Inquiry into alleged anti-competitive conduct by Janssen
See the news release that corresponds to this position statement.
OTTAWA, February 20, 2019—Today, the Interim Commissioner of Competition announced that he has discontinued an inquiry into allegations that Janssen Inc. (Janssen), a subsidiary of Johnson & Johnson, has engaged in conduct contrary to the abuse of dominance provisions of the Competition Act (Act). The Competition Bureau's inquiry considered whether Janssen's alleged conduct inhibited the entry or expansion of biosimilar products in Canada that compete with Janssen's biologic product Remicade (active ingredient "infliximab").
This statement summarizes the Bureau's inquiry and the reasons for its discontinuance. It also identifies and provides guidance on some of the competition issues relevant to biologic and biosimilar pharmaceutical products.
In brief, the Bureau's inquiry confirmed that Janssen has engaged in, and continues to engage in, conduct that could raise concerns under the Act in certain circumstances. However, the Bureau did not find adequate evidence at this time that this conduct was likely to substantially lessen or prevent competition. Since Janssen's conduct remains ongoing, the Bureau will continue to monitor the developing biologic and biosimilar industry for potential violations of the Act.
Overview of the biologic and biosimilar industry
Biologic drugs (biologics) are a class of pharmaceutical products derived from living organisms, such as a microorganism or animal cell. Biologics tend to be larger, more complex, and more variable than traditional small molecule drugs, which are chemically synthesized.
There has been a significant shift in pharmaceutical sales towards biologics over the last decade. Whereas only one biologic made the list of the ten top-selling patented pharmaceutical products in 2006, biologics accounted for seven products on this list in 2017 representing 42% of patented medicine sales in Canada.Footnote 1
Biologics are one of the fastest growing pharmaceutical product segments in Canada. The high cost of biologics—with treatment costs ranging from thousands to tens of thousands of dollars per year per patient—as well as their continued growth in usage, have contributed to a significant increase in pharmaceutical expenditure.
Biosimilars, a relatively new category of drugs in Canada, have the potential to provide Canadians with the benefits of competition in this growing segment of the economy. A biosimilar is a highly similar version of a brand name biologic already authorized for sale. In order for a biosimilar to be marketed in Canada, it must first obtain approval from Health Canada. To date, Health Canada has approved biosimilars for at least 9 biologics. Biosimilars are generally less costly than original biologics. Canada's public and private insurers stand to potentially realize substantial cost savings by promoting the use of these drugs.
Competitive dynamics between biologics and biosimilars
Competition between branded and generic small molecule drugs generally follows a common pattern. For a period of time, branded products generally benefit from patent and regulatory protection for their innovation. This often allows for high prices and steady volume. However, once patents and other protections expire, generic competition emerges and quickly captures much of the market at a lower price.
This pattern, known as the "patent cliff", has not yet materialized in Canada for biologic and biosimilar pharmaceutical products. Instead, many biologics—especially those that treat chronic conditions—continue to capture most of the market for many months (or even years) following the expiry of their patents. A number of unique features of biologics and biosimilars may explain this trend not typically seen in the traditional branded and generic small molecule industry.
For one, the degree of risk associated with developing a biosimilar is likely to exceed that assumed by firms that produce generic small molecule drugs as their development requires additional time and capital and assuming the risk that the investment may not lead to a marketable discovery. The prolonged development time and substantial financial investment required to develop biosimilars may limit the number of manufacturers willing to enter the market, as well as prevent the entry of smaller manufacturers. Additionally, with the prolonged time for biosimilar development, there is a risk of new alternative therapies becoming available prior to the biosimilar entering the market. As a result, the potential market for the biosimilar could be significantly smaller by the time of entry.
Features of the regulatory approval process may also contribute to a longer period to bring a biosimilar product to market. In order to approve a biosimilar, Health Canada requires biosimilar manufacturers to demonstrate that there are no clinically meaningful differences in safety and efficacy between the biosimilar and its reference biologic. While generic manufacturers can provide this information through an abbreviated new drug submission, biosimilar manufacturers must submit a new drug submission, which requires more information (including clinical trials) and takes more time to complete and receive approval. Health Canada's different regulatory framework and submission requirements for biosimilars, as compared to its approach with traditional generic small molecule drugs, reflect the increased complexity and variability of biologics and biosimilars.
In addition, biosimilar manufacturers must provide Health Canada with detailed information for each indication they wish to seek for the product.Footnote 2 While a generic drug will be interchangeable with an original branded drug for all indications, a biosimilar manufacturer may not request or obtain approval for all of the indications treated by the reference biologic. Where this occurs, the biosimilar will only be able to compete for a subset of the patients served by the reference biologic.
This challenge is compounded by the fact that, at least at present, there is a lack of consensus regarding the implementation of switching policies for biologic and biosimilar drugs, notwithstanding observations by market participants that emerging scientific literature suggests these policies are safe for patients. Although some public and private payors have taken steps to encourage patients that are currently stable on a biologic to switch to a biosimilar, the vast majority have not. This distinguishes biologics and biosimilars from small molecule drugs, which are subject to automatic substitution policies. These policies, which have been implemented by many public and private insurers, encourage pharmacists to dispense generic drugs in place of costlier branded drugs.
Consequently, while it is common for patients to be substituted from a branded to a generic small molecule drug, there is currently limited substitution from a biologic to a biosimilar. As a result, in Canada, competition between biologics and biosimilars generally centres on attracting new patients that have not started on either pharmaceutical product.Footnote 3 This group of patients generally represents a small fraction of the total market served by the reference biologic (often between 10-25% of the market in a given year).
A final factor that may help explain why certain biosimilars have achieved limited growth relates to the role of infusion clinics. Certain biologic and biosimilar drugs must be administered via infusion. This has resulted in biologic and biosimilar manufacturers partnering with third parties to develop networks of infusion clinics across the country, sometimes on an exclusive basis. Information from market participants suggests that it can take biosimilar companies a number of months to develop a network of clinics that rivals their competitor's network, thus impeding, at least for a period of time, their ability to compete for patients throughout the country.
The Bureau's inquiry
The biologic at issue in the Bureau's inquiry was Remicade. Remicade was first introduced in Canada in June 2001 and is now Johnson & Johnson's top earning pharmaceutical product, with revenue exceeding $6.3 billion (USD) worldwide in 2017. In Canada, Remicade accounted for around $1 billion in sales in 2017.
In Canada, Remicade is indicated for the treatment of a number of conditions in adult populations, including rheumatoid arthritis, psoriatic arthritis, plaque psoriasis, ankylosing spondylitis, Crohn's disease and ulcerative colitis. Remicade has also obtained Health Canada's approval for a subset of these indications for the paediatric population. There are currently two approved biosimilars of Remicade in Canada: Inflectra (marketed by Pfizer Canada Inc.) and Renflexis (marketed by Merck Canada Inc.). Inflectra is currently approved for all of Remicade's adult indications and Renflexis is currently approved for all Remicade indications (including for the paediatric population).
In 2018, the Bureau commenced an inquiry in response to concerns that Janssen was allegedly engaging in a series of practices to inhibit biosimilar competition to Remicade. In assessing these allegations, the Bureau interviewed key market participants, including pharmaceutical manufacturers, public and private insurers, hospitals, physicians, infusion clinic networks and trade associations, while also gathering relevant records from many of these parties.
The alleged conduct under inquiry included:
- supplying many, if not all, hospitals with Remicade for 1 cent per vial;Footnote 4
- providing free Remicade to patients that are not eligible to receive reimbursement for the drug under a public or private insurance plan;
- entering into contracts with hospitals and public and private insurers that require or induce them to favour Remicade over its biosimilars; and
- entering into exclusive contracts with third-party infusion clinics that prohibit them from infusing biosimilars to Remicade.
The Bureau's inquiry confirmed that Janssen was engaging in many of the alleged practices. In particular, market participants confirmed that Janssen was supplying many hospitals throughout Canada with Remicade for 1 cent per vial, providing free Remicade to a large number of patients without insurance coverage for the drug, and had negotiated exclusivity with certain third-party infusion clinic networks, which prevent them from administering patients with certain other biologic and biosimilar drugs, including biosimilars to Remicade.
On the other hand, the Bureau's review revealed that Janssen does not have contracts with hospitals and public and private insurers that require or induce them to favour Remicade over its biosimilars. Instead, these contracts, which have only been negotiated with certain private and public insurers (i.e., not with hospitals), have resulted in these insurers not implementing policies that would result in biosimilar drugs being reimbursed on more favourable terms than Remicade.
As summarized below, the Bureau's review assessed whether these four sets of practices individually or collectively contravened the restrictive trade practices provisions of the Act, with a focus on the abuse of dominance provisions.
Abuse of dominance occurs when a dominant firm or group of firms in a market engages in a practice of anti-competitive acts, with the result that competition has been or is likely to be prevented or lessened substantially. The Bureau's inquiry focused on the last part of the abuse of dominance test—namely, whether Janssen's alleged conduct was likely to substantially prevent or lessen competition in a market. Consistent with recent Bureau guidanceFootnote 5, the Bureau's analysis in this case assumed that the relevant market was the market for the sale of infliximab products in Canada.
The Bureau assessed the competitive impact of Janssen's conduct through two overarching theories of harm. First, the Bureau assessed whether Janssen's conduct was predatory (i.e., deterred entry or expansion through below-cost pricing). Second, the Bureau assessed whether Janssen's alleged conduct was exclusionary (i.e., raised the costs of its competitors and thus made them less effective).
On balance, the evidence reviewed by the Bureau during the course of its inquiry did not support either of these theories of harm. In reaching this conclusion, the Bureau was guided by the following findings:
- Predation theory: consumers benefit from competitive prices. Low pricing is thus often an indication of vigorous competition unless the pricing is found to be predatory. Predatory pricing occurs when a firm sets prices below cost for long enough to eliminate, discipline or deter entry by a competitor. This involves an expectation that the firm will be able to recoup its losses later, by raising prices again. In this case, the Bureau's review confirmed that Janssen was offering Remicade at a price below cost to certain hospitals and patients. However, the Bureau did not find credible evidence that Janssen's low pricing strategy was sufficiently widespread that it was likely to eliminate, discipline or deter entry by one or more competitors, so as to substantially prevent or lessen competition in the relevant market. In particular, while Janssen's low prices may have shifted demand from biosimilar products to Remicade, the Bureau did not find that the practice was likely to induce competitors to exit the market or otherwise substantially affect competition at this time.
- Exclusionary theory: the Bureau did not find credible evidence that absent Janssen's conduct biosimilar firms would have likely competed more vigorously with Janssen on dimensions of competition like price, quality and service. Specifically, the Bureau did not find adequate evidence that Janssen's contracts with private and public insurers resulted in higher costs for infliximab. This is because Janssen negotiated these contracts by offering increasing rebates to public and private insurers following the entry of Inflectra and Renflexis, which significantly reduce Remicade's net price (i.e., list price subtracting discounts and/or rebates). Furthermore, although Janssen's exclusive contracts with third-party infusion clinics may have caused biosimilar firms to incur additional costs in establishing a comparable infusion clinic network, the Bureau did not find adequate evidence that these costs are likely to lessen a biosimilar firm's ability to act as a meaningful competitive constraint to Remicade.
In light of these and other findings, the Bureau has concluded that, at this time, there is insufficient evidence to find that Janssen's conduct has had, is having or is likely to have the effect of substantially lessening or preventing competition in the relevant market.
Continued monitoring by the Bureau
Notwithstanding these conclusions, the Bureau will continue to monitor the evolving biologic and biosimilar industry. Through its monitoring efforts, which will likely involve continued contact with market participants such as public and private insurers, the Bureau will be well positioned to respond quickly to developments that have the potential to disrupt current market dynamics.
An area of particular interest to the Bureau relates to the potential implementation of switching policies by public and private insurers. While many public insurers—and a few private insurers—have taken preliminary steps to encourage the use of biosimilars (e.g., requiring that new patients begin treatment on a biosimilar), they generally have not implemented mandatory switching policies. Such policies, which are similar in concept to the well-accepted automatic substitution rules that govern branded and generic small molecule drugs, encourage patients that are currently stable on a biologic to switch to a biosimilar.
Policies like these have been introduced in other jurisdictions, including certain countries in Europe. The decision to introduce these policies appears to be informed by a growing body of scientific literature that suggests it is safe and effective to switch a patient from a biologic to a biosimilar (and vice versa). Through these policies, other jurisdictions have been able to shift a significant percentage of total volume from a reference biologic to a biosimilar, allowing them to more immediately realize the cost savings of biosimilars.
The Bureau anticipates that public and private insurers in Canada may choose to implement switching policies, or other similar policies that encourage biosimilar uptake (e.g., policies that incentivize physicians to prescribe biosimilars), in the foreseeable future. Given the potential commercial impact of these policies on companies that sell reference biologics, the Bureau will monitor how these companies respond to the implementation of these policies, keeping an eye out for conduct that may seek to undermine their effectiveness. Such conduct could include spreading false or misleading information about the safety and efficacy of biosimilars with physicians, patients, patient advocacy groups and public and private insurers.
The Bureau's monitoring efforts will also help to identify other types of conduct by companies that sell reference biologics that could raise concerns under the Act. This includes conduct that has recently been reported in other jurisdictions, such as:
- agreements with insurers (public or private) that prohibit them from providing reimbursement for biosimilars, or that only allow for reimbursement if a patient has first failed treatment on the reference biologic;
- providing loyalty-inducing rebates based on volume that make it cost prohibitive for insurers to switch a portion of their insureds from a biologic to a biosimilar; and
- refusing to supply drug samples required by biosimilar companies to perform comparative testing.
The Commissioner has elected to discontinue his inquiry because there is insufficient evidence to conclude that Janssen's alleged conduct has, at this time, substantially lessened or prevented competition in a relevant market. The Commissioner will, however, continue to monitor the Canadian biologic and biosimilar industry with a view to identifying and assessing the impact of key market developments.
The Commissioner's enforcement decisions are based on the available evidence. Should new and compelling evidence come to light of harm in the Canadian marketplace, the Bureau will not hesitate to take appropriate action.
This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.
However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.
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