Healthcare – UK and EU Competition Law Update

Due to the sensitivity of the healthcare sector and the fact that the largest purchasers of medical devices and pharmaceutical products are national healthcare providers (such as the NHS), overcharges due to market distortion hit public sector resources, meaning that the market is subject to heavy regulation. The following examples detail the most topical issues and cases affecting the healthcare industry.

Recent Decisions and Investigations of the UK’s Competition and Markets Authority (CMA)

“Pay for delay” agreements

On 12 February 2016 the CMA fined GlaxoSmithKline plc (GSK), Generics (UK) Ltd (GUK) and Alpharma Limited (Alpharma) £45 million for anti-competitive agreements amounting to “pay for delay” for the entry of generic products into the market for the GSK’s branded anti-depressant paroxetine drug, Seroxat.

Seroxat was a “blockbuster” and GSK held certain patents in relation to paroxetine. In 2001 a number of generic manufacturers including GUK and Alpharma were taking steps to enter the UK market for paroxetine with their own generic version of the drug.

GSK challenged these companies, alleging that their generic products would infringe their patents, and commenced litigation against them. The settlement agreements they entered into before the litigation went to trial included terms prohibiting their independent entry into the UK market.

It was found that these agreements breached the Chapter I prohibition of the Competition Act 1998 and that, by breaching competition law in this way, which involved distorting the UK market for Paroxetine, the companies deprived the NHS of the price falls that would have occurred had generic products entered the market sooner. When generic entry finally took place (some two years later) prices fell by 70%. Sales of Seroxat in 2001 exceeded £90 million.

Illegal pricing and information exchanges by private consultant ophthalmologists

On 5 August 2015, the CMA issued an infringement decision following its investigation against Consultant Eye Surgeons Partnership Ltd (CESP).

CESP was fined £500,000 which was reduced to £382,500 in recognition of CESP’s continued cooperation and adoption of a comprehensive competition law compliance programme.

CESP members who were consultant ophthalmologists (eye surgeons) were provided with services including access to CESP’s negotiated contracts with private medical insurers. The competition law infringements which CEPS engaged in were:

• recommending that its members refuse to accept lower fees offered by an insurer, and that they charge insured patients higher self-pay fees;
• circulating amongst its members detailed price lists for ophthalmic procedures such as cataract surgery to be used with insurers. These collectively set prices did not pass on lower local costs (such as cheaper hospital fees) and made it harder for insurers and patients to obtain lower prices;
• facilitating the sharing of consultants’ future pricing and business intentions such as whether to sign up for private hospital groups’ package price, which enabled members to align their responses.

Excessive and unfair prices

On 6 August 2015 the CMA issued a statement of objections[1] to Pfizer and Flynn Pharma alleging that they had breached competition law by abusing their dominant market positions in the supply of the epilepsy drug, phenytoin sodium capsules.

Pfizer manufactures phenytoin sodium capsules and then supplies them to Flynn Pharma which distributes them to UK wholesalers and pharmacies. The statement of objections concerns both the prices that Pfizer charged Flynn Pharma and the prices that Flynn Pharma charged to its customers, since September 2012.

Prior to September 2012, Pfizer manufactured and sold phenytoin capsules to UK wholesalers and pharmacies under the brand name Epanutin®. Pfizer sold the UK distribution rights for Epanutin® to Flynn Pharma which genericised the drug and started selling its own version in September 2012. Pfizer continued to manufacture the drug which it sold to Flynn at prices that were between 8 and 17 times higher than the prices at which it had sold to Flynn historically. Flynn then sold the drug on to customers at prices which were between 25 and 27 times higher than those historically charged by Pfizer.

Prior to September 2012, the NHS spent approximately £2.3 million on phenytoin sodium capsules annually. This spend was just over £50 million in 2013 and over £40 million in 2014.

Excessive pricing is normally an abuse of a dominant market position which competition regulators are reluctant to find as, while businesses which hold dominant positions have an additional duty to ensure that prices are set that do not impair competition and which are not unfair or excessive, competition authorities are generally reluctant to set prices themselves, preferring to remove price-distorting behaviour such as exclusionary tactics or discriminatory pricing. However, in a case such as this, there seems strong prima facie evidence that the line has been crossed. Nevertheless, there has not yet been a decision, which is estimated to be issued in August 2016, and the CMA has stated it will carefully consider any representations by Pfizer and Flynn before deciding whether the law has been infringed.

Illegal market-sharing agreement for the supply of prescription medicines to care homes

On 20 March 2014, the OFT issued a decision finding that Hamsard 3149 Ltd, and its subsidiaries trading as Tomms Pharmacy together with Celesio AG and its subsidiary Lloyds Pharmacy Ltd, entered into a market-sharing agreement in relation to the supply of prescription medicines to care homes in England between May 2011 and November 2011. It imposed a fine of £370,226 on Hamsard and its subsidiaries. The decision of 20 March 2014 brought the investigation to a close following an earlier settlement agreement.

Resale price maintenance of mobility scooters

On 27 March 2014, the OFT found that Pride Mobility Products Ltd and some of its retailers breached the Chapter 1 prohibition of the Competition Act 1998 by entering into agreements which prevented them from advertising online prices below the recommended retail price (RRP). A supplier of a product is entitled to recommend a retail price but cannot prevent its reseller from selling below the RRP, which must be a recommendation and nothing more. A previous market study into the mobility scooters market showed that prices for the identical product can vary by over £1,000 and in some cases price differences of £3,000 were found. The internet is considered to be an essential tool for enabling consumers to compare prices and get value for money, so steps to prevent online discounting by resellers is taken seriously by competition authorities. A previous OFT decision in relation to similar practices by Roma Medical Aids Ltd, who had prohibited online sales by certain retailers and prevented online advertising by certain retailers, was issued on 5 August 2013.

A new-style “class action” (an opt-out collective claim as introduced by the Consumer Rights Act 2015) is reported to have been launched by a class representative of purchasers of mobility scooters against the companies involved in this breach of competition law.

Ongoing investigations

There are a number of ongoing investigations into the healthcare market where limited information is currently available, but estimated timescales for a CMA Decision have been published:

• An investigation into a suspected breach of competition law related to discounts offered for a pharmaceutical product under Chapter II of the Competition Act 98 and Article 102 of the TFEU (abuse of a dominant market position) – Estimated date of CMA Decision on whether to proceed with the investigation or to close it: May 2016.
• An investigation into a suspected breach of competition law in the pharmaceutical sector under Chapter II of the Competition Act 98 and Article 102 of the TFEU (abuse of a dominant market position) – Estimated date of CMA Decision on whether to proceed with the investigation or to close it: August 2016.
• An investigation into a suspected breach of competition law in the medical equipment sector under Chapter II of the Competition Act 98 and Article 102 of the TFEU (abuse of a dominant market position) – Estimated date of CMA Decision on whether to proceed with the investigation or to close it: October 2016.

European Commission “pay for delay” decisions

Servier

In July 2014 the European Commission fined Servier and five other producers of generic medicines – Niche/Unichem, Matrix (now part of Mylan), Teva, Krka, and Lupin – a total of €427.7 million for concluding a series of agreements which were aimed at delaying the entry of generic equivalents of Servier’s best-selling blood pressure drug, perindopril, in order to protect it from generic price competition. This was achieved through a technology acquisition and a series of patent settlements with generic rivals.

Perindopril is a blockbuster blood pressure control medicine, which was Servier’s best-selling product, and because no other antihypertensive medicines other than generic versions of perindopril were able to constrain Servier’s prices, Servier held significant market power on that market. Servier’s patent for the perindopril molecule largely expired in 2003 but generic producers continued to be faced with “secondary” patents relating to processes and form.

In 2004, Servier acquired the most advanced form of the limited available patent-free products as a means of delaying the entry of generic manufacturers, but the technology they acquired was never put to use.

Consequently generic manufacturer’s sought to challenge Servier’s patents in order to seek to enter the market. Between 2005 and 2007, almost every time a generic company came close to entering the market, Servier and the company in question settled the challenge. However, the Commission found that these settlements were not normal settlements where the two parties decided to settle a patent claim outside court to save time and costs. Instead the generic company agreed to abstain from competing in exchange for a share of Servier’s profits. One generic company acknowledged it was being “bought out of perindopril” and in one case, Servier offered a generic company a licence for seven national markets in return for the generic company agreeing to “sacrifice” all other EU markets and agreeing to stop efforts to launch perindopril there.

While it is legitimate to apply for patents, enforce them, and transfer technologies to settle litigation, such mechanisms cannot be used as a tool to shut out competing technologies.

Johnson & Johnson and Novartis

In December 2013, the European Commission imposed fines of over €16 million on Johnson & Johnson (J&J) and Novartis for entering into anticompetitive agreements to delay the market entry of generic versions of the painkiller fentanyl in the Netherlands. Fentanyl is a painkiller which is 100 times more powerful than morphine and is often used for patients suffering from cancer.

J&J had developed and commercialised fentanyl since the 1960s but in 2005 J&J’s protection on the fentanyl depot patch expired in the Netherlands and Novartis’s Dutch subsidiary, Sandoz, was on the verge of launching its own generic version of the patch. However, instead of doing so, Sandoz concluded a “co-promotion agreement” with J&J’s Dutch subsidiary. The agreement provided strong incentives for Sandoz not to enter the market, including payments for Sandoz which exceeded the monthly profits it expected to receive from selling its generic product, as long as there was no generic entry. The agreement was brought to an end in December 2006 when another generic manufacturer entered the market.

The Agreement delayed entry of a generic medicine for 17 months, therefore causing the Dutch national health system to have to pay higher amounts for its medicines.

Lundbeck

In June 2013, the European Commission fined the Danish pharmaceutical company Lundbeck over €93 million, and other generic manufacturers of medicines over €52 million, for agreeing to delay the entry of generic versions of Lundbeck’s blockbuster branded antidepressant medicine, citalopram.

After Lundbeck’s basic patent for citalopram expired, it only held a number of related process patents which provided more limited protection. However, instead of the generic manufacturers entering the market, they agreed with Lundbeck not to enter in return for substantial inducements amounting to tens of millions of euros. Lundbeck paid significant lump sums, purchased generics stock for the sole purpose of destroying it and offered guaranteed profits in a distribution agreement which gave Lundbeck the certainty that the generics producers would stay out of the market for the duration of the agreement.

Why is compliance with competition law so important?

As can be seen from the outcome of the various CMA and EU investigations, the consequences of breaching competition law can be serious and expensive. Those consequences include:

• Enforceability – the agreement can be rendered unenforceable, and partiesmay be ordered to cease or modify the agreement.
• Fines – parties can be fined up to 10% of their worldwide turnover.
• Damages – third parties may be able to bring private actions for damages in national courts or, in appropriate cases, an injunction in the civil courts.
• PR – adverse publicity and reputational damage.
• Resources – the company will have to dedicate significant time and resources to dealing with the investigation or case. There is also an increased risk of ongoing surveillance by the competition authorities following an infringement, as well as a risk of future complaints and investigations under EU or national competition law.

Some EU Member States have also introduced penalties for individuals involved in the competition law infringement. For example, in the UK it is a criminal offence to enter into certain hardcore cartel arrangements, which is an extraditable offence. Furthermore, directors of companies that have infringed UK or EU competition law face potential disqualification as a director.

Susannah Sheppard has over 15 years of experience advising and training companies on competition compliance and designing appropriate compliance policies and programmes. She has also assisted in defending companies where breaches have taken place, as well as using competition law as a strategy to assist companies challenge the behaviour of competitors.

[1] A statement of objections is issued where a competition authority (such as the CMA or the European Commission) concludes after an initial investigation that there are reasonable grounds for concluding that there has been a breach of competition law.