European Commission Sets its Sights on Allegedly Excessive Drug Prices
The Background: Following its 2008 pharmaceutical sector inquiry, the European Commission has largely followed through on its commitment to intensify competition law enforcement in this industry, although it has focused mainly on pay-for-delay agreements.
The Action: On May 15, 2017, the Commission announced the opening of a formal investigation into concerns that Aspen Pharma has engaged in excessive pricing with regards to several cancer drugs.
Looking Ahead: The action could signal a paradigm shift in the Commission's stated enforcement priorities in the sector and risks generating considerable uncertainty as to the legality of individual pricing practices of pharmaceutical companies.
In the European Union, Big Pharma has been operating with a target on its back for the best part of the last decade. Following its 2008 sector inquiry into the pharmaceutical sector, the Commission vowed to clamp down on firms engaging in anticompetitive practices. In particular, certain defensive patenting strategies, refusals to grant licenses on unused patents, as well as pay-for-delay agreements had been earmarked as being ripe for competition law enforcement. Eight years after the conclusion of the sector enquiry, it is clear that the Commission has largely been true to its stated priorities. Against this backdrop, the announcement of an investigation into excessive prices in the pharmaceutical sector marks a significant departure from past practice with potentially far-reaching consequences.
Competition Law Enforcement of Excessive Prices Called into Question
Exploitative practice par excellence, excessive pricing would appear to be a prime target for competition watchdogs. And yet, despite their deleterious effects on consumer welfare and the black letter of Art. 102(a) TFEU, direct control of high prices through competition law enforcement raises numerous issues. Indeed, it has been widely suggested that high prices should be condemned only where they generate exclusionary effects. The reasons for such caution are numerous. In particular, many have argued that in markets characterized by low barriers to entry, the extraction of monopoly rents by a dominant firm could be self-defeating in that it attracts new entrants to the market.
Under another particularly relevant argument for present purposes, regulatory intervention is viewed as counterproductive because monopoly profits are needed to carry out expensive research and development. As such, competition enforcement, it is said, would have a chilling effect on investments and innovation. Most convincing perhaps is the suggestion that crafting an administrable legal test, which would enable competition authorities to determine whether prices are indeed "excessive" (and, conversely, what constitutes a reasonable price with an acceptable profit margin), is fraught with difficulties. Moreover, assuming such a test could be articulated, regulators would then be faced with the equally difficult task of designing an effective and adequate remedy.
These challenges no doubt explain why excessive pricing as a basis for regulatory intervention seldom has been used.
New-Found Appetite to Challenge Drug Price-Gougers
Price-gouging in the pharmaceutical industry has garnered widespread media attention and has become both highly topical and politicized in many jurisdictions. In Europe, several national competition authorities have been at the forefront of this issue. In particular, the UK Competition and Markets Authority ("CMA") has been among the most aggressive, as evidenced by its two December 2016 decisions, respectively: (i) fining Pfizer and its distributor Flynn Pharma £89.6 million for alleged abuse of a dominant position by increasing prices of the anti-epilepsy drug phenytoin sodium by up to 2,600 percent following its debranding in September 2012; and (ii) issuing a statement of objections against Actavis for alleged abuse of a dominance position in connection with its price increases of up to 12,000 percent in relation to debranded hydrocortisone tablets. Moreover, the CMA is currently investigating Canadian producer Concordia International for the high prices it has charged to supply certain pharmaceutical products.
Besides in the United Kingdom, authorities in Italy and Spain have also sought to rein in price-gouging by pharmaceutical firms. On October 14, 2016, the Italian competition authority (AGCM) fined Aspen more than €5 million for increasing prices of four of its anticancer drugs by up to 1,500 percent. Acting on a tipoff from its Italian counterpart, the Spanish competition authority (CNMC) has recently followed suit by announcing on February 3, 2017, an investigation into whether Aspen and its Spanish distributor Deco Pharma have applied excessively high prices in relation to several of the former's anticancer drugs.
EU Aspen Probe
On May 15, 2017, the Commission announced the opening of a formal investigation into Aspen's pricing practices in relation to five of its anticancer drugs. The probe, which the Commission has indicated will be treated "as a matter of priority," will cover the entire European Economic Area, with the exception of Italy, where Aspen already has been condemned.
In order to establish the alleged infringement, the Commission will first have to prove Aspen's dominance on the market despite the fact that the patents on the contentious drugs have long since expired. Assuming dominance is found, the Commission will then have to pinpoint the level at which prices became excessive. This latter endeavor will undoubtedly prove to be highly contentious, given the problems associated with the legal test for establishing excessive pricing under EU competition law.
Indeed, the approach, which dates back to a seminal case of the early 1970s, looks at whether prices bear "no reasonable relation to the economic value of the product." To this end, the Commission must first determine whether the difference between the cost incurred and the prices actually charged are excessive. However, cost-price analyses are notoriously fraught with difficulties and are often not the only indicator of economic value. This is even more the case in the context of the pharmaceutical industry, where costs related to the high failure rate in bringing drugs to market are often difficult to ascertain.
Nevertheless, assuming the first prong of the test is fulfilled, the Commission will then have to establish that the prices are "unfair," either in themselves or when compared to the prices of competing products. The complexity of establishing the "unfairness" of a given price is well documented. In this regard, the Commission will have to factor in the possibility that high prices of a particular drug may simply reflect its superior therapeutic efficacy, as well as the fact that the pharmaceutical sector is highly regulated.
Much like its other European counterparts, the Commission appears to be setting its sights on pharmaceutical companies engaging in drastic price increases of "niche" off-patent medicines sold only in low volumes due to scarce levels of demand. Although this new trend may indeed prove to be confined, it is nonetheless significant in several respects.
First, the difficulties identified above relating to the use of excessive pricing as a basis for competition law enforcement remain relevant today. As such, pharmaceutical companies will be forced to operate within an increasingly uncertain legal environment. Indeed, not only will they struggle to ascertain whether they can be considered dominant on a given product and geographic market, but they will also be faced with the near impossible task of determining whether their prices are excessive and unfair.
Second, the EU Aspen probe suggest that, at least in the context of the pharmaceutical industry, exploitative practices will no longer play second fiddle to exclusionary behavior. Given the Commission's track record in this sector thus far and the Guidelines on its enforcement priorities in applying Article 102 TFEU, such a development would mark something of a paradigm shift. Finally, although the public outcry generated by certain drug pricing strategies is understandable, there is much to be said about competition law being used as a panacea to remedy the ills of other areas of the law that might be best addressed by other means.
Three Key Takeaways
The Commission's probe into Aspen's allegedly excessive prices suggests that, at least in the context of the pharmaceutical industry, exploitative practices will no longer play second fiddle to exclusionary behavior.
Although this new trend may prove to be confined to drastic price increases of niche off-patented drugs supplied in low volumes, it is nonetheless conducive to significant legal uncertainty.
The probe may also signal a willingness to use competition law as a panacea to remedy the ills of other areas of the law.
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Christian B. Fulda
Amédée von Moltke, an associate in the Brussels Office, contributed to the preparation of this Commentary.
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