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Centad extended a warm welcome to all participants to the meeting. Mr. Yogesh Pai, Associate Fellow, Centad, led the discussion by making a presentation on the EU Competition Commission’s pharmaceutical sector inquiry report. On 8 July 2009 the European Commission adopted the final report on its competition inquiry into the pharmaceutical sector, which largely confirms the findings of the preliminary report released in November 2008. The final report notes that market entry of generic drugs is delayed and there is a decline in the number of novel medicines reaching the market. The report has clearly identified that company practices are among the important causes for such an outcome, including shortcomings in the regulatory framework. The report has brought into light how originator companies use a variety of instruments to extend the commercial life of their products without generic entry for as long as possible. The inquiry notes that the R&D based pharmaceutical sector is engaged in defensive patenting strategies that mainly focus on excluding competitors without pursuing innovative efforts, which as per the commission will remain under further scrutiny. It is expected that the EU competition commission would now intensify its scrutiny of the pharmaceutical sector under EC competition law, including continued monitoring of settlements between originator and generic drug companies.
The discussion commenced by a brief presentation, which outlined:
- Context of the EU pharmaceutical sector inquiry.
- Some facts about the industry and generic market entry
- Major findings of the EU Competition Commission
- What lessons for India?
- Competition Act, 2002 (as amended in 2007)
- Identification of themes for further discussion
Contextualizing the EU report, the presenter elucidated some key points which led to the inquiry which are specifically related to decline in pharmaceutical productivity- novel medicines; delays in generic entry – insufficient generic price competition; need to keep public budgets on drugs in control; red tape in patent filing and enforcement strategies by originator companies; contracts, disputes and litigations between originator and generic companies; thorough review of opposition procedures and appeals before patent offices; patent settlements and other agreements between originator and generic companies; interventions of originator companies before national authorities deciding on marketing authorization; pricing and reimbursement of generic products. In respect of promotional activities the report raises it as an important ground, but does not address in detail potential shortcomings in the distribution chain. The context was also grounded in the introduction of second generation products to counter generic copies of first generation products. The report has noted that all these issues are interlinked. However, the report only pertained to prescription drugs market only.
The presenter noted that as per the report, from 2000 – 2007 originator companies spent on average 17% of their turnover from prescription medicines on R&D worldwide. Approximately 1.5% of turnover was spent on basic research to identify potential new medicines. 15.5% of turnover was spent on clinical trials and to obtain marketing approval. Strikingly, expenditure on marketing and promotional activities accounted for 23% of their turnover. Since generic entry is vital for price competition, the report has noted that generic entry took more than seven months after the patent expiry, on a weighted average basis. For the highest selling medicines, it took four months on average. On the issue of pharmaceutical innovation, the report has noted that originator companies substantially rely on the acquisition of compounds from third parties.
The report notes that in the year 2007 about 35% of originator companies' molecules where marketing authorisation was pending had been acquired or in-licensed. This is mostly from small bio-tech companies. Apart from this the report also noted that there were significant price reductions upon entry by generic companies. On an average 25% lower than the price of the originator medicines. Interestingly, two years after the generic entry this reduction has gone down to as low as 40%. The report has reaffirmed that prices of originator products appear to drop following generic entry. He also informed the participants that such price reductions were noted in US by the FTC in their study titled the Generic Drug Entry Prior to Patent Expiration: An FTC Study (July 2002).
The EU report has noted that generic companies share in off-patented market was about 30% at the end of the first year and 45% after two years. Average savings on health was 20% in the first year ending and 25% in the second year ending. The report has distinctly noted the importance of mandating pharmacists to dispense generic medicines. EU Member States which oblige pharmacists to dispense the cheapest generic medicines whenever possible appear to show earlier entry and greater savings for their health budgets.
Among the most important findings, the EU report notes that pharmaceutical patent applications have doubled during the period between 2000-2007. The report confirms the distinction between “primary” and “secondary” patents. However, secondary patents need not necessarily be of lower quality. While discussing this Yogesh said that this particular issue was bit confusing! Secondary patents, if not in all cases, are bound to be sought for incremental innovations forming a lesser degree of inventive step. Hence there are more chances that they would fall within the lower category of inventions. In case of blockbuster drugs, the report finds that patent filings are increasingly higher throughout the life cycle of the product and also at the end of expiry of the first patent. This certainly causes uncertainty for generic manufacturers, the report notes distinctly. During litigation, originator companies often rely on patents that were not yet filed when their product in question was launched. This is one of the oft used strategies by originator companies.
Thereafter, Yogesh discussed the issue of patent filing strategies, especially, patent thickets. On the issue of patent filing strategies, he quoted from the report that
“Filing numerous patent applications for the same medicine (forming so called "patent clusters" or "patent thickets") is a common practice. Documents gathered in the course of the inquiry confirm that an important objective of this approach is to delay or block the market entry of generic medicines”
Average number of patents and patent applications for the top selling medicines is 140% higher (i.e. 237) than the average of the overall sample (98.5). Strikingly, individual medicines are protected by up to nearly 100 product-specific patent families, which can lead to up to 1,300 patents and/or pending patent applications across the Member States. Generic challenge becomes difficult in Europe. During the course of the sector inquiry, the Commission noted that companies are aware that many of such patents might not be strong. Filing of divisional patent applications is also a strategy adopted for creating legal uncertainty for generic manufactures. Sending warning letter and citing primary patents was another strategy used by originator companies for patent enforcement litigation. During litigation, generic companies won 62% of the 149 cases. The average duration of the court proceedings was 2.8 years. Secondary patents were invoked during litigation when compared to primary patents raised during pre-litigation. Interestingly, in 11% of the final judgments reported, two or more different courts in different EU Member States gave conflicting final judgments on the same issue of patent validity or infringement. Validity issues, except for procedural irregularities, are largely based on issues on substantive patent law thresholds. This should amply clarify how differences in standards of patentability still exist among developed county jurisdictions. Highlighting the importance of oppositions at patent offices, the report notes that pharmaceutical patent opposition rates higher at the patent offices. Generic companies largely opposed secondary patents and prevailed in 60% cases at the patent office appeals.
All does not seem to be fine with reference to the perverse relationship between generics and originator companies. Patent settlements are a major cause for concern. They are in the nature of reverse payments (also called as pay for delay in the United States)- as payments flow from originators to generics. The issue of reverse payments is has figured prominently in the report since 200 settlement agreements were concluded between originator and generic companies, which covered 49 medicines (31 medicines (i.e. 63%) were best-selling medicines) that lost exclusivity between 2000 and 2007. Such settlements are done during litigation or in opposition proceedings or out of courts settlements. In half of the settlements in question the generic company's ability to market its medicine was restricted. Thus the report has noted the reverse payments can cause considerable delays in generic entry. In fact, the fallacy of the contracts between generics and originator is that direct settlements amounted to Euro 200 million in value! There can be indirect settlements also. Originator companies had also a low success record in cases concerning data exclusivity. The final court judgments confirmed claims of originator companies in 19% cases only
The sector inquiry has produced “indications” that some originator companies sought to put into question the quality of generic medicines, as part of a marketing strategy, and even after the generic product was authorised by the relevant authorities and was available on the market. This report is first of its kind to authoritatively confirm that originator companies engage in the strategy of confusing the general public about quality of generic medicines by putting them in question. However, the net impact of such a wrong campaign on consumer behavior and acceptability of generic medicines in not known. The report also notes that originator companies have used the different strategies for launching secondary product and to ward off generic entry.
More specifically, the report has made an important finding that originator companies engage in “defensive patent strategies” to create uncertainty for other originator companies. The EU sector inquiry reveals at least 1,100 instances where the patents held by an originator company potentially overlap with the medicines, R&D programmes and/or patents held by another originator company for their medicine. As a follow up to the report, it is now expected that the commission will intensify its scrutiny of practices of particular companies and will take action under EU Competition laws.
Contextualizing the lessons for India, the presenter noted that post 2005, after opening up for the product patent regime, the Indian patent system has also considerably opened up for such practices. Section 3(d) considered the greatest defensive mechanism for fixing the patentability criterion is still uncertain. While judicial decisions on section 3(d) have been forthcoming, the scope of the section is still uncertain. It certainly does not fully exclude IMDs and hence it may be responsible insufficiency in public notice function of the patent system. Further, only handful of generic companies can effectively litigate all the way through. Pre and post grant oppositions at the patent office need to be intensified, but the pertinent question is how far and how long will oppositions survive? The presenter then pointed out that patent offices in India have started granting product patents and almost 10 patented products on pharmaceuticals have been launched in the Indian market until mid 2009.
On the issue of settlement between generics and originator, the presenter noted that such instances not yet seen in the Indian context, but possibilities cannot be ruled out. However, Indian companies have gained from patent settlements abroad. Elucidating on patent litigation as one of the strategy to ward off generic competition, it was noted that patent litigation strategies may also act as non-tariff trade barriers. On the issue of price and its relationship with patent protection, it was noted that since no price regulation on patented drugs as yet, the NPPA wanted to negotiate prices for patented drugs based on reference pricing. However, there were considerable problems identified with such an approach in achieving the object of drastic price reductions on patented drugs in the absence of fierce generic competition.
The Competition Commission of India (CCI) newly established occupying a prominent regulatory space. However, much remains to be desired on the political content and commitment of the government to intervene in markets for ensuring a competitive framework. Hence the pertinent question was if the EU inquiry should send some signals to the Competition Commission of India? It was noted that the main object of the Competition Act, 2002 was “…provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto”. It was also noted that what amounts to “competition” remains undefined and is at the heart of controversy in era of Chicago and Post Chicago School of economic thought.
Section 3 of Competition Act bars anticompetitive agreements which are in the nature of horizontal or vertical agreements. Cartelization is prohibited under section 3 of the Act. This can have positive implications for streamlining drug procurement practices by bidders since such activities are caught within the framework. It was noted that unethical practices in drug promotion can also be controlled. The need to evolve a possible framework under competition law to thwart the ineffective voluntary guidelines proclaimed by industry organizations was much felt. The relationship between IPRs and competition law is considerably complex. Limited Restraints on IPR is allowed under section 3(5) of the Act. However, uncertainty remains as regulations are yet to clear what exemptions are specifically allowed for. On abuse of Dominance under section 4, mere dominance was not a criterion under the act. Specific instance of abuse in the relevant market was required. The issue of identifying relevant market was inherently complex in the prescription drug industry where consumers are not the choosers. Hence tests developed in case of other products to ascertain the scope of relevant market can be complex. Under abuse of dominance, the Act covered within its scope monopolistic pricing practices. In this regard the example of the South African Competition Commission to require two originator companies to license the patent at reasonable royalty rates in the form of a compulsory license was discussed. The possible use of essential facilities doctrine in case of conditional or unconditional refusal to license was also discussed. It was noted that compulsory license can be a remedy although it is not explicitly mentioned in the Act. Increasingly, the pharmaceutical industry has witnessed a host of creeping mergers and acquisitions. Mergers/acquisitions may lead to concentration. Sec 5 and 6 of the Act prescribe thresholds and triggers under which combinations shall be reviewed. It was noted that due to pressure from the industry, the section on combinations was not notified as yet.
In the continuing discussion on the themes that followed, it was noted that pharmaceutical innovation ecosystem extensively relies on public funded research, apart from private R&D. Hence there were considerable problems in the idea of patent exclusivities largely argued for the purpose of ensuring commercialization. A strong need for revisiting the innovation ecosystem in the pharmaceutical industry with due regard to the issue of privatization of public R&D was felt. This is especially in the light of the upcoming Bayh Dole styled Bill in India on IP protection of publicly funded R&D which makes it normative to seek and enforce IP protection to all inventions having a commercial potential. One of the participants noted that avoiding patents on incrementally modified drugs would act as a strong incentive for pharmaceutical R&D based companies to concentrate more on NCEs. On the issue of patent scope, it was gathering noted that patent scope and nuances concerning the same was left out during the submissions made during the Third amendment to India’s patent law. But the gathering asserted that it was now the right time to start the work again. One participant noted that there must be essential difference between accepting broad claims under a single application and allowing for multiple applications for minor improvement. It was clarified during the meeting that it would be difficult to make broad claims but not really difficult to make multiple applications on incrementally modified drugs. One of the participants suggested that need to draft a systematic paper on the scope of patent claims in pharmaceuticals by getting into the nuance of law, technology economics and policy. Here the issue of section 3(d) of the patent Act to deal with creating certainty for generic manufacturers was also discussed.
India has one of the most elaborate and unique pre and post grant opposition provisions in comparative patent jurisdiction. Oppositions at patent office do generate ex ante competition by allowing an early screening of unworthy patents. Participants asserted the need challenge patents through early oppositions and highlighted the success shown at the EPO. On IP enforcement strategies, the participants noted that a wait and watch policy must be adopted to see if appellate courts in India will understand the situation and fine tune the legal mechanism to avoid abuse of patents through enforcement and litigation. It was observed that the Courts in India have so far been benevolent to the needs of ensuring access to medicines even with the patent law in place by narrowly scoping the grant of injunctions. The participants further noted that any tendency for granting ex parte injunctions in patent infringement cases must be arrested since patents are not prima-facie valid until finally litigated.
One participant raised a question if the new competition Act could be used to ensure non-closure of public sector vaccine units. It was clarified that the Act did not provide remedy in purely policy matters. However, the CCI has powers to generate advocacy around issue through an informed understanding of whether such an act/even any legislation/policy decision may lead to lessening competition in the relevant market. The issue of patent settlements was also clarified in the context of Hatch Waxman Act in the United States where first generic entry is provided 180 day exclusivity and hence the issue of settlements is more acute in that context.
Thereafter, there was a discussion about the increasing consolidation in the generic and R&D based pharmaceutical industry in India and its implications for access to medicines. Participants discussed if such creeping acquisitions of Indian companies would lead to foreclosure of competition in generic markets or changing priorities of companies. It was noted that even while the Competition Act in India had a mandatory pre- merger review, it was not notified by the Government due to strong vested interests and opposition by the industry. The Competition Act has prescribed thresholds and tests for mergers and it is really unfortunate that the Government was not willing to not notify the same, the participants noted. Merger requires a futuristic assessment of the scenario and hence there could be possibilities where mergers could be blocked on account of development concerns or due to social costs. It was noted that the Indian industry was up for a sell out and only strict enforcement of competition laws could save the generic industry, quintessential for safe and affordable access to medicines. One of the participants noted that there were technical challenges in making a successful complaint with the CCI. Another participant noted that the data and other details where difficult to gather in the Indian context. It was also noted that there were other pertinent studies conducted by Generic pharmaceuticals in Europe and America and some selected studies by the US FTC and European Competition Commission in the healthcare sector.
On the strategy of using the competition law/policy as part of the national policy on pharmaceuticals, there was a consensus that a comprehensive review of the patent system and its relationship to competition law must be undertaken. The meeting decided that best efforts should be made to combine resources of the civil society and research based institutions to conduct a comprehensive study.
The gathering noted that the EU report clearly establishes what has since long been debated among public health groups and policy specialists involved in health related issues. Abuse of the patent system to keep off generic drugs from the markets does have tremendous implications price competition and for early entry of generic drugs. By the 2005 amendment to the Patents Act, 1970, India implemented its obligations under the TRIPS Agreement to put in place a product patent regime for pharmaceuticals. Although much has been discussed and debated about patents and its impact on prices, the importance of competition law and policy to ward off the evil of anticompetitive practices in the pharmaceutical Industry has not been adequately understood from a developing country context. Hence, the time is most opportune for such discussions and to draw early lessons from the EU pharmaceutical sector inquiry for India.
This is not to overemphasize that the EU report is path-breaking, or to assert that it answers some of the most fundamental problems prevailing in the current regulatory landscape of the pharmaceutical sector. But it definitely begs into the question of how equipped is the Indian regulatory system (including competition law) to handle issues pertaining to unfair/anticompetitive and anti-consumer practices in the pharmaceutical sector. The discussion aimed to explore possibilities and evaluate options for dealing with the issues identified above. This was with an aim to understand how such options could form part of India's pharmaceutical policy in the days to come, which derives it strength, focus and strategy that are people friendly and in national interest. The presentation and discussion made an attempt to raise some of the most pertinent issues that the EU report has answered, and those that have remained unanswered and contextualize it to the Indian situation.
The EU Competition Commission's report can be downloaded from: http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/index.html
The executive summary is available at:
http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/communicatio%0An_en.pdf
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