This post was written by Edward S. Miller, Gérard Sicsic and John Wilkinson.

In January 2008 the EC Commission spectacularly launched an investigation into the pharma sector by carrying out dawn raids on Europe’s major pharma groups. This was the first time a sector enquiry had been commenced by unannounced inspections.

The Commission has now published its 400 page preliminary report on its investigation which was launched at a press conference given by EU Competition Commissioner Neelie Kroes in Brussels on 28th November 2008.

The Commission’s preliminary view, on which it will now consult, is that competition in the European pharma industry is not working as well as it should. The Commission cites three practices of the large pharma groups which the Commission believes restrict competition and artificially keep the price of drugs high.

The practices which concern the Commission are: registering lots of patents – apparently 1300 in one case – for the same drug (patent clusters) in order to make it more difficult for other companies to produce competing (generic) versions of the same drug; a policy of initiating litigation to keep the generic companies out of the market or delay their entry; settling this litigation by agreements which typically keep the generic competitor out of the market for a time, give the generic competitor a licence of the patent holder’s drug or the right to sell it, so removing the possibility of a new generic drug entering the market, and/or include a so called “reverse payment” to the generic company.

The truth is that there is really nothing new in any of these allegations or practices, many of which have already been extensively litigated by competition authorities and industry players in the US. The debate turns on the tension between anti-trust legislation which is aimed at promoting competition, and other laws which safeguard intellectual property rights, which by their very nature confer an unchallengeable monopoly on the holder. Patents and other intellectual property rights are in the public interest because they incentivise innovation by allowing innovators the exclusive right to exploit the fruits of their work during a defined period. It is natural that powerful companies will wish to use the law in order to delay the entry of competitors and will vigorously defend any challenges to their intellectual property rights. European law recognises the importance of intellectual property rights, and also recognises that it is not a breach of competition law just to be big and powerful.

So the Commission will have its work cut out if it is going to mount legal challenges to the practices it has identified. Of course registration and vigorous defence of patents restricts competition. That is the whole point of having a patent. When does this activity go so far as to become something which the law should sanction?

In this connection, the Commission will take little comfort from the more recent developments across the Atlantic. Last month a US Federal Appeal Court upheld a decision in favour of drug companies Bayer, Hoechst and Barr in a challenge by a group of health plan providers that patent settlement agreements between the three companies had artificially kept up the price of the drug Cipro – exactly the same argument raised by the Commission in its report. Barr – a generic drug company – had claimed to be entitled to bring out its own generic version of Cipro on the ground that Bayer’s patents for Cipro were no longer valid. Bayer sued Barr for infringement, but subsequently settled the case on terms that Barr would remove its challenge to Bayer’s patents in consideration for Bayer supplying Cipro to Barr and also making a cash payment. The US court held that although this agreement did restrict competition, there was a recognised public benefit in settling litigation, rather than letting it drag on, and that such agreements would only infringe competition laws if the whole litigation was merely a sham. Not an easy thing for the plaintiffs in this case (or the European Commission) to prove.

So we will wait and see what enforcement action eventually results from this enquiry as it now goes to consultation. Consultation will finish at the end of January 2009, and the final report is expected next Spring.

In the meantime, the Commission is keeping busy having this week conducted another series of raids on the pharma sector. This, the Commission says, is unconnected with the current enquiry, and speculation is that these raids relate to distribution of drugs, rather than preventing or delaying generic entry. Neelie Kroes has picked a big fight with the pharma companies. It certainly promises to keep her busy.