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Competition law enforcement in the pharmaceutical sector in CEE

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The pharmaceutical or, more generally, the healthcare market is of vital socioeconomic importance. Its functioning directly affects patient health. As a result, the pharmaceutical market is heavily regulated and closely monitored by the European and national authorities. This supervision concerns not only standard regulatory issues like marketing, clinical trials and the promotion of medicinal products, but also competition law.

There is no doubt that in recent years, the pharmaceutical market has been closely scrutinised regarding competition law. As described in this guide, in 2019 the European Commission (“the Commission”) published a Report on Competition Enforcement in the Pharmaceutical Sector (2009-2017) (the “Report”), in which it described current enforcement of competition law, as well as the most common infringements on the pharmaceutical market. According to the Report, the Commission and national competition authorities (the “NCAs”) pay close attention to the pharmaceutical market in terms of competition law. The main aim in this context is to ensure increased competition and strive for innovation, product accessibility and fair prices.

This approach by the Commission is unlikely to change. On 25 November 2020, the Commission issued a communication entitled Pharmaceutical Strategy for Europe. According to this document, in the next few years the Commission will focus on maintaining a strong, fair competitive and green healthcare industry. To do so, the Commission will continue, among other thigs, to:

  1. review mergers between pharmaceutical companies; and
  2. scrutinise strategies that may hinder the entry or expansion of generic and biosimilar products.

It can also be expected that the Commission will propose some legislative amendments. According to the Pharmaceutical Strategy for Europe, in 2022 there will be a review of the pharmaceutical legislation to address market competition considerations.

Given the growing scrutiny of the pharmaceutical market, we have prepared an overview of the competition issues that have been identified in the Life sciences sector. Our Expert Guide includes a summary of the report and brief descriptions of competition law enforcement in different CEE jurisdictions.

Overview of the report

The Report provides a general overview of competition law enforcement by the Commission and the NCAs in the pharmaceutical sector in 2009–2017, as well as a description of the main characteristics of the pharmaceutical sector that shape the assessment of competition, and an illustration of how competition law enforcement contributes to affordable medicines and to innovation and choice in medicines and treatments. The Report is based on substantial investigation work by the Commission and the NCAs on competition concerns in more than 100 cases.

According to the Report, the most widespread type of competition concerns leading to intervention decisions are abuses of dominance (ca. 45% of the reviewed cases). Restrictive horizontal agreements between competitors, e.g. pay-for-delay agreements, account for ca. 31% of cases. Finally, cartels such as bid rigging, and prohibited vertical agreements such as clauses prohibiting distributors from promoting and selling products from competing manufacturers, take the third place with ca. 17% each.

Competition promoting access to affordable medicines

1. Antitrust enforcement supports swift market entry of cheaper generic medicines

The pharmaceutical market naturally evolves in a way that more and more generic medicinal products are introduced. Generic drugs enable wider access to therapies and, as a rule, reduce prices. According to the Copenhagen Economics study, the prices of innovator medicinal products drop by 40% on average after the generic products enter the market. The same study also indicated that when generic medicinal products are marketed, their price is on average 50% lower than the initial price of the corresponding originator product.

Due to these economic circumstances, originator companies often develop various schemes to mitigate the consequences of a corresponding generic product being marketed. These practices include patent filing strategies, disputes and settlement agreements. As a rule, these schemes are not illegal as such, however they are often assessed and questioned by the competition authorities.

Pay-for-delay agreements

Pay-for-delay agreements are concluded between originators and companies intending to introduce a generic medicinal product. Under these agreements, a generic manufacturer agrees to postpone its entry to the market in exchange for compensation. The parties can mutually benefit: for the originator, the profit comes from the delay in a generic medicinal product being marketed, while generic companies share the originator’s profit from their ongoing exclusivity. Regardless of benefits to pharmaceutical companies, such arrangements can adversely affect competition on the market and, as a result, patient access to affordable therapies. Concluding a pay-for-delay agreement can potentially infringe Art. 101 of the Treaty on the Functioning of the European Union (“TFEU”). This is because pay-for-delay agreements can be considered as prohibited market sharing between at least two competing companies. Under such contract, the originator and generic manufacturer can agree to temporarily limit or even exclude any competition on a particular market. In some cases, originators can even buy out their competitors and dissolve their companies. As a side note, from the perspective of competition law, it does not matter what type of agreement the originator and generic manufacturer conclude. In some cases, agreements that the authorities ultimately questioned were referred to as, e.g. co-promotion agreements or distribution agreements. Pay-for-delay agreements can also be considered an infringement under Art. 102 TFEU (i.e. as a form of prohibited market behaviour by a dominant company). That determination can potentially be made if the originator holds a dominant position on a relevant market, which is not unheard-of in the pharmaceutical sector.

Misuse of the regulatory framework

Apart from pay-for-delay agreements, the Commission identified other anti-competitive practices generally geared towards postponing the entry of generic medicinal products. One such practice involves the misuse of the regulatory framework. The Commission established the abuse of a dominant position where an originator made misleading representations to the patent office to extend the patent protection period for the original medicinal product. In addition, the originator would have marketing authorisations (“MA”) withdrawn in various countries. That way generic manufacturers could not market their products in selected Member States as, technically, the MA of the original medicinal product was not in force. In another case, the originator withdrew its product following the lapse of the patent protection but before the generic entered the market and its name was revealed. Due to this scheme, pharmacies and doctors were unable to provide their patients with a generic substitute and could only recommend another, similar product of the originator, a product that was still patent protected. Such marketing strategy was considered an abuse of a dominant position.

Disparagement and other practices curbing demand for generics

As determined by the European Court of Justice and NCAs, it would also be considered anti-competitive to defame either generic competitors or their products with the intent to decrease competition. Such defamatory practices include spreading misleading or false information regarding: (I) adverse effects; (ii) off-label use; or (iii) any scientific uncertainty as to the product’s reliability or effectiveness. Such information could potentially be passed on to the authorities, patients, and healthcare professionals. It could also be anti-competitive to compare products of the originator and the generic manufacturer falsely or unfoundedly. Based on such comparison, it could be construed that the original product was in fact better or safer than the generic medicinal product. This would, in turn, also hinder competition.

2. Enforcement against dominant firms charging unfairly high prices (excessive prices)

The Commission and NCAs have investigated numerous cases of abuses of dominant positions by entities active in the pharmaceutical sector which related to the imposition by those entities of excessive prices on consumers. The concept of an excessive price was developed for the first time by the European Court of Justice in the United Brands case. 1 According to the judgement, a price is excessive if “it has no reasonable relation to the economic value of the product” and this can be determined by a twofold test: it should be proved that: (i) the price-cost margin is excessive; and (ii) the price imposed “is either unfair in itself or when compared to competing products”. Over the years, the Commission and the NCAs found infringements and fined various entities in cases related to unfair prices for medicinal products. In those cases, entities marketing medical products were imposing significant price increases of between 300% up to 2,000% and using unfair pricing negotiation strategies with agencies dealing with the MAs of medicinal products. Those unfair strategies consisted, among others, in the MA’s holders threatening to terminate the supply of medicinal products. In all of these cases, the Commission and the NCAs had to consider and balance the need for innovation in the pharmaceutical industry and harm resulting from exercising excessive prices strategies.

3. Other anti-competitive practices capable of inflating prices

Coordination as a means to achieve higher prices

Coordination practices between competitors such as bid rigging or price fixing breach competition law as they often lead to increases in prices for medicinal products. This in turn usually inflicts harm on consumers and society in general. One example of the cases dealt by the NCAs in recent years has related to two entities active in pharmaceutical sector entering into an anticompetitive agreement aimed at discouraging the off-label use of a cheaper medicinal product and encouraging consumers to use the other product—the more expensive one. Both products, although initially used for treating different diseases, contained a similar active ingredient and could treat the same disease. In its investigation, the NCA found that both entities arranged to artificially differentiate both medicinal products whereas, according to the NCA, they were equivalent in all respects for the treatment of the disease. The main goal of the collusion between the parties to the agreement was to shift demand towards the more expensive product. The fine imposed by the NCA for this illicit collusion was ca. EUR 90 million for each of the two entities participating in the coordination practice.

Other European and national cases featured in the Report include market sharing agreements between pharmacies; bid rigging in hospital tenders, price fixing between wholesalers and distributors, market sharing, exchange of information related to prices and sale, coordination between wholesalers of fees and other trading conditions, as well as exchanges of sensitive information between wholesalers.

Competition driving innovation in the pharmaceutical sector

1. Competition driving innovation and promoting increased choice of medicines

Innovation is of key importance in the pharmaceutical sector. Research and development (R&D) may lead to new medicines for previously untreated conditions, to more effective medicines or such with fewer side effects, and to discovering that existing medicines can be used for treating other conditions as well. Innovation may also reduce the cost of treatments, e.g. by optimising the costs of the production process and by adding more efficient technologies that lead to higher quality medicines being produced.

Nevertheless, companies active in pharmaceutical markets may be tempted to ease the pressure of having to constantly innovate. Practices such as defensive patenting aimed at circumventing competing projects may in specific circumstances be anti-competitive and be particularly harmful to the interests of patients and national healthcare systems.

2. Enforcement against practices preventing innovation or limiting patient choice

Antitrust enforcement can help ensure that pharmaceutical companies do not enter into arrangements that hold back innovation and do not abuse their market power. Sometimes, looking for ways to extend the exclusivity period for an innovative medicine granted by the law is preferrable, as opposed to taking the risk of investing in further in new solutions. Dominant companies might also use abusive practices to force competitors out of the market. In this context, enforcement activities focused on removing obstacles to generic entry directly contribute to innovation in the pharmaceutical sector. 

In one of the reviewed examples in the Report, an originator company engaged in a strategy to delay generic entry for its blockbuster medicine, mainly by removing a number of competitors that were close to launching a generic version of the same drug. Delaying the generic not only allowed the company extra time to reap large profits from its medicine, but also to switch its patient base to the follow-on product, which had no clinical advantages over the old product.

Antitrust enforcement may also improve patient choice. In a reviewed case in Portugal, an originator company was fined for offering discounts for its high-demand product that were conditional on tied purchases of other medicines. Thus, the company leveraged its dominant position to exclude certain competitors for the other products. 

3. Green light for procompetitive cooperation between companies

Despite all enforcement pressure put on anti-competitive behaviour, the Commission and the NCAs support pro-competitive cooperation between pharmaceutical companies. Numerous competition rules acknowledge that companies’ behaviour may result in synergies that could further encourage innovation, e.g. when companies combine complementary assets required to engage in innovation or engage in technology licensing. These rules help companies to design their cooperation projects so that they comply with competition law and avoid enforcement from the competition authorities. For example, the EU Block Exemption Regulation (BER) on R&D agreements provides a broad safe harbour from competition law enforcement for R&D agreements between competitors, provided that certain conditions related to the market shares of the companies are met and the agreement does not contain certain hard-core restrictions on competition. Further, the BER on Specialisation and Joint Production facilitates the conclusion of specialisation agreements under certain conditions, and under which competitor companies agree to stop producing certain products and start purchasing them from the other company. These BERs, as well as certain other problematic areas such as exchanges of information, joint purchasing, joint commercialisation and standardisation are further explained by the Commission’s Horizontal Co-operation Guidelines. The two BERs expire on 31 December 2022, and there is an ongoing consultation on the terms for their renewal. 

Merger control specifics in the pharmaceutical sector

The competition authorities’ control of pharmaceutical mergers ensures not only that healthy price competition is maintained for the benefit of patients and national healthcare systems, but also that efforts to launch new medicines, or to extend the therapeutic use of existing medicines, are not diminished due to a merger.

As indicated in the Report, the Commission most frequently intervenes in the following types of merger cases: (I) between originators and generic companies; (ii) between generic companies; and (iii) between originators. Between 2009–2017, the Commission reviewed more than 80 transactions and identified some competition concerns in one in every four cases. Transactions in question were eventually cleared but with some commitments. On that note, the Commission highlights in the Report that its role in merger control is not limited only to accepting or prohibiting proposed mergers, but also to overseeing the merger proceedings and in particular the proposed commitments by the parties aimed at ensuring sound competition on the market after the merger.

The Report mentions several M&A transactions in the pharmaceutical sector that show the possible impact of mergers on the incentives for pharmaceutical companies to continue developing parallel R&D programmes after a merger. Sometimes, the merged company may be inclined to discontinue, delay or redirect its pipeline project in order to capture significant revenues from the other company’s competing product. Similarly, by bringing two competing firms under single ownership, a merger may reduce the incentives to engage in parallel R&D efforts. In such cases, the Commission would either prohibit the merger or would require appropriate remedies from the merging companies, designed to preserve the ability and incentives to innovate. Such remedies may include a divestment of pipeline products, or underlying R&D capabilities.

However, consolidation in the pharmaceutical industry may be pro-competitive if it combines the complementary activities of the merging firms, and as a result strengthens their ability and incentive to bring innovation to the market.

The Commission’s interest in pharmaceutical mergers was recently reconfirmed in a press release of 16 March 2021, which announced the forming of a Multilateral Working Group of the Commission with leading competition authorities to exchange best practices on pharmaceutical mergers.  The joint project will build further on the expertise from the competition authorities as well as other stakeholders with relevant experience, to ensure the most effective enforcement in this crucial market.