Q&A: Antitrust challenges in the pharmaceutical industry

August 2024  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2024 Issue

FW discusses antitrust challenges in the pharmaceutical industry with Sebastian Dworschak at Hengeler Mueller, May Lyn Yuen at Hogan Lovells and Kate McNeece at McCarthy Tétrault.

FW: To what extent is the pharmaceutical industry a hotbed of anticompetitive practices? How would you describe the nature and scope of risks in this area?

Dworschak: The pharmaceutical sector differs from other economic sectors in terms of competitive dynamics. These particularities include the specific structure of demand and supply involving a variety of stakeholders and a comprehensive regulatory framework. Pharmaceutical companies incur high costs in connection with the research and development (R&D) and regulatory approval of new pharmaceuticals. Against this background, pharmaceutical companies are particularly dependent on the effective utilisation of their exclusive intellectual property (IP) rights to amortise such costs. These particularities can harbour risks and may, under certain circumstances, provide incentives for anticompetitive practices. In the past, we have seen differences in the regulatory framework provide incentives to certain pharmaceutical manufacturers to limit parallel trade in the European Union (EU). In other cases, pharmaceutical companies have used a variety of tools to extend the duration of their IP rights, such as ‘pay for delay’ agreements.

McNeece: The Competition Bureau has a robust history of monitoring competition in the pharmaceutical industry in Canada. In the past five years, the Bureau has released position statements in respect of investigations into potential anticompetitive conduct in the pharmaceutical industry in respect of a variety of products, including generics, radiopharmaceuticals, biologic drugs and off-label use of vaccines. In 2007, the Bureau released a market study on the generic drug sector, and in 2022, a joint statement highlighting the collaboration between the Competition Bureau and Health Canada to strengthen collaboration on key issues in the pharmaceutical industry. Given the importance of pharmaceuticals to Canadian consumers and the Canadian economy, it is likely that the Bureau will continue to shine a spotlight on potentially anticompetitive activity in the pharmaceutical industry.

Yuen: While the pharmaceutical industry is not necessarily a hotbed for anticompetitive practices, the structure of the markets and how companies compete, taking into account the regulatory and IP aspects, make the industry more exposed to competition law risk and therefore more likely to receive regulatory scrutiny. The dynamics of the market are such that they incentivise constant innovation and the development of new products. In time, this encourages new entrants and competition, which brings prices down for the customer. The competition law rules play a role in safeguarding the competitive process and consumer welfare at every stage of the market, from product development to product launch and lifecycle management. For instance, collaboration efforts to research potential new drugs need to be competition law compliant, as do marketing and distribution arrangements. Further, in certain situations, patenting strategies as well as pricing must also be in line with competition law rules.

FW: What levels of antitrust enforcement activity have you seen in recent months? Has there been a rise in investigations involving pharmaceutical companies?

McNeece: The Bureau continues to investigate allegations of alleged anticompetitive conduct in the pharmaceutical industry, though the consistent cadence of investigation in this space does not suggest a noticeable rise in investigations. Key issues that have arisen in multiple cases include branded manufacturers attempting to restrict generic manufacturers from accessing samples of branded products, in order to prevent or delay entry of competing generic drugs, as well as contracting practices such as use of exclusive arrangements, and relabelling practices. With sweeping amendments to the Competition Act set to come into force in the coming weeks or months, it is likely that the level of enforcement activity in Canada will remain robust.

Yuen: There is generally a high level of antitrust enforcement activity in the pharmaceutical industry. While ‘pay for delay’ cases have typically dominated the headlines with regard to antitrust investigations by European regulators, there has been a broad range of cases brought by regulators against pharmaceutical companies. Regarding anticompetitive agreements, the European Commission (EC) recently issued fines in a cartel involving several pharmaceutical companies that were found to fix the minimum sales price of pharmaceutical ingredients to customers, allocate quotas and exchange commercially sensitive information. There has also been an increase in investigations against dominant companies for anticompetitive unilateral conduct, including investigations relating to excessive prices, and investigations relating to abusive patenting strategies.

Dworschak: The effective enforcement of antitrust law is increasingly important in delivering access to a wider choice of affordable and innovative medicines. In recent years, antitrust authorities have established several important precedents which clarified the application of antitrust law to novel issues in the pharmaceutical industry. These landmark decisions were often based on comprehensive investigations of the entire sector. According to the EC’s latest report on Competition Enforcement in the Pharmaceutical Sector: “there is a constant if not increasing inflow of antitrust and merger cases in the pharmaceutical sector. Also, in light of the COVID-19 pandemic, this sector and healthcare in general have been a high priority across the EU.” The statement of objections issued against Alchem International on 13 June 2024 is further evidence of this trend.

FW: Have any recent antitrust cases in this sector caught your attention? What insights do they offer into the current attitude of regulatory authorities and the challenges companies face in staying out of their crosshairs?

Dworschak: In recent years, we have seen several landmark antitrust cases in the pharmaceutical industry. The Servier case concerned ‘pay for delay’ agreements. Teva was fined for striking side-deals with Cephalon to drop a generic challenge to Cephalon’s blockbuster sleeping-disorder treatment. In another case, for the first time, a cartel regarding an active pharmaceutical ingredient, concerning price fixing and the allocation of quotas, was sanctioned by the EC. Finally, there is the EC’s attempt to target certain disparagement practices by means of article 102 of the Treaty on the Functioning of the European Union (TFEU) and its investigation in the field of veterinary-use painkillers concerning the discontinuation of R&D activities with regard to a pipeline drug. These and other cases show that the EC is willing to move away from its usual take on article 102 TFEU cases, now not only targeting the industry with cartel investigations, but also ramping up its antitrust scrutiny in general.

Yuen: There have been a number of recent investigations relating to the disparagement of competitors which are interesting. The EU member state competition authorities have been particularly active in bringing these types of cases. The authorities have brought cases under the abuse of dominance rules to find that dominant firms are abusing their positions when they have been spreading misleading information about their competitor’s product to discourage customers from moving to a competitor. These cases involve communications made by the dominant firm – an originator – about the safety of generic alternatives. They are interesting because there may be valid reasons to communicate to the market concerns about the safe use of alternative products. It is important that the EC provides guidance on disparagement as an abuse of dominance, so that companies can assess whether their third-party communications are compliant with antitrust rules.

McNeece: In its most recent position statement in this space, the Bureau outlined concerns with contracting practices by Isologic, a supplier of radiopharmaceuticals for use in single-photon emission computed tomography (SPECT) imaging. The Bureau found that Isologic held a dominant position in the market for the supply of SPECT radiopharmaceuticals in Canada, that there were a number of clauses in Isologic’s customer contracts that raised concerns, in particular those requiring customers to purchase radiopharmaceuticals exclusively from Isologic, and that these contracts raised barriers to entry for actual or potential competitors, and that these resulted in a substantial prevention or lessening of competition. The Bureau entered into a consent agreement requiring Isologic not to enter into any new contracts or renew existing contracts where such contracts had exclusivity requirements, required a minimum quantity of purchases or prevented the customer from terminating the contract, with some exceptions. This position statement demonstrates that where a competitor has a dominant market position, contract terms that might otherwise be considered benign can have material competitive impact. Companies with significant market positions should carefully consider the risks of contract terms that could act as barriers to entry or expansion.

FW: Could you outline any recent legal and regulatory developments that are set to have an impact on antitrust issues in the pharmaceutical industry? How do you expect companies to respond?

Yuen: We expect to see the conclusion of a number of important cases in the EU in the near future. In addition to the EU’s highest court ruling on patent settlement agreements, the court will also soon issue its judgment on the EC’s use of the EU merger rules to seize jurisdiction over M&A transactions that fall below the merger notification thresholds. This will be of interest to pharmaceutical companies involved in M&A activity as the judgment should provide more clarity on the EC’s jurisdiction to review mergers in innovative markets.

McNeece: One recent legislative development that is already having an impact on the pharmaceutical sector is access to the Competition Tribunal for private plaintiffs. As of June 2023, private complainants can seek leave to pursue an action under the abuse of dominance provisions of the Competition Act. The first applicant to seek leave under this provision was a generic pharmaceutical manufacturer, Apotex Inc., alleging that three branded pharmaceutical manufacturers were abusing their dominant position by refusing to supply samples of a branded drug. The action was discontinued two weeks later – presumably, though none of the parties have confirmed publicly, as a result of a settlement. Though the quickly terminated action did not advance the case law surrounding abuse of dominance in the pharmaceutical sector, it demonstrates that generic manufacturers now have another avenue to seek redress from branded manufacturers that are attempting to stymie competition.

Dworschak: In Germany, the transaction value threshold has become particularly relevant for the assessment of merger control cases in the pharmaceutical industry. It allows for a review of mergers in which companies or assets are acquired for a purchase price of more than €400m, even though they still generate very low or no turnover at all. The law, which was introduced in 2017, is designed to capture mergers that have high economic significance despite the low turnover of the target company. Pharmaceutical companies are particularly affected by this threshold, which is shown by recent clearance decisions of the German Federal Cartel Office, such as the acquisition of Shockwave Medical by Johnson & Johnson, of Cardior Pharmaceuticals GmbH by Novo Nordisk A/S and of MorphoSys AG by Novartis AG, all of which were only subject to a filing requirement in Germany due to the transaction value threshold.

FW: How important is it for pharmaceutical companies to manage antitrust challenges and maintain compliance across their operations? What potential penalties might face those companies found to have breached the law?

McNeece: In addition to private actions for the abuse of dominance provision, pending amendments to Canada’s Competition Act would make available private actions and allow litigants to seek administrative monetary penalties for agreements between competitors, as well as, in some cases, vertical agreements, and deceptive marketing claims, as well as allowing private litigants to seek disgorgement of amounts gained through anticompetitive behaviour for all three provisions. Private enforcement is expected to complement Bureau activity in respect of each of these provisions.

Dworschak: Companies may face different kinds of consequences for a breach of antitrust law. These consequences include fines of up to €1m for individuals and up to 10 percent of the total turnover achieved in the previous financial year for undertakings, civil claims for damages, criminal sanctions, such as for submission fraud, or restorative measures in the event a merger is implemented without prior antitrust clearance. Further potential sanctions include the nullity of certain agreements, cease-and-desist orders, skimming benefits and, more generally, loss of reputation. To prevent these severe consequences, pharmaceutical companies must manage antitrust challenges and maintain compliance across their operations.

Yuen: There has been an uptick of competition law enforcement activity in the last few years, including against life sciences companies. A breach of EU competition law rules can have a serious impact on a business, not just as a result of the imposition of high fines, but also on the reputation of the company. In some jurisdictions, individuals such as directors may also face penalties for breaching competition law rules. In addition to this, dealing with investigations is time consuming and costly. Pharmaceutical companies would therefore be well advised to remain vigilant regarding antitrust risk.

FW: What advice would you offer to pharmaceutical companies on reviewing their policies, processes and business activities with a view to avoiding anticompetitive practices?

Yuen: It is important to keep abreast of developments in competition law and policy. While there is a large amount of content freely available in this regard, it is always helpful for a company to engage with its legal counsel to ensure there is a tailored strategy for competition law compliance. At the very minimum, a company should have a competition law compliance policy, as well as guidance available within the company about what to do in the context of an investigation.

Dworschak: We recommend pharmaceutical companies invest in a compliance strategy to prevent antitrust violations. This includes internal control systems and employee training to sensitise employees to the relevant aspects of antitrust law. External law firms may also carry out antitrust law workshops. Compliance strategies may further help uncover prior antitrust law infringements. This enables the company to better manage compliance risks. The EC has also issued various reports and guidelines, such as the Commission Regulation (EU) 2023/1066 of 1 June 2023 on the application of article 101(3) TFEU to certain categories of R&D agreements, that pharmaceutical companies should pay close attention to. If in doubt, an antitrust lawyer should be consulted to give guidance on individual business practices and their compliance with antitrust law.

McNeece: It is important for pharmaceutical companies to remain apprised of the provisions of Canada’s Competition Act, especially given the significant amendments expected to come into force in the coming months and years. Especially where a company has a significant market position with respect to a given product or products, care should be taken when drafting contracts or engaging in commercial discussions, to ensure that the conduct would not be considered to have the intent of or have the effect of, preventing competition with respect to that product. In this respect, it can be helpful to document any legitimate business justification or procompetitive rationale, for a given contracting practice or course of action, as this can be used as evidence contrary to anticompetitive intent.

FW: What are your predictions for antitrust enforcement efforts in the months ahead? What trends are we likely to see in this space?

Dworschak: In 2009, the EC had identified an entire ‘toolbox’ of practices by pharmaceutical companies that may give rise to antitrust concerns. While some of these practices have been subject to in-depth analyses, other practices, such as early entry agreements, have not yet received much attention. Thus, it will be interesting to see whether the authorities will engage with these practices in the future. In any case, the pharmaceutical industry will remain subject to intense antitrust scrutiny in the months ahead, including merger control cases. In Germany, for instance, we see an increased number of cases involving pharmaceutical companies being reviewed because of the transaction value threshold. We expect this trend to continue and assume that, in the future, we will see an increased number of licence agreements between pharmaceutical companies being reviewed on this basis. The German Federal Court of Justice confirmed the application of the merger control regime to licence agreements years ago. So far, however, too little attention may have been paid to this, particularly by stakeholders in the pharmaceutical industry.

McNeece: Given the pending amendments which strengthen the Bureau’s tools in respect of abuse of dominance, and the increased availability of private actions, we anticipate an uptick in antitrust litigation in Canada once the amendments come into force. In this respect, we expect that antitrust enforcement will continue to address similar concerns for pharmaceutical manufacturers, including contracting practice, access to samples, and IP issues, such as the impact of patent litigation settlements.

Yuen: One area that is quickly developing is the EC’s enforcement of the new Foreign Subsidies Regulation (FSR). Under the FSR, the EC is entitled to review transactions, public procurement tenders and through its own investigatory powers companies that have been in receipt of subsidies from non-EU countries, and to block deals, tenders or impose commitments to redress distortions on the EU market. While the FSR is new, there have already been significant cases in this space that show that the EC is serious about protecting European interests. Pharmaceutical companies are likely to have had state dealings, for example through the sale of medicines to a national authority and the receipt of tax advantages to encourage R&D, and thus may be caught under the FSR rules.

Sebastian Dworschak advises clients on antitrust and merger control cases. His focus is on follow-on damage claims litigation as well as cartel investigations. He represents clients before the European Commission, the German Federal Cartel Office as well as before the European and German courts. His practice also covers abuse of dominance investigations, compliance training and audits, and aspects of day-to-day business. He can be contacted on +49 211 8304 722 or by email: sebastian.dworschak@hengeler.com.

May Lyn Yuen’s practice consists of advising on competition issues and procedure in relation to multijurisdictional mergers and large-scale complex antitrust cases. She works for a broad range of clients, including those in the life sciences, consumer goods, technology, manufacturing and automotive sectors. She is recognised as a future leader in Who’s Who Legal. She can be contacted on +32 2 505 0977 or by email: maylyn.yuen@hoganlovells.com.

Kate McNeece is a partner in McCarthy Tétrault’s competition/antitrust & foreign investment group in Toronto focusing on competition and antitrust law and foreign investment review. Her practice encompasses all aspects of competition law, including mergers & acquisitions, marketing and distribution practices, abuse of dominance, criminal and civil investigations, and compliance matters. She also provides strategic advice on foreign investment merger review under the Investment Canada Act, including with respect to state-owned enterprise investment and national security issues. She can be contacted on +1 (416) 601 7836 or by email: kmcneece@mccarthy.ca.

© Financier Worldwide

THE PANELLISTS

Sebastian Dworschak

Hengeler Mueller

May Lyn Yuen

Hogan Lovells

Kate McNeece

McCarthy Tétrault

Competition & antitrust

Q&A: Antitrust challenges in the pharmaceutical industry

Algorithmic pricing under the antitrust microscope: lessons from recent developments

Generational changes to Canada’s competition law framework

CMA’s increased powers in UK competition law investigations

The shifting boundaries of competition law in Europe

Belgium ends merger control in the hospital sector

Japan’s challenge to encourage competition in the smartphone software market