Brussels antitrust practice describes some of the implications of the much-awaited report.

DG Competition was characteristically combative in its press conference to release its final report on competition in the pharma sector. But the gap between the rhetoric of the press briefing and the reality of the report was clear. The report itself was much more balanced and nuanced than the interim report: "It's not the purpose of this report to identify any behaviour as anticompetitive," was in sharp contrast to the press statement that "the overall conclusion is that there is something rotten in the state".

It appears that DG Competition was not planning the frontal assault on the patent system that many had feared. But three areas for further scrutiny have now been identified: patent settlements, "defensive" patents and regulatory complaints. An investigation into the litigation over perindopril and related arrangements between Servier and generic manufacturers was announced on the same day.

The Public Consultation

In the interim report, patent portfolios, litigation, settlements, regulatory communications and patented second-generation products, were all highlighted as potentially suspect causes of delay to generic entry. This, it was claimed, led to European health systems, overpaying €3 billion.

Interventions from senior (former) judiciary and the European Patent Office (EPO) were perhaps most telling during the consultation stage. The English Court of Appeal judge, Lord Justice Jacob stated this was an "extraordinary attack on the patent system", reminding officials that "no patents meant no new drugs", remarks said to be "well directed" by former House of Lords judge, Lord Hoffman (CIPA June 2009, pp 377-378).

Furthermore, Sir Christopher Bellamy, author of the seminal English language antitrust textbook and former judge both at the European Court and Competition Appeals Tribunal, warned of a lack of objectivity and misplaced conclusions as to the anticompetitive effects of a patent, which is by nature an inherently exclusionary right (Fordham, 16th April 2009.).

The EPO's comments – so strongly worded they needed to be revised prior to public release – found fault with DG Competition for legal errors on patent numbers, opposition proceedings and patenting incremental innovation (EPO Comments, 10 March 2009; IPK at "Inappropriate and misleading": whatever happened to the original EPO response? 23rd March 2009).

The Final Report

The interim report's accusatory tone has been substantially revised. Terminology such as "toolbox", "patent thickets", "patent clusters", "secondary" and "defensive" patents is not to be taken as criticism of patent portfolios or the patenting of incremental innovations. They are not of themselves illegal, nor are the patents in question invalid or of lower quality. A number of patent law misconceptions in the interim report have been amended, most famously the misleading inflation of patent numbers, which had drawn sharp criticism from the EPO.

When do Generics Come to Market and Why?

In the interim, DG Competition's economists had conducted an extensive analysis of why it took 7.9 months (weighted average) or, for the 20 most valuable drugs, 4.2 months, for generics to come onto the market after patents and other exclusive rights expired.

The statistical exercise was impressive, but for one curious omission. Commercial and regulatory factors were clearly demonstrated to affect the speed at which generics enter markets; – however the DG Competition team did not analyse whether alleged "blocking tactics" had any impact. This omission surprised economists since regression analysis typically allows precisely that kind of analysis. Available evidence suggests there would not be a correlation. Generic speed to market increased over time notwithstanding an alleged two, three or four fold increase in alleged blocking tactics.

Entry is fastest where blocking tactics are allegedly most prevalent, namely for drugs with the highest sales and countries with the largest markets. Innovators "window of commercial exclusivity" – from first innovator sale to first generic sale – was well under the 15-year maximum considered by the SPC Regulation (No 1798/92/EC) to be "adequate protection" for pharma R&D, averaging 12.5 years (between 10.5 and 14 years) over the period.

DG Competition has declined to make the data available for independent review, so perhaps the answer will never be known, but its core finding that innovators contribute to generic delays – based on selected instances of conduct rather than industry wide analysis – must be read with this background in mind.

Patent portfolios

Portfolios of patents, including "secondary" patents filed late in the product's lifecycle, and in particular post launch, make entry more difficult for generics, the report states. Delays and uncertainly are exacerbated by use of divisionals and protracted opposition proceedings. The "1,300 patents" allegation (an inflated number mistakenly counting national patents, rather than EU wide patent families) has been acknowledged to be a rather more manageable average of 30 patent families covering the 30 best selling drugs.

There is rightly no suggestion that patent portfolios can, in themselves, be illegal. EC competition law is clear that portfolios, and an active patenting strategy, are entirely lawful (the Tetra-Pak II case). The fix – according to the report – is to be found in establishing a Community patent and a high-quality, efficient, single patent court, sentiments with which few patent practitioners would disagree. The EPO's initiatives to "raise the bar" on patent quality and curtail use of divisionals are also endorsed.

Litigation

€430 million was spent litigating 68 medicines, each case lasting on average 2.8 years, from one year in the fastest courts (France and UK) to more than six in the slowest (Portugal and Italy). Innovators lose 62% of cases (51% of those they initiate) and, when challenged, patents are revoked 55% of cases.

The report makes much of these statistics. But they are unsurprising to practitioners and little different to win/loss statistics for patent litigation across all industry sectors. Potential infringers provoke litigation only in cases where there is the best chance of winning and the win rates reflect this. "Win statistics don't show bad patents. They show good lawyers," as one IP lawyer put it. They say nothing about the validity of patents as a whole.

Litigation is not flagged for follow-up by DG Competition. In part, this may be because it is difficult to prosecute vexatious litigation as an antitrust violation – the EC courts, unwilling to curtail access to justice, rightly set a very tough test for competition authorities to satisfy (the ITT Promedia case). Perhaps, too, the Commission recognises that the way forward is to fix the system, not prosecute its users. An efficient, high quality and cost-effective single European patent court would resolve many of the report's concerns.

Patent settlements and "reverse payments"

The EC adds its voice to that of the US Federal Trade Commission and, since the change in administration, the US Department of Justice in calling for the investigation of settlement agreements which limit generic entry and involve a transfer of money or other benefits, to the generic. The report finds 45 such settlements in the EU, with 23 of them involving transfers of €200 million in aggregate.

The report proposes "focused monitoring" of these settlements. An earlier proposal to require mandatory notification of all such agreements was dropped.

The challenge for DG Competition is that there is no EU legal precedent. Recent US cases state that a bona fide settlement that imposes restrictions on generics going no further than the patent can have no impact on competition (Schering-Plough and Cipro II). Applying general principles, the position in the EU would be similar. The burden of proof is on the authority to show that settlement restricts competition because the innovator and generic are competitors. This can only be done by showing the patent is invalid. Absent a "smoking gun" document that shows the patentee knew the patent was invalid, how can an antitrust authority second guess validity?

Complaints to Regulators

The report also says that meritless complaints to marketing authorisation bodies delaying approval of generics will be investigated. The Commission is clearly suspicious that such complaints are unmeritorious, finding innovator win rates of 2% in litigation on efficacy/safety concerns and 19% in relation to data exclusivity, albeit in a tiny sample of cases.

A "primary intent" test is proposed to determine when complaints are potentially unlawful, namely whether a complaint "was primarily made to delay the market entry of a competitor".

The approach is ill-thought through and sets a potentially dangerous precedent. Any complaint alleging, for example, inferior quality or lack of bioequivalence will clearly have as its intention, and quite legitimately so, the elimination of the generic. It is likely that all such approaches to regulators will be based on mixed motives. If the concerns are genuine or founded on a reasonable suspicion, then intent is irrelevant. The complainant is bringing a bona fide concern to the regulator. In such a case, regardless of any intent to exclude the generic, there should be no antitrust liability. Any other rule would be to discourage companies coming forward with genuine concerns about the safety or quality of medicines.

"Defensive Patents"

"Defensive patents" are also singled out for investigation. Patent overlaps are found in 1,100 cases, and some patents are obtained solely to block competitors. An alleged decline in new medicines coming to market may be as a result of these blocks, the report alleges.

The criticism that this conclusion contradicts the substantial literature – which the report declines to examine – on the regulatory, scientific and commercial factors influencing innovative output is brushed aside. DG Internal Market will review this as part of a separate "Single Market Review". Though how it is safe to reach any conclusion, let alone one that presages antitrust prosecution, without that analysis is unexplained.

The report finds licensing is common to resolve blocks. Only two R&D projects were abandoned as a result of a refused licence, which may be contrasted with the 4,400 R&D projects currently reported in the sector. Undeterred, DG Competition states that "defensive patent" strategies will be investigated further. These are defined as "patenting strategies that mainly focus on excluding competitors without pursuing innovative efforts and/or the refusal to grant a license on unused patents ... in particular in situations where innovation was effectively blocked".

This definition has little relationship with the reality of the pharmaceutical R&D cycle. During a 10-year development process a company may well have a portfolio of unused technology which, though unworked, represents a substantial investment in potentially important future development opportunities. Equally, an innovator may not be prepared to invest the substantial time and resources necessary to develop a new medicine if it is not allowed to patent potential alternative or neighbouring technologies uncovered during the R&D process that would allow its rivals to come to market with a competing medicine.

Any such cases would require DG Competition to prove (to the standard established in Microsoft et al) that (i) the innovator was dominant, (ii) the patent was essential to compete in a related market, (iii) refusal to license eliminated any effective competition in that market, (iv) refusal stifled the emergence of a new product or product with new features and (v) there was no objective justification. It would also require a weighing of the harm to innovation incentives through mandatory licensing.

Regulatory Reform

The policy recommendations contained little that was new: (i) adoption of a Community patent and single patent litigation system; (ii) initiatives to improve patent quality and limit procedural delays and uncertainty; (iii) streamlining MA procedures; (iv) proper implementation and enforcement of the Transparency Directive and consideration of automatic pricing and reimbursement approvals for generics and more co-ordinated HTA assessments for innovators; (v) encouraging authorities to disregard innovator complaints about generics and/or to bring meritless complaints to the attention of competition authorities (and/or payers to sue for damages); (vi) recommending an assessment of the relative merits of price caps, mandatory generic substitution, tender procedures and other mechanisms to encourage take-up of and competition between generics.

Conclusion

The final report is far from the frontal assault on the patent system that many feared. The enforcement priorities are now clear. Settlement agreements will require antitrust review in anticipation of possible production to the Commission, and payments to the generic while it remains off the market will require strong justification. As for regulatory complaints, companies will need to document carefully that these are demonstrably in good faith.

In relation to "defensive patents", companies should be prepared to deal with antitrust claims being used as legal leverage in licence negotiations, backed by threats of an antitrust complaint if appropriate terms are not secured. Especially in technology or product areas where the company has a high market share; justifications for refusals to license out unworked patents should be carefully reviewed. So, too, it should be borne in mind that reasons given during portfolio audits for maintaining patents may well be the subject of future disclosure to DG Competition.

Ultimately, it is difficult to see that the report met its objectives. Regulatory and commercial factors are found to be a key cause of generic delay. No serious examination is given to the diverse regulatory, scientific and commercial factors that influence innovation. Perhaps the most significant words in the 600 pages, therefore, are those on the penultimate page: "First enforcement action is already under way".

Bill Batchelor is a partner at Baker & McKenzie’s Brussels antitrust practice. Baker & McKenzie represented EFPIA in the inquiry. The views expressed are personal.