Remarks by John Pecman, Commissioner of Competition

George Mason University Pharma Conference

Fairfax, Virginia

September 23, 2014

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Introduction

Good afternoon. It’s a pleasure to be providing the keynote luncheon address at this very important conference on Global Antitrust Challenges for the Pharmaceutical Industry. As you know, this conference brings together antitrust officials and practitioners from North America and Europe to discuss a variety of pharma-related issues, such as life-cycle management strategies, reverse-payment settlements and merger control.

While the conference is focused on pharma-related issues, my remarks today will be somewhat broader. In particular, I will discuss how the Canadian Competition Bureau (Bureau) approaches the interface between competition law and intellectual property (IP) law, which is described in our Intellectual Property Enforcement Guidelines (IPEGs). I will then discuss some IP-related issues that the Bureau, like other antitrust agencies around the world, is grappling with. Finally, I will provide an overview of the pharmaceutical industry in Canada, summarize some of the enforcement work that the Bureau has done in this industry, and discuss a number of pharma-related issues, with an emphasis on the treatment of reverse-payment settlements, also known as "pay-for-delay" agreements, under the Competition Act (Act).

Given the importance of pharmaceuticals to Canada’s health care sector, changes in the pharmaceutical industry are of interest to the Bureau. As a result, the Bureau has taken a keen interest in reverse-payment settlements and product hopping issues, given the possibility that they may delay generic entry.

Some have suggested that Canada’s regulatory regime governing pharmaceuticals has several unique features that dictate a less vigorous approach to reverse-payment settlements in Canada than in the United States (US) or Europe (EU). We completely disagree and are in the process of developing an approach to these types of agreements, which I will share with you later in my remarks.

Without giving too much away, I expect that many of you in this room may find our approach somewhat surprising, particularly in light of the US Supreme Court’s recent decision in Actavis.

As part of my appearance today, the Bureau has developed a white paper titled Patent Litigation Settlement Agreements: A Canadian Perspective, which will be published on the Bureau’s website. This paper provides important background on the pharmaceutical industry and regulatory regime in Canada; the provisions of the Act that may be applicable to reverse-payment settlements; and the Bureau’s preliminary views as to how the Act could apply to reverse-payment settlements.

Competition Bureau mandate

Now, before I go any further, I recognize that some of you may not be familiar with the Bureau and the legislation we enforce. So, I’d like to take a moment to provide an overview of the Bureau, its mandate and certain provisions in the Act.

The Bureau is an independent law enforcement agency. Our mandate is to ensure that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

The Bureau is responsible for administering and enforcing the Act and three labelling statues. The purpose of the Act is to maintain and encourage competition in Canada in order to, among other things, promote the efficiency and adaptability of the Canadian economy and provide consumers with competitive prices and product choices. The labelling statutes set out certain labelling requirements and prohibit false or misleading representations in specific sectors, namely prepackaged consumer products, precious metal articles and consumer textile articles. I note that Health Canada — rather than the Bureau — is responsible for the labelling on pharmaceutical products.

Under the Act, the Bureau has wide-ranging powers to investigate anti‑competitive behavior and merger transactions, refer evidence of criminal violations to the Public Prosecution Service of Canada or litigate alleged civil violations before the Competition Tribunal (Tribunal) or the courts. Of utmost importance to my remarks today is the application of the Act to agreements between actual or potential competitors. In this regard, while it is likely that many patent settlements are not anti‑competitive, the record shows that a subset of such agreements can be damaging to competition. Depending on the facts, such settlements can raise issues under the criminal conspiracy provision, the civil agreements provision or the civil abuse of dominance provision under the Act.

By way of background, the criminal conspiracy provision, which is found in section 45 of the Act, is reserved for agreements between competitors to fix prices, allocate markets or restrict output that constitute "naked restraints" on competition — that is, restraints that are not implemented in furtherance of legitimate collaboration. Other forms of competitor collaborations, such as joint ventures and strategic alliances, may be subject to review under the civil agreements provision in section 90.1 of the Act. Unlike the criminal provision, this civil provision applies only where an agreement is likely to substantially lessen or prevent competition. The Bureau’s approach to these provisions is described in detail in our Competitor Collaboration Guidelines, which are available on our website.

The civil abuse of dominance provision enables the Bureau to examine agreements where competitors are jointly dominant, the agreement facilitates conduct that has a negative effect on a competitor that is exclusionary, predatory or disciplinary, and the conduct is likely to have the effect of substantially preventing or lessening competition in a market. I note that there is an exception to this provision for conduct engaged in pursuant only to the exercise of rights under certain IP-related legislation, including the Canadian Patent Act.

Interface between competition law and IP law

The Bureau recognizes that IP laws and competition laws are two complementary instruments of government policy that promote a healthy and efficient economy. IP laws provide incentives for innovation by establishing enforceable property rights for the creators of new and useful products. Competition laws may be invoked to protect these same incentives from anti‑competitive conduct that creates, enhances or maintains market power or otherwise harms vigorous rivalry among firms. In this way, the promotion of a competitive marketplace through the application of competition laws is consistent with the objectives underlying IP laws.

The IPEGs articulate how the Bureau approaches the interface between competition policy and IP rights. They describe how the Bureau will determine whether conduct involving IP raises an issue under the Act. They also explain how the Bureau distinguishes between those circumstances that warrant a referral to the Attorney General under section 32 of the Act, and those that will be examined under the general provisions, including the criminal conspiracy provision, the civil agreements provision or the civil abuse of dominance provision. Section 32 of the Act is a special provision that gives the Federal Court the power to make remedial orders if it finds that a company has used the exclusive rights and privileges conferred by IP to unduly restrain trade or lessen competition.

The circumstances in which the Bureau may apply the Act to conduct involving IP or IP rights fall into two broad categories:

  1. those involving something more than the mere exercise of the IP right; and
  2. those involving the mere exercise of the IP right and nothing else.

The Bureau will use the general provisions of the Act to address the former circumstances and section 32 to address the latter. The Bureau defines the mere exercise of an IP right as the exercise of the owner’s right to unilaterally exclude others from using the IP. The Bureau also views an IP owner’s use of the IP as being the mere exercise of an IP right.

Updates to the IPEGs

The IPEGs were first published in 2000 and, about a year ago, I announced that they would be updated in two stages.

The first stage involved revisions to reflect the amendments to the Act that have occurred since the IPEGs were first published, the Bureau’s recent enforcement experience, and changes to ensure consistency with other Bureau enforcement guidelines. Updated IPEGs were released for public consultation in April of this year and were released in final form last week, marking the end of this initial phase.

The second stage will involve a public consultation on a further update to the IPEGs to include the Bureau’s enforcement position with respect to new competition policy and IP issues that have arisen in recent years. Examples of these issues include market access and marketing practices by pharmaceutical firms, such as reverse-payment settlements and life-cycle management strategies, as well as the conduct of patent assertion entities and activity related to standard essential patents. As with the earlier update, the Bureau envisions releasing this document for public consultation and input in the near future.

The Bureau is not alone in considering these issues. Rather, they are being considered by numerous agencies around the world. The experience of other jurisdictions will help inform the Bureau as we develop our approach to these complex issues.

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International considerations

I would like to turn briefly to comment on recent public reports that certain competition agencies are introducing industrial policy into their decision making processes. This is a subject my US counterparts have spoken about over the past few weeks and I could not agree more with them.

Introducing industrial policy into the decision making processes of an agency with a competition mandate is troubling and in my view can lead to sub-optimal outcomes. In contrast, basing such decisions exclusively on a solid competition analysis would lead to more efficient market outcomes. For example, we’ve seen recent examples of competition authorities indicating that they are prepared to impose sanctions against firms specifically in relation to those firms’ terms for licences for access to their standard essential patents. Simply considering patents to be "essential facilities" without regard to a competition analysis operates to the detriment of the firms under investigation and, more broadly, against the efficient functioning of the market.

In our work in the international arena through both the International Competition Network and the OECD, as well as through bilateral dialogue, we will continue to promote the important principle that competition policy should be an independent voice to assure welfare is maximized and we will advocate for international consistency in this area.

Pharmaceutical sector and issues

I would now like to shift away from our approach to IP generally to focus on various pharma-related topics, including our treatment of reverse-payment settlements under the Act.

(a) Pharmaceutical sector in Canada

Why is the Bureau interested in the pharmaceutical industry? It’s because pharmaceuticals account for a significant portion of total healthcare spending in Canada. In fact, the Canadian Institute for Health Information recently estimated that total health care spending accounts for 11.2% of our economy — meaning that we spend just shy of C$6,000 per capita on health care. Spending on pharmaceuticals accounts for the second-largest component of this amount — estimated at 16.3% last year. Not surprisingly, almost 85% of this spending goes towards prescription drugs.

While generics represent two-thirds of retail prescriptions, they account for less than a quarter of total prescription drug expenditures. This gap gives you a sense of the dramatic savings that generics offer to both Canadian consumers who pay out of pocket and to drug plan providers, including our provincial governments. Like many other countries, Canada has an aging population, and organizations both within the public and private sectors are struggling with how to provide first-rate, affordable and accessible services to seniors and other citizens on fixed incomes.

The significance of pharmaceuticals to Canada’s health care sector — combined with the role that generic drugs have played in fostering the benefits of competition — has led the Bureau to take an active interest in this sector.

(b) Bureau activity in the pharma sector

The Bureau has sought to preserve and promote competition in the pharmaceutical sector through both advocacy and enforcement. I would like to take a few minutes to summarize some of this activity.

Generic drug study

As part of its advocacy initiatives, the Bureau published two studies addressing competition issues related to generic competition. The first, titled Canadian Generic Drug Sector Study, was published in October 2007. This study was a detailed examination of the Canadian generic drug market and identified reasons why the prices of generic drugs were higher in Canada than in other jurisdictions. The second report, titled Benefiting from Generic Drug Competition in Canada: The Way Forward, was released in November 2008 as a follow-up to the original report. This report contained specific recommendations for private and public drug plan providers on initiatives they could adopt to decrease generic drug prices. Since these reports were published, a number of Canadian provinces have made regulatory changes in order to reduce generic drug prices for both public and private payers.

Pharma workshop

Last November, the Bureau hosted a workshop to explore a number of developments in the industry, including international trends in pharmaceuticals and antitrust law, pay-for-delay settlements and lifecycle management strategies. The purpose of hosting the workshop was to signal the Bureau’s interest in competition issues involving the health care sector, as well as to learn from the experiences of international antitrust authorities.

Merger review

On the enforcement front, the Bureau has several decades of experience in reviewing mergers in the pharma sector, and has sought remedies in a significant number of cases over the years. For example, the Bureau has reviewed and required remedies in respect of the Pfizer/Wyeth, Teva/ratiopharm and Novartis/Alcon mergers. Recently, the Bureau has been involved in the review of a number of transactions involving pharmaceutical firms, including the GlaxoSmithKline/Novartis and Valeant/Allergan transactions. In many cases, our reviews and remedies have been coordinated with authorities in other jurisdictions, most notably the US and the EU.

Much has been reported about how "big pharma deals" are now back in a significant way. While consolidation in this sector has been ongoing over the last 15 years as a result of the industry’s attempts to address waning R&D productivity, expiring patents and the need to access new drugs and find cost savings and synergies, a wave of deals announced this year appears set to transform the industry. Companies including Novartis, GlaxoSmithKline, Eli Lilly, Bayer, AbbieVie and Merck have participated in a record US$194 billion of deals so far this year, a figure that does not include AstraZeneca’s rejection of Pfizer’s US$117 billion takeover bid. A combination of the pressures facing the industry and the sense of urgency that certain global entities are feeling to complete "tax inversion" transactions prior to anticipated legislative intervention have led industry experts to forecast a steady stream of similar "blockbuster" deals into the foreseeable future. The Bureau will perform careful and fact-specific analyses to ensure that Canadian consumers are protected as the pharmaceutical industry continues to consolidate.

Abuse of dominance

In addition to this merger activity, in 2012 the Bureau commenced an inquiry under the abuse of dominance provision into "product-hopping" or "product switching" by Alcon Canada Inc., a branded pharmaceutical firm. This inquiry was prompted by allegations that Alcon had intentionally disrupted the supply of its prescription anti-allergy drug Patanol as part of a conversion strategy meant to forcibly switch patients to a reformulated version of the drug and discourage or delay the entry of a generic version. The investigation was ultimately discontinued as Alcon resumed the supply of Patanol and generics were able to enter and capture a significant share of the anti-allergy market in question.

(c) Differences between regulatory regimes

Like the United States, Canada has a regulatory regime that governs the entry of generic pharmaceuticals. This regime balances the benefits Canadians receive from timely access to lower-cost generic medicines against the need of brand manufacturers to protect their IP.

Some have claimed that the differences between Canada’s regulatory system and that of the United States necessitate caution in — or even abdication of — efforts to police reverse-payment settlements in Canada. While it’s clear there are differences, the Bureau does not believe that they eliminate the role of competition analysis in reviewing potentially anti‑competitive reverse-payment settlements, nor do they call for a less vigorous enforcement approach in Canada.

As discussed in more detail in the white paper, commentators typically point to the following three differences between the Canadian and US regulatory regimes:

  • The Notification System: Unlike in the United States, where all potential pay-for-delay settlements must be reported, there is currently no such system in Canada. The notification regime in the US has enabled the US Federal Trade Commission (FTC) to track the total number of pharmaceutical settlements, finding that reverse-payment agreements have steadily increased in recent years. A similar notification system in Canada would furnish the Bureau with substantive information about settlement agreements and enhance our ability to address potentially anti‑competitive agreements. In turn, this would allow us to better protect consumers from potentially anti‑competitive behavior.
  • The 180-day Exclusivity Period: Under the US Hatch-Waxman Act, the first generic to challenge a brand’s patent has 180 days of market exclusivity vis-à-vis other generics. There is no equivalent to this in Canada. Some have claimed that the absence of such an incentive in Canada calls for relaxed scrutiny of settlements because generics are less likely to have an incentive to challenge brands’ patents. However, evidence from Canada disputes this — showing that generics have, in fact, filed patent challenges, and in large numbers, especially in markets for popular drugs.
  • Section 8 Damages: The nature of prohibition proceedings and the existence of damages under section 8 of Canada’s Patented Medicines (Notice of Compliance) Regulations are two aspects of the Canadian regulatory framework that are not present under the US Hatch-Waxman Act. As discussed in more detail in the white paper, these two aspects of the Canadian regulatory framework create the risk of "double jeopardy" — namely, the possibility that a pharmaceutical company could face two different damages claims. While the Canadian legislation generally presents a higher degree of legal risks for both generic and brand pharmaceutical manufacturers than they face in the United States, the existence of risk is commonplace in any regulatory regime around the world. In our view, the existence of such risk certainly does not deliver a knock-out blow to competition law enforcement in the pharmaceutical sector.

(d) Entry date versus pay-for-delay

Continuing on the theme of different approaches to regulatory control, I want to spend a few minutes discussing our approach to entry-date settlements versus pay-for-delay agreements.

In the US and EU, settlements have been treated very differently if they involve only a date for generic entry, as compared to a payment for delayed entry. Settlements involving a compromise on the generic’s entry date tend to reflect the odds of the parties’ success in patent litigation.

For example, prior to the recent US Supreme Court decision in Actavis, the FTC had litigated a number of patent settlement cases, where the response from the court had been to deem these agreements legal, provided that they were within the scope of the patent — for example, that they allowed for generic entry prior to the patent expiry. Indeed, in Actavis, the Court stated that settlement allowing entry before patent expiration could "bring about competition . . . to the consumer’s benefit", in contrast to "payment in return for staying out of the market", which "simply keeps prices at patentee-set levels" and leads to "consumer losses".

However, in Canada we’ve adopted the position that the Act applies even in cases where the settlement allows for generic entry prior to the patent expiry. We do not operate from the assumption that a patent is valid and infringed. The very existence of litigation casts the patent in doubt — and as I’ve just noted, even if the settlement allows for entry before patent expiry, our position remains that the settlement is reviewable under the Act.

(e) Approach to review of patent settlement agreements

Significantly, the Court in Actavis also found that reverse-payment settlements are subject to a "rule of reason" analysis. While the Bureau appreciates the decision, we’ve taken a decidedly different view in Canada — one that sees us looking at these agreements under either the criminal or civil provisions in the Act. More specifically, our approach will be to review these agreements under the per se criminal conspiracy provision or the civil agreements or abuse of dominance provisions. We will determine which provision to apply having regard to all relevant facts and evidence.

As I noted earlier, the criminal conspiracy provision is reserved for agreements between competitors to fix prices, allocate markets or restrict output that constitute "naked restraints" on competition. The Bureau would be more inclined to commence an inquiry under this criminal provision in the following circumstances:

  • If a settlement is between competitors and includes conduct with respect to markets or products that are not the focus of the patent litigation or the conduct is beyond the scope of the patent, such as fixing a generic entry date beyond the term of the patent, provided that the conduct is of the type prohibited by this provision.
  • If there is direct or circumstantial evidence that indicates that the settlement is a vehicle for a "naked restraint" on competition that is not implemented in furtherance of a legitimate collaboration or was motivated by factors beyond the issues associated with the litigation.

By way of example, if there was a settlement in which a generic agreed to enter beyond the expected expiry date of the patent in exchange for a payment, we would likely interpret this as a clear payment for delayed entry — in effect a market allocation agreement — and it would be examined under the criminal conspiracy provision. Similarly, if the evidence suggested that a payment was strictly to delay or prevent entry, this would also potentially be examined under the criminal provision.

If the Bureau concludes that an agreement is not a "naked restraint" on competition, the Bureau’s inquiry may proceed under the civil provisions of the Act, with the most likely scenario being an examination under the civil agreements provision. However, in cases where the parties to an agreement are believed to be abusing a dominant position in the marketplace, the Bureau may also consider an investigation under the abuse of dominance provision. For either of these sections of the Act to apply, the Bureau must be able to demonstrate that the agreement in question would likely have the effect of causing a substantial prevention or lessening of competition.

The need for a notification system

As discussed in more detail in the white paper, there are areas where Canada’s regulatory regime could be improved. For example, unlike the regime in the United States, where all potential pay-for-delay settlements must be reported, there is currently no such system in Canada.

Given the absence of a notification system in Canada, we don’t know when — or even if — pay-for-delay settlements are occurring, and this lack of insight challenges our determination to ensure that competition is open and transparent, and that the benefits of competition accrue to both business and consumers. The lack of a notification regime in Canada may also explain why the Bureau is not as active in enforcement as the FTC in the pharmaceutical sector. Accordingly, I intend to advocate for better information on patent settlements and the need to explore approaches that could be adapted to Canada’s regulatory framework.

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Conclusion

Canadians are justifiably proud of their publicly-funded universal health care system. But, the benefits of universal health care — such as ready access to primary care practitioners and chronic care facilities — can be easily undermined if drug costs are prohibitively high.

From the perspective of the Bureau, we are committed to playing our part. We will continue to scrutinize the activities of the pharmaceutical industry to ensure that competition within it is fair and open, and that both business and consumers enjoy the benefits of a transparent and vibrant marketplace.

Thank you.

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