Big Pharma Faces a Crackdown in Europe

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The pharmaceutical industry is one of the few sectors around that appears to be weathering these difficult times with relative ease. On Friday the European Commission suggested why that might be: it claims Big Pharma systematically rigged the market to squeeze out copycat medicines.

By using patent lawsuits and other delaying tactics to prevent cheaper generic medicines from entering the market, the drug majors cost European consumers up to $4 billion over an eight-year period until 2007, E.U. competition commissioner Neelie Kroes contends. "Market entry of generic companies and the development of new and more affordable medicines is sometimes blocked or delayed, at significant cost to health-care systems, consumers and taxpayers," she said in Brussels.

The damning indictment was part of a 400-page, interim Commission report based on evidence collected during January raids at the headquarters to some of the world's biggest drug companies, including U.S. companies Pfizer and Johnson & Johnson, Britain's GlaxoSmithKline, Anglo-Swedish giant AstraZeneca, and Sanofi-Aventis of France. The other companies known to be raided were Wyeth, Merck, Bayer Schering Pharma and Roche, as well as generic firms Teva and Sandoz.

The Commission won't complete its investigation until next spring, but Kroes is already threatening firm action against drug companies that conspire to thwart European competition rules.

The drug giants use various measures to hold up the release of cheaper copies of their brand-name drugs when patents expire, the Commission said. The most common tactic allegedly involves filing multiple patent applications for the same medicine — so-called patent clusters — that stake out an extremely broad claim for a drug's intended use and physical form (for instance, whether as a liquid, a capsule or a pill). In one case, the E.U. found 1,300 patents for a single medicine. Other tactics condemned by the Commission include launching litigation that lasts nearly three years on average, and lobbying national authorities against giving generic companies regulatory approvals.

In a departure from normal practice, the Commission released documents from their January raids meant to expose the schemes. "We need to identify options to obtain or acquire patents to limiting the freedom of operation of our competitors," said one passage from a document seized from one unnamed company.

Such tactics may help fatten corporate profits, but they hurt consumers, says Ilaria Passarani, health policy officer at the European consumer organization BEUC. "These measures represent a huge cost for patients and healthcare systems," she says. "These major drug companies should be focusing on innovative medicines, but this report says they actually spend 23% of turnover on marketing and promotional activities, a third more than the 17% they spend on research and development."

The European pharmaceutical federation, EFPIA, said that the report merely described the landscape of a highly competitive sector, but offered no evidence that competition law had been broken. "The report acknowledges that patents are key to pharmaceutical innovation and should be protected," said EFPIA director general Brian Ager. "Indeed the interim report acknowledges that the industry spends more of its turnover on R&D than any other industry sector in Europe."

The European medicines market is worth over $175 billion. Europeans spend some $275 billion a year on pharmaceutical products — an average of $550 for every man, woman and child. But generic medicines can cost as much as 90% less than branded drugs: total savings gained by copycat drugs entry amounted to at least $17 billion over the 2000-2007 period examined by the Commission. Without these savings, the total expenditure for the medicines would have been more than 25% higher.

According to the pharmaceutical market news service Pharmawire, around $114 billion worth of drugs will go off patent in 2008-12, including lucrative brands such as Eisai's Aricept, which treats Alzheimers, and Pfizer's Lipitor, which lowers cholesterol. Some analysts say patent expirations could lead AstraZeneca and GlaxoSmithKline to lose up to one third of their sales by 2010.

The irony, say critics of current practice, is that abusing the patent system doesn't necessarily help Big Pharma in the long run. Generics account for just over 40% of the market by volume in Europe, against more than 60% in the U.S. But over the past decade, the U.S. pharmaceutical market has grown twice as fast as the European market. According to IMS data, 65% of sales of new medicines marketed since 2002 are generated on the U.S. market, compared to 24% on the European market.

Earlier this month, Ernst & Young took drugmakers to task for failing to meet changing market dynamics, such as an increasingly cost-averse customers. The industry faces unprecedented challenges related to patent expirations, pricing and regulatory pressures, shifting demographics, and globalization, yet most drug companies — particularly in Europe — have yet to adapt, Ernst & Young said.

If the Commission follows up its report with firm action, this could force European drugmakers to adopt global strategies that go beyond merely stamping on cheap rivals.

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