Competition law in the pharma sector – Developments and what’s to come in 2022

In this update, our pharma sector competition law experts in Brussels, the UK, Germany, South Africa and China look at a number of recent competition law developments of impact to the sector. This is a selective list of developments that have practical implications on the way pharma companies do business.

European Union

The pharma sector has long been a focus of the enforcement activity for the European Commission. As a former EU Commissioner put it the sector is "literally essential" for European citizens' lives.
Over the past few months the Commission has reaffirmed its aim to ensure innovation and competition in the sector. 2022 promises to bring important developments, across a number of fronts:

• Tougher and expanded jurisdiction in M&A : As we reported in previous posts, all the signs are that the Commission will not only continue its vigilant enforcement of merger control rules in the pharma sector in 2022, but will seek jurisdiction over more cases as it expands its novel use of Article 22 EUMR. This enables Member States to send cases to the Commission for review even where the case does not trigger the merger control thresholds of the EUMR or Member States. The Commission’s guidance on Article 22 specifically refers to pharma deals.
• The ongoing Illumina/GRAIL saga is a good example of the Commission’s novel approach, and how this can impact acquisitions of innovative pharma companies.
  • Illumina announced the deal in September 2020 and closed it in August 2021. It remains under (Phase II) review by the European Commission. The Commission’s concerns appear to centre on vertical input foreclosure relating to Illumina’s strong position in next generation sequencing (NGS) technologies, which are key inputs for the development and commercialisation of NGS-based cancer detection tests, and that post-transaction Illumina would have the ability and incentive to restrict supply of NGS technologies to GRAIL’s detection testing rivals.
  • Illumina has offered remedies to guarantee the continued supply of Illumina’s products and support to oncology customers at the same price GRAIL pays, make its latest technologies available on the same terms that GRAIL receives, and guarantee a significant price reduction over the coming years (this appears similar to the “open offer” it made in relation to the US review of the deal).
  • The Commission’s jurisdiction to review the case is based on its new approach to Article 22 EUMR, and Illumina is challenging this in the EU General Court. We provided detail on this aspect of the case in a previous post.
  • Subsequently, on 29 October, the Commission adopted interim measures requiring Illumina to hold GRAIL separate (among other things). It noted that "This is the first time the Commission adopts interim measures following an unprecedented early implementation of a concentration. The interim measures aim to prevent the potentially irreparable detrimental impact of the transaction on competition as well as possible irreversible integration of the merging parties, pending the outcome of the Commission's merger investigation." Illumina is also appealing this decision, challenging both the Commission’s jurisdiction to impose interim measures (effectively the same appeal as on jurisdiction generally), and the scope of the measures.
• Meanwhile in the US, the FTC and DOJ announced on 18 January that they were considering modernising their merger guidelines, with a particular focus on preserving innovation in sectors such as pharmaceuticals. A tightening of merger review in the US could influence the ongoing work of the Multilateral Working Group on Pharmaceutical Mergers (announced in March 2021) which brings together the Commission, US regulators and others to update their approach to analysing the effects of pharma mergers. Important outcomes are certainly expected to emerge from this co-operation and we will continue to monitor developments.
• Pay-for-delay agreements: 2022 is expected to shed yet more light on the EU approach to pay-for-delay agreements. Last March the CJEU confirmed the Commission’s Decision in the Lundbeck pay-for-delay cases. In 2022 the CJEU is set to deliver its judgment in the Servier pay-for-delay cases (the General Court quashed the Commission's Decision due to errors in its approach to market definition). AG Juliane Kokott is set to deliver non-binding opinions on the Servier appeals shortly (these were due for 27 January 2022 but have been postponed). These and the CJEU judgement when handed down, should provide further guidance on when such agreements may infringe competition law.
• Vertical restrictions: As we have been reporting, the Commission is working at full speed to update the Vertical Block Exemption Regulation (VBER) and Vertical guidelines expiring on 31 May 2022. This is a major legislative development as the current VBER and guidelines have been in place for over a decade and the new rules will also be in place for a long time. The revised VBER will certainly have an impact on the pharma sector and needs to be reviewed closely by pharma companies. It will outline the Commission's approach and shape its enforcement on different issues of direct relevance to the sector such as resale price maintenance (RPM), exclusive or shared distribution models (with an impact on wholesale, retail and direct-to-pharmacy distribution models where a pharma company may find itself being both a supplier to wholesalers and a competitor to them via its direct distribution (a so-called dual distribution scenario) with new rules), as well as online sales of pharmaceuticals with important amendments to the rules regarding dual pricing and restrictions on online sales. We will be monitoring and provide an update upon adoption of the final text with all the relevant changes and implications for pharma companies. We note that as part of this review the Commission has just launched an additional consultation on proposed guidance on data exchange in dual-distribution relationship (see here and here) - interested parties have until 18 February 2022 to comment.
• Patent lifecycle strategies: As we reported last March, the Commission continues to investigate Teva and its alleged anticompetitive conduct relating to divisional patent filing and litigation strategies. Developments in this investigation will have important consequences about how pharmaceutical companies can manage their patent prosecution and other life-cycle strategies.

United Kingdom

On 4 January 2022, the National Security and Investment (NSI) Act entered into force, introducing a new foreign direct investment (FDI) regime with standalone powers for the review of FDI in the UK. The new regime replaces the existing public interest merger regime provisions of the Enterprise Act 2002 insofar as a transaction involves national security considerations. Our post "UK National Security and Investment Act 2021: what do investors need to know?" is available here. Of particular relevance to the pharma sector, we note that the list of sectors where a mandatory notification may be required includes "Artificial Intelligence" and "Synthetic Biology" (examples of the latter being researching, developing and producing goods based on the application of engineering to biology (e.g. gene editing and therapy).

The pharma sector has been and remains a strong focus for the UK Competition and Markets authority (CMA) as it is keen to ensure that the “NHS does not pay significantly more than it should for essential medicines and treatments, and that consumers who depend upon these drugs and treatments do not lose out.” In July 2021 the CMA imposed record fines of £260 million for excessive pricing and pay-for-delay agreements in the supply of hydrocortisone tablets and £100 million for excessive pricing of liothyronine tablets (both cases are currently on appeal before the Competition Appeal Tribunal). The high level of fines serves as a serious warning to pharma companies, but in addition the CMA is also increasingly making use of its powers to impose director disqualification undertakings or orders in the pharma sector, placing greater focus on the individual liability of directors.

The CMA has recently secured yet another director disqualification in the pharma sector.

• Under the Company Directors Disqualification Act 1986 the CMA can seek the disqualification of an individual from being a company director for a period of up to 15 years, where that individual was a director of a company that has breached competition law and their conduct makes them unfit to be involved in the management of a company. The CMA can either apply to the court requesting a competition disqualification order or accept a competition disqualification undertaking from a director (in which case it will not seek to recover any costs of its investigation from that director).
• Director disqualifications apply not only where the director contributed to a breach of the UK competition rules but also where the director did not know, but should have known, that the company was involved in conduct that was in breach.
• On 11 January 2022 the CMA secured a director disqualification undertaking from a director of Lexon (UK) Limited in the context of the CMA's infringement decision in the Nortriptyline investigation.
  • This found that three pharmaceutical companies had exchanged commercially sensitive information about prices and volumes of the tablets they were supplying.
  • The CMA secured three director disqualification undertakings at the time it adopted the infringement decision in 2020.
  • Following an unsuccessful appeal by Lexon against the decision before the Competition Appeal Tribunal, Lexon's director has now accepted that his actions caused the company to participate in the illegal exchange of commercially sensitive information and has given an undertaking not to act as a director of any UK company for a period of four years starting on 12 January 2022.

Germany

At the end of 2021 the German Bundeskartellamt and its Austrian counterpart published updated joint guidance on the application of their respective transaction value thresholds for mandatory merger notifications. These Guidelines are currently only available in German.

The transaction value test is of particular relevance for pharma M&A as it can catch acquisitions of companies not yet generating significant turnover, e.g. a biotech or other company with a valuable pipeline drug which is not yet on the market. Even where the target's turnover in Germany or Austria does not exceed the relevant domestic turnover thresholds, a notification obligation can arise where (i) the value of the contractual consideration exceeds €400 million (Germany) or € 200 million (Austria) and (ii) the target has substantial domestic operations ("local nexus").

• The first criterion (transaction value) can cause uncertainty where the transaction foresees future "earn-outs", i.e. where the consideration can vary depending on the success of the target in the future, as we often see in pharma transactions. The Guidelines require that these future earn outs have to be discounted in the calculation of the transaction value, which can prove quite problematic and complex, for example where the target is still at an early stage of clinical testing.
• The second criterion (local nexus) is usually not satisfied where the target's turnover is (i) below the traditional domestic turnover thresholds and (ii) this low turnover adequately represents its market position and competitive potential. The last point can again cause uncertainty in pharma transactions: a target which is in the process of developing a drug that has just entered phase III of clinical testing may not yet have turnover in Germany, and therefore its lack of turnover does not reflect its market position should the drug subsequently pass the trials and be marketed in Germany.

In the revised Guidelines the authorities try to reduce uncertainty by using illustrative examples to demonstrate how the transaction value test should be applied. Several examples are from the pharma sector. However, application in individual cases could still prove difficult. In this regard the revised Guidelines do not add much to the previous version. Essentially, the German authority clarifies that the local nexus test will not be satisfied if the target's German turnover remains below € 17.5 million and this adequately reflects its competitive potential. This is merely a follow-up adjustment to the general overhaul of the second domestic turnover threshold, which has been increased significantly from € 5 million to € 17.5 million at the beginning of 2021 (see our blog post here). Hence, parties to pharma transactions will have to continue to analyse carefully, extrapolating from the examples in the Guidelines where relevant, to assess whether their merger should be notified in Germany or Austria despite the target having no or minimal turnover in these jurisdictions.

South Africa

A number of laboratories have settled excessive pricing complaints relating to COVID-19 PCR and rapid antigen tests.

• Private laboratories Ampath, Lancet and PathCare, have entered into settlement agreements with the Competition Commission, which were confirmed as consent orders by the Competition Tribunal, pursuant to the Commission's excessive pricing investigations relating to COVID-19 PCR and rapid antigen tests.
• The Commission found that prima facie the laboratories had engaged in excessive pricing in contravention of the Competition Act, 89 of 1998 read with the Consumer and Customer Protection and National Disaster Management Regulations and Directions (the Regulations), 19 March 2020. The Regulations state that, during any period of the national disaster, a material price increase of essential goods or services which inter alia does not correspond to or is not equivalent to the increase in the cost of providing that good or service indicates prima facie that the price is excessive. The settlement agreements record that the failure to reduce prices in the context of reductions in costs, as was the Commission's finding, results in the same effect i.e. an increase in the margin earned for an essential product.
• The laboratories agreed to reduce the price to a maximum, inclusive of VAT, of R500 and R150 respectively in relation to COVID-19 PCR tests and rapid antigen tests. Contrary to the usual practice of the Commission and Tribunal where an admission of liability is generally required in order for a firm to settle, the laboratories settled without admitting that they charged exorbitant and/or excessive pricing, and without any administrative penalty.

The Commission has also taken a novel approach to excessive pricing in relation to breast cancer drug Herceptin / Herclon.

• The Commission referred a complaint to the Tribunal for prosecution against Roche for alleged excessive pricing of Trastuzumab, a breast cancer treatment drug, in contravention of the Competition Act. The Commission alleges that the excessive pricing took place between (i) 2011 and 2020 in the private healthcare sector, where the drug is sold under the brand name Herceptin; and (ii) 9 November 2015 to July 2020 in the public healthcare sector, where the drug is sold under the brand name Herclon. The Commission is seeking the maximum penalty against Roche (10% of Roche's annual turnover in, into or from South Africa).
• Trastuzumab is a first line treatment life-saving drug which stops the development of Human Epidermal Growth Factor Receptor 2 Positive (HER 2+) breast cancer. The Commission's allegations are based on three competitive benchmarks including (i) Trastuzumab biosimilar manufacturing cost estimates; (ii) prices of a biosimilar drug supplied in South Africa; and (iii) value-based price benchmarks.
• The Commission estimated that over 10,000 HER2+ patients (representing approximately 50% of the total number of newly diagnosed patients in the private and public healthcare sectors) were unable to receive treatment with Trastuzumab between 2011 and 2019 because of the excessive prices charged.
• In addition to a contravention of the Competition Act, the Commission alleges that Roche's conduct infringes several constitutional rights including the right to equality, the right to access to healthcare services, the right to dignity and the right to life. Notably, the Commission appears to be attempting to use potential violations of the South African Constitution in its prosecution of the excessive pricing complaint, which is a novel approach to excessive pricing.

China

APIs remain a focus for competition enforcement. China has emerged as the leading supplier of APIs by volume to the global market, while exports of finished pharmaceutical products are less significant. Influenced by the drug safety policy, there are a small number of manufacturers in each API market, which has given rise to competition law concerns. Based on the enforcement statistics, the pharmaceutical sector accounts for 40% of anticompetitive conduct-related-enforcement in China, among which APIs remain the focus.

• For example, in 2020, China's competition authority (SAMR) imposed a cumulative fine of RMB325.5m (approximately US$48m) on three calcium gluconate API firms for refusal to supply, excessive pricing, and unfair contract terms. The three parties were structurally connected, and SAMR also pointed to multiple “internal” transactions that were used to artificially increase the price – for example, one “internal” transaction raised the price by 760%. The three firms are challenging SAMR's decision in front of the Beijing High Court, representing the first time SAMR has been sued for its antitrust decision.
• APIs have also been the focus of private enforcement, with Yangtze River Pharmaceutical being awarded record damages in a suit against its API suppliers. The court upheld allegations as regards exclusive dealing, excessive pricing, and unfair contract terms.
• 2021 saw a further sharpening of enforcement focus in the sector, leading to more cases and higher fines. For example, on 15 April 2021, SAMR imposed a fine of RMB 764 million (approximately US$116.8m) on Yangtze River Pharmaceutical for engaging in resale price maintenance.

Enforcement in relation to APIs continues to gain momentum. The API Guidelines, released in November last year, confirm that a single API will constitute a separate relevant product market (which may then be further subdivided based on needs). In light of this, refusal to deal, excessive pricing and tying by API suppliers will present a relatively low barrier to enforcement by SAMR.

Given that China has declared APIs to be key enforcement priority in 2022, we anticipate that this strong enforcement of competition law in relation to APIs will continue.