Member Article

Over € 214 billion are spent annually on pharmaceuticals in Europe, and because of its aging population, spending on medicines is expected to increase. It is a constantly growing sector, making the need for well-functioning laws and regulations particularly important. In recent years however, according to the European Commission there have been indications that competition between originator companies and generic companies is restricted and distorted. Generic companies are companies that distribute pharmaceuticals equivalent to original drugs at a lower price after the original company’s patents have expired. Distorted competition between originator companies has also allegedly been noted. The European Commission initiated the Pharmaceutical Sector Inquiry in January 2008 with the aim of gathering facts and identifying shortcomings in the regulatory framework of the industry. However, many legal experts have been critical of how the inquiry was conducted.

"The Commission began its inquiry with virtual dawn raids, unexpectedly visiting several pharmaceutical companies simultaneously and demanding that they show the Commission’s officials all their files and data," says Peter Utterström, lawyer and head of the life science team at Delphi, a Swedish law firm. "This method is highly unusual and in my opinion in conflict with the Commission’s rights with respect to making such inquiries."

The Commission claims that it was not seeking to identify wrongdoers, but to inquire into the sector as a whole and how companies use patents. But Peter Utterström is skeptical of this claim.

"If this was indeed the purpose, it has conducted the inquiry in quite the wrong way. Its methods have instead cast a shadow on all companies in the industry, which is unacceptable and unfair to the majority of the companies in the industry."

Scientific research vs. patents

The inquiry covered the period between 2000 and 2007 and analyzed 219 pharmaceuticals.

These comprised medicines for which patent protection had expired in recent years or medicine entering the market as generics for the first time, as well as some top-selling medicines, many of which still benefit from exclusivity but where patent expiry is expected in the near future.

"In Europe, supplementary protection certificates allow for an extended patent protection, by a maximum of five years, to pharmaceuticals since the time between filing an application and market launch may be significantly longer than in other sectors," explains Karin Johansson, patent attorney and member of the life sciences specialist team at Awapatent.

The findings of the first phase of the inquiry have been summarized in a preliminary report. A main finding of the inquiry is that the competition in this industry allegedly is not working as well as it should. The consequences have been a decline in innovations, measured by the number of new medicines reaching the market, and delayed market entry of generic medicines. This has led to additional burdens on public health budgets, and ultimately on taxpayers and patients.

- Are patents limiting the spread of scientific research?

"The patent system as such cannot be held responsible for limiting the spread of new findings from the scientific community. On the contrary, the whole purpose of the patent system is to contribute to development by rewarding inventors with a time-limited monopoly in exchange for making their inventions available to the public. All patents applications are published 18 months after filing and researchers can publish their research findings the very same day that a patent application is filed," says Inga-Lill Andersson, European patent attorney and head of life sciences specialist team at Awapatent.

Defensive strategies

The report states possible reasons why competition is not working as well as it should. For example, originator companies strategically delay or block the market entry of competing medicines by filing numerous patent applications for a single medicine, so called patent clusters. Another strategy mentioned in the report is divisional application filing, which allows the applicant to split an initial parent application into one or several applications.

"It should be noted that the report does not question the patent system as such, but the way in which companies utilize patents in the pharmaceutical market," says Karin Johansson. "Patent applications are often filed in the early stages of medical research when it might not yet be clear what will actually turn out to be the definite medicine. Therefore, many applications may be filed as a safeguard."

"One has to understand that a company based on research and innovations needs to have a strategy in order to protect its findings in the best possible way, for example by using patents. This is a natural strategy and not exclusive to the pharmaceutical industry; any R&D intense company is likely to act in this way and is merely acting in accordance with the legal system," says Peter Utterström. "It’s a matter of the rule of law. To the extent the Commission, or a competitor, is of the opinion that a methodology applied by a company is in conflict with the e.g. the competition rules, it has all possibility to act and make use of its vast powers in this regard." "There might be companies that breach the current competition laws and deliberately attempt to delay the market entry of generic medicines," he continues. "But it would be more efficient if the Commission and the national competition authorities were to continuously watch and follow up the compliance of the competition rules." The preliminary report also states that from 2000 and 2007, originator companies on aver age spent only 17 % of their sales of prescription drugs on R&D, and 23 % on marketing.

"It is true that marketing is a large part of the total cost but this cost is a combination of "traditional marketing", within the restrictions for such, and the cost of skilled people advising on the use of the products. Another overlooked factor of vital importance is that the R&D cost for a new drug in 2003 was approx imately USD 897 million (EFPIA) and increa sing. This cost barrier is probably one of the most significant factors of the low number of new products entering the market. With these comments in mind it is worth noting that the Commission avoided mentioning that generic companies only reduce the costs of pharmaceuticals by 20 % on average. With no need to fund R&D or to market the products, the prices of generic medicines should be much lower, shouldn’t they? Or is it just that generic companies, like any other business, are in it for the money?" Peter Utterström says.

Centralization

Although Peter Utterström and other legal experts believe there are several flaws in the inquiry, it has some points that he considers worth noting. For example, the report calls for the creation of a Community patent supported by a community patent court system.

"The current Community Patent System has failed as the supporting court system solely deals with the national part of a European patent. As a result a so-called European Patent can be upheld in one member state and revoked in another," says Peter Utterström. "The idea of a Community patent is to al low companies to obtain a unitary patent covering the whole of the EU. This patent would have equal legal force throughout the EU, and an individual member country cannot revoke the patent. Instead it could only be granted, transferred or declared invalid for the whole of the EU," explains Karin Johansson.
"The creation of such a patent and system would be an important step towards a simple, cost-ef fective, and high-quality patent system in Europe. The pharmaceutical sector in particular, as it is patent-intensive, could be expected to benefit from such a system." Another important point in the report is the need for a more centralized European patent court. At present, there is no single jurisdiction for European patent disputes.

"The European Patent Office, EPO, handles patent applications centrally, but once a European patent is granted it becomes a bundle of national patents," says Karin Johansson."One of the disadvantages with the current system is that multiple litigation in a number of countries is inevitable where there is a dispute, which is costly and lacks legal certainty. There are also quality differences between national court systems and differences in the speed of the proceedings and calculating damages indifferent jurisdictions." There is a proposal to establish a uniform jurisdiction for European patents under the draft European Patent Litigation Agreement (EPLA). "A common European litigation system would be advantageous for everybody, but perhaps in particular for generic companies which are smaller and more vulnerable to costly and lengthy proceedings," says Inga Lill Andersson. "If, or when, this is implemented the Community can deal with the wider issue and based on the rule of law any abuse, real or perceived, can be dealt with – using the anti trust rules or the patent system. And not based on what to day seems to be the concern, i.e. that the pharmaceutical sector takes too large a portion of the tax base," says Peter Utterström. Feedback from stakeholders on the preliminary report is now being received and a final report will be published during spring 2009. "I hope that the final report will be more balanced in its design," says Peter Utterström.