Drug companies could face huge fines if they delay the production of cheaper generic versions of their medicines, after the publication of a European Commission report yesterday.

Neelie Kroes, the European Competition Commissioner, said that such standard practice in the industry had cost European consumers €3 billion (£2.5 billion).

Ms Kroes, in her preliminary report, attacked pharmaceutical companies over the increasingly common patent settlements, which allow one generics company a period of exclusivity with their cheaper version of the drug. She also criticised “patent clustering”, in which companies protect their sales by taking out many patents for a drug. In one case reported by the Commission, a company had taken out 1,300 patents on one medicine.

Ms Kroes said: “Market entry of generic companies and the development of new and more affordable medicines is sometimes blocked or delayed, at significant cost to healthcare systems, consumers and taxpayers. The Commission will not hesitate to open antitrust cases against companies where there are indications that antitrust rules have been breached.”

The cost of a medicine falls by about 20 per cent in the year after generic versions become available.

Competition law and intellectual property lawyers are preparing for the first cases to be brought by the Commission within months.

Stephen Rose, a competition partner at Eversheds, the law firm, said: “The European Commission has declared war on the pharmaceutical sector by questioning the legitimacy of a range of well-established business practices.”

Brian Sher, competition law partner at Nabarro, who specialises in pharmaceuticals, said: “There’s nothing to stop them going after companies before the report is published. Their first line of attack is likely to be the patent settlements, as they’ll be easier to attack under competition law.”

Intellectual property is more difficult to attack than patent settlements because each country has a separate system. Patent litigation lasts an average of three years and generic companies win more than 60 per cent of cases. However, in the meantime, the original drugs company has been able to sell its more expensive version of the drug without competition. Intellectual property is the bedrock of the pharmaceuticals industry and companies will go to great lengths and costs to defend their patents.

The European Federation of Pharmaceutical Industries and Associations said that the report had failed to recognise the complex and highly regulated nature of the pharmaceutical market in Europe. Brian Ager, its director-general, said: “The Commission’s report does not substantiate in any respect their statement made at the opening of the inquiry that the industry is impeding innovation.”

A senior industry source said: “This could really hurt the development of new medicines. Companies need the resources to develop new drugs and, if their intellectual property isn’t respected, it will disincentivise them.” Big pharma is already facing a troubled time as some of the top-selling medicines, including Lipitor, Pfizer’s anticholesterol drug, and Advair, Glaxo-SmithKline’s asthma treatment, go off-patent between now and 2012.

Patent settlement deals involve a pharmaceuticals company allowing a generic drugs maker exclusivity on one of its drugs after a particular date, in return for the generic manufacturer halting litigation around patents. These deals often involve direct payments from originator companies to generic companies. The Commission found that these payments amounted to more than €200 million. AstraZeneca struck one such deal with Teva Pharmaceutical Industries, the world’s largest generic drugs producer, which threatened to start making a generic version of Pulmicort Respules, its billion-dollar-selling asthma treatment. Teva, one of several generics companies that are attacking patents more aggressively, will be able to make the drug exclusively after December 2009, although there is no suggestion that Teva was paid for the deal. AstraZeneca suffered a fresh blow to its pipeline yesterday when it emerged that Motavizumab, its new drug to treat lung infection in babies, faces further questions from the US Food and Drug Administration. Analysts believe that it will delay the drug’s entry to the market by up to six months.

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