11 Apr 2012

(by Sven Gallasch) Last month the European Commission closed its antitrust investigations into and . These centred on possible anticompetitive agreements to delay generic entry into the market. The investigations had been launched following the European Commission’s Pharmaceutical sector inquiry in 2009. The decision to end the investigations may come as a surprise given comments made at the time by Commissioner Kroes: So why did the investigation run out of steam?

We have no detailed information from the Commission, but there are two likely reasons for the decision to suspend: (1) difficulties regarding market definition which is essential for a finding of dominance; (2) a viable theory of harm that can show the anticompetitive effects of such agreements.

In defining the relevant product market under Article 102, if the Commission employed the Anatomical Therapeutic Chemical (ATC) classification system used in merger cases, the investigated pharmaceutical brand companies are unlikely to have passed the relevant threshold for the finding of dominance. An ATC level 3 used in merger control, covers a pharmacological subgroup, such as all drugs that lower blood pressure. Even at ATC level 4, only a chemical subgroup is covered, not the chemical substance itself. In both cases, a number of competing chemicals can be anticipated, decreasing the market share of the investigated company. The problem is that market power in the pharmaceutical sector does not necessarily coincide with the traditional definition of the relevant market.

When it comes to the theory of harm regarding these pay-for-delay settlements, the Commission drew on the US experience of heavily scrutinising these settlements. Despite the apparent similarities of pay-for-delay settlements in the United States and Europe – including a direct value transfer from the brand company to the generic company to stay out of the market – it can be argued that the anticompetitive potential of such agreements ought to be significantly less in Europe. This is largely due to regulatory differences with regard to pharmaceutical market approval, especially in terms of generic drug approval. The European regulatory system lacks provisions comparable to the Hatch Waxman Act, which was designed to promote generic investment by protecting the first generic entrant six months protection from further entry. This enabled a brand to foreclose the relevant pharmaceutical market in the US, simply by entering into a delay agreement with the first generic company that applies for FDA market approval. In contrast, the European equivalents to the FDA are not allowed to take economic factors, such as patent protection and the potential infringement by the generic company, into consideration during the generic drug approval process. Yet, such an infringement by the generic company is the cornerstone for the exclusion of subsequent generic entrants from the market in the US. A possible way to foreclose the market in Europe would be to pay off all potential generic entrants at once. Yet again, this is unlikely to happen as the generic entrants (contrary to the US) do not have to notify the brand company about their intended entry. The brand company therefore cannot be certain which generic company is about to enter. The only alternative – paying the generic companies off one by one – appears to be neither economically viable nor sensible as it would only attract ‘entry for buyout’.

Overall, it will be very hard to challenge ‘pay for delay’ successfully under European Competition law.