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22 February 2013

Introduction

On February 6, 2013, the Italian Competition Authority (“ICA”) has opened an investigation against Hoffman La Roche Ltd. (“Roche”), Novartis AG (“Novartis”), Genentech Inc. (“Genentech”), Roche S.p.A. (“Roche Italia”) and Novartis Farma S.p.A. (“Novartis Farma”) into a suspected cartel in the pharmaceutical sector, for the possible infringement of the Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) which prohibits cartels and anticompetitive agreements.

The investigation took issue with two complaints filed by an association of private health care facilities (Aiudapds) and the Italian Ophtalmological Society, according to which the groups Roche and Novartis may be involved in an anticompetitive agreement for excluding in Italy the ophthalmic use of Avastin, a medicine marketed by Roche, in order to advantage the sales of Lucentis, a medicine marketed by Novartis. Genentech, a wholly owned subsidiary of Roche, which is participated by Novartis with a 33% share, has patented both medicines.

According to several studies there is no difference between Avastin and Lucentis: however Lucentis is much more expensive than Avastin. As Roche did not require an on-label registration of Avastin for ophthalmic use, only Lucentis is currently reimbursed by the Italian National Health Service: as a consequence, the claimants argue that the damages of the alleged cartel may amount to over Euro 400 million.

Background

Under Italian regulatory framework, pharmaceutical products may be subject to an on-label or off-label usage. A product is subject to an on-label usage when its therapeutic characteristics are approved for the treatment of certain diseases by the Italian Pharmaceutical Agency (“AIFA”) that issues a specific authorization for the trading of the product on the market. In such a case the Italian National Health Service shall reimburse costs incurred by individuals for the purchase of such medicinal products.

On the contrary, a pharmaceutical product is subject to an off-label usage when, although addressed to the treatment of certain diseases, it may be also used for the treatment of other pathologies, according to the results of analysis conducted by scientists and academics. Products subject to off-label usage may be included in a specific list by the AIFA (the “List 648”), and the Italian National Health Service may reimburse relevant costs when a different product having the same therapeutic effects is not available on the market.

Avastin has been originally patented by Genentech/Roche and registered in Italy by Roche for an on-label usage in cancer therapies. However, due to the useful effect of Avastin in treating ophthalmic pathologies, an off-label usage of Avastin had widely spread over the international medical community for treating the age-related macular degeneration (AMD). Therefore since 2007 Avastin has been included in the List 648 and the Italian National Health Service provided the reimbursement of Avastin (with a cost of around Euro 15 for each treatment).

Although Avastin was approved and used as off-label pharmaceutical product for the treatment of ophthalmic pathologies (and therefore it might be registered by Roche for on-label usage) Genentech/Roche patented Lucentis, a product developed and traded by Novartis in force of a distribution contract according to which Novartis paid to Genentech/Roche royalties and Genentech/Roche granted Novartis profits deriving from the trading of Lucentis outside the USA.

Due to the registration of Lucentis by Novartis for an on-label usage in the treatment of ophthalmic pathologies and the notification by Roche to pharmaceutical authorities of the existence of damages linked to the use of Avastin (i) Avastin was cancelled by the list of off-label products due to the availability on the market of a different product for the treatment of ophthalmic pathologies, and (ii) Lucentis (and Macugen, marketed by Pfizer Limited) are as of today the only pharmaceutical product reimbursed by the Italian National Health Service (with a cost of around Euro 810 for each treatment) for the treatment of ophthalmic pathologies.

ICA’s assessment

ICA deems that Roche and Novartis, also through Genentech and their relevant Italian subsidiaries, might be involved in a horizontal agreement aimed at marketing Lucentis rather than Avastin. The horizontal agreement might ensure Novartis high profits from the sale of Lucentis, while Roche preferred not registering Avastin for on-label usage, and collecting royalties paid by Novartis for the distribution of Lucentis according to the distribution contract with Genentech/Roche.

In ICA’s view, this is the only way to explain this inactive behaviour by Roche, taking into account that an ordinary business practice would be aimed at increasing profits through the sale of products, and considering that many studies have confirmed the therapeutic properties of Avastin for ophthalmic use. In addition, Roche sought for preventing off-label use of Avastin in the ophthalmic sector, also notifying the existence of damages linked to the use of Avastin to pharmaceutical authorities.

Finally, ICA believes that horizontal agreements might be influenced by corporate and commercial relationships between Roche and Novartis, since Novartis holds more than 30% of Roche’s share capital and developments activities are enhanced by Novartis and Genentech (company controlled by Roche).

ICA deems that the behaviour of Novartis and Roche may constitute an anticompetitive agreement related to the market of the treatment of ocular diseases in breach of the Article 101 of TFEU, as affects the trade between Member States. In fact, according to EU case law, a cartel can affect the trade between Member States when the agreement can exercise a direct or indirect, actual or potential influence on patterns of trade between State Members. Therefore, although the alleged anticompetitive conduct has been carried out by Novartis and Roche in Italy, ICA upheld the European Commission view under which: “agreement extending over the whole territory of a Member state by their very nature have the effect of reinforcing the partitioning of markets on a national basis by hindering the economic penetration which the Treaty is designed to bring about”. (1)

Possible Outcomes

ICA opened an investigation according to the Article 14 of the Law 287/1990 (the “Competition Act”) against Roche, Novartis, Genentech, Roche Italia and Novartis Farma, into a suspected cartel in the pharmaceutical sector, for the possible infringement of the Article 101 of the TFEU.

If the investigation reveals the existence of an anticompetitive agreement between Roche and Novartis, the ICA shall set a deadline within which the companies concerned are to remedy the infringements. In the most serious cases ICA may decide, depending on the gravity and the duration of the infringement, to impose a fine up to 10% of the turnover of each involved company during the prior financial year.

To prevent the imposition of fines, within three months from notification of the opening of the investigation, the pharmaceutical companies may offer commitments that would correct the alleged anti-competitive conduct. ICA may make them binding on for the companies and terminate the proceeding without ascertaining the contravention, provided that the companies will observe the commitments approved.

When the ICA would levy a fine against a company, the relevant amount should be calculated taking into account (i) the turnover in the relevant product and geographic market to which the infringement is related (ii) the gravity and duration of the infringement, (iii) certain circumstances which may increase or decrease responsibility, such as the behaviour of the company in the course of the investigation and (iv) the effective economic capacity of the companies to affect significantly competition in the relevant market.

(1) Commission Notice 2004/ 101/07 “Guidelines on the effect on trade concept contained in Articles 81 and 82 of the Treaty”, par. 78.