Business cooperation at the time of COVID-19: The European Commission clears a cooperation agreement in the pharmaceutical sector

Business cooperation at the time of COVID-19: The European Commission clears a cooperation agreement in the pharmaceutical sector

 

Introduction

Competitors may react to disruption caused by deep economic crisis such as that caused by the outbreak of Covid-19 by entering into cooperation agreements. These agreements may take the shape of either cartel crisis purporting to reduce overcapacity or information exchange through which participants replace mutual competition between them with a coordination of their market activities[1]. While lawful cooperation between competitors may be necessary to deal with the crisis-provoked demand and supply shocks, these may also constitute restrictive business practices prohibited by antitrust rules[2]. Bearing in mind these opposing ends, several national competition authorities have issued guidance on how enforce antitrust rules to these practices[3]. competition law  

That said, this post considers the Medicine for Europe (MFE) case in which the Commission cleared a specific implement a cooperation project in the pharmaceutical sector by issuing a comfort letter[4] under the Temporary Framework adopted by the European Commission to explain how it intends to apply the EU competition rules to coordination projects addressing this unprecedented public health emergency[5].    

 

The Regulatory Framework

The traditional analytical framework for cartel crisis and information exchange arrangements

The outbreak of COVID-19 gave rise to an unprecedented shock to economy with an exponential increase for certain products needed to treat or mitigate the disease, which may lead to a scarcity of such products. To ensure the orderly supply of these products to the benefit of consumers, competitors may put in place mutual cooperation projects. At ordinary times, horizontal agreements attract the attention of competition authorities, which fears that these arrangements may reduce competition amongst the parties, violating the prohibition of anti-competitive agreements (see for example Article 101 of TFEU). For this reason, the European Commission as well as national competition authorities as illustrated by the policy document handed down OECD ‘Co-operation between competitors in the time of COVID-19’ have adopted an analytical framework to explain how competition provision apply to cooperation project to exceptional circumstances of COVID-19.

The Joint Statement of the ECN

To address these problems the European Competition Network (ECN) regrouping the national competition enforcers of the EU Member States has promptly issued a policy paper (the Joint Statement)[6] on the application competition law during this health crisis’. The ECN stated that in the current circumstances cooperation projects aimed at ensuring the supply and fair distribution of scares products are unlikely to give rise to competition concerns. Either the agreements would not amount to a competition restraint or would generate pro-competitive effects. The ECN will not take action against necessary and temporary arrangements put in place to deal with supply shortages. Instead, the ECA will intervene against companies that will take advantage of the current situation by cartelising or abusing their dominant position.

The Temporary Framework of the European Commission

These principles are embraced and further developed on by the European Commission with its Temporary Framework. The purpose of the Temporary Framework is to:

i)                   the criteria followed by the Commission for the assessment of cooperation projects dealing with the COVID-19 outbreak

ii)                 ii) the temporary exceptional process of the Commission to give comfort to undertakings in relation to specific and well-defined cooperation projects.

The Commission acknowledges that cooperation arrangements might be an effective tool to efficiently address the issue of shortage products during the COVID-19 crisis. In that regard, the Commission is ready to provide guidance to undertaking for self-assessing cooperation agreements and specific comfort on the legality of a given cooperation projects.

Two forms of cooperation between companies operating in the health sector are considered by the Commission. Cooperation arrangements consisting, for example, of exchanging of aggregate only production, capacity and supply information or coordinating joint transport for input material or identifying the essential drugs in short supply do not normally rise competition concerns, provided that certain safeguards are taken by parties.

Yet, a stronger cooperation may be needed to bridge the gap between demand and supply for COVID-19 related products, and namely coordinating the re-organisation of production so that the parties may increase the output of drugs and products that are in urgent need. Achieving this objective, however, may imply the exchange of sensitive information and a coordination of the activities of production sites. As a general rule, these exchanges and conducts violate Article 101 TFEU. Notwithstanding that, in light of the current exceptional circumstances, these conducts would neither restrain competition nor constitute an enforcement priority for the Commission if a three-limb test is satisfied. First, the conducts are objectively necessary to increase output in the most efficient way to address the shortage of supply of COVID-19 related products. Second, they have a temporary nature applying as long there is a risk of shortage during the COVID-19 outbreak. Third, the conducts must be proportionate not exceeding what is strict necessary to achieve the objective of avoiding the shortage of supply.

The European Commission’s Comfort Letter in the MFE case

As indicated in the Temporary Framework, the Commission, exceptionally and at its own discretion, may ensure the concerned parties of the legality of cooperation project by issuing a specific comfort letter. The Commission exercised this power for the first and, as far is known as of time of writing this note, only time by the Comfort Letter addressed to Medicines for Europe (MFE).

MFE is an association regrouping the producers of generic drugs. It asked the Commission for guidance on a cooperation project concerning the production and supply of COVID-19 related drugs open to its members and to all interested drug manufacturers. The objective of the cooperation project is to improve supply and increase in the most expedient and effective way as well as to improve distribution.

In that regard, in its submission to the Commission, MFE argued that to meet the health care needs of COVID-19 patients across the EU it is necessary to substantially increase the production capacity for COVID-19 medicines, and namely deep sedatives, neuromuscular blockers, strong analgesics, vasopressors, antibiotics and adjuvants. The European Commission together with the European Medicines Agency (EMA) acknowledged the risk of shortages of those drugs.

To deal with this problem, the members of MFE intended to cooperate to model demand for the drugs in question. The planned cooperation also included identification of production capacity and existing stocks; to adapt or reallocate, on the basis of projected or actual demand, production and stocks; and address the distribution of COVID-19 medicines. In practice, the MFE cooperation project may include cross-supply of active pharmaceutical ingredients (API) and intermediates; jointly determine to switch production capacity of certain drugs to different production sites; adapt capacity utilisation, production, supply and possibly distribution.

Bearing in mind the above facts and considerations, the Commission took the view that the MFE cooperation project fell outside the prohibition of anti-competitive agreements in Article 101 TFEU on the account of the following grounds. First, the Commissioner for Health and Food Safety and the Commission’s Directorate-General for Health and Food Safety requested drug companies to engage in information exchange about this cooperation project. As explained by the Commission in the Temporary Framework, whether a cooperation project is encouraged and/or coordinated by a public authority is a relevant factor to rule out that this arrangement is anti-competitive. Second, the MFE cooperation project passed the above described three-lamb test because, crucially, it was necessary to increase production and supply of urgently needed COVID-19 drugs.  

In addition to that, MFE accepted to put in place the following safeguards:

i)                   the cooperation project will open to its members and non-members;

ii)                it will draft and keep minutes of meetings and of copies of will share with the Commission copies of the agreements concluded under the cooperation project;

iii)             the manufacturers will solely exchange confidential business information, in an aggregate form, that are indispensable to achieve the above objectives of the cooperation project;

iv)              the cooperation will be limited until the risk of shortage will subsist.  

Taking into accounts the above considerations, the Commission took the view that the cooperation projected submitted by MFE did not rise any competition concerns under Article 101 TFEU. However, the Commission stressed that this comfort letter does not cover non-essential cooperation arrangements and other anti-competitive practices that will be duly prosecuted.

    

 

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[1] Aymeric de Moncuit, ‘How might the Covid-19 crisis change the dynamics of competition law’, Concurrences No. 2 -2020, 58.ò

[2] Faustine Viala, David Kupka, ‘Cooperation between companies in times of health crisis’, Concurrences No.2-2020, 111.

[3] OECD, ‘Co-operation between competitors in the time of COVID-19’, www.oecd.org/coronavirus.           

[4] European Commission, Comfort letter: coordination in the pharmaceutical industry to increase production and to improve supply of urgently needed critical hospital medicines to treat COVID-19 patients.

[5] Communication from the Commission, Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak, [2020] Official Journal of the EU C 116/17.

[6] European Competition Network, ‘Antitrust: Joint statement by the European Competition Network (ECN) on application of competition law during the Corona crisis’.