European Scrutiny Committee Contents

12 Final Report of the Commission's inquiry into the pharmaceutical sector

(30810) 12097/09 COM(09) 351

+ ADD 1

+ ADD 2

Commission Communication: Executive summary of the pharmaceutical sector inquiry report

Final report of the inquiry

Annexes to the final report

Legal base
Document originated8 July 2009
Deposited in Parliament22 July 2009
DepartmentBusiness, Innovation and Skills
Basis of considerationEM of 13 August 2009
Previous Committee ReportNone
To be discussed in CouncilNo date set
Committee's assessmentPolitically important
Committee's decisionCleared


12.1 Article 81(1) of the EC Treaty prohibits agreements, decisions and practices which might affect trade between Member States and which have as their objective the prevention or distortion of competition within the common market. Article 82 of the EC Treaty prohibits undertakings from using their dominant position to, for example, limit production or technical development to the detriment of consumers or impose unfair prices.

12.2 A Council Regulation of 2003 sets out rules for the implementation of Articles 81 and 82 EC.[37] Article 17 of the Regulation authorises the Commission to conduct an inquiry into a business sector where the trend of trade between Member States, the rigidity of prices or other circumstances suggest that competition may be restricted or distorted.

12.3 There are two main types of pharmaceutical company:

  • originator companies, ranging from SMEs to huge multinationals, which invest heavily in research on new pharmaceuticals, develop them from the laboratory through to market authorisation, sell them on the market and obtain patent protection of their products; and
  • generic companies which produce and sell products which are no longer covered by patent protection and which comprise the same active substances as, and are bioequivalent to, the originator products.

  Generic companies spend much less on R&D (7% in 2007) than originator companies (18%) and are not required to pay for expensive pre-clinical and clinical trials when applying for a market authorisation. They spend a much bigger proportion of their turnover on manufacturing: for example, in 2007 EU generic companies spent 51% of their turnover on manufacturing whereas originator companies spent 21%.

  The pharmaceutical sector in Europe is highly regulated. The regulatory framework includes legislation on:

  • patents;
  • market authorisation; and
  • the pricing of products and the reimbursement of their cost.

12.6 Patents: the European Patent Convention is an intergovernmental agreement. It was adopted in 1973 and revised in 1991 and 2000. It applies to the pharmaceutical industry. Patents may be granted either by national patent offices, using criteria which are common to most of the 36 contracting states, or by the European Patent Office (EPO), which has been in operation since 1978 and has about 4000 patent examiners. The EPO is based in Munich and its Council is comprised of representatives of the contracting states. If the EPO grants a patent, the holder then needs to obtain the validation of the national patent office of each of the countries in which it wishes to sell the product (validation generally requires the holder to satisfy the national translation rules and to pay a publication fee and renewal fees).

12.7 Patents grant the holder the right to prevent third parties from making, using, selling or importing the product without the patent-holder's prior consent. Patent protection gives the originator of a product the exclusive right to the commercial exploitation of the product for a specified time (up to 20 years in Europe) in order to give the inventors sufficient compensation for their creative work, provide incentives for R&D and encourage the transfer of new products from the laboratory to the commercial market. For the duration of the patent, the patent-holder may be able to charge a price for the product which is higher — often far higher — than the marginal cost of its production. On the expiry of the patent, anyone may use the invention commercially to manufacture a generic medicine.

12.8 Because it is not possible to obtain a single patent which is valid and enforceable throughout the EU, in 2000 the Commission proposed a Regulation to create an EC patent and a Decision to create a Community Patent Court. Neither was adopted. In 2007, the Commission published a Communication on Enhancing the patent system in Europe.[38] It reiterated the view that a single Community patent "continues to be a key objective for Europe" and suggested the creation of a unified and specialised patent judiciary with competence over European and EC patents.

12.9 Marketing authorisation: in the EU, medicinal products may be placed on the market only after they have obtained marketing authorisation in accordance with a Regulation of 2004.[39] There are two types of authorisation:

  • National authorisations issued by Member States and valid only in the territory of the authorising state (although a national authorisation may be recognised in other Member States through the mutual recognition procedure); and
  • Community authorisations issued by the Commission and valid throughout the EU for a renewable period of 5 years.

12.10 Companies which wish to sell generic medicines are required to obtain a marketing authorisation. The requirements are less onerous than those for an originator product and the fees are lower.

12.11 Pricing and reimbursement: each Member State may impose on companies its own requirements about the ex-factory price of prescription-only medicines and about reimbursement (that is, the proportion of the retail price which is to be met from public funds).

The document

12.12 The document comprises:

  • the Commission's 29-page summary of its Final Report on its inquiry into the pharmaceutical sector;
  • the Final Report itself, which runs to 533 pages (ADD 1); and
  • annexes containing detailed information in support of the Final Report (ADD 2).

12.13 The Commission conducted the inquiry because there were indications that competition in the pharmaceutical sector was not working well. In particular, the inquiry set out to find the reasons for the delay in the market entry of generic medicines after the patents had expired and the apparent decline in the number of new medicines. The inquiry was concerned solely with prescription-only medicines. It examined the practices which originator companies can use to block or delay the introduction of generic products or competing originator products. 43 originator companies, 27 generic companies and 219 medicines were examined in detail.

12.14 The inquiry looked at data and developments between 2000 and 2007. The inquiry began in January 2008. The Commission received more than 70 responses to its invitation to interested bodies to comment on the Preliminary Report, which was issued last November. Among the respondents were consumer representatives, originator and generic companies, patent lawyers and the European Patent Office. The Commission has taken the comments into account in producing the Final Report.

12.15 The Commission's main findings are as follows:

  • within the first year after the expiry of a patent, about half the originator medicines faced new competition from generic products;
  • on average, it took more than seven months for a generic product to enter the market after the originator company's patent expired;
  • the price at which generic products were put on the market was, on average, 25% less than the price of the originator medicine before the expiry of the patent;
  • two years after the generic medicines entered the market, their prices were, on average, 40% less than those of the originator products before patent protection expired;
  • the price savings to public authorities would have been 20% more if the generic medicines had entered the market immediately after the expiry of the patents;
  • originator companies use a variety of means to delay or block the entry of generic products or to prolong the life of their patents (by, for example, filing multiple patent applications for the same product, initiating lengthy litigation alleging breach of patent protection even though the patent has expired, obtaining interim injunctions pending the court's final judgment, and making objections to an application for a marketing authorisation of a new generic product);
  • similarly, originator companies sometimes seek to block or delay the introduction of a competing originator product and prolong their own patent protection (by, for example, objecting to competitors' patent applications and filing patent applications which overlap with their competitors' applications).

12.16 In the light of its inquiry, the Commission concludes that there is evidence of action by companies in the pharmaceutical sector which is contrary to Articles 81 and 82 of the EC Treaty and EC competition law. This calls for determined enforcement of the law by both the Commission and national competition authorities.

12.17 In addition, the Commission:

  • recommends the establishment of Community patent without further delay;
  • recommends the establishment of a Europe-wide unified and specialised patent litigation system;
  • invites Member States to streamline their market authorisation processes; and
  • invites them to consider granting pricing and reimbursement status to generic products immediately if the originator product already has that status.

The Government's view

12.18 In his Explanatory Memorandum of 13 August, the Minister of State for Business, Innovation and Skills at the Department for Business, Innovation and Skills (Mr Pat McFadden) tells us that the Government welcomes the Commission's recommendations. He says, in particular, that the establishment of a single Community patent and unified and specialised patent litigation system has received strong support from Member States, the pharmaceutical sector and others. Similarly, there is widespread support for the streamlining of the marketing authorisation process and improving pricing and reimbursement systems.

12.19 The Minister tells us that:

"The UK is one of the countries where generics are brought to market early after patent expiry. Our pricing system allows manufacturers of generic medicines and new products, introduced following the granting of an EU or UK new active substance marketing authorisation, to set their own prices which means that there is no delay once such products have received a marketing authorisation. As the report recognises, the UK's policy of encouraging clinicians to use the generic name rather than the branded product name of a drug means that where appropriate a pharmacist can dispense the generic product as soon as it becomes available. We currently see 83% of drugs prescribed generically in primary care in the NHS in England. This policy ensures that the NHS receives value for money for those products that are out of patent and this headroom allows the UK to provide appropriate reward to originator companies for developing the next generation of cost effective innovative drugs."[40]


12.20 In our view, the Commission's inquiry has produced valuable information which provides the basis for improved competition in the pharmaceutical sector. This would be in the interests of consumers, manufacturers and the taxpayer. The Final Report does not, however set out the text of new EC legislation or propose additional expenditure. Any such proposals would come to us for detailed scrutiny.

12.21 Because of the importance of the subject, we draw the Commission's Final Report to the attention of the House. But there are no questions we need put to the Minister about the document and we are content to clear it from scrutiny.

37   Council Regulation (EC) No. 1/2003: OJ No. L 1, 4.1.03, p.1. Back

38   (28530) 8302/07: see HC 41-xxii (2006-07), chapter 14 (16 May 2007). Back

39   Regulation (EC) No. 726/2004: OJ No. L 136, 30.4.04, p.1. Back

40   Minister's Explanatory Memorandum of 13 August, paragraph 16. Back

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Prepared 23 September 2009