EUROPEAN COMMISSION Brussels, 28.5.2018 SWD(2018) 240 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No 469/2009 concerning the supplementary protection certificate for medicinal products {COM(2018) 317 final}

{SEC(2018) 246 final}

{SWD(2018) 241 final}

{SWD(2018) 242 final}



Table of contents 1.Introduction: Political and legal context 1.1.Political context 1.2.Scope of the impact assessment 1.3.The EU Supplementary Protection Certificate regime 1.4.Strong evolution of pharmaceutical markets in the EU and globally 2.Problem definition 2.1.Decreasing competitiveness of EU-based generics/biosimilars manufacturers 2.1.1. Two specific problems 2.1.2. Unintended side-effects of the EU SPC framework 2.1.3. Magnitude of the problem and urgency to act 2.2.Two problem drivers 2.2.1. Asymmetry in SPC protection globally 2.2.2. The ‘first mover’ advantage 2.3.Consequences: relocation and decreasing attractiveness of the EU as a pharmaceutical hub 3.Why should the EU act? 3.1.Legal basis 3.2.Necessity for action at EU level 3.3.Added value of EU action

4.Objectives: What is to be achieved? 4.1.General objectives 4.2.Specific objectives 5.What are the available policy options? 5.1.What is the baseline from which the options are assessed? 5.2.Options discarded at an early stage 5.2.1. Trying to persuade third countries to adopt SPC protection in line with that of the EU (i.e., reducing the existing global SPC protection asymmetry) 5.2.2. Expanding the scope of the EU ‘Bolar patent/SPC exemption’ to allow for advance manufacturing for export purposes 5.2.3. New ad-hoc licensing measures 5.2.4. Cutting down the duration of the SPC 5.3.Description of the policy options 5.3.1. Option 0: status quo 5.3.2. Option 1: voluntary industry-led agreements/‘soft-law’ approaches 5.3.3. Option 2: introducing a manufacturing waiver for export purposes in Regulation 469/2009 5.3.4. Option 2-bis: implementing Option 2 with anti-diversion measures 5.3.5. Option 3: introducing a manufacturing waiver for stockpiling purposes in Regulation 469/2009 5.3.6. Option 3-bis: similarly to option 2-bis above, option 3 could be implemented with anti-diversion measures 5.3.7. Option 4: introducing a manufacturing waiver for export and stockpiling purposes under Regulation 469/2009 5.3.8. Option 4-bis: similar to options 2-bis and 3-bis, option 4 could be implemented with anti-diversion measures 5.4.Timing scenarios for applicability of options 2 to 4bis

6.What are the impacts of the policy options? 6.1.Impact of option 0 6.2.Impact of option 1: voluntary industry-led agreements 6.3.Impact of option 2: SPC manufacturing waiver for export-only purpose 6.3.1. Findings of studies 6.3.2. Feedback from public consultation 6.4.Impact of option 2-bis: SPC manufacturing waiver for export purpose with anti-diversion measures 6.4.1. The risk of diversion 6.4.2. Possible anti-diversion measures 6.4.3. Retained anti-diversion measure for option 2-bis 6.5.Impact of Option 3: SPC manufacturing waiver for stockpiling purposes 6.6.Impact of Option 3-bis: SPC manufacturing waiver stockpiling purposes with anti-diversion measures 6.7.Impact of Options 4 and 4-bis: SPC manufacturing waiver for export and stockpiling purposes (with anti-diversion measures) 6.8.Impact of the options for the timing of the introduction of the manufacturing waiver 7.How do the options compare? 8.Preferred option 8.1.Preferred option 8.2.REFIT (simplification and improved efficiency) 9.How will actual impacts be monitored and evaluated? Annex 1: Procedural information

Annex 2: Stakeholders’ views Annex 3: Who is affected and how? Annex 4: Differences between generic and biosimilar medicinal products Annex 5: Biosimilars Approved in the EU as of December 2017 Annex 6: Analytical methods Annex 7: Generic and biosimilar market is expanding Annex 8: Impacts of the current SPC regime (baseline scenario) Annex 9: Comparison of SPC protection expiry dates Annex 10: Assessment of Waiver Timing Scenarios Annex 11: Biopharmaceuticals R&D and manufacturing activities Annex 12: Studies on the manufacturing waiver Annex 13: Number of marketing authorization Referred to in SPC applications Annex 14: Patent cliff and geographical scope of SPC protection Annex 15: Impact of a possible SPC manufacturing waiver on R&D in the EU Annex 16: SME Test Glossary Term/Acronym Meaning/Definition API Active pharmaceutical ingredient (the part of any medicine that produces its effects) Biosimilar medicines or biosimilars

(also known as ‘follow-on biologics’ or ‘subsequent entry biologics’) A biosimilar is a biological medicine highly similar to another already approved biological medicine (the ‘reference medicine’). Unlike the small molecules of classical medicines, which are ‘chemically’ synthesised, the much more complex biosimilars are extracted or synthesised from biological sources such as blood or tissues, and for this reason cannot be fully identical to their reference products. EMA evaluates biosimilars in the EU Bolar exception The Bolar exception, which allows small-scale manufacturing of generic/biosimilars medicines to take place during the patent/SPC protection period of the reference medicine in order to conduct the testing required to obtain regulatory approval for the generic/biosimilar Blockbuster A medicine with annual global sales of over USD 1 billion Day-1 First day following expiry of intellectual property (IP) protection for a given medicine. For practical reasons (such as national-level pricing and reimbursement negotiations), generics/biosimilars rarely enter on the market on the very first day following SPC expiry. Therefore throughout this document ‘day-1’ entry shall be understood as referring to entry on the first practically possible day, or more generally to a ‘rapid’ or ‘timely’ entry EMA European Medicines Agency FDA U.S. Food and Drug Administration Follow-on product Generics and biosimilars are also called ‘follow-on’ products Generic medicines (‘generics’) A generic medicinal product is a copy of an original non-biologic ‘reference medicine’ whose IPR and market protection has lapsed or expired. The generic medicine is usually manufactured by a different company. Generics have the same qualitative and quantitative composition in active substances and the same pharmaceutical form as reference medicinal products Manufacturer of generics and biosimilars This term includes manufacturers of generics and/or biosimilars as well as manufacturers of APIs corresponding to those generics/biosimilars Originators or innovators They are typically the SPC holders, but are increasingly becoming leaders in the production and commercialisation of biosimilars SPC A supplementary protection certificate is a sui generis IP right that extends by up to 5 years the effect of a patent in Member States (with an extra 6 months added if a paediatric investigation plan is conducted). SPCs apply to human medicinal (or plant protection) products subject to regulatory authorisation TRIPS Agreement of the World Trade Organization (WTO) on Trade-Related Aspects of Intellectual Property Rights 1.Introduction: Political and legal context 1.1.Political context

The Single Market Strategy announced a targeted recalibration of certain aspects of patent and Supplementary Protection Certificate (SPC) protection, aiming to tackle the following problems: (1)Loss of export markets (in unprotected third countries), and of timely day-1 entry onto Member State markets, for EU-based manufacturers of generics and biosimilars, due to the unintended effects of the current EU SPC regime; in this regard, it was suggested to introduce in the EU SPC legislation an ‘SPC manufacturing waiver’ allowing manufacturing of generics and biosimilars, within the EU, during the SPC term. (2)Fragmentation resulting from the uneven implementation of the current SPC regime in the Member States that could be solved in connection with the upcoming unitary patent, and the possible creation thereafter of a unitary SPC title. (3)Fragmented implementation of the Bolar research exemption. The European Parliament resolution on the Single Market Strategy endorsed the Commission’s intentions and notably ‘urge[d] the Commission to introduce and implement before 2019 an SPC manufacturing waiver’, so as to boost the competitiveness of the generics and biosimilars sector, ‘while not undermining the market exclusivity granted under the SPC regime in protected markets’. In June 2016, the Council of the European Union called upon the Commission to engage in a wider review of IP incentives in the pharmaceutical sector. In particular, the Council invited the Commission to conduct, before 2019, an evidence-based analysis of the impact of EU pharmaceutical incentives on innovation, availability and accessibility of medicinal products, including on pricing strategies. Among those incentives, the Council considered that particular attention should be given to SPCs, the ‘Bolar’ patent exemption, data and market protection, market exclusivity for orphan medicinal products, and incentives and rewards for paediatrics. As regards the review of the SPC Regulation and following a series of studies (see Annex 1 and section 4), an inception impact assessment was published in February 2017 announcing possible legislative and non-legislative proposals. In October 2017, a 12-week online public consultation was launched; its results are summarised in Annex 2. As regards the wider pharmaceutical review, the Commission contracted an economic study. The Commission also intends to conduct an evaluation of the orphan and paediatric legislation, with further analysis in 2018-2019. 1.2.Scope of the impact assessment (1)Even though the public consultation showed wide support for the introduction of a unitary SPC, it would be premature at this stage to table a proposal for the creation of a unitary SPC, as the unitary patent package is not yet in force. Secondly, whilst the public consultation and ongoing analysis show a need for more clarity as regards the way the SPC Regulation is applied in practice, it would be preferable to await the outcome of certain pending cases before the Court of Justice of the European Union (CJEU) before proceeding to offer practical guidance. Thirdly, as regards the Bolar exemption (which is enshrined in the pharmaceutical acquis), the public consultation and ongoing studies point to the need for more clarity, which could be offered through guidance. (2)There is an urgent need to tackle the specific problems faced by EU-based generics and biosimilars manufacturers.As discussed below, the markets for generics and biosimilars are highly competitive and steadily growing. Under the current SPC rules however, EU-based manufacturers of generics and biosimilars are put at a competitive disadvantage vis-à-vis manufacturers capable of producing generics and biosimilars outside the EU. As of 2020, a significant number of medicinal products will go off-patent and off-SPC, opening a significant market for generics – and biosimilars in particular (expected to amount to EUR 95bn) – to competition. For example, in 2015, the originator firm Pfizer spent USD 17bn to purchase Hospira (a leading developer of biosimilars) in view of the USD 100bn patent cliff faced by biologics up to 2025 (a USD 20bn biosimilars market is expected by 2020). This upcoming ‘patent cliff’ will come in a context of SPC protection now mainstreamed across the Union, thus forcing companies who are willing to invest in the new opportunities to start – or relocate – their manufacturing outside the EU. The EU was a pioneer in the development of regulatory procedures to approve biosimilars: the EMA authorised the first biosimilar in 2006 (to Sanofi), while the FDA did so only in 2015. However, there are clear signs that Europe is now losing its competitive edge as a hub for manufacturing of generics and biosimilars, with trade partners now quickly catching up. For example, South Korea invested 35% of its national medical R&D budget in biosimilars development in 2012 (see Deloitte’s Winning with biosimilars-Opportunities in global markets), and Canada, while accepting to introduce SPC protection as a result of the negotiations with the Union on the Comprehensive Economic and Trade Agreement (CETA), nevertheless insisted on including an SPC manufacturing waiver in the Agreement, so as to allow its own firms to reap the benefits of the new generics and biosimilar markets. Therefore, and as testified both by the respondents to the public consultation and in various studies, there is an urgent need for the EU to restore the competitiveness of EU-based manufacturers of generics and biosimilars. Doing nothing or postponing an initiative would further weaken European industry and unravel the EU’s pioneering-effect competitive advantage in the biosimilar sector in particular. (3)The competitiveness issues addressed in this impact assessment can be addressed in a stand-alone manner. In fact, the issues under discussion here, and the measures taken to address them, are not related to the wider debate on the optimal scope and duration of IP protection in the pharmaceutical sector in the EU. It should, moreover, be noted that the public consultation and study results have not pointed to the need for a broader re-opening of the SPC regime. 1.3.The EU Supplementary Protection Certificate regime An SPC can extend by up to five years the protection conferred by the basic patent, but only with respect to the medicine(s) covered by the related marketing authorisation(s) to place the protected reference medicine(s) on the market. An SPC is therefore considered a sui generis intellectual property right. SPC protection was first introduced in the EU in 1992 and is currently governed by Regulation (EC) No 469/2009 concerning the supplementary protection certificate for medicinal products. SPC protection aims to offsetting the loss of effective patent protection due to the length of necessary testing, clinical trials and marketing authorisation procedures, thereby providing the pharmaceutical industry with appropriate incentives to innovate.

An SPC takes effect at the end of the term of the basic patent, and can be granted for a period equal to the period which elapsed between the date on which the application for a basic patent was filed and the date of the grant of the first authorisation to place the product on the market in the EU, reduced by five years. This means that not all patented and authorised medicines benefit from 5 years of SPC protection. Some may not be eligible for SPC protection at all (if the marketing authorisation was granted relatively quickly); some may enjoy SPC protection having the full duration; while others enjoy SPC protection but on the basis of a shorter duration. According to the Copenhagen Economics study, the average duration of SPCs granted in the EU amounts to 3.5 years. The benefits of an SPC for its holder are significant. Since an SPC ‘confer[s] the same rights as conferred by the basic patent’, the monopoly resulting from the basic (reference) patent is extended and enables its holder to prevent competitors from practicing the invention (manufacturing the medicine, offering it for sale, storing it, etc.) in those Member States in which an SPC has been granted. Annex 8 includes a detailed table summarising the main impacts of the current EU SPC regime for medicines, as governed by Regulation (EC) No 469/2009, on various stakeholders during the SPC protection period. Reliance on SPC protection is significant and increasing. The number of SPC applications filed in Member States has tripled from about 500 applications in 1993 (in then EU-12) to 1,518 in 2013 (in EU-28). A recent study (Kyle) shows that the share of new medicine introductions having an SPC in at least one Member State increased from 75% in the early 1990s to 86% today. Biologics account for about 16% of medicinal products subject to an SPC. In addition to more medicines benefitting from SPC protection, SPCs are also protected in an increasing number of Member States. States that acceded to the EU from 1986 onwards were given transition periods during which they were not yet required to put in place SPC protection systems. The lapse of these transition periods has led to the gradual roll-out of SPC protection system across the whole EU. The effects of this roll-out are now being felt in particular in those Member States that joined the Union as and from 2004. 1.4.Strong evolution of pharmaceutical markets in the EU and globally Since the introduction and codification of the SPC regime in 1992 and 2009 respectively, the European and global markets for pharmaceuticals have undergone very profound changes: (i) Global demand for medicines is increasing, with a significant switch towards generics and biosimilars The global pharmaceutical market has dramatically changed in the past 25 years. The fast growing economies of Asia, Central and South America – the so-called ‘pharmerging’ regions – combined with ageing populations in the traditional industrialised regions, have driven massive global demand for medicines over these decades. This is confirmed by industry data, which shows that total global spending on medicines increased from EUR 950 billion in 2012 to EUR 1.1 trillion in 2017. The USA represents 40% of this global market, while China (20%) has now displaced the EU into third place (with less than 15%). Biologics will represent 25% of the pharmaceutical market value by 2022 (Deloitte, 2017). Meanwhile, this growing global demand for pharmaceuticals is being accompanied by a shift towards ever-greater market share by generics and biosimilars, which could represent 80% of medicines by volume by 2020 and about 28% of global sales (Deloitte, 2018), with a future compound annual growth rate estimated at 6.9% (partly due to efforts by governments to contain overall healthcare costs). According to Medicines for Europe, 56% of medicines by volume currently supplied in the EU are generics or biosimilars. That being said, penetration rates vary considerably from one Member State to another. (ii) Pharmaceutical R&D and manufacturing in the EU is significant but patterns are changing The pharmaceutical sector in the EU is significant. According to Eurostat, there are about 4 000 enterprises active in this sector and together they provide about 570 000 jobs (figures from 2015). R&D expenditure in the EU amounted to EUR 27bn in 2015. Calculations by EFPIA show the following (these figures include Switzerland): The leading Member States in pharmaceutical R&D investment are Germany, UK and France. Belgium, Denmark and Sweden are intensive in R&D and manufacturing. Germany and Italy are the leading manufacturers of pharmaceuticals in absolute terms; however, while the trade balance in Germany is very high, Italy has a negative trade balance. The leading Member States in employment in this sector (in absolute terms) are Germany and France. Ireland, Denmark, Belgium and Sweden are highly intensive in manufacturing and have large trade balance. Member States that acceded to the EU as of 2004 (in particular Poland and Hungary) account for over 50 000 jobs combined, notably in the generics sector. However, investment in R&D is low in these Member States. The pharmaceuticals manufacturing sector in the EU is composed of a relatively small number of large capital-intensive enterprises, although small and medium-sized enterprises (SMEs) are active in manufacturing as well, in particular as regards generics (details in annex 16). 60% of European production is generated by global firms who are active in several Member States. Manufacturing includes innovative drugs, biological/biosimilars, as well as high-end APIs and value-added generic medicines. Whilst the largest share of EU manufacturing is controlled by patent- and SPC-holding companies, the generics and biosimilar sector in the EU comprises 350 manufacturing sites, accounts for over 160 000 jobs and exports to over 100 countries. According to IMS Health, the company that provides information, services and technology for the healthcare industry, the generics and biosimilar sector accounts in volume for 56 % of prescribed medicines in 2016 and accounted for 22% of the total sales of medicines in 2014. As illustrated in the map provided by Medicines for Europe, its companies are established in most Member States as indicated in the map below (originator firms also have biosimilars plants in other Member States, but these are not indicated): According to the Eudra Good Manufacturing Practice (GMP) database which is maintained and operated by the EMA, 234 sites in 19 Member States are authorised to produce biologics and biosimilars (see annex 11 for details). Biosimilar production requires costly and complex development and manufacturing processes, but is also highly lucrative. Given that approval of biosimilars started in the EU much earlier than elsewhere (already from 2006), and given Europe’s excellent ecosystem (including universities) and infrastructure (including clinical and contract research organisations), the EU quickly became the world leader for the development and manufacturing of biosimilars (with 31% of global FDI in manufacturing and R&D for biosimilars currently taking place in the EU).

Today, the classical boundaries between originators and generics/biosimilars manufacturers are more blurred. Some originators have branches devoted to generics (e.g. Novartis/Sandoz, Pfizer and Merck KGaA are the top sellers of unbranded products in the EU) and some traditional generic manufacturers are developing innovative or high value- added generics and biosimilars (e.g. Mylan, Dr. Reddy’s or Teva). This does not, however, necessarily translate into jobs in the EU, as originators tend to increasingly manufacture biosimilars and generics outside the Union, and notably in Canada, the USA and Asia (e.g. Samsung Bioepis manufactures in Asia and registers biosimilars at the EMA and FDA, that are then commercialised by the originator firms Merck and Biogen; Pfizer bought Hospira, a leading manufacturer of biosimilars with manufacturing capacity in Asia and North America; and Celltrion manufactures biosimilars in Asia for Pfizer). It should be noted that in the field of pharmaceutical innovation, start-ups and SMEs play an increasingly important role, in particular as regards the initial steps of innovation. In fact, pharmaceutical companies are increasingly outsourcing their R&D. Today, significant innovation comes from specialised SMEs focused on the initial steps of R&D and development, with less than 25% of the new medicines being developed by originators (Deloitte, 2018). According to a report by Accenture (2016), over the past decade, 60% of innovator small molecules and 82% of innovator biologics have their roots outside big pharmaceutical companies (see for more details, Annex 16 on SME Test). (iii) Global developments of pharmaceutical R&D and manufacturing 25 years ago, pharmaceutical R&D and manufacturing was essentially situated in the USA, the EU and Japan; today pharmaceutical R&D and manufacturing is a global phenomenon. The EU has traditionally been the biggest exporter of pharmaceuticals, representing over 25% of the Union’s total high-tech exports. In recent years however, India, Singapore and Israel have also managed to position themselves as major pharmaceutical exporters (IFPMA 2017), while China is now the world leader for the production of APIs (by volume), according to the World Health Organisation. Regarding biosimilars development, according to Deloitte’s 2018 Global Life Sciences Outlook: ‘Led by China, the Asia-Pacific region has more biosimilars in development than anywhere else in the world. China has the potential to become the frontier market for biosimilar drugs (269 biosimilars under development). The growth of biosimilars could push the industry into an innovative phase’. Indeed, all four BRIC countries (Brazil, Russia, India and China) have updated their regulatory rules and are becoming increasingly attractive for investments in biosimilars (see Annex 7 for more detailed information). Global competition is therefore fierce, requiring the EU to take the steps needed to remain competitive. 2.Problem definition A problem tree is included at the end of this section. 2.1.Decreasing competitiveness of EU-based generics/biosimilars manufacturers In the current international context, and given the evolution and dynamics of the pharmaceutical market, the EU SPC protection, established back in 1992, is unintentionally acting to the disadvantage of EU-based manufacturers of generics and biosimilars vis-à-vis non-EU-based manufacturers, and this detrimentally affects the whole EU pharmaceutical ecosystem. Responses to the public consultation confirm that EU-based manufacturers of generics and/or biosimilars are losing competitiveness with respect to non-EU based ones. As identified in the Single Market Strategy, it is urgent (see section 1.2 and 2.1.3) to tackle the difficulties faced by such manufacturers regarding export during the SPC term and entry onto the EU market immediately after SPC expiry. 2.1.1.Two specific problems Manufacturers of generics and/or biosimilars (based in Member States where an SPC has been granted for the reference medicine), face two problems: -Problem 1: during the period of protection covered by the certificate of the reference medicine in the EU, they cannot manufacture for any purpose, including export outside the EU to countries where SPC protection for the reference medicine has expired or never existed, while manufacturers based in those third countries can do so; -Problem 2: immediately upon the expiry of the certificate: they are not ready to enter the EU market on day-1, since the EU SPC system does not allow manufacturing in the EU until then. By contrast, manufacturers based in third countries where SPC protection for the reference medicine has expired earlier or never existed can be ready from day-1 to enter, via exports, the EU market, and thus gain a considerable competitive advantage. These problems put EU-based manufacturers at a competitive disadvantage vis-à-vis manufacturers located outside the EU in both global market and in the (day-1) EU market. This is aggravated by the dynamics of generics/biosimilars markets whereby, after expiry of patent/SPC protection of the reference medicine, only the first generics/biosimilars to enter the market capture a significant market share and are financially viable (see section 2.2.2 below). In the public consultation on SPCs, these two problems were confirmed in submissions by the group of generics/biosimilars, as well as by the group of patients/doctors/insurers’, as follows: Table 2.1.1. Generics/biosimilars’ opinion Patients/doctors/insurers’ opinion Yes (The problem exists) No Don’t know No answer Yes (The problem exists) No Don’t know No answer Problem 1 56 1 2 4 10 1 4 - Problem 2 53 3 3 4 6 3 6 -

2.1.2.Unintended side-effects of the EU SPC framework Taking a step back, the Bolar exemption (governed by Directive 2001/83/EC and Directive 2001/82/EC which in practice can be considered a manufacturing waiver for testing and clinical trials purposes) was intended to ensure that a generic could enter the market as soon as possible after the expiry of patent/SPC protection. Without this exemption, necessary testing and clinical trials prior to the authorisation of a generic or biosimilar medicine could only start after such expiry, which practically speaking, would extend the patent/SPC protection period of the reference medicine by several months, if not years in some cases, beyond its legal duration (considering the time needed to develop a generic or biosimilar and get it approved). The Bolar exemption has eliminated this untended side-effect of the strong patent/SPC protection, based on the basic rationale that free competition should be allowed as soon as protection expires. Regarding the SPC manufacturing waiver, firms are facing a situation similar to the pre-Bolar one. While the legitimate purpose of an SPC is to prevent the manufacturing for the purpose of marketing of competing products on the EU market when it is in effect, it has two unintended consequences that were not foreseen, namely preventing generics/biosimilars (1) from being manufactured in the EU and exported to third countries (where no legal protection applies) during the EU SPC term, and (2) from being manufactured in the EU (and then stored) early enough to be placed on the EU market immediately from day-1. The absence of an SPC manufacturing waiver, in practical terms, results in unduly extending SPC protection beyond its legal term. This is detrimental to the day-1 entry of generics/biosimilars onto the EU market (as they can be supplied from day-1 by firms based in ‘non-SPC’ third countries), but also, much more so, to the competitiveness of EU-based generics/biosimilars manufacturers, which are not able to compete with those based in ‘non-SPC’ third countries, neither in terms of export during the SPC term, nor of day-1 entry onto the EU market. The following charts underline the difference between the theoretical (intended) and practical (i.e. unintended and de facto) consequences of the scope of the exclusivity conferred by SPCs. 2.1.3.Magnitude of the problem and urgency to act The problems described above preclude major export opportunities for EU-based manufacturers of generics and biosimilars (about EUR 1bn yearly for a sample representing 32% of relevant medicines (see detailed quantification in section 6.3, and tables 7.1 and 7.2)). They also imply a loss of ‘lead time’ for EU-based manufacturers wanting to enter into the EU market after expiry of SPC protection, thus making these manufacturers forego significant opportunities in a fast-growing global pharmaceutical market, which is undergoing a significant shift toward generics and biosimilars. As indicated in section 1.2, as of 2020, a growing number of medicinal products will go off-patent/off-SPC, opening a significant market for generics – and biosimilars in particular (expected to amount to EUR 95bn) – to competition. Indeed, the global market for generic medicines is expected to increase by 50% over the 5 year period up to 2021, reaching EUR 500bn. In this context, the biologics market is booming, with annual sales of over EUR 150bn (biologics currently top the list of blockbusters), and originators increasingly entering the market of biosimilars. The Pugatch study (2017) estimates that every year a global market of between USD 2.7bn and USD 5.4bn is opened to generics and biosimilars competition. EU-based manufacturers of generics and biosimilars are therefore at risk of foregoing significant sales opportunities, both within EU and in global markets. This will act to the detriment of existing companies, but will also deprive new companies from the possibility of starting- and scaling up in high-growth markets. Companies will be faced with a stark choice: either to manufacture in Europe, where they are confronted with a legal barrier; or to manufacture abroad. There is an urgent need to tackle the specific problems faced by EU-based generics and biosimilars manufacturers. Markets for generics and biosimilars are becoming highly competitive, and these markets are steadily growing driven by a major patent/SPC cliff of blockbusters, especially in the biologics sector, and by increasing global demand for medicines (see further section 1.2). This has been understood by EU’s trade partners that recently have been investing in pharmaceutical manufacturing and biosimilars development. Doing nothing, or postponing an initiative would, firstly, further weaken the EU pharmaceutical industry (by not allowing it to seize the new emerging opportunities), and secondly, unravel the EU’s pioneering-effect competitive advantage in the biosimilar sector in particular. 2.2.Two problem drivers The two identified problems share the following drivers: -Many of the EU’s trading partners grant weaker or no SPC protection, which is in stark contrast to the EU’s own SPC protection, thus leading to asymmetry in SPC protection globally; -The market for generics and biosimilars is highly competitive with a strong ‘first mover’ effect (i.e. a clear advantage for the first mover) both in the export and EU markets. 2.2.1.Asymmetry in SPC protection globally While the TRIPS agreement obliges all EU trade partners to provide at least 20-year patent protection, it does not impose SPC protection – which is a sui generis right. Many trade partners of the EU do not provide for SPC or SPC-like protection at all (such as the BRIC states), some offer SPC protection with a manufacturing waiver for export purposes (e.g. Canada), while others offer SPC or SPC-like protection that is in general shorter than the EU SPC protection (e.g. USA and Israel).

The following table shows that, in most cases, SPC protection is the longest in the EU. Country Molecules with known SPC expiry date Molecules with SPC expiry date earlier than in the EU Average difference in SPC expiry dates between EU and third country (years) US 109 93 2.06 Korea 44 40 2.86 China 41 41 3.31 India 22 22 3.07 Canada 40 40 3.53 Note: See Annex 9 for details. Even if the EU were able to convince third countries to accept SPC- or SPC-like protection via its FTAs, CETA is likely to have a precedent effect in future FTA negotiations negotiated. Third countries accepting to introduce, or increase, SPC protection might well, at the same time, ask for a manufacturing waiver. On this basis, it can be observed that: ¾there is a reasonably level playing field between most countries of the world insofar as patent protection is concerned (with a duration of 20 years), as provided for under TRIPS; ¾there is a lack of a level playing field between the EU and other countries regarding SPC (or SPC-like) protection, which is simply not available in many third countries; more specifically, there is a lack of a level playing field between EU-based manufacturers of generics/biosimilars and those based in most third countries (56 submissions from generics/biosimilars to the public consultation claim that the longer the difference in the duration of protection, the less attractive the EU is for their manufacturing activities). Therefore, generics and biosimilars manufacturers established in third countries with no (or shorter) SPC or SPC-like protection are able to start manufacturing earlier than their EU-based competitors (this is a driver to the first problem). This timing advance in manufacturing also puts them in a much better position for day-1 entry onto the EU market (the driver of the second problem). Thus, the strong SPC protection in the EU introduced in the early 1990s is now creating unintended consequences not foreseen by the legislator at that time. In the early 1990s, developing countries did not constitute major competitors regarding the development of generics (whose market share was in any event limited). In addition, biosimilars did not even exist at that time. As a consequence, the two main problems described above had a low impact (causing little distortion). They were therefore not addressed in the travaux préparatoires of the 1992 Regulation (COM(90)101 final). However, today, modern infrastructure for the manufacturing of generics and biosimilars can be found in many developing countries that have no SPC protection (and notably in the BRIC states). 2.2.2.The ‘first mover’ advantage These problems faced by EU-based generics and biosimilars manufacturers are aggravated by the dynamics of the generics/biosimilars markets where frequently only the first products to enter markets in a timely way after protection expires capture a significant market share and are financially viable. In the EU, generic firms entering one year after the first generic entrant only capture 11% of the first entrant’s market share. Even though the decline in prices for biosimilars is not as steep as in the case of generics, there is a race in this market to launch first, since later entrants have difficulty in gaining market share without a further reduction in prices. For biosimilars, studies show that in 2016, the first biosimilars to reach the market captured over 70% market share (biosimilar volume). Second and third biosimilar entrants captured respectively 30-40% and 5-22% market share. In order to capture those potential sales, companies must supply the EU market either from their own plants or by subcontracting to third parties based in countries where protection of the reference medicine has already expired. 2.3.Consequences: relocation and decreasing attractiveness of the EU as a pharmaceutical hub The problems above result in a lack of a level playing field between EU and non-EU based generic and biosimilar producers, when it comes to competing in both global markets and day-1 entry in the EU. As it will be shown below, this affects not only EU-based manufacturers of generics and biosimilars, but also EU-based originators, and even EU patients (e.g. in terms of diversified supply). Thus, the whole EU pharmaceutical ecosystem is affected. This situation is particularly detrimental for small and medium-sized EU pharmaceutical companies (see Annex 16 on SME Test), since they rarely possess manufacturing facilities in ‘non-SPC’ third countries. The creation and growth of EU-based start-ups is also affected, as they require a proper ecosystem on top of a regulatory environment free of unintended legal barriers. This situation gives way to a number of negative consequences that will be exacerbated over time. The main consequence of the above-mentioned problems is increased relocation and/or outsourcing of the manufacturing of generics/biosimilars outside the EU, and loss of business opportunities inside the Union more generally, as companies will have a tendency to circumvent the current legal barriers they face, and will increasingly manufacture in third countries with weaker or no SPC protection, so as to be able to compete in global markets or be ready for day-1 entry onto the EU market. ‘Levofloxacin’ (an antibiotic that reached the sales-status of blockbuster before the SPC expiry) went out of SPC protection in 2011 in Member States. Previously, a generic manufacturer decided to set up production in Poland because SPC protection was not available in that country. From 2010 to 2016 (i.e. following SPC expiry in the USA and later in most EU Member States) the compounded market value creation (sales according to IQVIA) was more than EUR 120m. The generic manufacturer claims that the production would have been moved outside of the EU if the SPC had been applicable in the recently-joined Member States at that time. An EU-based generic manufacturer reported that it decided to set up the production of ‘remifentanil’ in Serbia, so as not to face the legal barriers to manufacturing in the EU. This product was SPC-protected in all Member States at the time. The value creation of the generic medicine is over EUR 10m from 2011 to 2016 (according to IQVIA). A developer of generics and biosimilars, headquartered in Spain, has reported the successful launch of a monoclonal antibody (a complex biosimilar) in several countries in the American continent, though the firm has had to expand production to Argentina due to EU SPC protection.

Source: provided by generic manufacturers. ·Detrimental impact on manufacturing capacity, employment and skills in the EU generics and biosimilars sector: -Loss of jobs in the EU pharmaceutical industry, in particular the generics and biosimilars sector, which accounts for 160 000 jobs in the EU, according to Medicines for Europe. -Loss of know-how and a brain drain of highly-skilled jobs, especially in the biosimilars sector, where R&D is increasingly shifting to other countries, notably in Asia. -Relocation of R&D, in particular for biosimilars: the biosimilars sector is R&D intensive, and R&D for biosimilars tends to be located where manufacturing takes place. If manufacturing of biosimilars is rendered less attractive in Europe, then there is a risk that R&D for biosimilars will also leave the Union, causing Europe to lose its related expertise and competitive advantage. In the generics sector, co-location of R&D and manufacturing is less frequent, and the risk of delocalisation of R&D is thus lower. -Loss of manufacturing capacity: once production is delocalised, it might well never return to the EU. This risk affects EU-based SPC-holders (that also use the manufacturing capacity of generic manufacturers) as well as generics and biosimilars manufacturers. According to Medicines for Europe, the minimum cost of relocating the production of a single biological product is EUR 10m and it takes a minimum of 1.5-2 years. If the relocation requires additional regulatory approvals to ensure that the safety, quality and efficacy of the product are not affected, costs easily multiply. Switching API suppliers has a high cost due to the requirement of new stability batches and new analytical studies on impurities, among others. It is estimated that for the more complex APIs, the cost associated to a change of API supplier could be around EUR 4m. Therefore, once an API supplier is chosen, the decision tends to be irreversible. ·Detrimental impact on the EU pharmaceutical industry as a whole, including the innovative pharmaceutical industry in the longer term: -Delocalisation of manufacturing capacity of medicines outside the EU might negatively affect originators investments and manufacturing in the Union, as originators often outsource production and are investing in biosimilars. As already mentioned, originators are heavily investing in developing and commercialising biosimilars in the EU and other markets to compete with the highly-lucrative innovative biologics (patent/SPC protected) of other originators. EMA databases (details in annex 5) show that 15 out of 33 biosimilars with current valid authorisations in the EU issued to major originator firms (e.g. Amgen, Boehringer, Eli Lilly, Merck and Sanofi) or their biosimilar divisions (e.g. Pfizer-Hospira, Novartis-Sandoz and Novartis-Hexal). Samsung Bioepis and Celltrion, which have 6 biosimilars authorisations at EMA, often manufacture and license to originators. Approximately 30% of commercial biologics (reference products) are manufactured by contract manufacturing organisations, some of which are located in Asia (e.g. Samsung Bioepis). -Loss of administrative regulatory-related skills in the EU: it is preferable that regulators be located near an advanced R&D and production ecosystem. If it is delocalised, there will be lessened impact of EU rules on the global regulatory environment, or other trade partners could even set the future regulatory rules for global markets. This would impact adversely on EU-based originators as well. ·Detrimental impact on EU patients and national public health budgets/systems: -Less diversity of (quality) generics and biosimilars to EU patients, and reduced security of supply, if the production is concentrated in particular geographical regions outside the EU. -An increasing dependence on imports of generics has been a trend in the EU. As reported by Member States to the Commission public consultation, the share of EU-manufactured generics decreased from 60% in 2010 to 55% in 2013 in the EU. A Commission Staff Working Document from 2014 revealed that while in the 1980s more than 80% of APIs destined for the EU market were of European origin, the proportion had decreased to 20% in 2008. The increased dependency on non-EU sources has already led to concerns with regard to maintaining security and quality of supply in the EU. -These concerns have materialised in recent years also in the form of some episodes of shortages, in the EU, of medicines mostly supplied from outside the EU following accidents or unexpected events. The website of the EMA provides a catalogue of shortages of supply of medicines in the EU. It should be noted that some shortages are due to disruptions to production which takes place exclusively outside the EU. -An increasing risk of imported counterfeit and falsified medicines has also been detected by EU customs authorities, which in 2016 seized almost 400 000 pharmaceutical articles. -A significant majority of citizens in the public consultation ˗˗ 32 out of 43 submissions ˗˗ indicated that they care about the origin of production of the medicines they consume (only 3 respondents suggested that they do not care). Some of the submissions express supply and quality concerns. -The relocation of clinical trials may also be detrimental to certain groups of patients, as participants in such tests may benefit from experimental medicines. -In the medium term, competition in the EU will be reduced, especially for medicines that are not so profitable (Kyle 2017), but still have important therapeutic value. Reduced competition affects access to medicines for EU patients and health expenditure for EU public health budgets. As often happens, reduced competition may lead to price increases. -Patients in a few Member States were not able to access to certain treatments until a biosimilar was available. Therefore, limiting the day-1 entry capacity for EU biosimilars in those Member States could make a difference for some EU patients. It is thus apparent that the current situation vis-à-vis delocalisation and outsourcing is not only detrimental for EU-based manufacturers of generics and biosimilars, but also for other categories of stakeholders.

Problem tree: context – drivers – problems - consequences 3.Why should the EU act? 3.1.Legal basis 3.2.Necessity for action at EU level At national level, agreements between generics/biosimilar manufacturers and originators have been concluded (see section 6.2), however without properly addressing the objective to create a level playing field for generics/biosimilar manufacturers within the whole of the EU territory. Firstly, it should be recalled that these agreements are of a voluntary nature. While in individual cases they may have led to positive results (e.g. allowing individual companies to advance manufacturing), originators are not bound by them. Generally speaking, and as reflected in submissions to the public consultation, these agreements are not considered to have been successful and these actions are therefore not sufficient to address the challenges and objectives described in the problem definition. Secondly, assuming they have encouraged day-1 entry of generics and biosimilar, such agreements are limited to the jurisdiction of one Member State and do not cover the full territory of the Union. Even if individual Member States introduced binding rules on manufacturing, its territorial effect would always be limited. By contrast, action at EU level would avoid the development of possibly diverging national legislation; avoiding such diverging national approaches has been a main objective of the SPC Regulation. EU action would also enable the legislator to tackle ˗ from an internal market perspective ˗ the issue of the competitive advantage enjoyed by manufacturers based outside the EU over their competitors within the EU, a competitive advantage unintentionally created by the SPC Regulation itself. As a consequence, intervention at EU level is considered necessary. 3.3.Added value of EU action EU-level action would bring significant added-value compared to national-level action to the extent that it would preserve the integrity of the internal market, by providing for a uniform, transparent and fair approach. Indeed, while soft-law approaches based on voluntary agreements between originators and generics/biosimilars manufacturers are already possible today (and used in certain Member States), as explained above, an increasingly heterogeneous and non-transparent situation across the EU would result if their use were generalised. 4.Objectives: What is to be achieved? An ‘objectives tree’ is included at the end of this section. 4.1.General objectives The general objective of the policy action is to create a level playing field for the manufacturing of generics and biosimilars in the EU vis-à-vis manufacturing in third countries, for the purposes of export to third-country markets, and for timely entry into the EU-market ‘on day 1’. This would defend and increase the global competitiveness of the EU pharmaceutical industry (including, but not limited to, manufacturers of generics/biosimilars) and on jobs in the EU. As stressed by Parliament, this objective should be achieved without undermining the market exclusivity granted under the SPC regime in protected markets.

4.2.Specific objectives The specific objectives sought with this initiative are the following: (1)Ensure that SPC protection in the EU does not prevent EU-based manufacturers of generics and biosimilars from entering unprotected third country markets during the EU SPC protection period. The criteria for monitoring and evaluating this objective will be, among other things, the evolution of future exports of EU generics and biosimilars (including APIs), the share of EU exports of these products, and the market share of EU generics/biosimilar in third country markets. (2)Ensure that SPC protection in the EU does not prevent EU-based manufacturers of generics and biosimilars from entering the EU market on day 1. For some products, this objective can be partly achieved through fulfilling specific objective (1). This is because building manufacturing capacity in a Member State for export purposes during the SPC term would, for certain products, allow for a quicker scale up of production to enter the EU market on day1. The criteria for monitoring and evaluating of this objective will be the future evolution of the EU market share of EU-manufactured generics and biosimilars. Through fulfilling objectives (1) and (2), the following beneficial consequences would result: -strengthening and retaining manufacturing capacity and know-how in the EU, thereby reducing unnecessary delocalisation/outsourcing; -reinforcing the EU supply chain of pharmaceutical products (less dependency on imports); -strengthening EU patients’ access to medicines by diversifying geographical sources of supply; -reinforcing the sustainability of the EU health systems, including from the perspective of the national public health budgets; -removing obstacles to starting generic and biosimilar businesses in the EU, especially for SMEs that have more difficulties in overcoming obstacles and facing up to non-EU competition. The above objectives must be compatible with: (i) keeping effective SPC protection in the EU until the expiry date of the SPC, i.e. maintaining the exclusive sales of SPC-protected medicines until SPC expiry in each Member State; and (ii) not increasing risks of diversion of generics and biosimilars in Member States where an SPC is in effect. Additional monitoring criteria for both objectives would be the evolution of the future number of manufacturing sites in the EU, and jobs in the different segments of the EU-based pharmaceutical industry. Objectives of the initiative – Objectives tree 5.What are the available policy options? 5.1.What is the baseline from which the options are assessed? The baseline scenario related to this initiative is ‘no policy change’ (status quo/option 0). With no policy action, the identified problems would not be fixed. As described in section 2.3, this would generate a number of negative consequences for manufacturers of generics or biosimilars (loss of competitiveness), for patients and health systems, and for the EU pharmaceutical sector as a whole. In this scenario, some Member States could still apply unilateral approaches at national level, e.g. via voluntary agreements between stakeholders (as explained under section 5.3.1, 5.3.2 and 6.2). However, such approaches are not likely to be effective and risk undermining the single market.

5.2.Options discarded at an early stage The following options have been discarded at an early stage: 5.2.1.Trying to persuade third countries to adopt SPC protection in line with that of the EU (i.e., reducing the existing global SPC protection asymmetry) The Commission has already persuaded, via FTA negotiations, a few third countries to introduce SPC-type protection. However, major trading partners have refused to accept SPC provisions in FTAs, or have accepted lower levels of SPC protection, such as Canada. CETA obliges Canada to introduce at least a 2-year SPC protection that will benefit the exports of European pharmaceuticals to Canada which amount to about EUR 4bn annually, but CETA also allows Canada-based generics and biosimilars, during those 2-years of SPC protection, to manufacture for export purposes. The situation of the base-line scenario could be improved by giving higher priority to the introduction of SPC protection in third countries in on-going and future FTA negotiations. However, giving higher priority to the introduction of SPC protection in FTA negotiations is not a realistic option to effectively meet the objectives, since some trade partners might not accept, in the short to medium term, to introduce SPC protection. In addition, such negotiations take time and, as regards the outcome, the EU is – by definition – dependent on the other partner. 5.2.2.Expanding the scope of the EU ‘Bolar patent/SPC exemption’ to allow for advance manufacturing for export purposes The Bolar patent exemption, defined by Articles 10(6) of Directive 2001/83 on the Community code relating to medicinal products for human use and Articles 13(6) of Directive 2001/82 on the Community code relating to medicinal products for veterinary use, allows small-scale manufacturing of generics/biosimilars to take place during the patent/SPC protection period of the reference medicine, in order to conduct the testing required to obtain regulatory approval. The aim of this exception is to speed up the regulatory approval of generic/biosimilar medicines, and their entry into the market once the patent/SPC of the reference medicine has expired. In theory, one option could hypothetically be to expand the scope of the Bolar exemption to include manufacturing for export and/or stockpiling for EU day-1 entry (see the Roland-Berger study). However, submissions received in the context of the public consultation did not identify this as an option. In addition, given that the Bolar exemption applies to both SPCs and patents, expanding the Bolar exemption to allow for export manufacturing and stockpiling during the patent term could conflict with Article 28 of TRIPS. 5.2.3.New ad-hoc licensing measures A specific type of license could be defined, which would be applied for by a generic/biosimilar company and granted by a competent authority, or alternatively negotiated with an SPC-holder under the supervision of a competent public authority, free of charge or against payment of a license fee. This option would bring transparency for the SPC-holders that could identify and monitor the beneficiaries of such a license. However, from the perspective of generic companies, the administrative procedures would involve costs and time delays, making it uncertain whether applying for a license would be economically sound. Moreover, SPC holders could tactically delay the grant of a license (e.g. via multiple appeals) making investment for generics very uncertain, or asking for unreasonably high royalties. 5.2.4.Cutting down the duration of the SPC Cutting down SPC maximum duration (for instance, to the 2 years provided for in CETA) would reduce the EU SPC protection asymmetry with respect to most third countries. However, this option has several major drawbacks: -It would significantly affect the current period of exclusivity (of up to 5.5 years in total) enjoyed by SPC holders with respect to placing their products on the EU market (it should be stressed that none of the retained options of this impact assessment affect this core exclusivity of SPC holders). Such a drastic option would go directly against the fundamental objective of SPCs, which is to compensate for the loss of effective patent protection due to development and authorisation procedures. -It would not solve the issue of timely day-1 entry onto the EU market, unless the EU SPC protection were completed removed in the EU, i.e. to align the EU with ‘non-SPC’ third countries with manufacturing capacity, such as India. Such an approach would roll back and overturn more than 25 years of EU intellectual property policy. It received almost no support from stakeholders in the public consultation (only 1% of the respondents to the public consultation supported this option, and in a different context to the problem definition articulated in this impact assessment). 5.3.Description of the policy options Aside from the status quo (option 0), a number of policy options are considered below to ensure that SPC protection in Member States does not prevent EU-based manufacturers of generics and biosimilars from competing on an equal IPR footing with manufacturers based in third countries. Apart from the status quo, two broad approaches can be envisaged: (1)Soft law approaches based on voluntary industry-led initiatives to allow EU-based manufacturers of generics and biosimilars, during the SPC term of the reference medicine, to manufacture for export and/or stockpile purposes (Option 1).

(2)Amending the EU SPC legislation so as to allow EU-based manufacturers of generics and biosimilars, during the SPC term of the reference medicine, to manufacture for export and/or stockpile purposes (Options 2 to 4). Approaches related to the 1st problem (Objective 1: export during the EU SPC term) Approaches related to the 2nd problem (Objective 2: day-1 entry in the EU) Status quo Status quo Soft-law approach allowing advance manufacturing for export purposes Soft-law approach allowing advance manufacturing for stockpiling purposes Export waiver legislation (possibly with anti-diversion measures such as specific labelling) Waiver legislation (possibly with anti-diversion measures), which could be an export waiver (to some extent) or a stockpiling waiver In total, nine (3 x 3) possible combinations of approaches are possible to tackle the two problems. Six of these combinations would entail different types of approaches to tackle each of the two problems (e.g. the EU SPC regime could be amended so as to allow export during the SPC term, while a soft-law approach would be promoted in order to allow stockpiling so as to facilitate day-1 entry) leading to complex implementation, requiring users to become familiar and develop different operational strategies to achieve the two objectives. Among those six combinations, those combining the status quo with another approach might not tackle one of the problems. For these reasons, the options analysis below does not address specifically all nine possible combinations, while it nevertheless distinguishes between a waiver for export-only purposes and a waiver for day-1 entry purposes (whose combination constitutes a further option). On this basis, the following options can specifically considered regarding the two specific objectives: Objective 1: export during the EU SPC term Objective 2: day-1 entry

in the EU Option 0 Status quo Option 1 Soft-law approach allowing advance manufacturing for both export & stockpiling purposes Option 2 Export waiver legislation (No action or soft law approach) Option 3 (No action or soft law approach) Stockpiling waiver legislation Option 4 Legislation on both export and stockpiling waivers 5.3.1.Option 0: status quo Not taking any policy action has already been described (cf. the baseline described above). The EU would continue to negotiate FTAs with an IPR chapter that includes SPC provisions, but as explained above, this trade approach is not effective to tackle the problems identified (FTA negotiations take years and a number of trade partners successfully resist adopting EU-like SPC protection). In this baseline scenario, a few Member States have already considered, or introduced, soft-law measures at national level (e.g. the LEEM-CEPS framework agreement in France – cf. below) aiming to allow advance manufacturing of generics during the patent/SPC term of the reference medicine for timely day-1 entry. As mentioned below, such a national non-regulatory approach, while it may be satisfactory in individual cases, is not desirable from the point of view of the single market, especially regarding uniformity, fair treatment and transparency. These national approaches have not led to successful results so far. 5.3.2.Option 1: voluntary industry-led agreements/‘soft-law’ approaches Without requiring any legislative changes, the Commission in collaboration with Member States could try to facilitate further voluntary agreements between generics/biosimilars manufacturers and originators consisting of allowing advance manufacturing of generics during the SPC term of the reference medicine. Such voluntary agreements could cover manufacturing export purposes to unprotected third countries and (this option 1)/or for stockpiling purposes for timely day-1 entry onto the EU market. 5.3.3.Option 2: introducing a manufacturing waiver for export purposes in Regulation 469/2009 This option envisages an amendment to Regulation 469/2009 to create an exemption to the SPC right that prevents manufacturing of SPC-protected products by non-authorised third parties. This waiver for export purposes would allow developers of generic and biosimilar products to manufacture these products in a Member State during the term of the SPC protection, with a view only to exporting them to third countries with shorter or no SPC protection. This waiver (for export-only) would also exempt a reasonable temporary storage that would happen between production and effective export of batches. Such temporary storage/stockpiling could not be used for day-1 entry onto the EU market (i.e. the entire production under the waiver of this option 2 being exclusively for export markets). However, manufacturers producing in the EU under this (export-only) waiver could be better prepared for timely entry into the EU market by scaling up their established production on day-1. Therefore, indirectly this option 2 also tackles to some extent the objective 2 (timely day-1 entry). Its effectiveness in this latter regard would depend on the capability of firms to rapidly scale up production to meet demand. 5.3.4.Option 2-bis: implementing Option 2 with anti-diversion measures Anti-diversion measures could consist of any of the following: a special labelling requirement, a notification requirement, a right to conduct inspections by the SPC holder, or the introduction of a reversal of the burden of proof in case of litigation. This could reduce the risk that that some of the products manufactured in a Member State under the waiver could end up on the market of that or another (SPC-protected) Member State. Section 6.4. further discusses several anti-diversion measures and their impact. The design of specific anti-diversion measures would need both to take into consideration the level of additional burden for SMEs (See Annex 16 on SME Test) and to address confidentiality concerns.

5.3.5.Option 3: introducing a manufacturing waiver for stockpiling purposes in Regulation 469/2009 Similar to option 2, under this option, Regulation 469/2009 would be amended to create an exemption to the SPC right that prevents manufacturing of SPC-protected medicines by non-authorised third parties. This waiver for stockpiling purposes would allow developers of generic and biosimilar products to manufacture and stockpile these products in the EU during the term of SPC protection, with a view to being fully ready for timely day-1 entry in Member States. 5.3.6.Option 3-bis: similarly to option 2-bis above, option 3 could be implemented with anti-diversion measures 5.3.7.Option 4: introducing a manufacturing waiver for export and stockpiling purposes under Regulation 469/2009 The SPC waiver proposed under this option would combine the features of the waivers of options 2 and 3. It would tackle both identified problems. Thus, this SPC manufacturing waiver for export and stockpiling would allow developers of generic and biosimilar products to manufacture these products in a Member State during the term of the SPC protection with a view not only to exporting them to third countries with shorter or no SPC protection (as in option 2), but also to storing them to be able to enter the EU market as and from day-1 (as in option 3). 5.3.8.Option 4-bis: similar to options 2-bis and 3-bis, option 4 could be implemented with anti-diversion measures 5.4.Timing scenarios for applicability of options 2 to 4bis In addition to the key options presented above which relate to the substance (i.e. the actual effects) of a waiver, and irrespective of which of them is preferred, a number of choices can be made regarding the ‘time-bound applicability’ of the waiver. It should be recalled that each SPC goes through four successive stages: (1) not yet applied for; (2) applied for; (3) granted (but not yet in effect, since the basic patent is still in force), and (4) in effect (i.e. after the basic patent has expired). In this context, a waiver could be made applicable as follows (from the broadest to the narrowest capture in terms of SPCs covered): -scenario 1: to all SPCs, even those which are already in effect when the waiver is introduced; -scenario 2: only to granted SPCs which will enter into effect only after the waiver is introduced; -scenario 3: only to SPCs which will be granted after the waiver is introduced (i.e. only to SPC applications); -scenario 4: only to SPCs which will be applied for after the waiver is introduced (i.e. only to future SPC applications). The respective impact of these scenarios – which anyway will be of a transient nature only – is analysed in section 6.8 below. Annex 10 provides further information about the expected numbers of SPCs that would be affected by each of these scenarios. 6.What are the impacts of the policy options? Further to the analysis below on the impact of the identified options, the tables in section 7 below provide a detailed description of the impact of the options described above. (See also Annex 16 on SME Test.) 6.1.Impact of option 0 The evolution of the problems related to the baseline scenario (no policy action) is analysed in section 2.3 above: delocalisation of manufacturing of generics and biosimilars and related consequences such as loss of employment in the EU, loss of pharmaceutical-related know-how, and relocation of R&D activities following delocalisation of manufacturing. A quantification of lost opportunities can be found in section 6.3 below. Whilst option 0 is likely to seriously affect the competitiveness of the EU pharmaceutical industry (in particular but not limited to the generics and biosimilar sectors), it will also entail negative consequences for the (health) public purse and for patients, in terms of security and quality of supply and access to medicines.

6.2.Impact of option 1: voluntary industry-led agreements The impact of voluntary, industry-led initiatives, even if stimulated at EU level, is likely to be limited. Indeed, being voluntary, such agreements may be refused by the SPC holder of the reference medicine, may only be adhered to by a few manufacturers of generics/biosimilars, or be subject to dissuasive conditions (e.g. high financial compensation requested by the SPC-holder). Experience shows that comparable initiatives launched in some Member States have not been very effective. The LEEM-CEPS framework agreement, introduced in 2009 in France, is an example at national level of this soft-law approach. It is focused on speeding up day-1 entry of locally manufactured generics and biosimilars, in exchange for compensation to the SPC holder. The LEEM-CEPS initiative has provided results for only four medicines since 2009. While this option might be helpful in individual cases, it may not be optimal from the perspective of the single market as a whole, as regards uniformity, fair treatment or transparency. If however it were pursued, the Commission could accompany such an approach with guidelines clarifying best practice, with the view to reducing the impact of the above-mentioned potential drawbacks. It should be noted that neither the public consultation nor the various studies feeding into this impact assessment favoured a voluntary approach to tackle the first identified problem. 6.3.Impact of option 2: SPC manufacturing waiver for export-only purpose 6.3.1.Findings of studies The impact of this option has been analysed and discussed by an independent study contracted by the Commission (CRA study) and other studies sponsored by the pharmaceutical industry (2 by generics companies and 4 by the originators industry). Annex 12 provides a description and estimations of each of the studies sponsored by industry. Whilst there are divergences in opinion and in study results as regards the magnitude of the impact of the introduction of an export waiver in the EU, all studies confirm that the net impacts of such a waiver on the EU’s pharmaceutical trade balance (net sales) and on job creation in the EU would be positive. The CRA and OHE (for EFPIA) studies estimate the additional exports for EU-based manufacturers of generics and biosimilars, the potential negative impact on the exports of EU SPC-holders in unprotected markets and the impact on jobs in the EU. The CRA study, based on a sample of 117 non-biologics molecules and 17 biologics molecules (representing about 32% of all molecules expiring in the EU over the considered period, per each of the two categories of molecules), for which the SPC term expires later in the EU compared to 8 third countries, estimates that an SPC manufacturing for export-only purposes could result in additional export sales by EU-based production of those generics of EUR 7.6bn and for EU-based production of those biosimilars of between EUR 463m and EUR 2.97bn over 10 years. CRA estimates, for that sample, a potential negative impact of this waiver on EU SPC holders’ sales of between EUR 139m to EUR 278m for unprotected non-biologics market and between EUR 868m and EUR 1.7bn for unprotected biologics markets over a 10 year period. Therefore, the net additional trade balance for the EU pharmaceutical industry represented by the sample of CRA would be between EUR 6bn to EUR 10bn over 10 years. The OHE study reviews some of the assumptions undertaken in the CRA study and recalculates its outcomes, estimating additional sales for EU-based manufacturers ranging between EUR 1.2bn and EUR 3.9bn for the sample over 10 years. OHE estimates potential negative loses of exports for EU SPC holders ranging between EUR 298m and EUR 573m (the EU pharmaceutical industry exported EUR 220bn in 2016 according to the EFPIA datacentre). Therefore, according to OHE, the additional net trade balance for the EU pharmaceutical industry represented by the CRA sample of molecules over a decade could be between EUR 696m and EUR 3.6bn. In terms of job creation, CRA estimates that the additional net exports could be translated into an additional 20 000 to 25 000 direct jobs in the generics and biosimilars sector (assuming constant productivity in the sector). OHE estimates that the reduction of exports by the SPC-holders would negatively impact on originator jobs. OHE also reduced the estimations of CRA of generic/biosimilar job-growth to between 2 837 to 9 430 new jobs (if SPC-holders lose 10% of their sales). However, the OHE calculations fail to take account of the jobs that could be created/retained/transferred across divisions by originators, who are currently investing massively in biosimilars (see annexes 5 and 7). These numbers above should be considered as the lower range since, as mentioned above, the effects here are estimated on a sample of 117 non-biological and 17 biological molecules, representing around one-third of the relevant market. The Pugatch study focuses exclusively on the potential impact of the waiver on originators based in the EU-28 and Switzerland. It estimates that between 0.6% and 1.04% of the global sales of the originators sector could be open to competition (i.e. as opposed to actual losses), if the EU introduces an SPC manufacturing waiver. The Pugatch study does not take into account that EU exports by originators can also include biosimilars manufactured by originators. Pugatch estimates that those percentages could represent between USD 1.34bn and USD 2.27bn of the global sales by European originators annually. However, Pugatch does not estimate which part of those shares opened to competition could be retained by European originators (or taken by their own exports of EU-manufactured biosimilars and generics), and which part will be taken by non-EU originators, EU-generics/biosimilars and non-EU generics/biosimilars. In terms of jobs, Pugatch estimates that the share of the exports that could be open to competition represents 4 600 to 7 750 employees in the originators sector. It does not estimate how many of those jobs could ultimately be lost, or transferred to the generics/biosimilars branches of other originators benefiting by the waiver. Therefore, the labour figures of Pugatch cannot be compared with the ones of CRA and OHE. 6.3.2.Feedback from public consultation According to the inputs provided to the public consultation, generic and biosimilar companies (63 on-line submissions) support the introduction of an SPC manufacturing waiver. 56 out of 63 submissions are of the opinion that SPCs disadvantage EU-based generics/biosimilars manufacturers compared with those based in countries with no SPC when exporting their products outside the Union (1 respondent denies this problem, and 2 do not know), and indicate that they would invest more in EU manufacturing and would expect a high increase in their exports (6 submissions expect some competition with the exports of EU SPC holders).

Originators’ submissions to the consultation reflect their broad opposition to the introduction of an EU SPC waiver: 54 out of 71 originators do not consider that EU-based generics/biosimilars manufacturers face the above problems. More specifically, as regards the views of originators, they consider that: -It would send a negative policy signal to originator pharmaceutical companies and to trade partners as regards the EU commitment to IP. However, it should be recalled that the EU has rolled out SPC protection to third countries via FTAs in favour of originators (according to EFPIA, EU exports to Canada of pharmaceutical products worth EUR 4bn yearly will significantly benefit from the new SPC protection introduced in Canada through CETA). -The waiver would erode some of SPC holders’ export sales (45 out of the 71 submissions of originators to the public consultation expressed this concern). However, as analysed above, the magnitude of that erosion is limited and compensated by the economic gains expected by the waiver. In addition, EU SPC-holders will in the medium term face increasing competition as more and more countries invest in development and manufacturing of generics and biosimilars (annex 7). -A waiver would conflict with the Union’s international obligations, notably FTAs concluded by the EU. A waiver would complement the Union’s trade policy approach overall. A waiver would also be consistent with existing international trade agreements, such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) between members of the World Trade Organisation (WTO), as well as those free trade agreements (FTAs) that the EU has concluded with third countries and which foresee protection of the nature of supplementary protection, such as CETA, which provides for a manufacturing waiver for export purposes. - The waiver would disincentive investments in R&D in the EU and may therefore result in some relocation of R&D outside the EU. Despite the waiver, the global IPR protection and enforcement framework in the EU would remain the strongest worldwide. Given that an export waiver would have a very limited effect on sales of SPC holders (no effect in protected markets) and does not affect to other major pharmaceutical-specific EU incentives for innovation, there would not be a meaningful negative knock-on effect on R&D incentives for originator products as a result (as the economic gains expected from R&D would be broadly the same). -The waiver would create a risk of illicit diversion of generics/biosimilars (made in the EU under the waiver) onto the EU market during the term of SPCs; this risk would be higher since the waiver would allow manufacturing in the EU during the SPC term (see also section 6.4.1). A risk of foreign products being illicitly placed on the EU market is already present today. It is kept at bay by the EU’s pharmaceutical legislation and its legislation regarding the enforcement of intellectual property rights. In addition, the waiver could be implemented with specific anti-diversion measures, which could actually help reduce the risk of diversion onto the EU market (see section 6.4). It should also be noted that there is no evidence of illicit diversion resulting from the existence of the ‘Bolar exemption’ in the EU, which itself if a form of manufacturing waiver for clinical trials purposes (and is available during the term of both patents and SPCs). -The exports gained by EU generics/biosimilars manufacturers would compete principally with SPC holders’ products made in the EU (i.e. due to the EU ‘goodwill branded effect’), and only in a negligible way with products made in countries such as China, Brazil or India, in view of the local barriers to imports. Contracting manufacturing organisations working under EU or US good manufacturing practice (GMP) are stablished globally. Biosimilars are taking up quickly not only in developed countries but globally. Asian plants are also manufacturing for originators, including for those originators’ biosimilars divisions (see section 2.3 and annex 7). In relation to supposed local barriers in 3rd countries, the EU trade policy aims to remove those barriers (industry information provided to the Commission indicates that EU-based manufacturers have been able to export to those markets upon expiry of the EU SPC). Regarding the feedback of SMEs in the sector of manufacturing of generics and biosimilars, and SMEs devoted to innovative medicines (See Annex 16 – SME Test for further details): Among the 63 respondents defining themselves as mostly manufacturers of generics/biosimilars, 12 respondents identified themselves as an SME and 1 as a start-up. The vast majority of SMEs manufacturing generics and biosimilars supports the introduction of a waiver in the EU, and considers that the longer duration of SPCs in the Union compared to non-EU countries makes manufacturing in the Union less interesting for them. Regarding pharmaceutical innovative SME, among the 71 respondents defining themselves as mostly originators, 2 respondents identified themselves as an SME involved in medicines biotechnology and one as a start-up in the field of biopesticides. In addition, several European pharmaceutical associations such as EUCOPE, EBE, and EuropaBio conveyed the views of their start-ups and SME members in their submissions and accompanying letters sent to the Commission during the public consultation. A few national innovative pharmaceutical associations focused on start-ups and SMEs-members (Belgium and Germany) also provided their views. These associations representing innovative SMEs have expressed concerns that the introduction of a manufacturing waiver would dilute SPC protection and therefore dilute the financial rewards they would receive for their inventions, as well as their possibility to get and secure funding for their innovative R&D (in particular because any process of legislative change might stir up uncertainty and dampen the willingness of financial institutions to invest). They also highlight that EU-manufactured generics are likely to compete for market shares in unprotected markets with the original brands and thus decreasing the actual or projected market share of these SMEs products.

As indicted above, these concerns may however be overstated, as the economic impact on originators of the introduction of a manufacturing waiver would be minimal (SPC holders maintain full SPC-related market exclusivity in the Union). Despite the waiver, the global IPR protection and enforcement framework in the EU would remain the strongest worldwide. Three associations representing patients and doctors favoured an SPC manufacturing waiver on the grounds that it would promote early competition in the market, and thus more affordable medicines. Some replies from public authorities claim that there is an increasing dependency on imports of medicines and APIs. Increased dependency on non-EU sources has already led to stakeholder concerns with regard to maintaining security and quality of supply in the Union (as discussed in section 2.3). Shifting part of the production established under this export waiver on EU day-1 into the EU (in cases where it is possible to quickly scale up the production to meet the demand), could improve the timely entry of generics and biosimilars into the EU market. It should be recalled however that EU-based manufacturers of generics and biosimilars could also achieve additional sales from exports to Member States where SPC protection has not been obtained. However, such a situation could in practice be easily prevented by SPC holders by extending SPC protection to all Member States. At some point in the future, the possible introduction of an EU unitary SPC title would also be relevant in this context. Many stakeholders consider that an amendment of the SPC Regulation to introduce an export-only waiver would not imply any implementation costs for the EU budget, Member State authorities or manufacturers of generics and biosimilars. 6.4.Impact of option 2-bis: SPC manufacturing waiver for export purpose with anti-diversion measures 6.4.1.The risk of diversion One of the reasons raised by SPC holders to oppose the introduction of an SPC manufacturing waiver is the potential risk of illicit diversion onto the EU market, or onto foreign markets still protected, of generics and biosimilars manufactured in the EU under the waiver (58 of 71 originator respondents to the public consultation expressed this concern). Today, any generic or biosimilar product found on the territory of a Member State where an SPC is in effect is considered, by default, to infringe the SPC. With a waiver, this would not necessarily be the case anymore, which these stakeholders consider might make the identification of infringing products more difficult. Other respondents to the public consultation (coming notably from the generics/biosimilars industry) consider this risk to be low, given that: -The supply of medicines is highly regulated by the EU acquis on falsified medicines (Directive 2011/62/EU), which includes: oObligatory safety features – a unique identifier and an anti-tampering device - on the outer packaging of medicines; oA common, EU-wide logo to identify legal online pharmacies; oTough rules on the import of active pharmaceutical ingredients; oStrong record-keeping requirements for wholesale distributors. -The EU Bolar patent exception also created a type of manufacturing waiver in 2004 for regulatory approval purposes for generics and biosimilars (not for export or stockpiling purposes), and no particular illicit diversion of products has been reported in this context. -Already today, generics and biosimilars could potentially try to enter ‘at risk’ (i.e. in breach of existing IP protection in the EU) the EU market via imports from unprotected third countries. 6.4.2.Possible anti-diversion measures While opinions regarding the risks of diversion differ, anti-diversion measures could be envisaged in order to minimise any additional risk of diversion and provide additional transparency. This would work to the benefit of originator companies, by reducing the risk of exposure to IP infringements compared to the situation today. Over 70% of SPC-holding companies who responded to the Max Planck Institute’s survey favoured four different types of anti-diversion measures in the event that a manufacturing waiver were to be introduced in the EU: (a)Compulsory special labelling for the products produced under the waiver

This would require generics/biosimilars manufacturers to affix clear indications or labelling on the product packaging manufactured under a waiver, for export purposes (and/or stockpiling purposes under policy options 3 and 4) That special labelling should not conflict with existing labelling requirements for medicines in export markets. For example, in the case of medicines for the EU market, Article 54 of Directive 2001/83/EC sets out the labelling requirements for medicines. This labelling option was also favoured by SPC-holders and generic/biosimilars manufacturers (over 70% for both categories), should a waiver be introduced. However, while such labelling can be expected to be effective in respect of products to be exported under an export waiver (option 2), it appears to be less necessary in respect of products to be stockpiled for EU day-1 entry (options 3 and 4 below) given the already strict traceability requirements imposed by the Directive 2011/62/EU on falsified medicines. Regarding the costs associated with special labelling, the sector is already subject to traceability measures in the EU under that Directive. As a proxy for estimation of the cost of labelling, the evaluation of Regulation 953/2003 to avoid trade diversion into the EU of certain key medicines found that a pharmaceutical company incurred costs of circa EUR 200 000 between 2003-15 for adding a logo on its packs. However, that cost included significant fees derived from the obligation of getting regulatory authorities to amend/extend marketing authorisations for the medicines due to a change of packaging (which might not be necessary to implement this option). (b)Ex-ante information This would require generics/biosimilars manufacturers to notify SPC holders, or a public body (e.g. by Member State bodies), of their intention to rely on the waiver – possibly with a specification of the quantities and destinations – before starting manufacturing. This option would create a slight additional administrative burden for generics/biosimilars manufacturers, and might create confidentiality issues if overly detailed information was required from such manufacturers. A notification – combined with the timely publication of the related information – would be beneficial for SPC holders, as it would increase transparency and legal certainty, and facilitate identification by them of possible instances of illicit diversion, as they would have information regarding a manufacturer’s intention to use a waiver in respect of a product. An advantage of such notification requirements for generics/biosimilars manufacturers is that the public body to which notifications were sent could publish the notifications, or alternatively give them, under request, to a court (or an equivalent body) in the event of litigation, so as to demonstrate the manufacturer’s good faith. In addition, a further safeguard would be the legal obligation on the manufacturer, pursuant to existing IPR enforcement legislation, to ensure that products are not released on the domestic market prior to expiry of the SPC. (c)Ex-post notification This would require generics/biosimilars manufacturers to inform SPC holders, or a public body, that they have manufactured products under the waiver, for export purposes (and/or stockpiling purposes for options 3 and 4) – possibly with a specification of the quantities and destinations. SPC holders could effectively use the information to prepare customs ‘applications for action’ aiming to prevent re-imports. The assessment is similar to preceding point b, with slightly increased (ex-post) transparency for originators and an increased administrative burden for generics/biosimilars manufacturers. (d)Shifting the burden of proof for infringement from SPC holders to generic manufacturers This would require generics/biosimilars manufacturers, when they are found to have manufactured, in a territory where an SPC is in effect, a product covered by an SPC, to prove that the product is intended for export, failing which the product would not enjoy the waiver. Any legislation introducing an SPC manufacturing waiver, if accompanied with anti-diversion and transparency measures, would take due account of the cost of such measures (e.g. operative cost, administrative burden), which could potentially have a dissuasive effect regarding the actual use of the waiver. The cost of anti-diversion measures would be negligible for major manufacturers, but it could have a more significant impact on SMEs. 6.4.3.Retained anti-diversion measure for option 2-bis In view of the above analysis, the preferred anti-diversion measure for this option 2-bis (an SPC manufacturing waiver for export-only purposes with anti-diversion measures) would be a legal obligation to label products produced under the waiver, and a requirement for any manufacturer of generics or biosimilars intending to make use of the waiver to notify this intention to a Member State public authority, which would publish that information. This labelling would allow effective and easy identification of generics/biosimilars to be exported under the waiver, and to check whether they are genuinely in the process of being exported. This labelling should be removable once the products have been exported outside the EU, in order not to conflict with any labelling requirement in the countries of destination, nor interfere with possible repackaging. The notification requirement would improve transparency for SPC holders. A manufacturer to public authority notification would reduce the risk of collusion between the SPC-holder and potential manufacturers vis-à-vis the option of a manufacturer-to-SPC-holder notification.

This approach appears to be cost-effective and proportionate, and is favoured by SPC holders as well as manufacturers of generics/biosimilars. An amendment of the SPC Regulation to introduce an export-only waiver with anti-diversion measures would not imply any implementation costs for the EU budget and very limited costs for Member State authorities, in relation to receiving the notifications of the intention of firms to use the waiver, publishing the information, and providing it, under request, to a court in the event of litigation. As discussed above, the measures should take into account the potential cost of implementation on manufacturers of generics and biosimilars, especially for SMEs. 6.5.Impact of Option 3: SPC manufacturing waiver for stockpiling purposes The impact of this option has been analysed and addressed by the studies contracted by the Commission. It should be noted that stakeholder studies have focused mostly on an export-only waiver. Generics and biosimilars manufacturers consider that a stockpiling waiver would greatly contribute to level the playing field between the manufacture of generics and biosimilars in the EU versus manufacturers based in third countries with regard to timely EU day-1 entry. According to the inputs provided to the public consultation, 53 out of 63 respondents representing generics and biosimilars companies (3 respondents deny this problem, and 3 do not know) consider that SPCs disadvantage EU-based generics and biosimilars manufacturers compared with those based in countries with no SPC when placing their products on the market in the EU immediately after the SPC expires. 41 submissions by generics and biosimilars companies indicate that they have obtained marketing authorisation(s) in the EU before the expiry of the SPC of the reference medicine (under the Bolar exemption). Many of them would be also interested in complementing their ‘early’ marketing authorisations with the possibility of manufacturing for stockpiling purposes (i.e. during the SPC term of the reference medicine) in view of timely entry of their products onto the EU market, or some other mechanism that would have an equivalent effect. This stockpiling waiver would also support EU generics/biosimilars manufacturers that are only interested in selling within the EU. In this regard, 3,372 pharmaceutical SMEs manufacture in the EU, 1,765 of those SMEs export, and 1,362 of them export outside the EU. As discussed under option 2, originators’ submissions to the consultation oppose the introduction of any type of SPC waiver. The CRA study estimates that an SPC waiver for stockpiling purposes would result in savings on pharmaceutical expenditure from this earlier competition and therefore lead to a speedier reduction of prices in Member States upon expiry of the SPC. CRA conducted a simulation of the impact on pharmaceutical expenditures on the basis of observed delays in generic and biosimilar entry during a sample period (Q1 2008 to Q3 2014) if such delays were reduced by up to 6 months. Their analysis indicates that if generic entry were brought forward by 6 months, savings on pharmaceutical expenditure would amount to EUR 1.1bn over a three-year period for the sample examined, due to the faster decline in prices, corresponding to a 4% saving. Regarding the biologics market, savings would amount to EUR 15m over a three-year period for a limited sample of 17 molecules examined, which corresponds to a 1% saving (it should be noted that as biosimilar penetration increases over time, the beneficial effects on pharmaceutical expenditure would also increase). However, from the perspective of pharmaceutical expenditure, it could be argued that, in the medium to long term, timely entry of generics and biosimilars in the EU would tend to happen anyway from non-EU based producers under the baseline scenario (i.e. without any waiver). Therefore, in the long term, and disregarding concerns related to the strength and diversification of the supply chain, the stockpiling feature may not necessarily have such a significant impact on savings to the health systems of those Member States with a sizable national market. Patients, as indicated above, would enjoy additional sources of supply of medicines with this stockpiling waiver. As explained under option 2, a few patient and health practitioner groups, as well as public health institutions, favoured the SPC manufacturing waiver on the grounds that it would facilitate access to more affordable medicines. As mentioned above, such a waiver could potentially reduce the risk of relocation, not only of manufacturing, but also of R&D (in the biologics/biosimilars sector). Since a stockpiling-only waiver would likely improve the timely entry of EU-manufactured generics and biosimilars, it could tackle – similar to an export waiver – the concerns expressed by some public authorities and citizens about over-reliance of imported medicines analysed in option 2 above. An amendment of the SPC Regulation to introduce this stockpiling-only waiver would not imply any implementation costs for the EU budget and Member State authorities. 6.6.Impact of Option 3-bis: SPC manufacturing waiver stockpiling purposes with anti-diversion measures The labelling measures proposed for option 2-bis above (waiver for export-only purposes with anti-diversion measures) might be unnecessary for this option 3-bis (stockpiling for entry in the EU market) in view of the strict traceability requirements imposed by Directive 2011/62/EU on falsified medicines. Among the anti-diversion measures discussed in subsection 6.4.2, the preferred one for this option 3-bis would be a legal obligation for the manufacturer to notify a public body (e.g. a public authority of the Member State of establishment of the production facility) of the launch of production for stockpiling purposes. That public body would publish the content of the notification, or store it and provide it, under request, to a court in the event of litigation. This would be a simple notification, not generating significant burden or cost on the applicant or the public body. An additional safeguard for a manufacturing waiver for stockpiling purposes could consist of confining the effect of the waiver to the final months of the term of the SPC of the reference medicine. The introduction of a stockpiling-only waiver with the preferred anti-diversion measure above would imply a negligible cost in additional administrative capacity in for the public body charged with receiving, publishing and dispatching (by a court order) the notification. 6.7.Impact of Options 4 and 4-bis: SPC manufacturing waiver for export and stockpiling purposes (with anti-diversion measures) An SPC manufacturing waiver for both export and stockpiling purposes would address both identified problems (manufacturing for export purposes and for timely entry into EU day-1 markets). The implications of these options 4 (and 4-bis) stem from the combination of effects described for options 2, 2 bis, 3 and 3 bis above.

Options 2 to 4 would be especially beneficial for EU SMEs manufacturing generics or developing biosimilars, because they do not necessarily have access to the necessary funding or skills to outsource or delocalise production outside the EU. Anti-diversion measures in options 2-bis, 3-bis and 4-bis should take account of potentially dissuasive costs for SMEs (additional operational costs (e.g. labelling), the need to contract specialised attorneys (e.g. for potentially complex notification procedures, and court proceedings). The preferred anti-diversion measure for this option 4-bis would be a combination of the preferred measures for options 2-bis (external labelling and notification for production for export purposes) and 3-bis (notification for production intended for stockpiling). 6.8.Impact of the options for the timing of the introduction of the manufacturing waiver Scenario 1 (namely immediate application to all SPCs, including those which are already in effect when the waiver is introduced): the manufacturing waiver could arguably be viewed as a clarification of the initial objective of SPC protection (which, as explained above, was never intended to prevent exports outside the EU nor day-1 entry onto the EU market after SPC expiry). This could justify its immediate entry into force, as happened with the EU Bolar patent exemption in 2004. However, this approach is not preferred, as it might negatively affect the acquired (property) rights and legitimate expectations of SPC holders. In addition, it is not considered useful since, in respect of SPCs already having taken effect, it would be late at that stage for generics/biosimilars manufacturers to make investment decisions (especially for export purposes). These objections are also, to a certain extent, valid for scenario 2 (namely application only to