The Pharmaceutical Intellectual Property and Competition Law Review: Canada
Canada is home to a robust pharmaceutical sector that includes originators as well as generic manufacturers and ranges from local subsidiaries of global giants to small and medium-sized biopharmaceutical enterprises. Contract research organisations and contract manufacturing organisations also play a role in the Canadian industry. According to an annual study on research and development spending by Canadian companies, pharmaceutical and biotechnology firms represent more than one-quarter of the most innovative companies in Canada.2
As discussed in detail in Section II, prices for patented medicines in Canada are regulated, using a multivariable formula that includes examining prices in a number of comparator countries. As a result, prices in Canada have, on average, been lower than in other countries.3 The pricing criteria are currently under review with changes expected to come into effect in 2021.
Canada's competition regime is stable and well established. The Competition Bureau is led by the Commissioner of Competition (the Commissioner), who is appointed by the federal cabinet to a five-year term. The Competition Bureau of Canada (the Bureau) is considered an independent law enforcement agency, empowered to investigate anticompetitive conduct. Where the Commissioner believes a non-criminal violation of the Competition Act has occurred, he or she may commence an action before the courts; suspected criminal violations are referred to the Department of Public Prosecutions. As discussed in Section VII, in recent years, the Commissioner has investigated, under the abuse of dominance provisions, a number of instances of originator firms refusing or delaying their responses to requests from generic firms for product samples.
Legislative and regulatory framework
Pharmaceutical products are regulated under the Food and Drugs Act (FDA) and associated regulations. Health Canada and its related agencies are responsible for the administration and enforcement of the FDA and its associated regulations. Health Canada is tasked with issuing notices of compliance (NOCs) and drug identification number (DIN) authorisations, as well as with monitoring post-marketing safety and marketing activities. It has the authority to impose fines and other penalties, including warnings, stop-sale orders, seizure of products, suspension of market authorisation, injunctions, refusals of importation and initiation of criminal proceedings.
With respect to pricing, drug prices are subject to regulatory control as long as a patent pertains to the drug, with the Patented Medicine Prices Review Board (PMPRB) setting the national ceiling price for patented drugs. Specifically, under the Patented Medicines Regulations (PMR) made under the Patent Act, the PMPRB has jurisdiction over any drug to which a patent pertains. The PMPRB has taken a broad view of when a patent pertains to a drug. If no patents pertain to the drug, the price is not regulated by the board.
The PMPRB considers several factors when determining a ceiling price for a patented medication. Historically, these have included the level of therapeutic improvement over other products, the prices of products in the same therapeutic class and the list prices of the products in seven other comparator countries. Annual price increases are evaluated in reference to the consumer price index. Should the PMPRB find that a price is excessive, it may order the patentee to reduce the price and take measures to offset excess revenues it may have received. The offset of excess revenues may be achieved through additional price reduction or a payment to the federal government.
Recent amendments to the PMR, scheduled to come into force on 1 January 2021, have introduced a complex set of criteria for determining the ceiling price. These amendments include a change to reference comparator countries (effectively lowering the comparator prices) and the introduction of three new pricing factors: a pharmacoeconomic evaluation, the size of the market and gross domestic product. The proposed regulations also increase reporting requirements. At the time of writing, the regulatory amendments are being challenged in the courts and implementation guidelines have not been finalised.
While the standard patent term of 20 years applies to pharmaceutical patents, patent term restoration rules may extend patent life in certain cases, such as undue regulatory delay in obtaining market authorisation for the drug. Under Section 115(1) of the Patent Act, the issuance of a certificate of supplementary protection (CSP) grants the certificate's holder and its legal representatives the same legal rights, privileges and liberties that are granted by the patent set out in the certificate, but only with respect to the making, constructing, using and selling of any drug that contains the medicinal ingredient, or combination of medicinal ingredients.
The Commissioner of Competition, as the head of the Bureau, is tasked with the administration and enforcement of the Competition Act (CA), a law of general application that applies to the pharmaceutical sector. The CA contains merger provisions, prohibitions on anticompetitive conduct such as price-fixing and bid-rigging that are per se illegal, and other practices such as refusal to deal, exclusive dealing, tied selling and abuse of dominance that are only problematic where they have an adverse or substantial impact on competition.
Pursuant to the PM(NOC) regulations, the Minister must maintain a register of patents linked to their respective medicines (the Patent Register). When an owner or licensee of a patent for a medicine files either an NDS or SNDS, it must also file a list of the relevant patents pertaining to that NDS or SNDS to be entered on the Patent Register. Subsection 4(2) of the PM(NOC) regulations asserts that a patent is eligible to be added to the Patent Register if the patent contains a claim for the medicinal ingredient, formulation, dosage form or the use of the medicinal ingredient for which a NOC has been issued in respect of the submission.
The process used by persons filing for a second or subsequent entry drug (e.g., generics or biosimilars) is provided for in the PM(NOC) regulations. If the generic or biosimilar drug submission makes reference to or is compared to a medicine for which patents have been registered on the Patent Register, the applicant must either:
- obtain the consent of the owner of the patent to make or sell the generic or biosimilar in Canada, and advise the Minister of same;
- accept that the NOC will not issue until the relevant patent expires; or
- file a notice of allegation (NOA), which alleges that the person who filed the patent on the patent list is not the patent owner, the patent is expired, the patent is not valid, the patent is ineligible for inclusion on the register, or that the generic or biosimilar does not infringe on the registered patent (Section 5(3)(a), PM(NOC) Regulations). The patent holder or licensee has 45 days to bring an action.
A 24-month statutory stay is triggered by the commencement of an action under Section 6 of the PM(NOC) regulations. During the stay, the Minister is prohibited from issuing an NOC to the generic or biosimilar. If the action is successful and the generic is found to infringe the patent, or patents, subject of the NOA, the court may order any legal remedy available in respect of the infringement of a patent. If the action is unsuccessful and the generic is not found to infringe the patent, or patents, subject of the NOA, the Minister is no longer prohibited from granting an NOC for the generic or biosimilar.
i The Commissioner and the Bureau
The Commissioner of Competition enforces the CA, which includes both criminal and civil remedies, and applies to pharmaceutical companies and the pharmaceutical industry generally.
Section 45 of the CA creates a per se criminal offence for cartel-type conspiracy agreements between competitors. Accordingly, charges can be laid against individuals and corporations for conspiring to fix prices, allocate markets or restrict supply, and the penalty can be a fine of up to C$25 million or up to 14 years of imprisonment, or both.
Section 90.1 creates a civil remedy that allows the Commissioner to challenge agreements that are not within the scope of a Section 45 offence but that may prevent or lessen competition substantially. The Commissioner may bring an application to the Competition Tribunal (the Tribunal). The Tribunal may make an order that prohibits the offending conduct or that requires the person to take certain action, or both.
The Commissioner also enforces other non-criminal forms of anticompetitive conduct under Part VIII of the CA, including refusal to deal, price maintenance, exclusive dealing, tied selling, market restriction, abuse of dominant position and delivered pricing. The Commissioner recently conducted an inquiry into the conduct of a pharmaceutical company, considering allegations that it restricted a generic drug manufacturer from accessing samples of its branded product, preventing or delaying the entry of competing generic drugs contrary to the abuse of dominance provisions of the CA. The Commissioner discontinued the inquiry after the company took action to address the Commissioner's concerns. This was the second time the Commissioner inquired into refusals to supply samples by branded pharmaceutical companies.
The Bureau has indicated that it will continue to monitor the pharmaceutical industry for any conduct that prevents or delays the supply of samples of branded drugs to generic manufacturers and has warned that branded drug manufacturers should be aware that in future, even if samples are eventually supplied, the Bureau will take the necessary steps to address past conduct, including seeking administrative monetary penalties, where the evidence establishes the CA is engaged. Branded drug manufacturers should therefore anticipate that the Bureau will be very cautious and sceptical with respect to failures to supply generics in a timely manner.
Health authorities have no formal role in the application of competition law to the pharmaceutical sector. However, as sectoral experts, they may be consulted by the Bureau.
There are also two possible avenues for private parties to obtain competition-related remedies, including: a private right of action under Section 36 for persons that have suffered a loss or damage as a result of conduct contrary to the criminal provisions of the CA or breach of a civil prohibition order; and an application for leave to the Tribunal in respect of refusals to deal, price maintenance, exclusive dealing, tied selling and market restrictions.
Depending on the practice involved, both the Commissioner as well as Health Canada may take action under their respective acts for misleading advertising or marketing.
Health Canada may take action where there is a potential health risk, wilful non-compliance with industry codes, direct-to-consumer advertising of a prescription drug or marketing of an unauthorised product.
For its part, the Bureau will take action to address advertising or marketing claims that are unsubstantiated, false or misleading. For example, the Bureau recently entered into a consent agreement with a health sciences company and its president over weight loss and fat burning claims made in the marketing of certain natural health products. The Bureau has indicated that the agreement will prevent potential harm to consumers while the Bureau completes its ongoing investigation into whether the marketing claims are based on adequate and proper testing. If the Bureau ultimately concludes that the weight loss claims are unsubstantiated, false or misleading, it may file an application under the CA before the Tribunal. Those found by the Tribunal to be making false or misleading representations or engaging in deceptive marketing practices may be subject to various sanctions, including financial penalties.
Canadian regulators have also attempted to address issues that have arisen as a result of the covid-19 pandemic. For example, Health Canada has begun publishing a list of covid-19-related advertising incidents where it has taken compliance and enforcement action. The list outlines products and corresponding companies or advertising media that were found to engage in non-compliant marketing, as well as the compliance and enforcement actions taken against them. The Bureau has issued several statements regarding deceptive marketing practices and also taken action against companies selling filters or air purifiers that claim to filter out the coronavirus.
Pursuant to Sections 109 and 110 of the CA, and depending on the size of the parties and the transaction, a merger or acquisition may be notifiable to the Commissioner.
The party-size threshold is exceeded where the parties to the transaction, together with their affiliates, have assets in Canada that exceed C$400 million, or gross revenues from sales in, from or into Canada, that exceed C$400 million. The transaction-size threshold is exceeded where the aggregate value of the acquired assets, or the gross revenues from sales in or from Canada generated from those assets, exceeds C$96 million. This amount was most recently updated in 2019.
For patents and licences, the acquisition of any of the assets in Canada of an operating business is considered a merger. If the thresholds described above are exceeded, the acquisition of the patent or licence would be notifiable to the Commissioner.
As part of the Bureau's mandate, it may also investigate transactions that are not notifiable under the CA, but nonetheless raise substantive competition concerns.
Specific features of the pharmaceutical industry are also taken into account when the Bureau is assessing a merger between two pharmaceutical companies. For instance, the regulatory regime in which pharmaceutical companies in Canada operate will be an important consideration in assessing a merger (i.e., where it relates to barriers to entry).
In 2016, Teva Pharmaceuticals Industries Ltd's (Teva) proposed to acquire Allergan plc's generic pharmaceutical business. In its position statement concerning the transaction, the Bureau stated that it had assessed the regulatory framework in Canada with respect to the development of new generic drugs. In particular, the Bureau examined certain public and non-public information on drugs currently under development, and coordinated with Health Canada to make assessments as to the expected timing for regulatory approval and entry into the market.
In another example, in 2017, when reviewing a merger between two Quebec retail pharmacies, the Bureau took into account the regulation of pharmacists and prices of generic drugs in Quebec to conclude that the transaction did not substantially lessen competition.
i Market definition
Part of the Bureau's review of a transaction involves defining the product market and the geographic market.
For the pharmaceutical sector, the Bureau will typically seek detailed information on products currently supplied by the merging parties in Canada to assess any competitive overlaps. Parties may need to disclose information on a product molecular basis. Where products contain the same molecule or active ingredient and are supplied in the same format, the Bureau will typically consider them to be within the same relevant product market.
In defining the geographic market, the Bureau will assess buyers' ability or willingness to switch their purchases in sufficient quantity from suppliers in one location to suppliers in another, in response to changes in relative prices. A relevant geographic market consists of all supply points that would have to be included for a small but significant and non-transitory increase in price to be profitable. With respect to the pharmaceutical industry, the Bureau typically defines the geographic market to be no broader than Canada, as significant regulatory barriers limit the entry of pharmaceutical products from outside of Canada. While the Bureau has generally used a national geographic market as a starting point, because provinces regulate healthcare, pharmacies and the pricing of generic drugs, the actual relevant geographic market is often provincial in scope.
ii Reviewing the economics of a merger or acquisition
When considering a horizontal merger of multiple companies currently active in the same product and geographical markets, one of the key questions the Bureau will consider is whether the proposed merger will result in a post-merger market share of 35 per cent or greater. If the answer is yes, the merger will garner heightened scrutiny by the Bureau. However, such mergers are not necessarily deemed anticompetitive. Rather, the Bureau will examine various factors to determine whether such mergers would likely create, maintain or enhance market power, and thereby prevent or lessen competition substantially.
Overlaps with respect to products under development will, in all probability, be considered problematic where the products are likely to receive regulatory approval, the products will be sold in Canada within a reasonable period following the merger and the post-closing merged company will be able to exercise market power in respect of the products. For example, in the context of the proposed merger between Merck & Co, Inc and Schering-Plough Corporation, the parties agreed in their consent agreement with the Bureau to divest a human health product that was currently under development for the treatment of chemotherapy-induced and post-operative side effects to a third party.
Similarly, with respect to Teva's 2016 acquisition of Allergan plc's generic pharmaceutical business, the Bureau entered into a consent agreement with Teva, the terms of which required Teva to divest either its own or Allergan's Canadian assets relating to tobramycin inhalation solution and buprenorphine/naloxone tablets to buyers approved by the Commissioner.
Such agreements can go beyond a simple requirement to sell an asset or divest, and have in the past included commitments related to transmission of commercially sensitive information within a merged entity.
Pursuant to Section 96 of the CA, the parties to a proposed merger may seek to use an efficiency defence. The Bureau will examine claims related to, among other things, savings that arise from the rationalisation of research and development activities. Additionally, the Bureau will also examine claims that the merger has, or is likely to result in, gains in dynamic efficiency, including those attained through the optimal introduction of new products, the development of more efficient productive processes and the improvement of product quality and service.
Another argument parties may use is known as the 'failing firm' argument, where the business of the party being acquired 'has failed or is likely to fail'. In a recent development, while reviewing the acquisition of Total Metal Recovery by the American Iron & Metal Company Inc, two Quebec scrap metal companies, the Bureau took the position that no competitively favourable alternatives existed and that Total Metal Recovery's assets would likely have exited the market absent the merger. Given the economic uncertainty surrounding the covid-19 pandemic, parties may increasingly rely on the 'failing firm' argument.
Pursuant to Section 45 of the CA, the following is considered anticompetitive behaviour:
- to conspire, agree or arrange with a competitor to fix, maintain, increase or control the price for the supply of a product;
- to allocate sales, territories, customers or markets for the production or supply of a product; or
- to fix, maintain, control, prevent, lessen or eliminate the production or supply of a product.
Even if these specific activities are not undertaken, an agreement may nonetheless be reviewable under Section 90.1 of the CA where it prevents or lessens, or is likely to prevent or lessen, competition substantially in a market.
In the context of the covid-19 pandemic, the Bureau released a statement regarding competitor collaborations of limited duration intended to supply critical products and services. The Bureau indicated that where firms are acting in good faith, and motivated by a desire to contribute to the crisis response rather than achieve competitive advantage, it will generally refrain from exercising scrutiny. This conclusion applies as long as: there is a clear imperative for companies to be collaborating in the short-term to respond to the crisis; and collaborations are undertaken and executed in good faith and do not go further than what is needed. The Bureau specifically referred in its statement to the formation of collaborative buying groups and the sharing of supply chain resources such as distribution facilities.
ii Abuse of dominance
In Canada, abuse of dominance is a civil reviewable matter, meaning that there is no liability until the Tribunal actually makes a finding that abuse of dominance has occurred. The provision applies generally to all sectors of the economy.
The Commissioner must prove three elements on a balance of probabilities before the Tribunal may make an order proscribing the behaviour or imposing an administrative monetary penalty:
- that one or more persons substantially or completely control, throughout Canada or any area thereof, a class or type of business;
- that the person or persons have engaged in or are engaging in a practice of anticompetitive acts; and
- that the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market.
The Bureau released updated Abuse of Dominance Enforcement Guidelines in March 2019. In particular, the 35 per cent safe harbour was removed. The Bureau's new general approach is as follows:
- a market share below 50 per cent will generally only prompt further examination if other evidence indicates the firm possesses a substantial degree of market power, or that it appears the firm is likely to realise the ability to exercise a substantial degree of market power through the alleged anticompetitive conduct within a reasonable period while that conduct is ongoing;
- a market share of 50 per cent or more will generally prompt further examination; and
- in the case of a group of firms alleged to be jointly dominant, a combined market share equal to or exceeding 65 per cent will generally prompt further examination.
The case law is clear that although market share is important to the dominance analysis, a finding of market power must be supported by findings other than market share, such as the existence of barriers to entry, the number and effectiveness of competitors, excess capacity, predatory pricing and the state of the market.
Merely holding a patent does not confer dominance on its holder and, as such, is not definitive within the dominance analysis. If the product market were defined narrowly so as to include only the patented product, the holder might be dominant in that market. However, more than mere dominance is required. There must be some practice of anticompetitive acts.
Canadian common law includes a notion of regulated conduct defence, which is an interpretative tool to deal with how to apply one statute to conduct that is authorised or required by a federal, provincial or other law. In its October 2019 decision in The Commissioner of Competition v. Vancouver Airport Authority (VAA), the Tribunal held that the abuse of dominance provision of the CA does not provide the requisite leeway language that must be present before the regulated conduct doctrine may be relied upon to exempt or shield conduct from the application of the CA. However, the Tribunal further found that a respondent's compliance with a statutory or regulatory requirement may nonetheless constitute a legitimate business justification for conduct that is potentially anticompetitive under the abuse of dominance provision. The Tribunal ultimately concluded that VAA had a legitimate business justification for engaging in the impugned exclusionary conduct and that those justifications were more important in its decision-making process than any subjective or deemed anticompetitive intent, or any reasonably foreseeable anticompetitive effects of its conduct. Ultimately, the Tribunal dismissed the Commissioner's application against VAA.
iii Intellectual property
Despite the Bureau's ability to review agreements involving abuses of dominance, Subsection 79(5) of the CA sets out that an act engaged in, pursuant only to the exercise or enjoyment of any interest derived under certain IP legislation, including the Patent Act, is not an anticompetitive effect for the purposes of the abuse of dominance provision.
In its Intellectual Property Enforcement Guidelines (IPEGs), the Bureau sets out that the CA generally applies to conduct involving IP as it would apply to conduct involving other forms of property. However, the Bureau applies a two-pronged approach to cases involving IP or IP rights: those involving something more than the mere exercise of the IP right; and those involving the mere exercise of the IP right and nothing else. The Bureau states in the IPEGs that it will use the general provisions of the CA to address the former circumstances and Section 32 (special remedies) to address the latter.
Section 32 addresses situations involving the use of exclusive rights and privileges conferred by patents, trademarks or copyrights, for example, to restrain trade, limit the production of products or unduly limit facilities for transporting, producing or storing a product, among other things. In such cases, the Federal Court may take action, including declaring such an agreement or licence void in whole or in part. With respect to the general provisions, in practice, the mere exercise of IP rights has not been found to offend the CA.
According to the IPEGs, the Bureau will generally 'not consider licensing agreements involving IP to be anticompetitive unless they reduce competition substantially relative to that which would have likely existed in the absence of the licence's potentially anticompetitive terms'.
Several cases have dealt with IP licensing agreements, including Canada (Director of Investigation and Research) v. Tele-Direct (Publications) Inc, in which the Tribunal found that the enforcement of trademark rights, including the refusal to license trademarks, even selectively, were not anticompetitive acts within the meaning of Section 79(5) of the CA, because the Trademark Act grants to trademark owners the right to exercise these very rights.
With respect to patent disputes settlements, an 'entry-split' settlement, pursuant to which generic firms enter the market on or before patent expiry, will not pose an issue under the CA, according to the Bureau's IPEGs, particularly where the generic company does not receive any other consideration. However, a settlement pursuant to which the generic company enters the market on or before patent expiry and that includes a payment to the generic company, may be reviewed under Section 90.1 of the CA or, in cases involving a potential abuse of dominance, Section 79.
In terms of life-cycle management strategies, the Bureau has noted that the abuse of dominance provisions are the provisions of the CA 'most likely to apply to product-switching conduct' because the conduct 'involves anticompetitive acts by a single dominant company designed to exclude competitors and to create, maintain, or enhance its market power'.4
The Bureau previously investigated alleged product switching by Alcon Canada (an eye care device company) under the abuse of dominance provisions, but ultimately declined to refer the matter to the Tribunal after Alcon Canada reintroduced the product it had initially withdrawn from the market.
Outlook and conclusions
In the year ahead, pharmaceutical companies should keep in mind that the Bureau has recently indicated to branded drug manufacturers that it will treat any explanation for a failure to supply samples of brand-name drugs – also known as Canadian reference products (CRPs) – in a timely manner with an extremely high degree of scepticism. Even if CRPs are eventually supplied after an initial delay, the Bureau has indicated that it will take the necessary steps to address past anticompetitive conduct, including seeking administrative monetary penalties. This guidance was released after the Bureau recently conducted, and issued news releases about, two investigations into branded pharmaceutical companies' alleged refusals to supply CRPs to generic manufacturers.
Commissioner Matthew Boswell has also identified the pharma sector as a focus of potential scrutiny in respect of access to generic drugs and biosimilar products.
It will also be important for companies in the healthcare sector to continue to monitor the Bureau and Health Canada's approach to covid-19, particularly with respect to misleading advertising and claims specifically related to treatment of covid-19.
Finally, the pharmaceutical industry should also be aware of changes to the PMR, scheduled to come into force on 1 January 2021, which will affect the criteria for determining the ceiling prices of patented drugs.
1 Kevin Ackhurst and Stephen Nattrass are partners, and Erin Brown and John Greiss are lawyers at Norton Rose Fulbright Canada LLP.
2 Research Infosource Inc, Canada's Top 100 Corporate R&D Spenders, 2019.
3 Canada, Department of Innovation, Science and Economic Development, Pharmaceutical industry profile, 2019.
4 Paragraph 34 of the Bureau's submission to the OECD Competition Committee round table on Competition Issues in the Distribution of Pharmaceuticals, 28 February 2014.