Society of Obstetricians and Gynaecologists of Canada ("SOGC"): Agreement to Reduce Samples

Docteur André Lalonde
Executive Vice President
Society of Obstetricians and
Gynaecologists of Canada
780 Echo Drive
Ottawa ON  K1S 5R7

Monsieur A. Yuzpe
President
Foundation for the Promotion of Sexual
and Reproductive Health
780 Echo Drive
Ottawa ON  K1S 5R7

Dear Dr. Lalonde and Mr. Yuzpe:

I am writing in response to your letter of January 12, 2007, in which you request a written opinion under section 124.1 for guidance on the application of the Competition Act (the « Act ») to your proposed business conduct.

Section 124.1(1) of the Act states that: « Any person may apply to the Commissioner, with supporting information, for an opinion on the applicability of any provision of this Act or the regulations to conduct or a practice that the applicant proposes to engage in, and the Commissioner may provide a written opinion for the applicant’s guidance. »

This opinion seeks to facilitate business conduct by indicating whether proposed conduct or a practice would provide the Commissioner of Competition ( « Commissioner ») dwith reason to believe that grounds exist to commence an inquiry on her own initiative pursuant to paragraph 10(1)b) of the Act .You should understand that the Commissioner has no authority to decide the law. In addition, you should be aware that the Commissioner, under certain circumstances, is obliged to commence an inquiry under paragraph 10(1)c)¹ of the Act.

This opinion has been prepared based on the information provided and taking into account current jurisprudence, previous advisory opinions, knowledge and the stated policies of the Competition Bureau (the « Bureau »). While the original request was submitted on January 12, 2007, it is our understanding that implementation of the proposal would be suspended pending the issuance of this opinion.

Based on our understanding of the facts from the information gathered during the course of the evaluation and as set out below, it is our opinion that your proposed business conduct would not provide the Commissioner with reason to believe that grounds exist to commence an inquiry provided that it is carried out substantially as proposed.

Background:

This opinion responds to the third in a series of requests from the Society of Obstetricians and Gynaecologists of Canada (« SOGC »). Previous proposals assessed by the Bureau were received from SOGC in March 1999 and December 2003. For ease of reference, our previous two opinions are appended hereto.

The current SOGC proposal is to establish an agreement between it and four (4) pharmaceutical companies to reduce sampling of oral contraceptives (« OCs ») (the « Agreement »). The Agreement includes a commitment from each company to provide funding to the Contraceptive Assistance Program (« CAP »), a $4 million dollar promotional and educational program² established by SOGC under its Foundation for the Promotion of Sexual and Reproductive Health (the « Foundation »)³.

SOGC confirms that the progress of the sampling program are reviewed with participants each August. In 2005, approximately 2 million samples were provided to health professionals. ⁴. The new three year Agreement with participants proposes a further gradual reduction of sampling by 7% per annum. Although SOGC claims that it is difficult to determine the ideal sampling level, it believes that OC sampling in the 1.2 to 1.5 million range may be an appropriate target for the industry.⁵.

Previous SOGC proposals have been assessed by the Bureau under the conspiracy provisions of the Act with particular reference to the statutory defence for agreements which restrict advertising and promotion under paragraph 45(3)f) and subsection 45(4). The Bureau has concluded that, based on the information provided by SOGC at the time of each proposal, there was not reason to believe that grounds existed for an inquiry to be conducted pursuant to paragraph 10(1)b) of the Act. However, it was noted in each opinion that there was some uncertainty as to possible price effects stemming from the proposal which should be re-examined if the proposal was extended beyond three years.

The current agreement between SOGC and the pharmaceutical companies ended on December 31, 2006. SOGC and the pharmaceutical companies ended on December 31, 2006. SOGC is proposing to enter into a new three year agreement with four pharmaceutical companies from January 1^st, 2007 terminating on December 31^st, 2009 (implementation pending).

The Parties:

The proposal identifies the parties to the Agreement as the SOGC, the Foundation and the four major pharmaceutical manufacturers/suppliers in Canada. As will be explained further below, there are two other parties mentioned in the proposal who are contributors to CAP but are not party to the Agreement.

Pharmaceutical Companies:

There are six (6) manufacturers/suppliers of oral contraceptives in Canada. Four (4) will be party to the proposal and two (2) smaller companies (listed last below) are not participants but, instead provide a general contribution to CAP They are:

1. Wyeth Pharmaceuticals
2. Janssen-Ortho Inc.
3. Organon Canada
4. Bayer Healthcare Pharmaceuticals Inc.
5. Pfizer Canada
6. Squire Pharmaceutical Inc.

The first three companies noted above participated in previous CAPs. Bayer Healthcare Pharmaceuticals Inc. is the result of a January 2007 merger of the pharmaceutical businesses of Bayer and Berlex Canada Inc. (formerly Scherling). Pfizer Canada does not currently sell oral contraceptives but continues to market an injectable contraceptive, Depo Provera in Canada. Squire Pharmaceutical Inc. (formerly Galen Pharmaceuticals) produces orphan and generic drugs. Paladin Labs, its majority owner, is its Canadian distributor.

The Proposal:

1. Term of the Agreement

   The Agreement is proposed to come into effect on January 1^st, 2007 and continue until December 31^st, 2009.The parties may, by agreement in writing, elect to continue the Agreement for an additional 3 year term. The Bureau notes that the Commissioner’s opinion only covers the period from implementation to December 31^st, 2009.

   There is a penalty clause for any CAP participant who over samples during the term of the agreement⁶. Reconsideration of any or all of the terms of the Agreement may be negotiated between the partners in the event of significant dynamic changes in the marketplace that affect the OC industry⁷.

2. Sampling Levels

   Pursuant to the proposal, each of the four (4) participating pharmaceutical companies agrees to reduce their respective sample levels of OCs.Revised sampling levels are established with each new contractual period. A two-tiered sample level has been established based on a market share threshold of 20%. That is, if a participating pharmaceutical company has a market share below 20%, a lower sample level is established as compared to a pharmaceutical company with a market share above 20%.

   Target sample OC numbers (before a penalty is administered) for the two large pharmaceutical companies Wyeth Pharmaceuticals and Janssen-Ortho shall be 600,000 at the commencement of the Agreement in 2007 and will decrease by 7 percent each subsequent year of the agreement which terminates December 31, 2009. Similarly, sample OC numbers for the two smaller pharmaceutical companies, Organon and Bayer shall be 400,000 and decrease by 7 percent for each subsequent year of the agreement.

Sampling Levels

Company/Years	2007	2008	2009
Total	2 000 000	1 860 000	1 729 800
Wyeth	600 000	558 000	518 940
Janssen-Ortho	600 000	558 000	518 940
Organon	400 000	372 000	345 960
Bayer	400 000	372 000	345 960

Sources : Foundation letter of January 12^th, 2007;
Discussion notes of March 1^st, 2007 prepared by Bureau.

1. Funding

   Pursuant to the proposal, each participating pharmaceutical company agrees to make an annual financial contribution to the Foundation. It is understood that the companies will save money from reducing samples and in return provide funding to the Foundation. The total funding provided by the participating companies will be approximately $2 million⁸,Pursuant to the proposal, each participating pharmaceutical company agrees to make an annual financial contribution to the Foundation. It is understood that the companies will save money from reducing samples and in return provide funding to the Foundation. The total funding provided by the participating companies will be approximately $2 million ⁹ in dollars based on the following formula.

   Company Market Share X Total Funding Requirement

   Total Market Share of Companies (where market share means dollar sales of OCs in Canada)

   There are financial partners in CAP who provide funding for the work of the SOGC’s Foundation but are not parties to the Agreement. Foundation but are not parties to the Agreement. One anticipated partner has participated in the CAP in the past and another firm is expected to be a new entrant in the industry.¹⁰.

2. Additional Payments (Penalties)

   In addition to the above funding mechanism, each pharmaceutical company agrees to a ‘penalty fee’ for exceeding its sampling limits in its contract with SOGC and the Foundation.

   1. Penalty for Existing OC

      If a pharmaceutical company exceeds the sample numbers established above, it shall pay $10.00 for every sample OC above the threshold. Sales to other offices such as Planned Parenthood Federation of Canada, and samples distributed through the Compassionate Oral Contraceptive Sampling Program, are not included.

   2. Samples for a New Product Launch

      Sample CO numbers for a new product launch ¹¹ shall be limited to 50,000 in the first year. If the pharmaceutical company elects to include such numbers in their allocated level set out in the agreement, there is no additional cost.

      However, if the pharmaceutical company elects to exclude the new product launch from their allocated sample level, the company will pay the sum of $1.00 for every sample, up to 50,000 samples¹². The reduction of this sampling limitation reflects an amendment in the terms of the Agreement to an annual figure rather than a figure over the full three year period as in previous CAPs.

   3. Rationale

      In SOGC’s submission, over sampling of OCs by the pharmaceutical industry has been a threat to the health of Canadian women and continues to be a concern for health professionals. To quote from its submission:

      Oral contraceptives are indiscriminately over sampled in Canada...There is still an urgent need to increase awareness concerning the various contraceptive methods...If the SOGC were not able to continue with this agreement, the market would be flooded with over sampling once again putting the health of Canadian women at risk and threatening the introduction of new drugs and new companies in the marketplace¹³.

3. Auditing

   Monitoring will be performed by an independent auditor who will review the company records concerning the distribution of samples, twice a year. The purpose of the audit is to ensure that the appropriate fees to the foundation are being paid. The results of the audit will be kept confidential by the Foundation and not revealed to the other participants.

4. Enforcement

   The Agreement with the participating pharmaceutical companies is enforced through the sampling provision with a high cost incurred by the firm that chooses to over sample¹⁴. The SOGC is relying on corporate ethics and an appreciation of the current problems with oral contraceptives samples to ensure compliance. Participation by the companies is voluntary. Each participating firm agrees to be bound by the terms of the Agreement including to negotiate new terms or potentially the termination of the Agreement in specially requested meetings with the Agreement partners.

   The Agreement contemplates that a major new entrant into the market could participate in the Agreement. The Bureau considers additional participants in CAP would constitute a change in material facts.¹⁵.

5. Compassionate Drug Program

   As part of the Agreement, the pharmaceutical companies have also agreed to participate in a Compassionate Drug Program. This will ensure that women who rely on samples as a source of OCs for financial reasons will not be adversely affected by the Agreement. Physicians will be able to access a toll-free number to order OC samples from the participating companies under the Compassionate Drug Program. These samples will not be restricted and no woman in financial need will be denied access to this prescription medicine. It is estimated that there have been approximately 150,000 free OC samples provided to Canadian women through the Compassionate Drug Program since 1999; 15,000 prescriptions (« scripts ») were filled in 2006 alone. ¹⁶.

Competition Analysis:

The proposal has been considered under the conspiracy provisions of the Act with particular reference to the statutory defence for agreements which restrict advertising and promotion under subparagraph 45(3)f).

As you know, under subsection 45(1) of the Act;

Every one who conspires, combines, agrees or arranges with another person

c) to prevent or lessen, unduly, competition in the sale or supply of a product is guilty of an indictable offence and liable to imprisonment for a term not exceeding five years or to a fine not exceeding ten million dollars or to both.

Pursuant to subparagraph 45(3)(f), in a prosecution under subsection 45(1), the court shall not convict the accused if the agreement or arrangement relates only to:

f) the restriction of advertising or promotion, other than a discriminatory restriction directed against a member of the mass media

However, in subsection 45(4), there is an exception to the defence such that subsection 45(3) does not apply if the agreement or arrangement has lessened or is likely to lessen competition unduly in respect of one of the following:

1. prices
2. quantity or quality of production
3. markets or customers, or
4. channels or methods of distribution

or if the agreement or arrangement has restricted or is likely to restrict any person from entering into or expanding a business in a trade, industry or profession.

The appropriate legal framework for assessing whether the agreement is likely to lessen competition unduly was articulated by the Supreme Court of Canada in R. v. Pharmaceutical Association of Nova Scotia et al (« PANS »)¹⁷. In that case the Supreme Court held that the inquiry into whether an agreement has prevented or lessened competition unduly involves two steps:

1. Analysing the structure of the market;
2. Analysing the behaviour of the parties to the agreement.

It is the combination of market power and behaviour likely to injure competition that makes a lessening of competition undue and thus unlawful.

Relevant Market

The relevant product market is oral contraceptives (birth control pills) for the sub 50 mcg oral contraceptive market (each pill contains less than 50 mcg of estrogen). Currently, the four participating manufacturers market approximately 19 different products. Formulations are different between the drug companies and even within each manufacturer’s brand. The ultimate users are women aged from adolescence to menopause. In SOGC’s submission, high costs of regulatory compliance and manufacturing have delayed the entry of generic products into the Canadian marketplace¹⁸.

The target audience for sampling consists primarily of family physicians and obstetricians/gynaecologists. It is estimated there are approximately 1,200 gynaecologists and 6,000 family physicians who are actively involved in prescribing OCs in Canada. Their use is highest in women between ages 15-24. General industry information confirms that sales force visits to doctors with samples are the single most important marketing tool available in the business.

Methods of Distribution

Oral contraceptives are distributed through drug wholesalers and major pharmaceutical distributors who in turn provide Canadian prescription drug wholesale and retail pharmacy chains with stock for distribution to the consumer who has a prescription from their physician. Another method is direct account selling to pharmacies and hospitals. The Agreement applies to sample OCs only. It does not apply to other distribution channels.

Oral Contraceptive Prices

1. Nominal Price Increases

   Retail prices of OCs (the average prescription price) have increased up to 3.5% in each of the last three years. In real terms, prices have been relatively stable assuming that an average 2.2%¹⁹ of that increase represents an inflationary component of the increment. This is not surprising since most of the OCs covered by this Agreement are regulated by the Patented Medicines Prices Review Board (PMPRB). The current manufacturers' price data provided for the 19 brands indicate a retail price range from $10.78 to $11.73 for a one month’s supply. Accounting for inflation as noted above, the price for OCs is not likely a significant factor to gaining market share.

2. Effective Price Increases²⁰

   A concern raised by the Bureau at the time of the 1999 and 2003 advisory opinions was whether there would be an effective increase in prices as a result of decreasing the number of free OC samples.²¹. The 2003 opinion stated that:

   « Since the previous agreement was effective commencing 2001, if the decrease in samples starting that year had a substantial effect on the number of cycles purchased, one could expect to see an increase in cycles purchased starting in 2001. No such increase is observable. However, ...the number of cycles purchased per patient...increases noticeably only in 2002...One reason for a delayed effect may have been that there were still plenty of samples in doctors’ offices... so the decrease in sampling might not really show up in greater purchases until 2002 or later. »

   SOGC has provided the Bureau with data on the average number of OC prescriptions purchased per year per patient for all OCs from 2003 to 2006. The data was aggregated and is set out in the table below.

Annual Prescriptions Purchased

	2004	2005	2006
Total Prescriptions	11 970 719	11 584 336	11 779 691
Total Prescriptions	3 497 631	3 422 264	3 668 543

Source: IMS Health, Canadian CompuScript Audit, furnished by SOGC.

In 2005, the number of prescriptions decreased. However, SOGC, submits this occurred because stocked samples, with a typical shelf life of approximately 2.5 - 3 years, remained in doctors’ offices to dispense. Moreover, some patients likely switched to other forms of contraception like the new dermal patch or the inter-uterine ring.

There is a possibility that the effect of significant sampling decreases may, in turn, cause an increase in the effective price for OCs for consumers. The issue bears monitoring if SOGC proposes to renew the Agreement after 2009.

Barriers to Entry

New entrants would likely benefit from the agreement as they could offer a large number of samples without the fear of being swamped by samples from the incumbents. There is no requirement for a new entrant to participate in the agreement.

For firms participating in the Agreement, the effects on barriers to entry are ambiguous. Since the Agreement will limit sampling competition from other firms, it will be easier to introduce a new product. The Agreement limits the number of samples provided for a new product in the first year and adds an extra cost for distributing them. Specifically, if an incumbent wishes to introduce a new product, it will be limited to 50,000 samples and pay the $1.00 /sample premium to the Foundation. However, if the company reduces its sampling of other products and fits the new product samples into its allocated maximum, then it will not pay the $1.00/sample premium. Information provided from SOGC confirms that there have been three (3) new oral contraceptive products introduced in the past three years. Furthermore, according to SOGC, these new products are performing well.

Impact on Competition

One important issue raised by the Agreement is whether there will be an adequate level of samples available to provide doctors with sufficient choices for patients seeking an OC. The SOGC claims that informal surveys and their experience suggests that there are still samples from previous years available in doctors’ offices. There may be as many as 500,000 new and switching patients each year. Most of those patients would receive a sample. As the Agreement sets the available samples at 2 million for the first year declining to 1.7 million in the third year, there will be 3- 4 samples still available for each new/switching patient. This suggests ample choice for the patient.

Data on scripts issued in Canada may indicate whether there is sufficient competition between OC brands to offer choice for patients. While actual OC sample levels decreased, the number of new scripts for OCs increased slightly. The rise in new scripts can be an effect of the reduction in the number of samples but other factors play a role such as existing patients switching to a new OC product or new patients filling new scripts. The decline in the total number of prescriptions can be explained by the switch by some patients.

We were also concerned that the Agreement might affect the ability of the pharmaceutical companies to attract new patients from the general population or attract patients away from a competitor (to switch brands) by limiting this primary competitive tool. These effects could show up in three possible ways:

1. in a smaller level of switching between OC brands; or
2. as a decrease in the proportion of consumers choosing OCs as their preferred form of contraception; or
3. in market share stability.

Data provided to the Bureau for the years 2002 to 2006 suggests an increase in switching behaviour²².

The OC market remained relatively stable during the term of the previous Agreement. If the Agreement was seriously holding back competition between OC firms, then one might expect that OCs would lose ground compared to other forms of contraception. This appears not to have been the case with the volume of new prescription sales for OCs dispensed in 2006 increased 2% from the previous year. According to SOGC, new products introduced in the market are performing well.

There has been some movement in market shares from the 2003 to 2006 period. The movement in market shares has happened despite the sampling agreement and in the face of the introduction of new OCs to the market in the last few years.

Based on the evidence on the effects of the sampling restrictions under CAP, the Agreement is not likely to restrict competition in the OC market nor cause a significant change to the effective price of OCs for consumers in Canada.

Conclusion

On the basis of the information provided by SOGC On the basis of the information provided by SOGC and other information furnished to the Bureau summarized above, our opinion is that the proposal is captured by the statutory defence under paragraph 45(3)(f) of the Act , an agreement which relates only to the restriction of advertising or promotion, and it is not likely to result in an undue lessening of competition with respect to the items enumerated in subsection 45(4) of the Act. Accordingly, the Commissioner would not have reason to believe that grounds exist to cause an inquiry to be commenced pursuant to subparagraph 10(1)b)(iii) of the Act.

This opinion is based on current law and jurisprudence and is predicated on the assumption that the facts, as set out in your request and subsequent information furnished to the Bureau, are accurate, that no material facts have been omitted or misrepresented in your submission, and that our understanding of the facts is accurate. This opinion is binding so long as the facts provided are accurate, the material facts remain unchanged, the conduct or practice is carried out substantially as proposed, and the law and jurisprudence remains unchanged. Should any of these factors change, you should apply for a new opinion. The Bureau notes that in the event there is a major new entrant into the market who chooses to participate in the Agreement, this would be a change in material facts and the opinion would no longer be binding.

Given that the proposed agreement has a three year extension clause, the Bureau reminds you that this opinion only covers the period from implementation to December 31, 2009 and that future guidance should be sought from the Bureau for any extension.

To promote compliance with, and foster transparency in the administration and enforcement of the Act, the Bureau may publish written opinions, or summaries thereof, that add to the understanding of how the law is administered or where a new issue or sector of the economy is being examined. Valery Parkinson will contact you within 30 days to seek consent to publish this opinion in its entirety. If you object, the Bureau will edit the opinion to remove company names and/or produce a summary of the opinion that protects identities and commercially sensitive information.

If you have any further questions or require clarification of this letter, please do not hesitate to contact Ms. Parkinson at 819-953-1610 or e-mail at parkinson.valery@cb-bc.gc.ca or fax 819-997-3835.

Sincerely,

Denyse MacKenzie

Senior Deputy Commissioner of Competition
Criminal Matters Branch

Attachments: 2

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¹ Paragraph 10(1)(c) provides that the Minister of Industry may direct the Commissioner to commence an inquiry.

² SOGC supplemental information confirms that funding for its CAP program from pharmaceutical companies fluctuates annually. In the term covered by the current proposal, this funding would be reduced to $2.25 million annually. Monies for the balance of the budget are sourced from other governmental and non-governmental bodies.

³ Each SOGC proposal to the Bureau is essentially identical except for the OC sampling levels to which each pharmaceutical company has committed, the updated market data and the CAP funding commitments of each company. Details on CAP and the Foundation are set out in the past opinions attached hereto.

⁴ SOGC has provided the Bureau with data from its independent program auditor, KPMG, which conducts an annual audit of the OC samples distributed by each CAP participant.

⁵ Supplemental information received from SOGC dated April 19, 2007.

⁶ $10 per sample distributed above the negotiated quota for the particular firm.

⁷ Pursuant to the final paragraph under Funding clause 3 of the new Agreement.

⁸ Contributions from two non-participants of CAP will bring funding up to $2,250,000 annually. SOGC request dated January 12, 2007.

⁹ Reliable market survey information is produced by IMS Health Canada Inc., a private sector pharmaceutical data collecting company.

¹⁰ SOGC correspondence claims that a new generic OC is expected to reach market in 2007.

¹¹ An OC for which a new notice of compliance and a new DIN has been granted.

¹² In the last term of the Agreement, three (3) new OCs were introduced to the market.

¹³ Appendix A of SOGC January 12, 2007 request for written opinion, pages 3 and 4.

¹⁴ See paragraph (d) above entitled Additional Payments (Penalties).

¹⁵ SOGC has indicated one of the parties to the proposed CAP may introduce a generic product to the market in 2007 but that this firm is not considered a « major new entrant ».

¹⁶ SOGC request dated January 12, 2007 and SOGC supplemental information dated March 1, 2007.

¹⁷ (1992) 2 S.C.R 606.

¹⁸ The relatively high costs of showing bioequivalence before the Patented Medicines Price Review Board and price regulation at the provincial level will apparently be overcome by a new entrant to the market.

¹⁹ The PMPRB limits increases in prices of of pharmaceuticals covered under the Patent Act to the rate of inflation as measured by the CPI. Statistics Canada’s historical data lists the CPI for 2003 through 2006 as 2.8%, 1.9%, 2.2% and 2.0%, respectively, for an average of 2.2%.

²⁰ An effective price increase is defined as the increase in units purchased caused by a decrease in the available number of free samples.

²¹ In other words, although the price of purchased OC units may not increase as a consequence of the proposal, patients may nevertheless end up paying more for OCs because of the reduction of free samples offered through health professionals, thereby obliging them to pay for previously free samples.

²² Product specific switching data as compared against new prescriptions and sampling levels was not provided in 2007. Switching behaviour was extrapolated from data on total and new prescriptions compared against allowed sampling numbers.