The European Commission (EC) has published a report on competition law enforcement in the EU's pharmaceutical sector during the 2018-2022 period. The report, released on 26 January, provides detailed insights into the actions taken by the EC and national competition authorities (NCAs) to tackle claimed anti-competitive conduct and their approach to M&A transactions that raise competition concerns, reflecting the continued high level of enforcement activity in the pharmaceutical sector. The report builds on the EC’s previous report which covered the period 2009-2017.
While the report does not contain concrete guidance on how the EC and NCAs generally assess certain types of behavior or effects of transactions, it provides key statistics, summarizes important cases and outlines the authorities’ understanding of how pharma markets work. Highlights and takeaways from the report are set out below.
Antitrust Enforcement
The report reveals that the EC and NCAs wrapped up 26 investigations in pharmaceutical markets during the relevant period by either identifying an infringement or accepting binding commitments from companies to cease problematic practices. This equates to approximately 5 cases on an average yearly basis, a rise from 3 cases per year recorded during the 2009-2017 period. This trend reflects the sector's high priority for competition authorities in the EU.
Out of the 26 decisions, half of the cases pertained to an abuse of a dominant position. This encompasses the first investigation by the European Commission into excessive pricing in the pharmaceutical industry as well as other claimed abuses, including vexatious litigation, disparagement campaigns, abusive pricing and rebates, and a margin squeeze. The remainder of the cases related to different types of restrictive agreements between companies. These include outright cartels such as bid rigging (approx. 31%), other types of horizontal agreements such as patent settlement agreements (approx. 8%), and vertical agreements such as clauses prohibiting distributors from promoting and selling products of competing manufacturers (approx. 11%). During the 2009-2017 period, the percentage of “other horizontal agreements such as pay-for-delay agreements” was still markedly higher (around 31%). While this could be interpreted to suggest that patent settlement agreements are becoming less of a focus for enforcers in the EU, it is clear that such cases generally continue to be on the authorities’ radar.
17 of 26 interventions relating to pharmaceuticals concluded with a prohibition decision. Penalties were levied in 20 cases, totaling nearly EUR 780 million. In 9 instances, the inquiry was concluded without a finding of an infringement as the companies under investigation addressed competition concerns through commitments. Of note, only 2 of the decisions were adopted by the EC. The remaining decisions were adopted by NCAs, highlighting the continued significance of enforcement at the national level.
In addition to cases resulting in infringement/commitment decisions, European competition authorities conducted extensive investigations into over 40 cases that were ultimately closed owing to various factors. These include instances where the alleged anti-competitive practices ceased during the investigation, rendering the case a lower priority, or where preliminary investigations failed to uncover adequate evidence.
Merger Enforcement
According to the report, the EC assessed more than 30 M&A transactions in the pharmaceutical sector from 2018 to 2022. The EC identified competition concerns in 5 of the transactions (such as potential price increases, deprivation of medicinal products to patients, and diminished innovation), representing an intervention rate of approx. 17%. This is more than three times higher than the rate across all industry sectors during the same period (i.e. approx. 5%). Merging parties were able to offer remedies that resolved the EC’s concerns in 4 of the 5 cases, with one M&A transaction being abandoned by the parties.
The report emphasizes the importance of innovation in the pharmaceutical sector. The EC describes for the first time its practice of investigating four ‘layers’ of competitive overlaps in M&A transactions: actual competition (i.e. overlaps in marketed products), potential competition (i.e. overlaps between pipeline products and marketed products), innovation competition (i.e. overlaps between pipeline products) and competition in innovation in general (i.e. overlaps in R&D).
The EC also explains its revised approach to requests for case referrals by NCAs that do not have jurisdiction over a merger. In the past, NCAs were discouraged from requesting referrals in such cases, as it was considered that the turnover-based thresholds captured all transactions that could materially impact the internal market. Under the EC’s new approach, mergers that fall below national jurisdictional thresholds can be referred to the EC where there is a concern that the transaction would affect trade between Member States, and that - based on a preliminary analysis - the transaction threatens to significantly affect competition in that Member State’s territory. This is particularly relevant for the pharmaceutical sector, where innovation is a key parameter of competition. Thus, targets with promising drug pipelines can have high valuations and significant competitive potential, even if they do not generate turnover yet and therefore fall below the relevant merger control thresholds. The EC now actively monitors pharmaceutical deals to identify transactions that fall below the EU’s and Member States’ notification thresholds but are nonetheless considered to merit review by the EC.
Legislative Developments
The report also discusses the ‘pharmaceutical package’ adopted by the EC on 26 April 2023, which is currently under consideration by the Council of the European Union and the European Parliament. If approved, this package would replace the existing pharmaceutical legislation, including the legislation on medicines for children and for rare diseases. Stated aims include promoting innovation in areas of unmet medical need, making medicines more accessible (in all Member States), available (to address risks of shortages), and affordable (to national health systems and patients), while supporting the competitiveness of the European pharmaceutical industry, combatting antimicrobial resistance, and ensuring higher environmental standards of medicines.
To achieve these aims, the package proposes measures including a system of modulation of incentives to promote patient access to medicines in all Member States, additional periods of data protection, and measures which involve enabling earlier market entry for generic and biosimilar medicines after the expiry of the patent protection of the originator by broadening the “Bolar exemption”. This exemption stipulates that under certain conditions, procedures such as sample production necessary for regulatory approval do not violate existing patent rights or supplementary protection certificates.
Conclusion
The EC's report shows that effective enforcement of EU competition rules in the pharmaceutical sector remains a matter of high priority for the EC and NCAs. European competition authorities will continue to monitor and be pro-active in investigating potential anti-competitive situations as they continue to adapt to the sector's continuous changes and evolutions. Pharmaceutical companies therefore need to remain alert to the impact of competition law developments on their operations and build effective compliance structures into their commercial strategies. Companies planning transactions should be prepared for rigorous scrutiny by the EC, in particular of innovation-related aspects, and should consider potential competition issues at an early stage of their transaction planning (factoring in the increased risk of case referrals).
