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How ill is the European pharmaceutical industry?

This article was originally published in Scrip

Executive Summary

The EU Commission's initial pharma sector report could have provided a valuable basis for an in-depth reflection on the legal and policy context within which the pharmaceutical sector operates, so as to ensure a more vibrant and competitive industry and better patient care. Unfortunately, the exercise seems doomed to fail, at least for two reasons.

First, the report heavily focuses on the potential for budgetary savings for healthcare systems if generics come to the market more quickly. It also demonstrates that the most significant source of potential savings lies in better competition between generic companies – the topic which has been excluded from the inquiry.

Second, the report shows that the Commission misunderstood the regulatory framework of the pharmaceutical industry and drew conclusions based on wrong premises. Perhaps the mathematical impact of this misunderstanding is limited – only DG Competition has access to the figures and they declined a request for access to even an anonymised set of data – but even then this approach undermines the credibility of the report.

With regard to market entry of generics, the key finding of the Commission is that for a selection of 128 active ingredients in 17 Member States significant additional savings could be realised. In the words of Commissioner Neelie Kroes, "[u]sing a sample of medicines across 17 Member States that faced loss of exclusivity in the period 2000 to 2007 we found €14 billion in savings after generic entry, and that delays to entry cost consumers around €3 billion on that sample." The delays are allegedly caused, at least in part, by strategies by originator companies, which are somewhat denigratingly accused of using a "tool-box" of instruments.

"The wise physician does not hastily give prescriptions at first sight, but he studies the constitution of the sick man before he prescribes anything; the treatment is begun later, but the patient is cured, while the hasty doctor kills him."

(Jean-Jacques Rousseau, Emile)


Such savings are of course very important (provided they are real), but more crucially, the inquiry also concluded that there are much bigger savings to be made by having more competitive prices for generics. For instance, the report mentions that a recent Dutch scheme, called the "collective preference policy", shows that by allowing insurers to enter into exclusive supply arrangements for specific periods of time, health insurers can obtain price reductions ranging (for the six top-selling products) from 76% to 96%. This illustrates just how much profit is produced by the generic industry.

Assuming, for the sake of argument, that 50% savings could be made for the same group of 128 products, the report suggests that the impact of such price reductions would be more than €15 billion. That figure dwarfs the €3 billion that forms the basis of the main message in the report, and shows that the inquiry is incomplete. Commissioner Kroes stated that "you can already see the savings available from good generic competition" but she should have added that much more can be saved by looking at competition within the generic industry. This is the first reason why the report cannot form a sound basis for a policy debate on the pharmaceutical industry.

The second reason is actually more worrying because it demonstrates that the report was prepared without a proper understanding of the EU pharmaceutical rules that define the regulatory context within which all companies, originators and generics, operate. This is, of course, surprising in light of the size of the inquiry, the amount of time and effort invested in it, and the strong statements made about the industry in the preliminary report.

The misunderstanding goes to the heart of the pharmaceutical rules, namely the principles of regulatory data exclusivity that specify a period following the approval of the innovative product during which no application for a copy product can be submitted without a full dossier, including non-clinical and clinical data. The rules go back to the late 1980s and provide 10 years of protection for centrally approved products and six or 10 years for other products. The effective protection is the relevant period of 10 or six years plus the time needed to review and approve the generic, which is typically around one year. The rules strike a balance between protection of innovation and stimulating generic competition and their importance was, for instance, stressed by the Commission in the context of negotiations with Turkey: "Data exclusivity and patent protection are in principle distinct legal rights and separate forms of intellectual property rights under both the TRIPS Agreement and the EC law and, therefore, should be protected separately."

The rules were revised in 2004. The new rule is an eight-year data exclusivity period during which no abridged application can be submitted, followed by two years of market exclusivity, during which the generic product cannot be marketed. The effect of the new rules is that they provide 10 years of protection for all products throughout the entire EU and EEA. This shortens the "old" 10-year protection by about one year, needed for review and approval, but extends the protection in the Member States that operated a six-year rule. It is a compromise for obtaining a fully harmonised protection period.

The 2004 rules, however, only apply to innovative products for which the original approval was applied for as from late 2005. The practical effect on abridged applications for generic products will thus only be felt as from 2013. The sector inquiry investigated the period from 2000 to 2007. The new data exclusivity rules are thus irrelevant for the inquiry (but they are relevant for any subsequent policy discussion).

Nevertheless, the Commission asked pharmaceutical companies to provide "loss of exclusivity" dates based on patent/SPC expiration and data exclusivity, and assumed that generics could normally enter the market immediately thereafter. It ignored the fact that if the data exclusivity was the longest protection, or expired only several months before the patent and SPC, its normal effect was that the generic could only be approved around one year later. For instance, if for product A the data exclusivity expired in June 2005 and the patents/SPC in December 2005, the innovative company was entitled to see no generic products on the market before about June 2006 at the earliest, not December 2005.

The impact on the €3 billion estimate is unknown until the Commission releases more detailed data, but the error in methodology undermines the credibility of the report. This is particularly relevant because the report is very severe on the originator industry. It accused companies of using a "tool-box" to delay generics – while many of the tools are IP rights that are key to innovation, as the Commission itself has recognised in other contexts.

It is also most unfortunate because a solid analysis would indeed have provided a very valuable basis for discussions on how to improve the EU pharmaceutical regime. In these circumstances, the Commission should reopen the inquiry to include competition within the generic industry in its scope and it should also re-examine its existing preliminary findings. This should result in a new preliminary report, on which all interested parties can provide useful input.

As correctly stated in the first sentence of the preliminary report, "[t]he pharmaceutical sector is vital to the health of Europe's citizens" and shortcomings in the sector are of major public interest. The pharmaceutical industry may indeed suffer from some illness. If it needs examination, it should be done thoroughly and completely. If there is a need for more analysis and consultation of specialists, that must be done promptly. Without this, no proper diagnosis can be made and no assessment of treatment options is possible.

Peter Bogaert is partner and head of the European Life Sciences Practice, Covington & Burling LLP. He can be contacted


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