The Italian Competition Authority clears a co-marketing agreement for the commercialization of a drug imposing a number of commitments on the parties

Introduction

By a co-marketing agreement two pharmaceutical companies agree to simultaneously and independently sell and market the same drug, though under different trademarks[1]. Though such agreements are commonly relied on within the pharma industry, they can give rise to some competition concerns. In particular, the parties to a co-market agreement may agree to fix the prices for their drugs[2]. The Italian Competition Authority (ICA) has recently examined the effects on competition of a co-marketing agreement in an Article 101 TFEU investigation in the case Arca/Novartis-Italfarmaco[3]. Interestingly, the ICA did not adjudicate on whether the parties breached competition, but closed the proceedings with a commitment decision[4]. The decision is worth reading as it gives an insight into the ICA thinking about the competition impact of co-marketing agreements and which commitments the parties should offer to resolve the competition problems that may arise out of this type of agreements.

The facts of the case

In January 2014 the ICA started an Article 101 TFEU investigation against Novartis Farma (Novartis) and Italfarmaco upon the receipt of a complaint lodged by the body responsible for the purchase of drugs for the health authorities of the region of Lombardy. The complainant reported that Novartis and Italfarmaco coordinated their conducts with regard to the tender procedures organized by it over the 2010-2013 period for the selection of suppliers of drugs containing the active ingredient of long acting octreotide. Initially the ICA's enquiry focused on the conducts of the parties concerning only the competitive tender procedures called for by the health authorities of the regions of Lombardy, and then extended the investigations also to the procedures launched by the health authorities of Veneto and Emilia-Romagna from 2010 to 2013.

 At the beginning of the proceedings the ICA believed that the conducts of the parties amounted to a bid-rigging practice that Novartis and Italfarmaco carried out with the view to manipulate the outcome of the above tender procedures. And the ICA feared that in this way the parties agreed to fix prices for the drug supplies and share the market between them. However, the evidence collected in the ensuing investigation showed that Novartis and Italfarmaco entered into a co-marketing arrangement having as object the selling of drugs prepared with the long acting octreotide. The co-marketing arrangement was governed by a supply and a sub-licence contract. Under this contract, Novartis sold the drugs under the brand name of 'Sandostatin LAR' and it committed to supply the same products to Italfarmaco that sold with the trade name of  'Longostatina LAR' for which it hold a market authorization.

Therefore, by a decision made in August 2014 the ICA extended the proceedings to the co-marketing agreement and, as a consequence, also modified the relevant product market affected by the allegedly anti-competitive agreement. That market was then defined as the national market for drugs having the same therapeutic functions as those of the long acting somatostatin. Indeed, octreotide is a synthetic substitute for somatostatin.

The decision of the ICA

Some of the clauses included in the co-marketing agreement attracted the attention of the ICA that viewed them as having a restrictive effect on competition in the relevant market. These clauses are as follows:

i)                a pervasive exchange of sensitive information between the parties;

ii)              the Novartis' right to control the marketing strategies put in place by Italfarmaco;

iii)             a non-competition agreement;

iv)             the Italfarmaco commitment to achieve a minimum market share.

To address the competition problems that, according to the ICA, the above clauses may create, the parties have proposed a number of behavioural commitments on the basis of the Article 14-ter of the Italian Competition Act. The commitments were subjected by the ICA to a market test and then partially amended by the parties to meet the concerns raised by respondents. Then, the commitments were approved and made binding by the ICA, which, accordingly, closed the investigation with a commitment decision. The set of commitments approved by the parties can be summarized as follows:

i)      Exchange of information.

The parties commit to significantly reduce the length of notice by which Italfarmaco has to notify Novartis its purchase orders. In this way, Novartis may not know the exact quantities of 'Longostatina LAR' drugs available to Italfarmaco when an invitation to bid for contract supply of the drug is published by health authorities. To put it in other words, this commitment ensures that Novartis will not be in the position to know the quantities of drugs that Italfarmaco will indicate in its bid. Therefore, the co-marketing agreement will not reduce the competition between the parties with regard to such procedures.

ii)    Novartis's control over Italfarmaco's commercial policies

The parties redrafted the clauses governing the obligations of Italfarmaco concerning its commercial policies. Originally, the agreement imposed on Italfarmaco the obligation to meet specific quantitative thresholds as the investments to made to promote the commercialization of 'Longostatina LAR'. With the commitments the parties removed such quantitative obligations and now Italfarmaco has only the duty to employ adequate financial and human resources for the commercialization of the drug. The parties have also eliminated the obligation for Italfarmaco to comply with the promotion strategies developed by Novartis. Also the Novartis's supervision over the Italfarmaco marketing activities was removed.

 The ICA has favourably assessed such amendments, as the previous obligations imposed on Italfarmaco went beyond what necessary to enable the licensor to monitor whether the marketing documents prepared by the licensee were in compliance with the relevant regulations. The obligations imposed on Italfarmaco as amended with the set of commitments are thus proportionate to the purpose of the co-marketing agreement as well as necessary to avoid free riding from Italfarmaco on the investments made by Novartis

iii)   Obligation to achieve a minimum market share

The parties committed to remove the obligation in original text of the agreement, whereby Italfarmaco had to achieve a minimum market share. This amendment was positively received by the ICA that believed that the obligation was conducive to market sharing arrangements between the parties.

iv)   The non-competition clause

The parties agreed to not amend the non-competition clause by which Italfarmaco gave the undertaking to refrain from marketing products similar to somatostatin. Interestingly, the ICA did not object to it. Taking into account the other commitments given by the parties, the ICA believed that the clause is compatible with the purpose of the co-marketing agreement, which is to provide the licensee with incentive to compete with third parties. Indeed, the agreement does not ban Italfarmaco from developing and manufacturing a new drug competing with 'Longostatina LAR'. Similarly, the agreement does not prevent Italfarmaco from selling it through other intermediaries.

v)     The length of the agreement

According to the parties, the agreement, as amended with the set of commitments approved by the ICA, will be in force until the 2017/2018 period. In the ICA view, the proposed length of the agreement, as revised with the commitments, may have two positive effects on competition. First, relying on the quantity of drugs that Novartis is obliged to supply under the agreement, Italfarmaco will be in position to bid for the next supply contracts that may be tendered out by the health authorities in the near future. Absent the co-marketing agreement, only Novartis could submit a bid for such supply contracts. Second, bearing in mind the R&D activities carried out by Italfarmaco to launch a new competing product, the agreement ensures that Italfarmaco will stay in the market for all the time needed to develop and market the new drug. Indeed, the existence of the co-marketing agreement is of relevance, particularly to strengthen and preserve the reputation of Italfarmaco with general practitioners responsible for the prescription of drugs.

Conclusion

In Arca/Novartis-Italfarmaco the ICA initially feared that the contested co-marketing agreement might have restricted competition by frustrating the entry of the licensee in the market and also by affecting a number of tender procedures organized by some health authorities for the purchase of drugs.

Yet, when assessing the suitability of the set of commitments tabled by the parties to resolve such competition problems, the ICA took the view that the co-marketing agreement, as revised by the parties’ commitments, may have instead pro-competitive effects. By considerations similar to a counterfactual, the ICA held that the new text of the agreement would enable Italfarmaco to stay in the market, whereas in the absence of the agreement it may be unable to successfully develop and market its drug.

 

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[1] Carlo Piria, ‘The Position of Co-marketing and Co-promotion between EU Regulatory and Competition Rules’, Regulatory Affairs Journal 2002, 653; Anna Lamote, Peter L’Ecluse and Catherine Longeval, ‘Generic entry- a challenge to traditional EC competition law?, Cross Border Handbooks, Life Sciences 2008/09, 81.

[2] See, for example, Autorità Garante della Concorrenza e del Mercato (ICA), decision n. 7337 of 1 July 1991, Case I331, Servier Italia-Istituto Farmaco Biologico Stroder.

[3] Autorità Garante della Concorrenza e del Mercato (ICA), decision n. 25508 of 4 June 2015, Case I770, Arca/Novartis-Italfarmaco.

[4] For a comment on this decision, see also Sara Gobbato, The Italian Competition Authority accepts commitments to amend a co-marketing agreement and closes the antitrust investigation