In the spotlight

It is well known that maintaining the value of the product's brand is key if pharmaceutical companies are to recoup the significant, long-term investments often incurred in research and development.

The strategies employed to achieve this take place within the boundaries of a heavily regulated arena and many in the industry will be acutely aware of these limits. Now, though, following two recent court decisions and further movement by the European Commission (EC) and national regulators, a number of these standard industry strategies may soon be deemed to infringe competition law.

Competition law
Lifecycle management strategies were a major focus of the EC's pharmaceutical sector inquiry between 2008 and 2009. That sector inquiry ended with a whimper and without any specific recommendations on how or whether competition law should apply to lifecycle management. However, subsequent European and national investigations have resurrected the prospect of competition law regulation in this area.

Those investigations have, or appear to have, been based on Article 102 Treaty on the Functioning of the European Union (TFEU) or its national equivalents. Article 102 TFEU prohibits certain practices where they amount to an 'abuse of a dominant market position'. In very general terms, where a company is dominant (that is, where it is so powerful in the market that it can essentially act independently of its customers, competitors and other parties), then it must observe a 'special responsibility' not to distort competition in that market. This means that competitive strategies which could lawfully be employed by non-dominant companies (pricing below cost, for example), could well be unlawful when employed by dominant companies ('predatory' pricing is classified as abusive conduct under Article 102 TFEU). In pharmaceuticals, some types of product reformulation could soon turn out to be classified as an abuse under Article 102 TFEU.

Reformulation
Reformulation (in the broad sense) can be an effective method of protecting originator products. In many cases, reformulation is often accompanied by a withdrawal from sale of the original medicine and a significant investment in marketing and promotion designed to change patients to the newer, modified, product. Since 2005, European and national regulators have been forming a consensus over how such practice should be analysed under Article 102 TFEU.

•  2005 - The EC fined AstraZeneca (AZ) an amount which now stands at €52m for abuse of dominance in relation to Losec (omeprazole). When Losec approached the end of its patent protected life, AZ selectively withdrew Losec capsules from the market and replaced them with a tablet version. This was achieved by deregistering marketing authorisations for capsules in certain countries. The EC concluded that this hindered generic market entry and was an abuse of dominance. AZ appealed the decision to the General Court but received little encouragement in that forum, and a further appeal has been made to the European Court of Justice.

•  2009 - At the conclusion of its pharmaceutical sector inquiry, the EC noted that: 'the launch of a second generation product can be a scenario in which an originator company might want to make use of instruments that delay the market entry of generic products corresponding to the first generation product'. At the time, it did not make specific competition law recommendations, but merely noted the existence of the practice.

•  2010 - In a case against Reckitt Benckiser, the Office of Fair Trading in the UK imposed a fine of £10.2m for an abuse of a dominant position in relation to its Gaviscon brand. Reckitt Benckiser had withdrawn and de-listed National Health Service (NHS) packs of Gaviscon Original from the NHS prescription channel and replaced it with a newer, slightly modified product, Gaviscon Advance. By virtue of a feature of the NHS prescription IT system, generics were almost entirely excluded from the NHS prescription channel.

•  2011? - Many in the industry will be familiar with the Shark Fin Project story, in which AZ replaced its existing omeprazole drug (Losec) on the market with an esomeprazole drug (sometimes known as Nexium). Nexium has always been a controversial drug, with many questioning its efficacy over Losec, citing it as a classic example of 'product hopping': while Losec is a racemic mix, Nexium is merely the purified enantimoner of the active pharmaceutical ingredient. In that case, the product hop allowed AZ to maintain patent exclusivity. Late in 2010, the EC carried out dawn raids on AZ and others, apparently in relation to practices connected with esomeprazole. If the EC is focusing on the Shark Fin Project aspects of AZ's conduct, it will send a clear message to the industry that it considers reformulation to fall squarely within potential abusive conduct under Article 102 TFEU.

Public policy debate
If product reformulation effectively becomes an activity which is, to some extent, regulated by the application of Article 102 TFEU, then it will not be without competition regulators resolving some difficult questions of public policy in the process.

•  Scientific progress is incremental - Product reformulation is often the result of the normal course of scientific progress. Many improvements to drugs are incremental and there are relatively few radical step changes in the way medical products come to market. It cannot be the case that competition regulators intend to stymie this kind of genuine incremental progress, although without many clear formal decisions at this stage, such a risk remains.

•  Validity of patents - Instead, it may be the case that competition regulators will seek to identify cases where the newer, modified product in some way lacks the quality of incremental improvement. Project Shark Fin could turn out to bear a number of the hallmarks of this kind of modification. However, only time will tell if the EC pursues this avenue. An additional problem here is that it will be difficult for any competition regulator either to show that a patent is, or is not, valid, other than with clear evidence that the patentee knew of its invalidity, or that a patent over a reformulated product is valid, but somehow does not reach a nebulous, separate, qualitative standard imposed by competition law.

•  How special is the pharmaceuticals sector? - In order to bring reformulation within the scope of Article 102 TFEU, competition regulators may need to state definitively that the pharmaceuticals sector is like any other consumer-facing industry. In that case, despite the substantial investment in R&D, the long lead-in times, the price regulation and so on, pharmaceutical companies will not be allowed any leeway by the regulators over lifecycle management practices.

•  What about biotech and biosimilars? - Competition regulators may soon need to review much of their legal reasoning with the emergence of the biosimilars sector and there is no guarantee that the conclusions will be the same. Current market penetration of biosimilars in Europe is low relative to market penetration for chemical pharmaceuticals. There could be many reasons for this, including high costs and the risks associated with gaining approval for biosimilars, greater brand power in the biotech industry, or more sophisticated commercial or pricing techniques being employed by originators in this industry to combat biosimilar market entry. With the chemical pharmaceuticals patent cliff approaching fast for most companies, the EC also needs to decide whether the same legal principles should apply to different facts and circumstances for the important medicines of the future, not the recent past.

The Authors
Natasha Kirk and Stephen Whitfield are associates at Taylor Wessing

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