ANLYSIS-EU's Kroes goes to war with drug industry

By Ben Hirschler, European Pharmaceuticals Correspondent

LONDON, Nov 28 (Reuters) - Neelie Kroes, Europe's competition tsar, is challenging key elements of the way the global pharmaceuticals industry does business in what promises to be a bruising battle.

After accusing the world's top drugmakers of blocking cheaper generic competition, her antitrust police will now start to build cases against individual companies, with the potential for large fines down the road.

European officials calculate patent and litigation tactics used by drug firms resulted in EU states spending some 3 billion euros ($3.9 billion) more during 2000-07 than they would if generic medicines had entered the market without delay.

Clawing back some of those billions is clearly an attractive proposition, especially given rising healthcare costs and strained government budgets.

Yet making the case against firms stick will mean redrawing the boundaries for many long-standing industry practices.

"The European Commission today declared war on the pharmaceutical sector by questioning the legitimacy of a range of well established business practices," said Stephen Rose, competition partner at international law firm Eversheds.

Defensive patent strategies and mutually beneficial settlement agreements with generic firms -- sometimes involving payments to generic makers to delay rivals entering the market -- have long been bread and butter in the sector.

"Both originators and generic companies will need to review the way they do business to ensure that they are not among the test cases that will surely follow," Rose said.

For Big Pharma, Kroes's hard-hitting interim sector report, published on Friday, could hardly come at a worse time.

Patents on many of the world's biggest drugs expire in the next four years and European regulators will be watching like hawks for any obstructions to generic versions of drugs such as Pfizer Inc's (PFE.N) cholesterol pill Lipitor, the world's top seller.

At the heart of the matter is how far major drugmakers like Pfizer, GlaxoSmithKline Plc (GSK.L), AstraZeneca Plc (AZN.L) and Sanofi-Aventis SA (SASY.PA) are allowed to push patent rights.

"Of course registration and vigorous defence of patents restricts competition. That is the whole point of having a patent," said Edward Miller, a partner at law firm Reed Smith.

The question is: when does this go so far as to be unlawful?

U.S. EXPERIENCE

Past experience in the United States suggests drawing a clear line is not easy.

Only last month, a U.S. appeals court upheld a decision allowing a Bayer AG BAYG.DE agreement that paid Barr Pharmaceuticals BRL.N to delay producing a generic version of the antibiotic drug Cipro -- just the kind of anti-competitive settlement criticised by Kroes.

The U.S. Federal Trade Commission, like the European Commission, considers agreements that delay cheaper generics to violate antitrust law. But the courts have split on whether they are legal.

Interestingly, the landscape may be changing in the United States, too, since President-Elect Barack Obama has in the past backed legislation to bar such arrangements.

Marc Dalby, a life science expert at law firm Lovells, expects the European Commission to target a handful of large drug companies in high-profile cases, although it is likely be more than a year before any are concluded.

This is not the first time that the EU executive has conducted a broad sector inquiry into an industry. Other recent probes covered energy and financial services.

But the launch of the pharmaceuticals investigation in January marked the first time that a probe has started with unannounced inspections of companies.

The Commission argues such raids -- including a fresh round this week -- are necessary in cases where highly confidential information could be easily withheld, concealed or destroyed.

Drugmakers are unhappy with the heavy-handed approach.

"I have told the Commissioner that the raids seem to create an impression of being guilty until proven innocent," said Arthur Higgins, chief executive of Bayer HealthCare and president of the European Federation of Pharmaceutical Industries and Associations. For main story on EU pharma report click on [ID:nLR257965] (Additional reporting by Bate Felix in Brussels; Editing by Chris Wickham)