Canada: Life Sciences Newsletter, April 2009 – Part Two

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Definitions of Generic Competition in Contracts

By Gary Howes

In licensing and other collaborations the onset of 'generic competition' may be cause for renegotiation of certain aspects of the agreement or reductions in payments. Such clauses tend to be contentious. Below we review the US and EU rules which will inform when such competition can be said to arise.

In the US, there are two possible ways to define generic competition in contracts, reflecting the two available routes to bring generic drugs to market.

The first route falls under section 505(j) of the Food, Drug and Cosmetic Act ("the Act"). A section 505(j) application is made when a product is identical in active ingredient, dosage form, strength, route of administration, labelling, quality, performance characteristics and intended use, among other things, to a previously approved product. This is known as an abbreviated new drug application (ANDA) and is not accompanied by clinical studies or evidence of safety and efficacy but information establishing bioequivalence to an originator product. This route represents a "true" generic as it is a direct copy of a previously approved product.

The second route falls under section 505(b)(2) of the Act where an application is accompanied by full reports of investigations of safety and effectiveness of a drug where at least some of the information comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. A section 505(b)(2) application may therefore be submitted for a new chemical entity or for changes to an originator product. Applications made under Section 505(b)(2) are therefore not considered to be "true" generics as they are not duplicates of an originator product but simply a modification of an approved product.

Different tactics are employed when defining generic competition in commercial contracts. In license agreements, licensors will seek to receive the maximum amount of royalties under the license by attempting to limit the definition of generic competition to the "true" generic under Section 505(j) of the Act, whereas a licensee would attempt to include a wide definition of generic competition (covering both possible routes) in order to reduce the amount of royalties payable to the licensee when such generic competition enters the market.

In the EU, the introduction of generic products to market is contained in Directive 2001/83/EC on the Community Code relating to medicinal products for human use (as amended by Directive 2004/27/EC) ("the Directive").

Article 10(1) of the Directive provides that an applicant with a "generic medicinal product" of a reference medicinal product can dispense with providing results of pre-clinical and clinical trials. The reference product may be considered to correspond to the Section 505(j) type of generic as it provides for a route to market for a direct copy of a previously authorised product and is therefore a "true" generic.

In circumstances where a medicinal product does not fall within the definition of a generic medicinal product, Article 10(3) of the Directive provides than an applicant can rely on results of preclinical tests and clinical trials and in part on new data to support a modification of an existing product. Article 10(3) of the Directive is therefore broadly equivalent to section 505(2) (b) of the Act and covers variants of the reference products which are therefore not "true" generics.

The Directive is more comprehensive than the Act in and provides for further routes to market for generics than the US regime.

Article 10(4) of the Directive provides that where a biological product is similar to a reference biological product, results of pre-clinical tests or clinical trials can be provided in support of the application. Article 10(a) establishes a gateway where the results of pre-clinical and clinical trials can be replaced by reference to published scientific literature of a well established product. Article 10(b) further covers substances used in the composition of authorised medicinal products where the results of new pre-clinical tests or new clinical trials relating to that new combination can be provided. Finally, Article 10(c) of the Directive allows a possible route where consent has been given by the originator to cross- refer to existing data possessing the same qualitative and quantitative composition.

Comment:Although the US regime has two gateways for generics, the EU has several (although many may not fall within the strict definition of a "true" generic). Definitions of generic competition in contracts should therefore be considered in light of the differences between the regime in the US and the EU. Under the EU regime, there are more scenarios of generic competition to exclude when acting for licensors, however, licensees will have more options to consider.

In any event, mere market entry alone of the generic should not be the basis of a licensor to submit to reduced royalties as the reasoning behind such clauses is a reflection that the licensee's volumes will decrease as a result of sales of the generic.

Parallel Trade and Quota Schemes

By Antonina Cuffaro

The ECJ has ruled that a pharmaceutical company that is dominant in a national market for a product abuses its dominant position if it refuses to meet orders from wholesalers for that product that are "ordinary". Such companies are however, permitted to refuse to fulfill orders from wholesalers that are "out of the ordinary in terms of quantity".

On September 16, 2008, the European Court of Justice (ECJ) delivered its judgment in the joined cases C-468/06 to C-478/06, C-Sot. Lélos Kai Sia EE (and Others) v. GlaxoSmithKline AEVE.

Until November 2000 GlaxoSmithKline distributed its pharmaceuticals in Greece through wholesalers. Its products included Lamictal® for epilepsy, in which it was found to be dominant. In addition to supplying the local market some wholesalers exported the product into Germany and the United Kingdom. GSK limited its supply to amounts required to meet their domestic needs, plus a safety margin.

The wholesalers complained to the Greek competition authority, which in turn asked the ECJ to interpret the underlying EU law on abuse of dominance—Article 82 of the EC Treaty. This reference to the ECJ resulted in its judgment in the Syfait case delivered in May 2005 [Case C-53/03, Syfait and Others [2005] ECR4609] (see previous Fasken Martineau newsletters) where Advocate General Jacobs delivered an opinion to the ECJ in 2004 that the conduct in question did not automatically constitute an abuse. The ECJ declared itself unable to rule for jurisdictional reasons.

Following a preliminary reference from the Athens Appeal Court to the ECJ, Advocate General Ruiz-Jarabo (contrary to Francis Jacobs' view in the Syfait case), on 1 April 2008 considered that a dominant company's refusal to meet wholesalers' order with a view to limit parallel trade amounts to abusive practice.

Advocate General Ruiz-Jarabo disagreed with Advocate General Jacobs and found that to justify refusing to meet the orders of wholesalers of pharmaceutical products, with a view to reducing the harm caused by parallel trade, regulation of the market must compel the dominant undertaking to behave in that manner in order to protect its legitimate business interests.

The ECJ decided that whilst price regulation in the EU pharmaceuticals sector cannot preclude the application of EU competition rules, state intervention in the pricing of pharmaceuticals cannot be ignored when assessing the abuse by a dominant pharmaceutical company because it is likely to contribute to the creation of opportunities for parallel trade. However, it went further to say that Article 82 cannot operate such that the only solution left to dominant pharmaceutical companies is to refrain from marketing its products in low-priced Member States and that they must be able to take reasonable and proportionate steps to protect their own commercial interests.

The conclusion was that a dominant company may protect its commercial interests by refusing to fulfill orders that are "out of the ordinary" (i.e. out of proportion to those previously sold by customers to meet demand in the relevant member state) but not "ordinary orders" of an existing customer solely because that customer intends to parallel export some of the goods supplied.

Comment:The ECJ clearly states that an order would be "out of the ordinary in terms of quantity" if it is out of proportion to those previously sold by wholesalers to meet demands in the relevant Member State. Otherwise, the only guidance offered by the ECJ on what constitutes an "ordinary" order is that consideration must be given to the previous business relations of the parties and the size of the orders in relation to market requirements in the relevant Member State. Despite the lack of certainty as to what exactly constitutes "ordinary" the ECJ's decision is positive for dominant pharmaceutical companies who may be able to refuse to supply wholesalers quantities of its products that are out of proportion to those previously supplied to meet the market needs in that Member State.

TUPE and Outsourcing

By Cerys Williams

Outsourcing arrangements (whether involving clinical research, manufacture, logistics, sales and marketing or facilities) are highly prevalent in the life sciences sector. The current economic climate is already likely to exaggerate this tendency further; as businesses seek to trim overheads, many are looking to remove employment cost and risk by contracting out business services. In entering into outsourcing arrangements, both client and service provider will need to navigate the minefield of TUPE (the Transfer of Undertakings (Protection of Employment) Regulations 2006).

Broadly, TUPE means that whenever a business outsources a service or moves from one service provider to another, any employees assigned to performing that service have preferential rights including:

• automatic transfer of their employment to the new service provider (with all historic liabilities);
• protection from dismissal in connection with the transfer;
• rights to information and consultation with their elected representatives;
• invalidation of changes to their employment terms in connection with the transfer (with limited exceptions).

TUPE is good news only for employees. The consequences for unwary service providers can be disastrous. Whole teams of employees can be landed on their doorstep (physically and metaphorically) and their options for integrating or removing them severely constrained by law. Equally, the former employer may be dismayed to see valued staff leave, particular where a re-tendering exercise means they are joining a key competitor. The client of the services is also likely to be unhappy, as changing provider does not rid them of the very staff who may have prompted the change, albeit now under new corporate flag.

TUPE applies where the services are provided pre-transfer by employees based in England or Wales irrespective of where the client or new service provider is based. This can come as a real shock to North American service providers who win a contract only to find themselves on a crash course in English employment law. While the geographical shift may make dismissals lawful, the non-UK service provider will be responsible for the severance costs, which are often significant in the UK. Take heed also that TUPE derives from European law and similar protections apply in all EU countries.

While there is no way to stop TUPE applying, with careful planning, its worst consequences can be mitigated by the following practical measures:

• Where possible, structure services, whether provided internally or externally, so that employees are not dedicated or assigned to a particular business division, contract or customer.
• Consider using services contracts for specific events or projects on a short-term, case by case basis, which fall within a specific TUPE exemption, rather than using a general retainer.
• Consider using self employed contractors or temps provided through an agency, rather than retaining employees. Only employees are protected by TUPE (but bear in mind that de facto contracts of employment can be created inadvertently).
• Most importantly, make sure that TUPE and its associated risks and costs form part of your negotiations and pricing structure up front. Whilst parties cannot contractually prevent employees claiming under TUPE, there is nothing to stop the parties agreeing to a division of risk and cost as between themselves. If you are the new service provider, try to pass some of the risk and cost to the client, who may well be able to pass this on to the former services provider under existing contractual provisions.

INDUSTRY AFFAIRS

European Commission Pharmaceutical Sector Inquiry

By Stuart Richards

We review below the background and current status of the landmark Commission enquiry into the pharmaceutical industry, particularly its patent expiry and generic entry practices.

In January 2008 the Commission announced that it had launched the inquiry in response to concerns that competition in the sector may be stifled other than by parallel trade restrictions, highlighting the fact that there had been a decline in the number of new products reaching the market and instances of delays in the launch of generic medicines. The Commission stated that it was eager to establish if there were agreements restricting competition or abuses of dominant position and particularly blocking patents or settlements in patent disputes being used to delay the entry of generics.

The Commission took the unusual step of conducting unannounced inspections ("dawn raids") at several pharmaceutical companies, including GlaxoSmithKline, AstraZeneca, Pfizer and Sanofi-Aventis, the first time this instrument has been used in a Commission sector inquiry.

In addition, the Commission initially sent questionnaires to approximately 100 companies that produce originator and/or generic medicines and then widened its inquiry to include other stakeholders. It also spoke to European industry associations, including the European Federation of Pharmaceutical Industries and Associations (EFPIA) (representing the originator companies) and the European Generic Medicines Association (EGA) (representing the generic companies).

The Report, published in November 2008, days after a second series of dawn raids, makes clear that it does not seek to identify wrongdoing, rather that it provides information for the Commission to decide what further steps might be taken. However, its findings will cause concern that further action can indeed be expected. Indeed, the Commission press release is headed "Preliminary report on pharmaceutical sector inquiry highlights cost of pharmaceutical companies' delaying tactics" (such delay was said to be on average six months from end of originator's exclusivity to generic launch, at a cost of €3 billion between 2000 and 2007 in respect of the sample of medicines investigated in the Report) and the FAQ page on the Commission's website states "The main findings are that competition in this industry does not work as well as it should. According to the preliminary report there is evidence that originator companies have engaged in practices with the objective of delaying or blocking market entry of competing medicines."

While this interim report gives no advice to the Commission as to how to proceed, it is clear that some of the findings will give considerable food for thought when the Commission considers the matter further. A further consultation period closed at the end of January, and the Commission will prepare a final report, expected in the spring of 2009. Competition Commissioner Neelie Kroes has said "the Commission will not hesitate to open antitrust cases against companies where there are indications that the antitrust rules may have been breached".

In addition, beyond the inquiry itself, it should be noted that, during her speech given when the report was presented, the Competition Commissioner read out quotes from a number of potentially damaging documents found in the course of the dawn raids, and specifically said that this type of evidence shows the importance of carrying out investigations in this way. This may well indicate that while this was the first sector enquiry to be started in this way, it is unlikely to be the last.

Medicines Rationing

By Antonina Cuffaro

The UK High Court has recently reviewed a Primary Care Trust's exceptionality policy as applied to the cancer drug lenalidomide.

In R (Ross) v West Sussex PCT [2008] EWHC B15 (Admin) (Admin Ct) Mr Ross, the claimant, applied to the local PCT for exceptional funding under the PCT's Individual Cases Policy for a trial course of lenalidomide. Lenalidomide is not ordinarily available to patients in the area.

Under the PCT's terms of reference when funding is sought for non-routine treatments under the PCT's Individual Cases Policy, a patient is required to demonstrate his exceptional circumstances and the clinical efficacy and cost effectiveness of the treatment. The PCT's Review Panel and appeal body rejected the claim on both grounds.

The PCT's terms of reference for the Review Panel included guidance on exceptionality. The guidance provided that there was no comprehensive definition of an exceptional case but stated that:

"In order for funding to be agreed there must be some unusual or unique clinical factor about the patient that suggests they are:

• Significantly different to the general population of patients with this condition.
• Likely to gain significantly more benefit from the intervention than might be expected from the average patient with the condition."

The guidance also provided that the panel could not make a decision to fund "where by doing so a precedent would be set that establishes a new policy (because the patient is not, in fact, exceptional, but representative of a group of patients)."

The High Court held that the PCT's exceptionality policy was unlawful because it meant that a patient was not 'exceptional' if his condition had characteristics similar to those of other patients, thus setting a requirement of uniqueness that was unattainable.

The judge also criticised the PCT's failure to distinguish patients who were resistant to their previous treatment or who experienced unfavourable side effects from those (as was the case with the Claimant) who suffered intolerable side effects. In the judge's view, this distinction was "of vital importance" to the proper determination of exceptionality.

Cost effectiveness and clinical efficacy - the judge further found that the decision-makers had erred when assessing the clinical efficacy and cost effectiveness of the treatment. In the context of determining clinical efficacy the initial Review Panel was criticised for failing to seek expert advice. As a consequence, they had failed to appreciate the strength of the evidence in favour of treating a patient like the claimant with lenalidomide.

The judge held that the panels' views were such that no reasonable authority could reach and therefore irrational. The panel had misunderstood or failed to take account of various matters. For example, the panel had failed to offset the cost of the alternative care that the Claimant would otherwise be receiving.

Comment: It is well-established that the courts cannot interfere with the funding priorities of the health authorities, provided they are reasonable - the court's role is limited to reviewing the lawfulness of the decision. A public authority is entitled to set its own policy for making decisions, provided it does so rationally, logically and lawfully.

This decision may encourage unsuccessful drug companies to challenge reimbursement and funding decisions on the basis that the decision makers have misunderstood the evidence, thus allowing the courts to give at least some consideration to factual matters. As the judge noted, the courts will generally be prepared to subject highly sensitive "life and death" decisions to particularly rigorous scrutiny but of course as with all grounds of challenge in judicial review, mistake of fact is also applicable in the context of decisions by public bodies.

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