Approaches to Drugs Going Off-Patent: Naughty or NICE?

Last month the CMA published its evaluation of the OFT’s 2011 decision concerning Reckitt Benckiser’s withdrawal of Gaviscon prescription packs (which we wrote about, in the context of follow-on actions, here).

Such evaluations assess the validity of previous decisions and their impact, but are also a window into to the ‘mind’ of the CMA and can indicate what the CMA may investigate in the future.

The OFT’s original investigation considered whether Reckitt had abused a dominant position by hindering generic entry in competition to its prescription drug Gaviscon Liquid, an alginate-based compound used to treat acid reflux. 

Shortly before expiry of the patent covering Gaviscon Liquid, Reckitt launched a new formulation, Gaviscon Advance, which was protected by a further patent.  At around the same time, Reckitt withdrew Gaviscon Liquid from the database of prescription NHS drugs.  Had the product not been withdrawn, the OFT concluded that it would have been easier for doctors to prescribe generic versions of Gaviscon Liquid.  Instead, most patients were transferred onto the new Gaviscon Advance product for which there was no generic alternative, and which therefore resulted in higher costs for the NHS.  Consequently, the OFT concluded that Reckitt Benckiser had abused a dominant position. 

A focus of the recent CMA review was whether the OFT would have achieved greater impact had the investigation been concluded earlier.  The CMA’s conclusion was that any intervention would have had to take place very shortly after the withdrawal if it were to have had any greater impact.  Such an outcome would be difficult to achieve in practice, since competition investigations are usually complaints-based rather than the result of continuous monitoring.  Vast resources would be required to monitor the country’s economy in this way – such an approach would be disproportionate to any gain.

So much for the CMA’s introspection.  Of particular interest to companies active in the pharmaceutical sector is the fact that the CMA places an increasing emphasis on intelligence-led enforcement. While the CMA’s main targets are cartels, the evaluation of the Reckitt decision suggests that “there could be merit in taking a more proactive approach to monitoring drug markets when originator drugs go off patent”.  This would be of concern to the innovative pharmaceutical industry.  Coupled with the recent reduction in the standard for interim measures to be imposed by the CMA, this is an area where increased vigilance may be needed.  

While the CMA is pondering how to react to drugs going off-patent, Parliament is considering the same topic.  The Off-Patents Drugs Bill is due to continue its second reading in the Commons later this week (due on 4 December 2015).  If the Bill were to pass, the Secretary of State for Health would be required to take steps to secure licences for off-patent drugs in relation to new indications.  NICE would then conduct a technology appraisal.  If NICE recommends the drug for the new indication, the relevant health bodies would provide funding to ensure the drug is available for patients.  

However, the chances are that the bill won’t make it to the statute books. It’s the second time that MPs have tried to pass the Bill in little over a year – its second reading was adjourned last month, and the Bill was abandoned in the last parliamentary term due to lack of support.  Perhaps part of the problem is that little thought appears to have been given to the interaction between legislation of this kind and other patent protection which may be available for new indications.  Indeed, for many drugs, the expiry of the main chemical compound patent does not mean that there is no longer any relevant patent protection.  It is unclear how this bill would apply if there are already second medical use patents in play, or other forms of continuing protection.  Nevertheless, the bill’s promotion by a number of medical charities demonstrates the continued and understandable desire for cost-effective new medicines.

#EUhaveyoursay

"The Internet is the oxygen of our digital economy and society. We are more and more connected, at every moment, everywhere.” - Andrus Ansip, Vice-President for the Digital Single Market.

...It’s no wonder that the European Commission is currently pushing forward a development strategy for all things telecommunications.  The Commission sees the availability of effective telecoms systems, including satisfactory broadband, as a key plank of its Digital Single Market strategy (on which we have written previously, for example here).

To that end, the Commission reached agreement with the European Parliament earlier this year to bring about an end to roaming charges within Europe.  The new rules bring network access charges into line with what consumers would pay in their home territory, and should be fully implemented within two years (i.e. by June 2017).  More contentiously, the same legislation also establish net neutrality rules for the first time in the EU.  These rules are intended to limit the ability of network operators to block or throttle customers’ access to particular online content or services, and will apply even sooner – by 30 April 2016.  The Commission’s memo on these changes can be found here.

A substantial further development was announced back in September when the Commission launched a ‘360 degree review’ of telecoms rules and Europe’s current and, more importantly, future broadband requirements.  The first stage of this review comes in the form of a consultation in which the Commission hopes to hear not only from organisations but the general public also – in fact the consultation is open to all “users, organisations, public bodies, and businesses across all sectors”.  Casting the net far and wide should allow the Commission to understand the needs of businesses, such as those that “develop applications and services that depend on connectivity” like eBay, Facebook and Uber, but also to anticipate private requirements and to put together a plan for meeting both business and private needs.  

The broadband consultation is intended to gauge the quality, speed and availability of internet provision that will be required in the future.  By understanding what Europe will need in the years to come, the Commission hopes to be better equipped to create effective policies to promote the growth and strength of connectivity networks and incentivise investors to fund them.  The overall aim is to unify Europe’s telecoms industry and reduce / eradicate inequalities between Member States’ telecoms regulations and pricing structures, which is further reflected in the Telecoms Framework consultation.  Further insight into the review can be found in the Commission’s Q&A here.  #EUhaveyoursay by submitting a response to the consultations and help ensure that Europe is ready for the next stage of the digital revolution!


Analogue taxis and hotels beware! The EU Internal Market Strategy is published

The Commission has published its new internal market strategy. The areas that are likely to be of particular interest are those which overlap with the Commission’s Digital Single Market strategy, launched in May 2015. 


These are: 

1. Enabling the development of Europe’s sharing economy

The most eye catching, and potentially controversial, initiative is the promotion of Europe’s online sharing economy, such as Uber or Airbnb.  The commission plans to publish guidance early next year on the position and rights of sharing firms under existing EU rules and also a review of national regulation of sharing services. Interestingly, Jyrki Katainen, a commission vice-president, compared the banning of UberPop (a disruptive car sharing service) with attempts by horse riders to ban cars. 

2. Preventing discrimination on territorial grounds 

Also up for review is the denial of access to cheaper websites, offers and discounts based on territorial restrictions. The commission plans to introduce new rules, and take legal action against Member States, to ensure commercial terms do not discriminate.  The importance of this objective is demonstrated by the commission’s crusade against the geo-blocking of access to sport and film content.    

3. Consolidating Europe’s intellectual property framework

The commission has ambitious plans to modernise the European intellectual property framework, notably for pharmaceutical and other industries. The plans for next year include a review of the EU intellectual property enforcement framework.

The commission’s other initiatives are: 

4. Helping small and medium enterprises and start-ups

In relation to SMEs, the aim is enhanced access to finance and to reform the VAT regime. An in important practical idea is legislation on businesses insolvency, to make sure entrepreneurs have a second chance after being declared bankrupt. 

5. Removing barriers for cross border trade in services

The commission is, rightly, concerned that the EU Services Directive has not achieved its intended objectives. It is well known that architects, engineers, and accountants are often prevented from offering services in other Member States. This objective has the potential to be something of a game changer, however it is one European has consistently struggled to implement in the face of resistance from many professional bodies.
 
6. Addressing restrictions in the retail sector 

There are plans to tackle barriers to setting up retail businesses in other Member States, including: size; location; the requirements for local permits; and discriminatory planning rules. 
 
7. Modernising the European Standards System

The adoption of European wide standards will be reviewed to take into account the increased importance of information and communication technology. 
 
8. Achieving transparent and accountable public procurement

Member States will be able to access assistance with the procurement aspects of large infrastructure projects. 

9. Promoting a culture of enforcement in the single market

There will be a renewed commitment to ensuring that the principle of mutual recognition is respected, accompanied by more rigorous enforcement action against Member States. 

Conclusion

Ambitiously, the commission’s strategy aims to makes significant progress by 2017. However, Europe has attempted to address most of these issues on numerous previous occasions and the degree to which this attempt translates into concrete action will depend on the political will to address powerful vested interests in Member States.  

Noel Watson-Doig

CMA investigates pharmaceutical sector pricing issues

On 26 June 2015, the UK Competition and Markets Authority (CMA) announced the closure of its year-long investigation into a suspected breach of competition law by a pharmaceutical company. The investigation had looked into a loyalty-inducing customer discount scheme – a potential infringement of the competition rules if the company offering the scheme has a dominant position.

While the CMA closure statement does not provide much detail of the investigation (and the company under investigation has not been identified), the CMA must have sought significant documentary evidence in order to reach its provisional conclusion. The CMA evidently concluded that expending further resources on this case would have had limited value. This could be due to a number of possible factors: e.g., the infringement was very small scale; or there were factors which would have made it difficult for the CMA to prove a breach; or the company offering the rebates may not have been dominant. The CMA ultimately sent a warning letter to the investigated company, which constitutes neither a finding of wrongdoing, nor a bar to the investigation being re-opened in future.

CMA guidance on rebate schemes

Although the CMA did not pursue this case, the authority has sought to make clear that there will be situations where the offering of rebates will engage the competition rules. To assist companies to identify such situations, the CMA has provided some general guidance on the use of rebate/discount schemes.

The guidance acknowledges that such schemes can be mutually beneficial for customers and suppliers and that not all rebates or discounts offered by dominant suppliers will engage competition law. For example, a scheme offering rebates/discounts which apply only to units above a certain volume threshold is unlikely to raise competition concerns. This kind of offering is usually justifiable on the basis of the savings to the supplier from selling increased volumes.

However, the CMA guidance also notes that rebate/discount schemes may constitute an abuse of dominance where they have a ‘loyalty-inducing’ or ‘fidelity-building’ effect, which may exclude or limit competing firms’ ability to enter the market. This, in turn, may limit the incentives for firms to innovate, with customers potentially facing higher prices in the long term. In the context of the pharmaceutical industry, this concern is of particular relevance for wholesale supply (e.g., to hospitals/pharmacies), where governmental price regulation / reimbursement schemes do not prevent such rebates or discounts being offered.

One particular scheme highlighted by the CMA is a ‘roll-back’ rebate (also known as a ‘retroactive’ scheme). Under such a scheme, a customer which reaches a specified volume will receive discounts in respect of units purchased both above and below the threshold. The CMA considers this may be capable of ‘inducing’ customer loyalty. This may be an abuse of a dominant position in particular where the grant of the rebate/discount is conditioned on the customer purchasing from the dominant company in circumstances where it might otherwise have decided to buy from a competitor.

The CMA further highlighted that where a scheme results in effective prices charged by the dominant company which are below its production costs, it is likely to be concerned that competitors could be prevented from competing for some/all of the customer demand.

Comment

The content of the CMA’s guidance is in line with EU law in this area, and, as such, should not be seen as a significant new legal development. However, the CMA’s decision to provide guidance on this topic in the context of a pharmaceutical industry investigation suggests that it recognises that such schemes may be commonly used in this industry.

The CMA evidently has a renewed interest in pricing issues for pharmaceutical companies, as it has also recently opened a formal investigation into Pfizer and Flynn to consider possible excessive pricing of the anti-epilepsy drug Epanutin. 

CMA closure statement

For further information on the Pfizer/Flynn case, please see here.  

Nokia / Alcatel-Lucent’s SEP portfolio: A tale of two mergers

In the past few months, Nokia’s acquisition of Alcatel-Lucent has been approved by the EU (Case M.7632, decided 24 July 2015 and published in late September) and Chinese competition authorities (press release announcing decision, 21 October 2015).

While the European Commission approved the merger in Phase I without remedies, the Chinese authority (MOFCOM) has required Nokia to give commitments in relation to the licensing of the acquired standard essential patents (SEPs).  MOFCOM’s market analysis suggested that Nokia’s market position for 4G SEPs (presumably based on patent declarations) would climb from second to first, and considered that “it’s possible that Nokia will use its standard-essential patents (SEPs) to exclude or restrict the relevant market competition after the deal”.  MOFCOM further stated: “After the concentration, the possible unreasonable changes of Nokia’s charges of SEPs will bring differences to the landscape of China’s mobile terminal manufacturing market and wifi equipment manufacturing market. It will exclude and restrict the market competition and finally impair the interest of consumers”.  As a result of MOFCOM’S concerns, Nokia “promised to continue to abide by FRAND rules with regards to SEPs, and also made commitments on topics concerning the prohibition and transferring of SEPs”.  The exact text of the commitments has not (yet) been made public.

Why, then, the concern in China, when no such concern was evinced in the EU?  First, the EU seems to have come to rather different conclusions on the merged entity’s position in 4G technology markets (not the market leader, according to the EU’s assessments).  More fundamentally, the Commission appears to take the view that the FRAND obligations which apply to the transferred patents are sufficient to prevent harm: “The merged entity is […] obliged to license its SEPs to any interested party under such FRAND terms and the transaction will not affect or change the parties' FRAND commitments”.  The way this is expressed is worth noting, since it provides some helpful explanation of the requirement in Article 6.1bis of the ETSI IPR Policy (newly introduced in March 2013) that FRAND undertakings should be “binding on successors-in-interest”.  The Commission evidently understands this to mean that FRAND for a particular SEP has to mean the same thing, regardless of which party is licensing out that patent.  The Commission also seems to place importance on the fact that the merged entity will retain a significant infrastructure manufacturing business.  Query whether its conclusion would have been different had the transfer of SEPs been made to a non-practising entity.    

As regards non-SEPs, the press release from the MOFCOM investigation gives no particular insight.  The Commission took the view that no concerns would arise: it stated that there were no indications that Nokia “would have greater ability and incentive to enforce Alcatel’s non-SEPs than Alcatel has today”, and further stated that its investigation had not suggested that any of Alcatel’s non-SEPs were “indispensable” for manufacturers.  The criterion of indispensability seems to set a high bar for competition law intervention in relation to non-SEPs.  It is, however, in line with the Court of Justice’s view in Huawei v. ZTE that ‘FRAND-encumbered’ SEPs are in a different class from other patents which manufacturers can design around.  Time will tell if this distinction is warranted, so far as the merged entity is concerned.

Sophie Lawrance

Huawei v ZTE - three months on

Three months have gone by since the Huawei v ZTE judgment.  Having considered the judgment on behalf of both licensors and licensees, I find myself wondering if my views have changed, compared to when the judgment was first handed down. 
 
It was clear on initial review that the judgment was potentially more favourable for licensors than licensees. If anything, this impression has been reinforced by looking at how the judgment may work in practice: whereas licensors can avoid (most of) the obligations by not seeking injunctive relief; licensees are in the dark as to what patents may be asserted until it happens. At that point it may be too late to correct any non-compliant conduct (although that is still far from clear). 
 
This may be a desirable or undesirable outcome depending on your market position. However, there is undoubtedly an information asymmetry which can favour the licensor. 
 
The judgment is (at least in the recitals) also extraordinarily prescriptive in a way which has no clear legal foundation.  Neither Article 102 nor the Enforcement Directive contain any basis for the imposition of such obligations on (unproven) patent infringers.  
 
In fact, the operative parts of the judgment (i.e. the final two paragraphs) are much less prescriptive. Given the procedural autonomy of national courts, the detailed provisions in relation to matters such as provision of security may well become a matter of national judicial discretion. 
 
For those who would like to read more, an article (here) we have written on the judgment has been published in Competition Law Insight. 

Sophie Lawrance

Online platforms hold on tight...

...Geo-blocking and online platforms are the next dip in the roller-coaster that is the e-commerce sector enquiry - which is fast gathering pace. 

On 24 September 2015 the European Commission announced that it is now launching two public consultations: one on geo-blocking and the other on online platforms. 
The consultations’ aim is to identify and categorise potential antitrust problems and other practices which may create barriers to cross-border trade. Of note perhaps is the comment in Director General Laitenberger’s “retour aux sources” speech on 21 September that the competition authorities may use different tools to tackle the same behaviour. The suggestion is that where the behaviour is practised by a dominant undertaking, then competition law armoury may be used while behaviour by non-dominant undertakings may require other “legislative initiatives”. It is becoming clearer that there are certain topics that are very much in or out of the competition law remit of this particular enquiry...
 The timeline for the next steps and beyond are summarised below.

Timeline
UK parallel enquiry

In parallel to the above consultations, the UK House of Lords launched its own enquiry into online platforms. The deadline for responding to this enquiry is 16 October 2015.

The aim is to provide a “constructive contribution” to the EU debate. The aim is to identify the benefits that platforms can provide as well as collect data to inform any recommendations for regulatory change that the U.K. may propose.

More Questions than answers?

In short, for those involved in the sector, it can fairly be said that lots of people and institutions are currently asking lots of questions – some of which may be at cross purposes. What is less clear at the moment is who is responding and how the responses will in fact be used to inform policy. 

“Everything online” including “everything copyright”

On 9 October 2015, the European Commission published its clearance decision in relation to the joint venture between three collecting societies (GEMA, STIM and PRSfM). This joint venture - and the European Commission’s (Commission) decision to clear it (following commitments offered by the parties) is of particular note, not only because it fits under the e-commerce umbrella (it is all about the licensing and administration of online rights in musical works), but also because it represents a further move towards breaking down the practice by collecting societies of dividing up the licensing and administration of copyright along national boundaries, long-criticised by the Commission. As highlighted by Competition Commissioner Margrethe Vestager in her recent speech in Florence:**   barriers to cross-border trade can be created either by national copyright laws or by the use of contractual terms in copyright licences. This decision deals with the latter.

To be clear, up to now, reciprocal representation agreements between collecting societies have permitted each participating collecting society to license the repertoires of other collecting societies around the world to users but only for use in its own territory. Although collecting societies have started granting multi-territorial licences for their own repertoires, they have licensed the world repertoire of other collecting societies only on a mono-territorial basis for their home country. 

Several “firsts”

The joint venture will provide new products on both sides of this two-sided market:

  • The joint venture will provide multi-territorial licences to online platforms for all three collecting societies’ musical repertoires. Going forward, the likes of iTunes will need to negotiate only one single multi-territorial licence for all three repertoires instead of negotiating a licence for each country where the platforms operate. Small collecting societies who do not license their repertoire on a multi-territorial basis will also be able to request that their repertoire is included in any multi-territorial online licensing offer. 
  • Collecting societies and large music publishers will also have the opportunity to obtain copyright administration services on a multi-territorial basis for the first time. Until now such services have been offered for a single country, namely that of the collecting society providing the service. 
What was the Commission concerned about?

The Commission’s concerns lay in the market for the provision of copyright administration services to collecting societies and particularly to large music publishers (so-called “Option 3 publishers”) in relation to transactional multi-territorial licences. These publishers tend to license the mechanical rights for their Anglo-American repertoires themselves but obtain a mandate from the PRSfM to license the performing rights. They still obtain administration services from collecting societies. One of the Commission’s concerns was that in return for granting a mandate to license the performing rights for the Option 3 publisher’s repertoire, the PRSfM would oblige Option 3 publishers to obtain all their administration services from the joint venture, thus excluding collecting societies who wished to compete in providing these services.  In the eyes of the Commission, the joint venture might also impose exclusivity provisions or bundle such services in an attempt to foreclose competitors. Lastly, the Commission was concerned that the joint venture may make it difficult for users of its database to transfer their data to a competitor if they decided to switch to a different collecting society.

The commitments made by the parties

The PRSfM committed: 

  • not to use its position in relation to Option 3 publishers’ performing  rights to require them to obtain their copyright administration services from the joint venture. Other collecting societies and Option 3 publishers will be able to pick and choose the services they require from the joint venture and such services will not be bundled together.
All three collecting societies committed that the joint venture would:

  • not enter into exclusive contracts other than for database services; 
  • offer copyright administration services to competing copyright societies on fair reasonable and non-discriminatory terms when compared with the terms offered to its parent companies; 
  • facilitate switching; and 
  • allow termination of the contract at any time on the provision of reasonable notice.
Not only will the Collective Management Directive (“CMD”) be directly applicable to the joint venture, but the joint venture itself puts into practice the idea, made legally binding in the CMD, that musical repertoires should be able to be aggregated into multi-territorial online licences regardless of the location of the right-holder or the collecting society. In addition, the Commission’s decision may pave the way for easier switching by rights holders which will increase their choice of collecting society.  Offline licensing and mono-territorial online licensing and administration are not the subject of the decision and will continue to function as before.

It will not be surprising if the impact of the CMD, the European Commission’s investigations in relation to the e-commerce sector enquiry as well as the review of copyright rules across the EU, lead to a change in the landscape relating to the licensing and administration of online musical rights, and pave the way for more exciting “tie-ups” in the future. Who knows if the offline world of music licensing will follow?

**Speech by Commissioner for Competition, Margrethe Vestager,  at the 19th IBA Competition Conference, Florence 11 September 2015 

Competition law as panacea for high prices?

It seems that the CMA's opening of an investigation into Pfizer / Flynn (which we discussed here) may not be the only pending competition case on excessive pricing of pharmaceuticals. A possible investigation into Turing Pharmaceuticals is being mooted in the US, following the company's decision to increase the price of Daraprim (an anti-parasitic) from $13.50 to $750, according to reports.  
 
Pricing, in particular excessive pricing, is a notoriously difficult area for competition authorities. The legal test does not lend itself well to markets where intellectual property rights may apply.  There may also be many reasons why a company might seek to introduce above-inflation price increases: to reflect increased input / manufacturing costs, to improve the margin, to reflect changed competitive dynamics, to compensate for financial problems elsewhere in its business, and so on. None of these are in themselves contrary to competition law.
 
Nevertheless, price increases of the type introduced by Turing at least seem to indicate a lack of effective competition on the relevant market. The drug is long off patent, yet prices are evidently unconstrained by generic competition. This may be due to low sales of the drug, or manufacturing cost/complexity that third parties may find difficult to replicate without the originator's know-how.  The regulatory framework almost certainly plays a role in raising barriers to entry and also – in countries where free pricing is an option – in failing to constrain the price at which such drugs are sold.  The enormous differences in wealth and living standards across the globe also lead to difficult questions for pharmaceutical companies – high prices in one country may in fact facilitate lower prices being made available to health services in countries which are less able to afford such drugs.
 
These complex dynamics certainly contribute to the dearth of excessive pricing cases in this sector.  Competition law seems an unlikely panacea.  But pharmaceutical companies considering their pricing strategy should nevertheless be aware of the tools potentially available to competition authorities and private claimants.
 
The message to business seems to be: 
  • Don’t forget the possibility of competition law scrutiny when increasing prices;
  • Document the objective basis for any price increases and be particularly cautious when increasing prices to captive parts of the market.
Sophie Lawrance

Competition law developments in the pharma sector


Last night we had the pleasure of giving a seminar at our offices on competition law developments in the pharma sector. We looked at investigations into patent settlements, and in particular the ‘pay for delay’ cases. We also reflected at how the recently published Lundbeck and Servier decisions may impact upon other important areas for pharmaceutical companies, such as licensing transactions. We concluded by drawing some ‘bright lines’ to try to assist in navigating what can sometimes appear to be a very grey area, providing practical guidance where we could. After a thorough review of a complex, and sometimes daunting, area of competition law we enjoyed a well deserved drink with many familiar faces, and some new ones too...

For those of you who couldn’t make the seminar a webinar version is available here and the slides here.