Medical Malpractice: Contractual or Tortious Nature?

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The Rise of Medical Malpractice Cases and of Defensive Medicine.  Over the last two decades, medical malpractice has become a prominent issue in the Italian healthcare debate. Medical malpractice litigation has dramatically increased, with dire reflections on prices and availability of professional liability insurance. Insurance premiums have rapidly risen and insurers have often been unable to provide insurance coverage to physicians. As a consequence, physicians have been adopting changes to their practices, by taking allegedly unnecessary precautions or by refusing treatments that may be in the patients’ best interests but may also give rise to their  complaints (the so-called phenomenon of “defensive medicine”).   Different Interpretations of Malpractice by Courts.  Such phenomenon has been exacerbated by the fluctuating approach taken by civil courts in dealing with medical malpractice cases. In fact, Italian Courts have been advancing different interpretations on the nature of the relationship between a physician and a patient.

  1. Medical Malpractice as a Tort. Until 1999, liability arising from medical malpractice was deemed to be a tort. Interpreters believed that the absence of a formal agreement between the parties would trigger tort liability. As no contractual relationship was established between  physicians and patients, the latters, as injured parties, could rely  exclusively on proceedings based on section 2043 of the Italian Civil Code[1]. In light of this interpretation, medical negligence was considered to be a violation of a general duty of care, while patients bore the burden of proving damages suffered, a medical act negligent and a causation link between the two.
  1. Medical Malpractice as Contractual Liability. The above view has been gradually replaced by several opposing theories, which lean towards a contractual interpretation of the relationship between physicians and patients. Accordingly, medical negligence is currently held to be the failure to fulfil a specific obligation, and liability arising from such failure has been considered as contractual liability.

The more convincing approach to define the nature of physician’s liability was introduced by the Italian Supreme Court (Corte di Cassazione) with judgment no. 589/1999. According to such judgment, physicians can be held contractually liable under the theory of  “social contact” (contatto sociale). Such theory is based on the contractual liability of physicians for breaching the duty to protect patients’ health. Given the contractual nature of medical responsibility, damages can be awarded to patients if they produce evidence of the breach of contract committed by physicians, unless  physicians are able to prove that such breach is a result of conditions not attributable to them. In other words, physicians bear the burden to prove the exact fulfilment of the contractual obligation.   A New Statutory Provision on the Role of Guidelines in Medical Practice.  By enacting Law no. 189/2012, the Italian legislator has tried to counter the spread of defensive medicine. Section 3 of the aforementioned Law states that: “The health professional who, in her medical practice, adheres to guidelines and best practices accredited by the scientific community cannot be held criminally liable for ordinary negligence. In such cases however she remains subject to the obligation set out by section 2043 of the Civil Code. The judge, even when determining damages, shall take due account of the conduct referred to above”.   Renewed Controversy on the Nature of Medical Malpractice.  Reference to section 2043 of the Italian Civil Code in Law no. 189/2012 has sparked a new debate among scholars and in courts, some of which maintained that the legislator clearly meant to endorse the tort liability theory. For example, the Court of Milan[2] has recently stated that the theory of “social contact” has been repealed by the 2012 statutory provision and that, absent a specific contractual relationship established between patients and physicians, malpractice must be deemed a tort liability.   Others[3] have pointed out that the provision of Law no. 189/2012 merely states that, in the event of ordinary negligence, the obligation to compensate damages remains, without referring to the nature of medical liability, and that nothing in the statutory provision appears to be in conflict with previous case law on the contractual nature of medical liability.   The “social contact” theory therefore still stands, but the phenomenon of “defensive medicine” has yet to find a solution. [1] Section 2043 of the Italian Civil Code translates as follows: “Any willful or negligent fact causing to a third party an unfair damage triggers the obligation to reimburse such damage”. [2] Decisions no. 9693 of July 23, 2014 and no. 1430 of December 2, 2014. [3] For example, the Italian Supreme Court states this view in its decisions no. 8940 of April 17, 2014.

Defective Medical Devices: an Interesting Decision by the ECJ

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On March 5, 2015 the European Court of Justice (“ECJ”) delivered a ruling on product liability that could have consequences for manufacturers of medical devices.

FACTS OF THE CASE. The quality control system of a company selling pacemakers and implantable defibrillators in Germany found that a component utilized to hermetically seal pacemakers may experience a gradual degradation. That defect could lead to premature battery depletion, resulting in loss of telemetry and/or loss of pacing output without warning. In light of such circumstances, the manufacturer issued a warning recommending physicians to replace the implanted pacemakers with others provided free of charge. At the same time, the manufacturer also recommended physicians to turn off a switch in the defibrillators.

PROCEEDINGS. The insurance companies, covering patients whose pacemakers or defibrillators had been replaced, instituted legal proceedings to obtain reimbursement of costs relating to such replacements. The German High Court raised a preliminary question before the ECJ asking whether the devices that had been replaced may be classified as defective, despite lack of evidence that the actual product implanted was defective, on the basis of the corrective measures recommended by the manufacturer. Moreover, the German Court asked whether costs of replacing those pacemakers and defibrillators could be classified as damages, for which the manufacturer may be liable pursuant to the Product Liability Directive[1].

ECJ RULING. In its ruling, the ECJ stated that, in order to determine whether or not the manufacturer was liable, (i) the function of such products, (ii) the vulnerability of patients utilizing them, (iii) the costs borne to replace them, and (iv) the costs relating to turning off the switch of defibrillators had to be taken into account and balanced. In this respect, the ECJ observed that even the potential lack of safety of those products gave rise to the manufacturer’s liability, in light of safety standards that patients could expect from that kind of products and the abnormal possibility of damages to patients, who would be at risk of death. In addition, and in more general terms, the ECJ affirmed that costs borne to replace potential defective devices may constitute damages inasmuch as the expenses incurred are necessary to remedy the defect. However, such a judgment, as pointed out by the ECJ, pertained to the merits of the claim, and must therefore be ascertained by a national Court.

CONSEQUENCES OF THE RULING. Under the Product Liability Directive claimants must produce evidence of the defect, damages arising therefrom and a causation link between the two. By contrast, the ECJ’s decision establishes that even potential defects may be considered as defects. As a consequence, consumers appear to be relieved from the burden of proof that products are actually defective. By the same token, manufacturers’ right of defense seems to be compressed, as – when there are corrective measures recommended by them – the ruling does not leave any room for proof of lack of liability.

WHAT WILL BE THE IMPACT OF THE RULING.  The ECJ’s approach to product liability adopted in the ruling at hand appears to be skewed towards consumers’ protection. A cynical reading of the ECJ’s judgment may even prompt manufacturers to be reluctant to “admit their own mistakes” and issue safety warnings regarding their products! As often happens with legal issues affecting innovation and health policies, balancing of interests is key.

[1] Council Directive 85/374/EEC of July 1985 on the approximation of the laws, regulations and administrative provisions of the Member States concerning liability for defective products. According to the Directive, the producer is liable for damages caused by a defect in his product.

Medical Apps and the Law, Part II – Medical Apps: Helpful or Harmful?

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A BOOMING MARKET. The idea of running software on a mobile device with healthcare uses has been discussed as early as 1996[1]. However, the issue has assumed explosive proportions in recent years, thanks to the spreading of an “app mentality” among health care professionals and consumers, and its potential, given cloud computing, social networks and big data analytics, could be yet to be realized. According to a March 2014 BCC report, this growing trend will be continuing in the next years[2]. App stores offering thousands of medical app also confirm the trend, as about 97,000 mobile health apps in 62 app stores according to a Research2Guidance market report of last year. Hardware manufacturers are certainly not immune to the medical app fervor, and – for example – the new smartphone Gear 2 Neo by Samsung, launched on April 11, 2014 by Samsung in 125 countries, incorporates a heart rate sensor.

 

ACCORDING TO THE EU COMMISSION, MEDICAL APPS AND E-HEALTH HAVE GREAT POTENTIAL.  What is the view of the authorities on this phenomenon? The potential of apps makes them app enthusiasts, the reality of apps worries them. The European Commission believes in medical apps, which can be leveraged in order to eliminate barriers to “smarter, safer, patient-centred health services”. Further, digital health could also be a promising factor to cut Member States’ budget[3] while – in the words of the Commission – “putting patients in the driving seat”[4]. The reality of the app market, however, does not necessarily boost patient empowerment. In fact, the Commission noted that there are substantial risks connected with the way apps are currently marketed: information to consumers is not clear, the trader’s contact details are not easy to find, the use of the term “free” is often misleading[5].

 

ENFORCEMENT ACTION BY THE ITALIAN DATA PROTECTION AUTHORITY. On September 10, 2014 the Italian Data Protection Authority has issued a warning regarding data protection risks inherent to medical apps (“Medical Apps: More Transparency Is Needed On Data Use”) promising future sanctions. The Authority found that insufficient information to users prior to installation, as well as the processing of excessive data. The survey conducted by the Italian Data Protection Authority involved a total of 1,200 apps and the findings thus obtained were striking: (i) barely 15% of them provided meaningful privacy notices; and (ii) in 59% of the apps reviewed the Authority found it hard to locate pre-installation privacy notices. The stance taken by the Italian Data Protection Authority echoes the Opinion 02/2013 by The “Article 29 Data Protection Working Party”, which had identified lack of transparency, lack of free informed consent; poor security measures; disregard for the principle of purpose limitation requiring processing of personal data only for specific and legitimate purposes.

 

CONSENT IN WRITTEN FORM: A REQUIREMENT PECULIAR TO ITALIAN LAW.  Italian legislation includes a couple of additional requirements, which could kill the medical app market. We note, however, that they have not been mentioned by the Italian Data Protection Authority in their September 10, 2014 warning so it is unclear whether there is any appetite for enforcing them. In addition to a specific authorization by the Data Protection Authority, typically substituted by a general authorization such as this, Section 23 of the Data Protection Code requires that consent to process sensitive data, such as health data, must be given in written form, a requirement which is not satisfied by a mere “click” on the smartphone, but would only be satisfied by the digital or qualified electronic signature in accordance with Italian legislation. This obstacle could be solved only when (and if) the proposed EU Data Protection Regulation enters into force and repeals the existing Italian Data Protection Code, as consent to process sensitive data shall have to be “freely given, specific, informed and explicit” and the controller shall bear the burden of proof of such consent, but consent in written form would no longer be required.

[1] “Regulation of health apps: a practical guide”, d4Research, January 2012, citing material from the Conference of the American Medical Informatics Association Fall Symposium of 1996.

[2] “This market is expected to grow to $2.4 billion in 2013 and $21.5 billion in 2018 with a compound annual growth rate (CAGR) of 54.9% over the five-year period from 2013 to 2018”.

[3] “In Italy, overall savings from the introduction of ICTs in the Health Sector are estimated to be around 11.7% of National health expenditure (i.e., €12.4 billion). Savings from digital prescriptions alone are estimated to be around €2 billion”. European Commission Memo of December 7, 2012 “eHealth Action Plan 2012-2020: Frequently Asked Questions”.

[4] It should be noted that, while the Commission is a fervent proponent of eHealth (see also the recent Green Paper on mHealth), there are strong limitations to its actions given its lack of competence in healthcare delivery and financing, which is entirely up to Member States. The effectiveness of eHealth solutions in Europe require the commitment of Member States to implement organizational changes which make patient-centric eHealth solutions an integral part of their healthcare systems, a task that each Member State is pursuing with various degrees. A March 24, 2014 press release by the European Commission commenting on two European surveys on the use of eHealth (including Electronic Health Records, Health Information Exchange, Tele-health and Personal Health Records) showed that many critical issues still exist: lack of penetration, lack of interoperability, and lack of regulatory certainty, to name a few.

[5] Focus of the Italian Antitrust Authority has so far been on game apps, rather than medical apps: it, too, found that apps were misleadingly presented to users as free, while they were not.

Medical Apps and the Law Part I – What is a medical app? Perhaps it is a medical device. Find out!

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Technology often starts in a simple way, perhaps with a simple “click” on an “I AGREE” button on your smartphone. Once the technology has spread, lawyers and authorities start debating what it is and how it fits with the laws.

The following post is the first part of a legal analysis of medical apps attempting to establish what they are under current legislation (Part I), as well as what is wrong with them according to various authorities who have scrutinized them (Part II).

 I keep reading and hearing that apps are not regulated and that the European Union stands behind than the United States in that process. Both statements are wrong. Medical apps can be regulated, if they fall within the scope of the definition of “medical device”. The trick is to find out if they do…

It probably takes less time to download a medical app on your smartphone than to determine if it falls under the definition of “medical device”[1]. Where to look for guidance?

THE EU COMMISSION GUIDELINES. In June 2012 the European Commission has issued Guidelines (MEDDEV 2.1/6) in order to attempt to clarify when standalone software is a medical device. A 6-step decision diagram is also provided by the Guidelines as an aid to decide if a medical application is a medical device. If the medical app is indeed a medical device, then a conformity assessment is required and the app must carry the CE marking.

One key element stands out in order to decide whether a medical app is a medical device: its intended use. This has been further emphasized in the Brain Products GmbH case (Case C-219/11) decided by the European Court of Justice regarding an electro-technical system enabling human brain activity to be recorded. The Court stated that “a device used in humans for the investigation of a physiological process falls within the scope of Directive 93/42 only if the intended purpose of that device, defined by its manufacturer, is medical”, while specifying that the fact that the software is used in a medical context is not sufficient to trigger its qualification as “medical device”. Therefore, the intended use of a device is up to the manufacturer, although – as the influential medical device counsel and blogger Erik Vollebregt puts it – “you cannot disclaim an obvious intended purpose as this would amount to a contradictory label and consequently a non-compliant product”.

THE FDA’s VIEW. On September 23, 2013 the United States Food and Drug Administration tackled the same problem and issued a guidance document “to clarify the subset of mobile apps to which the FDA intends to apply its authority”, because while “The FDA encourages the development of mobile medical apps that improve health care and provide consumers and health care professionals with valuable health information.”, however “The FDA also has a public health responsibility to oversee the safety and effectiveness of medical devices – including mobile medical apps.”

FURTHER HELP FROM THE UK. On March 21, 2014, the United Kingdom Medicines and Healthcare Products Regulatory Agency (MHRA) has also issued guidelines to help “healthcare and medical software developers who are unsure of the regulatory requirements for CE marking stand-alone software as a medical device”. The MHRA indicated that software functions that, e.g., analyze, alarm, calculate, control, convert, diagnose, measure, monitor, are likely to lead the app to be considered as a medical device.

REALITY CHECK! The intention of the EU Commission, the FDA and the MHRA to clarify the regulatory framework is commendable and guidelines abound (see also the D4Research guide), but how many mobile medical apps actually bear a CE marking? How many app developers, app stores and app users are even aware of such requirements? I have witnessed awards granted to apps and eHealth projects which showed no awareness of the regulatory aspects. Announcements to “crack down” on illegal apps have been issued (e.g., by the Dutch authorities). What is happening in Italy? While the Ministry of Health is developing its own apps, its general manager Dr. Marletta in December 2013 has announced that the explosion of medical app use is an area of concern, especially with regard to risks and liabilities, which will be monitored by the authority going forward. Actual enforcement action, however, is still to be seen.

THE PROPOSED MEDICAL DEVICE REGULATION: WHAT MAY HAPPEN NEXT.  If the Proposal Regulation replacing the Medical Device Directive sees the light, software will be expressly regulated and specific quality requirements will apply concerning the following aspects:

  • software design must ensure repeatability, reliability and performance according to the intended use;
  • appropriate means to eliminate or reduce as far as possible and appropriate consequent risks in case of single fault condition;
  • software must be developed and manufactured according to the state of the art taking into account the principles of development life cycle, risk management, verification and validation;
  • if intended to be used in combination with mobile computing platforms, software must be designed and manufactured taking into account the specific features of the mobile platform (e.g. size and contrast ratio of the screen) and the external factors related to their use (varying environment as regards to level of light or noise).CONCLUSIONS. Medical apps do not stand in a regulatory vacuum: if they fall within the definition of “medical device”, they are subject to essential requirements and should bear the CE mark.
  • INSTRUCTIONS FOR USE FOR MEDICAL APPS: IN WHICH FORM? We note that, under the e-labeling regulation (Regulation no. 207/2012) entered into force on March 30, 2013, stand-alone software that is deemed to be a medical device can have instructions for use in electronic form, provided that the devices are intended for exclusive use by professional users and that the use by other persons is not reasonably foreseeable. Instead, if the app is a medical device but intended for a patient, instruction for use in paper form must be provided. This requirement appears both unpractical[2] and unreasonable given that a patient downloading an app seems “digital” enough to be sufficiently protected by electronic instructions.

[1] The very definition of medical device included in Directive 93/42/EEC, as amended by Directive 2007/47/EC, includes software. In fact, “’medical device’ means any instrument, apparatus, appliance, software, material or other article, whether used alone or in combination, together with any accessories, including the software intended by its manufacturer to be used specifically for diagnostic and/or therapeutic purposes and necessary for its proper application, intended by the manufacturer to be used for human beings for the purpose of:

  • diagnosis, prevention, monitoring, treatment or alleviation of disease;
  • diagnosis, monitoring, treatment, alleviation of or compensation for an injury or handicap;
  • investigation, replacement or modification of the anatomy or of a physiological process,
  • control of conception,

and which does not achieve its principal intended action in or on the human body by pharmacological, immunological or metabolic means, but which may be assisted in its function by such means;”.

[2] An average smartphone user downloads 37 apps, according to the Opinion 02/2013 on apps on smart devices by the Article 29 Data Protection Working Party, page 2.

Hospital Use Of ATMPs: Toward A Stronger Protection Of Patients Resorting To Compassionate Use

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The Italian Ministry of Health has recently strengthened the requirements to obtain the authorization to manufacture and use advanced therapy medicinal products (“ATMPs” [1]) which are non-routinely produced. In fact, following the enactment of the Decree of the Ministry of Health of January 16th, 2015, published only last week (the “ATMP Decree”)[2], more control on such drugs’ hospital use is expected. The ATMP Decree does not apply to ATMPs under clinical trial and solely focus on compassionate use of non-routine ATMPs.

THE PREVIOUS REGULATORY SCENARIO. Prior to 2006, the use of gene therapy and cell therapy medicinal products, for which a marketing authorization had not been obtained, was authorized only within clinical trials[3]. In 2006[4] non-profit manufacturing and compassionate use[5] of gene therapy and somatic cell therapy medicinal products was first allowed.

The 2006 Decree allowed the use of such products on the basis of certain requirements, checked by the Agenzia Italiana del Farmaco, the governmental agency in charge of pharmaceuticals (“AIFA”). Given the lack of therapeutic alternatives in a life threatening condition, the requirements for production and use of gene therapy and cell therapy medicinal products were not especially strict and heavily relied on the patient’s consent and positive feedback by the Ethics Committee, as well as on the self-certification on the existence of the requirements by the doctor responsible for the drugs administering.

THE NEW RULES INTRODUCED. The ATMP Decree was introduced to protect consumers from fraudulent conducts. Even though the Decree does not make specific reference to it, it is widely accepted that the ATMP Decree aims at limiting the proliferation of cases like the famous “Stamina case”, where therapies for treatment of life-threatening diseases have been provided to patients in sheer lack of scientific grounds[6]. AIFA will enforce the new rules by way of on-site inspections that may lead to suspension or revocation of a previously granted authorization to manufacture, as well as to the prohibition to administer the drug. The ATMP Decree can be summarized as follows:

  • AUTHORIZATION TO MANUFACTURE. Manufacturing of ATMPs for non-routine hospital use now requires a prior authorization by AIFA, which is only issued to GMP (Good Manufacturing Practices) certified manufacturers[7]. Prior to issuing its authorization, AIFA checks compliance of the manufacturing site. The process may altogether take up to 120 days, save for further inquiries by AIFA[8].
  • AUTHORIZATION TO USE. Use of ATMPs is limited to “compassionate use”. Only certain public research hospitals will be suitable candidates to obtain AIFA’s authorization[9]. Moreover, the authorization will be released only upon approval by (i) a Committee for the Assessment of Admissibility to Phase I of Clinical Trials, composed of expert biologists and clinicians, and (ii) by the concerned hospital’s Ethical Committee. The authorization is issued after an analysis of all documents necessary to assess risks and benefits of the proposed treatment, as well as data concerning safety and efficacy available from previous clinical trials.
  • COOPERATION BY MANUFACTURERS AND PHYSICIANS.
    • Manufacturers of ATMPs must ensure traceability of medicinal products as well as of patients for thirty years, and must report to AIFA any adverse events. Also, manufacturers can deliver ATMPs only after authorization to use has been issued and in compliance with a physicians’ prescriptions.
    • Physicians, on the other hand, must ensure that the patient’s informed consent is obtained, and must comply with Good Clinical Practice principles in administering ATMPs in accordance with the protocol approved by the Ethics Committee. Finally, traceability of the drug and patient must be ensured and adverse events must be communicated promptly.

CONCLUSIONS. Manufacturing and use of ATMPs on non-routine basis shall follow objective requirements, to be assessed by governmental entities who are able to appreciate their scientific basis, rather than – as in the past – used under the mere responsibility of physicians and on the basis of self-certified manufacturing facilities. If, on the one hand, it would be advisable that all who need to resort to compassionate use of medicinal products can access medicinal products as quickly as possible, on the other hand it must be ensured that the same people receive adequate protection from deceitful conducts. The Stamina case showed how vulnerable to deception patients who are in a life threatening condition without any available cure can be to false hopes spread by therapies without scientific basis: the recent ATMP Decree attempts to protect them.

 

[1] According to Section 2 of Regulation (EC) No. 1394/2007 of the European Parliament and of the Council of 13 November 2007 on advanced therapy medicinal products and amending Directive 2001/83/EC and Regulation (EC) No. 726/2004 ATMPs include gene therapy products, somatic cell therapy products and tissue engineered products.

[2] The ATMP Decree has been published on the Official Gazette no. 56 of March 9th, 2015 and will become effective fifteen days after publication.

[3] See Section 1 of Ministerial Decree of March 2, 2004. Such non-routinely manufactured drugs were also excluded by the scope of the Pharma Code (Legislative Decree no. 219 of 2006) which focused on the industrial manufacturing of medicinal products and excluded non-routine drugs from its scope.

[4] Ministerial Decree n. 25520 of December 5th, 2006.

[5] According to Ministerial Decree n. 11521 of May 8th, 2013 “compassionate use” or “expanded access” of medicinal products may occur when no suitable alternative is available, in case of life-threatening situations, when serious harm to a patient’s health is potential, or in case of serious diseases with fast progression.

[6] The “Stamina Method”, created by Prof. Vannoni for the treatment of neurodegenerative diseases, is based on the conversion of mesenchymal stem cells into neurons and apparently lacks any scientific foundation. The method itself was also harshly criticized by Nature, one of the most prestigious scientific journals (http://www.nature.com/news/italian-stem-cell-trial-based-on-flawed-data-1.13329). Prof. Vannoni manufactured ATMPs while completely disregarding GMPs. Prof. Vannoni was criminally charged and prosecuted for organized crime with the purpose of fraud and recently plea bargained.

[7] Principles and guidelines of GMPs are contained in Commission Directive 2003/94/EC of 8 October 2003 laying down the principles and guidelines of good manufacturing practice in respect of medicinal products for human use and investigational medicinal products for human use.

[8] The process also includes submittal of request for authorization, along with a report on the ATMP.

New Transparency List For Generics And A Victory In Court

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On February 16, 2015 the Italian Medicines Agency (“AIFA”) has published the 2015 update to the so called “transparency list” (lista di trasparenza), i.e., a list of generic drugs authorized in Italy, along with their market price.

Following a number of changes in the legislation governing generics in the past few years, the National Health Service currently only reimburses the cost of the less expensive generic on the market. In fact, Section 7 of Law Decree 347/2001 sets forth the medicines having the same active ingredients composition, pharmaceutical form, way of administration, release modalities, number of tablets and dosage, are reimbursed by the National Health Service up to the price of the less expensive product on the market. The transparency list serves as a tool for reimbursement purposes: if the patient chooses to buy a branded product or a more expensive generic, the patient will need to cover the difference in price.

The publication of the transparency list comes shortly after a recent decision of the highest Italian administrative court, which stroke down past practices of AIFA on the reimbursement of new generics. In this case, the generic drug company EG S.p.A. claimed that AIFA issued a marketing authorization for gabapentin (a generic drug approved in a different EU member state) but unduly refused to recognize any reimbursement. The per-tablet dosage of the generic drug was in fact different from the branded product and other generics already included in the transparency list: therefore, according to AIFA, reimbursement was not warranted by Section 7 of Law Decree 347/2001. AIFA also argued that the new dosage, higher than other reimbursed products, entailed risks for the patients’ safety, as they would have to apportion the right dosage themselves (e.g., to split the drug tablets in half). The administrative court stated that such risk was ungrounded and had no impact on the reimbursement of the drug: if at all, it should have prevented AIFA from issuing a marketing authorization in the first place. Furthermore, the court stated that the National Health Service may reimburse a generic even if not included in the transparency list, striking down AIFA’s argument that dosages already reimbursed by the National Health Service sufficiently covered the needs of the patients, as such criterion was not set forth in applicable legislation.

The court decision comes as the latest victory for generics on the Italian market, adding to several regulatory and legislative changes prompted by budged restraints in the past few years, causing generics to continue gaining strength. In the meantime, proposed new legislation on the sale of generics outside of authorized pharmacies is stirring public debate.

Tax Relief on Exploitation of Intellectual Property Rights and Know-How

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INTRODUCTION OF THE SO CALLED “IP BOX”. Law no. 190 of December 23, 2014 (“Law”), provides for a new regulatory framework concerning taxation of revenue arising from exploitation of intellectual property rights and know-how eligible for legal protection.

Starting from 2015, repatriation of intangible assets owned by Italian and foreign companies abroad will be favored. Exportation or re-exportation of intangible assets to countries having more favorable taxation of revenue arising from exploitation of intellectual property rights will likely decrease, whereas investments in R&D activities in Italy should increase.

SCOPE OF THE LAW. The Law expressly covers works of intellect, patents, trademarks, design, models, processes, formulas, as well as industrial, commercial, and scientific know-how eligible for legal protection[1]. Revenue arising from both direct and indirect exploitation will receive a more favorable taxation as profits from licensing of eligible assets as well as their direct use (e.g. use of patented machineries in manufacturing processes) will be partially excluded from companies’ taxable income. The Law provides for a progressive implementation of the tax relief system. In 2015, only 30% of the profits will be excluded, whereas such percentage will increase to 40% in 2016, and to 50% in 2017[2].

Capital gains arising from sale of eligible intangible assets will be entirely tax-exempt, upon condition that at least 90% of sales revenue are invested, within two years from the relevant sale, in maintenance or development of any of such assets.

It must be noted that the tax relief will not automatically apply to all eligible entities. Instead, companies must expressly opt for the regime, and their choice will be binding and irrevocable for the following five fiscal years.

WHO CAN BENEFIT. Entities carrying out business activity in Italy, regardless of their type or size, can benefit from the new taxation regime. Foreign companies and other incorporated or non-incorporated entities, including trusts, carrying out business activity in Italy through a permanent establishment, can also benefit from the newly introduced regulatory framework provided that their country of residency is a party to a double tax treaty and undertakes to exchange relevant information with Italy.

CONDITIONS. The exclusion of profits from corporate income will apply only to those entities that carry out R&D activities by way of contracts entered into with either universities or equivalent research entities, or with companies other than those belonging to the same group[3].

In case of direct exploitation of eligible intangible assets, companies must conclude an advanced pricing agreement (APA) with the Agenzia delle Entrate (the Italian tax agency) to determine the ratio between the production value of the assets and the corporate income[4]. Such an agreement is optional for revenue arising from exploitation of eligible assets within the same group[5], whereas it is mandatory in case of capital gains deriving from sale of the assets.

EXEMPTED INCOME. Not all of corporate income benefits from the tax relief. The benefitting quota is instead calculated on the basis of the ratio between R&D costs incurred for maintenance and development[6] of eligible intangible assets and overall costs borne to produce such assets.

[1] The Law originally provided for works of intellect, patents, trademarks that are functionally equivalent to patents, processes, formulas and know-how eligible for legal protection. The meaning of “trademarks functionally equivalent to patents” has been debated ever since, with experts stating that such trademarks could be indentified in those trademarks used to market patented inventions. The recent Law Decree no. 3 of January 24th, 2015 (currently still to be converted into law) expanded the scope of the Law to all kind of trademarks, therefore also to purely commercial trademarks, as well as to design and models.

It must be noted that the scope of the Law is wider than what provided in other European countries by similar tax regimes, where tax relief is usually limited to exploitation of patents. Such systems are therefore commonly defined as “Patent Box”.

[2] The exemption is relevant to calculation of both IRES (corporate income tax) and IRAP (regional tax on production). It is estimated that, starting from 2017, revenue arising from exploitation of eligible assets will be taxed at a rate of 13.75%.

[3] The provision is aligned with the “nexus approach” adopted by OECD, aiming at limiting harmful tax competition amongst OECD countries. According to such an approach, tax relief is to be granted only when R&D costs are incurred, therefore hindering companies from exporting intangible assets to countries with more favorable tax rates without carrying out any R&D activity in such countries. (For further information on this issue visit http://www.oecd.org/ctp/beps-2014-deliverables.htm)

[4] The agreement is reached upon an international ruling procedure that is usually applied with regards to transfer pricing and dividends within the context of multinational companies.

[5] The Law originally provided for a mandatory agreement also in case of exploitation within the same group. Law Decree no. 3 of January 24, 2015, made such an agreement optional. Please note that the agreement may remain mandatory if the law decree is not converted into law or if it is modified by the law of conversion.

[6] Law Decree no. 3 of January 24, 2015, provides that such costs are increased by those incurred for the purchase of the asset or for research contracts entered into with companies belonging to the same group up to 30% of maintenance and development costs.

Health Innovation Academy: a new event coming up!

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The next event of Health Innovation Academy will take place on February 19, 2015 in Milan.

We will discuss how technological innovation reaches patients, with a focus on medical devices within the Lombardy healthcare system.

For more information on the event: http://healthinnovationacademy.weebly.com/come-giunge-linnovazione-tecnologica-al-paziente.html

Italian Competition Authority Targets Big Pharma, Triggers Expansion Of Off-Label Prescription

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I. ITALIAN COMPETITION AUTHORITY FINES ROCHE, NOVARTIS

On February 27, 2014, the Italian Competition Authority (Autorità Garante della Concorrenza e del Mercato, hereinafter “AGCM”), in an unprecedented decision concerning the pharmaceutical industry in Italy, issued fines in an amount of more than 180 million euro in the aggregate against F.Hoffman-La Roche Ltd. and Novartis AG, as well as their Italian affiliates. The two companies have been found to have restricted competition in connection with the commercialization of two drugs known by their brand name of Aventis and Lucentis.

The fines issued by AGCM, however, did not only affect Roche and Novartis. The AGCM decision triggered in fact, within a very few months, new legislation and case-law on off-label use of medicinal products, making it effectively easier for physicians to prescribe such products so long as their prices are lower than authorized alternatives.

Furthermore, the AGCM decision made painfully clear to the industry that mere compliance with the specific regulations applicable to pharmaceutical products will no longer shield companies from antitrust scrutiny.

II. PHARMACEUTICAL PRODUCTS, RELEVANT MARKET AND MARKETING AUTHORIZATIONS

Aventis and Lucentis have been employed in the treatment of several eye diseases, including in particular age related macular degeneration (“AMD”) and neovascular glaucoma. Both drugs have been approved by the European Medicines Agency (“EMA”) pursuant to the centralized authorization procedure. According to applicable legislation, medicines derived from biotechnology processes are subject to a single marketing authorization issued by EMA, which is valid in the entire territory of the European Union.

Avastin, a drug developed by Genentech (a fully owned subsidiary of Roche), has been approved by FDA and EMA, in 2004 and 2005 respectively, for the treatment of colon cancer. The marketing authorization has not been sought for the treatment of eye diseases. However, Avastin has been consistently employed off-label by ophthalmologists in the treatment of AMD. While Genentech has retained the rights to market Avastin in the US, it has assigned to Roche distribution rights in the rest of the world in exchange for royalties. Neither Genentech nor Roche have ever submitted a request for a marketing authorization for ophthalmological indications.

Lucentis has also been developed by Genentech and has been approved by FDA and EMA, in 2006 and 2007, for the treatment of AMD. Genentech has assigned the distribution of Lucentis (except in the US) to Novartis and sells to Novartis the active principle (ranibizumab).

III. OFF-LABEL PRESCRIPTION IN ITALY

In assessing the alleged restrictions on competition arising out of the marketing and commercialization of Avastin and Lucentis, AGCM extensively took into account the regulation of off-label prescription in Italy, which deeply affected the use of the concerned drugs by Italian healthcare professionals.

In the absence of any international regulation on off-label prescription of drugs, Italian legislation has developed through the adoption of a series of subsequent regulatory guidelines and ad hoc decisions. Law 648/1996 is the main legal instrument governing off-label prescription of drugs in Italy. Such law provides that, in the absence of a valid therapeutic alternative, the national health service may reimburse (i) innovative drugs that have been approved in other states but not in Italy; (ii) drugs that have not yet been authorized but are undergoing clinical trials; and (iii) drugs to be used for a therapeutic indication other than the approved one. The Italian pharmaceutical agency (Agenzia Italiana del Farmaco, hereinafter “AIFA”) holds, and periodically updates, a list of all the above drugs that may be reimbursed by the national health service, the so called “List 648”. Pursuant to such legislation, healthcare professionals may prescribe drugs included in the List 648 for off-label use and obtain reimbursement from the national health service. This legislation is peculiar to the Italian system, as in other countries off-label use is allowed but not reimbursed.

In 1998, the scope of the above provisions has been restricted, by providing that drugs may be prescribed for off-label use only if the healthcare professional is convinced, on the basis of documentable evidence, that the patient cannot be treated with approved drugs and such off-label use is in line with scientific works published on recognized international journals (Law 94/1998).

According to a brief submitted by EMA in the AGCM proceedings, the permissive legislation governing off-label use of drugs and their reimbursement has been beneficial to pharmaceutical companies, as it has allowed to sell products outside of the approved indications, while gathering at the same time scientific data to support future marketing authorizations at the expense of the national health service. The price of such products in most cases is also not established through negotiations with AIFA, as normally required for approved drugs used in accordance with their indications, thus generally yielding higher prices for reimbursement of off-label drugs. The unintended consequences of the above regulations led to a further crackdown on off-label prescriptions in 2006, when it was established that medicinal products cannot be prescribed and reimbursed unless they are at an advanced stage of clinical trials (at least in second phase) and scientific data from such trials are available (Law 296/2006).
In 2012 a change in the legislation concerning medical malpractice had the effect of further discouraging off-label prescription. Law Decree 158/2012, in fact, established that healthcare professionals are exempted from liability due to ordinary negligence if they comply with guidelines and good practices recognized by the scientific community. This has disincentivized healthcare professionals from prescribing drugs off-label, unless such practice is generally endorsed by the medical community.

IV. THE ANTICOMPETITIVE ARRANGEMENTS CONCERNING THE MARKETING OF AVASTIN AND LUCENTIS

Understanding off-label legislation and the possibility to obtain reimbursement from the national health service is essential to understanding how the Aventis-Lucentis case unfolded. The price of Lucentis is in fact significantly higher than the price of Avastin: as of November 2012 the price reimbursed by the national health service per injection was equal to €902. Avastin, on the other hand, had a price per treatment ranging from €15 to €81 and had been included in the List 648 for the treatment of AMD.

In line with then applicable legislation, the placement on the market of Lucentis triggered the cancellation of Avastin from List 648 for most of its off-label uses, since a valid alternative treatment, duly authorized for the same indication, was available on the market. AIFA definitely cancelled Avastin from the List 648 in October 2012 following a change in the summary of the product characteristics previously filed by Roche with EMA in order to account for certain adverse events in the ophthalmic use of Avastin as compared to Lucentis.

AGCM in its decision points to a concerted allocation of the market between Roche and Novartis, with this latter focusing on the ophthalmic sector and the first focusing on antitumoral drugs. In line with this shared marketing strategy, AGCM held that the two companies artificially restricted the use of Avastin, also by undertaking a variety of regulatory actions aimed at limiting its off-label use. Roche, on the other hand, claims that any such actions were in line with its pharmacovigilance duties, as they related to adverse events in connection with the use of Avastin in ophthalmic settings.

It is quite interesting to note that the actions undertaken by Roche regarding Avastin were on their face completely in line with the current regulatory framework. Roche, in fact, was under no obligation to seek a marketing authorization for the treatment of AMD and was actively (maybe too actively!) reporting any adverse events occurred in connection with the off-label use of Avastin. According to AGCM, however, all such actions in the aggregate had the specific goal of restricting competition and were instrumental to a restrictive agreement between competitors, even if they were formally in line with pharmaceutical regulations. The allegations of AGCM have been supported by the economic and contractual ties between Roche and Novartis and their common interest in the commercialization of the two products.

AGCM, in assessing whether the above practices had an impact on the market, also examined the higher costs borne by the national health service in connection with the prescription of Lucentis instead of Avastin and estimated such higher costs in the amount of €540 million in 2013 and €615 million in 2014. While such higher costs have not been taken into account by AGCM in defining applicable sanctions, but rather to show that the practice of Roche and Novartis had actual effects on competition, they quickly became the basis for a claim by the Italian Ministry of Health, who – soon after the AGCM decision – stated that it is willing to seek reimbursement for damages suffered as a consequence of the alleged anticompetitive arrangements.

V. NEW LEGISLATION AND CASE-LAW ON OFF-LABEL PRESCRIPTION

Following the decision of AGCM and the interest generated in the public opinion by the Avastin-Lucentis case, the Italian Government enacted a law decree (36/2014) significantly extending the possibilities for off-label prescription of drugs. The new legislation, in particular, provides that off-label prescription is allowed and reimbursement is warranted even if a valid alternative drug duly authorized for the concerned indication exists. The possibility to obtain reimbursement for such drugs is subject to their inclusion in the List 648, upon an assessment by AIFA that their use is appropriate and cost-effective. In addition, off-label use must be recognized by the scientific community and must be in line with Italian and international researches. Lastly, AIFA may also take appropriate monitoring measures to ensure patients’ safety, and is thus authorized to act independently in the event that the concerned pharmaceutical company fails to take action.

This new legislation appears to lessen the restrictions on off-label prescription previously introduced, and allows AIFA broad authority to expand the list of reimbursable off-label drugs. Contrary to past legislation, however, for the first time off-label regulations explicitly factor in the cost-effectiveness of off-label prescriptions in order to determine their reimbursement.

Only a few months after the AGCM decision and the enactment of new legislation, the Constitutional Court also decided a dispute regarding the prescription of Avastin. In fact, following the 2012 cancellation of Avastin from List 648, many Italian regions continued to recommend the use of Avastin in the treatment of AMD, giving rise to a dispute with Novartis. One of these disputes reached the Italian Constitutional Court, which on May 19, 2014 held that AIFA always had the power to conduct an independent assessment of valid alternative treatments, based not only on authorized indications but also on economic efficiency for the national health service, de facto authorizing AIFA to include products in the List 648 for off-label use and reimbursement, even if an alternative treatment is approved and marketed, but comes at a higher price.

VI. CONCLUSIONS

The AGCM decision already had the effect of triggering an independent investigation into this matter in France and, although still subject to judicial review, is likely to generate further litigation in the next months with the Italian Ministry of Health and other authorities abroad. In addition, the regulations enacted in the aftermath of the AGCM decision can be expected to trigger new actions from AIFA aimed at extending off-label use of drugs, to the extent that such use may serve the purpose of complying with budget restrictions.

Aside from the details of the Avastin-Lucentis case, however, the key takeaway for the pharmaceutical industry is that compliance with the regulatory framework no longer shields pharmaceutical companies from antitrust investigations. AGCM made it very clear that it will independently assess commercialization and marketing strategies of pharmaceutical companies, regardless of their formal compliance with regulatory requirements. Moreover, AGCM expressly stated that the marketing authorization is an entry barrier and cannot be used to determine the relevant market. If other authorities across the world are willing to follow this path, it might well be time for the industry to reassess their marketing strategies.