Excessive Prices in The Pharma Sector: The EU Antitrust Perspective

An undertaking is defined as dominant if it enjoys such a significant market position as to grant it the power to behave, to an appreciable extent, independently of competitors, customers and ultimately consumers. This dominance lays a special responsibility on the undertaking not to hinder competition in the market.1 Although a dominant market position2 is not unlawful per se, Art. 102 of the Treaty on the Functioning of the European Union (TFEU) – and equivalent national provisions – prohibits abuse of dominance aimed at excluding “as efficient” competitors from the market or at exploiting customers or consumers.

In particular, the article prohibits a dominant undertaking from directly or indirectly imposing unfair prices (or other unfair trading conditions). According to the Court of Justice of the European Union’s (CJEU) landmark judgment in the United Brands case, 3 a price applied by a dominant undertaking is excessive (and thus unlawful) if it:1 has no reasonable relation to the economic value of the product or service; and2 is unfair in itself or when compared to competing products. Subsequent CJEU caselaw establishes that unfairness and excessiveness may be proven also through other means, such as by comparing the price applied by the dominant undertaking in different geographic markets or at different times. These assessment criteria may also be used cumulatively, as clarified by Advocate General Wahl in the AKKA/ LAA case.4

From a general standpoint, competition authorities rarely used to apply Art. 102 TFEU (or equivalent national provisions) to excessive pricing practices, mainly because of the complexity of the underlying economic analyses and because of the liberal policy argument to leave market forces to self-regulate prices. But in the last five years, the pharma sector has seen a sharp increase in investigations for excessive pricing. Indeed, since the European Commission’s 2009 enquiry, competition-law enforcement and market monitoring have been a high priority for both the European Commission and national competition authorities, with the ultimate aim being to protect patients’ access to affordable, innovative and essential medicines – also considering the significant constraints on public healthcare budgets.

Needless to say, to carry out a proper assessment of particular conducts in the pharmvvca sector, competition authorities have to take into account all its features. Unlike for other sectors, it is essential to consider that the end customers (i.e., patients) generally:1do not decide what medicine to buy (their physicians do); and2 do not pay for it (the cost is usually charged to the national healthcare system or insurance companies, which thereby act as additional market players).

To discuss how the prohibition of excessive prices is to be applied, it is key to consider the very rigid structure of the demand (especially for life-saving medicines), the high R&D investments necessary to launch new pharmaceutical products, and the functioning of the marketing authorisation regime and other protection mechanisms (such as orphan drug designations).5 Ultimately, competition law must not prevent pharma companies from recouping their R&D investment (also for research projects that do not lead to new medicines) and making a fair profit. In this respect, the risk of overdeterrence is significant and ultimately jeopardises patients’ access to care.

Two landmark cases of excessive pricing in the pharmaceutical sector are undoubtedly represented by the Italian Aspen case6 (which was later followed by two investigations into similar conducts in Spain and before the European Commission, currently pending) and the Pfizer/Flinn case in the UK. More recently, several competition authorities across the EU are currently investigating Leadiant Biosciences for an alleged abuse of dominance through excessive pricing.5 The Aspen Case in Italy In 2016, the Italian competition authority (AGCM) imposed a EUR 5 million fine on Aspen. According to the AGCM, Aspen had pursued an exploitative strategy that consisted of: (1) acquiring the rights over five life-saving medicines that had been marketed at their original price for more than 40 years; (2) “delisting” those medicines so that Aspen could set prices even outside negotiations with authorities regulating the Italian reimbursement system; and (3) exploiting the lack of alternatives to threaten to withdraw those medicines from the Italian market. The national regulator (AIFA) was thereby forced to agree to excessive and unfair prices, which soared to between 300% and 1500% higher than the prices previously applied. To assess whether Aspen’s conduct constituted abuse for excessive pricing from an antitrust perspective, the AGCM applied two different tests:

• The first was based on an analysis of the margins that the five drugs had, as resulting from Aspen’s balance sheets. Basically, the AGCM found that the revenues of the five drugs already outweighed the costs directly connected to them, even before Aspen proposed the price increases. Given the absence of any increased costs for Aspen, the price increases were held to have contributed only to higher profits.

• The second was the cost-plus method. In brief, the AGCM determined the costs directly connected to manufacturing and marketing each drug and then increased it to take into account a certain share of indirect costs that could be attributed to those drugs, and a percentage of fair remuneration for the company (namely, a 13% return on sales, ROS).

In both cases, the AGCM held that Aspen had not incurred any significant R&D costs because all five medicines had been developed more than 40

years before, and all the patents had ceased to protect the company from competition from new and generic drugs. Similarly, Aspen did not have to do any promotional activities because the drugs were already well-known in the market.

The AGCM’s decision was upheld by the first-instance administrative court, which dismissed Aspen’s arguments on market definition and price fairness.8 The decision is under appeal before the Council of State (hearing scheduled for February).

In summary, the Aspen case seems to suggest that the main focus of competition authorities when assessing whether a price is excessive is the correlation between the costs directly or indirectly relating to the pharma product and the sell-out price applied by a dominant undertaking. A significant difference between these two parameters is undoubtedly a reliable proxy for competition authorities when assessing excessi-veness and unfairness.

The UK Pfizer/Flynn Case In a similar vein, in 2016 the UK Competition and Markets Authority (CMA) fined Pfizer and Flynn for having abused their dominant position by applying unfair prices for an anti-epilepsy drug. The CMA ruled that a price hike of between 2300% and 2600% was excessive, particularly when compared to the prices applied in other EU Member States. The CMA also applied the cost-plus method (with an expected ROS of 6%), which confirmed the assessments.

However, the CMA decision was not upheld by the Competition Appeal Tribunal (CAT), which criticised and severely disapproved the type of test applied by the CMA to ascertain whether the prices applied were excessive and unfair. According to the CAT, the cost-plus approach might be insufficient to establish that a price is unfair if different assessment methods are available that lead to the opposite conclusion, and the main benchmark for assessing excessiveness should thus be the price that would prevail under “normal competitive conditions”. The CAT thus held that the significant differences in price regulations across the EU rendered both the following prices insufficient proxies:(1) the price applied in other Member States and (2) the price to be applied according to the UK Pharmaceutical Price Regulation Scheme. By contrast, the CAT ruled that the comparison with the ROS of Pfizer’s and Flynn’s competitors would have represented a reliable proxy for the normal competitive market conditions in the absence of any abuse.

An appeal against the CAT judgment is pending before the Court of Appeal (hearing scheduled for April).

In short, the Pfizer/Flynn case – albeit not exhaustive on the assessment of excessive pricing – seems to suggest that a pharma company that sets its prices in line with its competitors’ ROS might be presumed not to apply excessive prices from an antitrust perspective. In this situation, competition would be focused on the cost structure and the efficiency of pharma companies, partly due to how many R&D projects ultimately result in the manufacturing and marketing of a medicine.

The Leadiant Case Even more recently, several competition authorities across the EU (including the AGCM and the Dutch Authority for Consumers and Markets) have been investigating whether Leadiant Biosciences has engaged in abusive

conduct aimed at applying excessive prices for Chenodeoxycholic Acid Leadiant (an orphan drug authorised by the European Commission to treat cerebrotendinous xanthomatosis). According to publicly available information, competition authorities are investigating whether Leadiant abused its dominant market position by applying an excessively high price for such a generic and repurposed drug, especially compared to its reference medicine (which had been used off-label to treat the same ultra-rare disease until Leadiant withdrew it from the market). The AGCM is even alleging – somewhat similarly to the Aspen case – that Leadiant is exploiting its strong bargaining position with AIFA to obtain a higher reimbursement price.

Although the Leadiant case is the first time competition authorities have focused on the pricing of orphan drugs, several elements suggest that competition authorities are not applying an innovative approach. Indeed, Leadiant is being investigated in relation to a medicine whose marketing authorisation seems to have been granted based on retrospective studies that were not even carried out by Leadiant. Therefore, a far lesser amount of R&D costs could be claimed to justify high prices. And, as mentioned, the medicine in question seems to be a repurposed drug (and thus a temporal comparison with the price applied for the drug’s previous version is possible).

It remains to be seen whether the criticisms raised by national competition authorities will ultimately determine the imposition of fines for excessive prices or other infringements of antitrust law. In any event, the Leadiant case confirms antitrust authorities’ keen interest in the pharma sector, particularly in terms of protecting patients’ access to affordable care and innovative essential medicines.

Conclusion In conclusion, the above three cases show that competition authorities are keen to investigate excessive pricing cases in relation to off-patent medicines. Indeed, the fact that these medicines have been available on the market for quite some time allows competition authorities to establish specific geographical or temporal benchmarks for excessiveness. It is unclear whether excessive pricing allegations could also be raised in the future in relation to entirely innovative medicines initially marketed at high prices. In fact, competition authorities might struggle to make comparisons in those instances, in which case the underlying economic analysis would need to be based entirely on the direct/indirect costs of researching, manufacturing and marketing the innovative medicine.

In any case, pharma companies need to remain highly vigilant. Significant R&D investment is still needed to launch innovative medicines (ultimately promoting competition) but only sound economic analysis based on the parameters outlined above could prevent the price of pharma products from being excessive and unfair. In any case, competition authorities should not prevent pharma companies from obtaining a fair return on this investment, particularly given the business risk. Antitrust enforcement against excessive pricing in the pharma sector should therefore be cautiously exercised, as overdeterrence might endanger innovation and, ultimately, be detrimental for patients.

REFERENCES

1. The first step to assess whether a company enjoys a dominant position on a given market is to define the product and geographical boundaries of the

“relevant market”, which encompasses all products and services that are substitutable on either the demand or the supply side. In the pharma sector, the relevant market is generally defined with reference to the third classification level of the Anatomical Therapeutic

Classification (i.e., ATC3). In specific circumstances, also ATC4 and ATC5 may be used for reference. In the recent

Avastin/Lucentis case (C-179/16), the

CJEU held that different drugs capable of treating (including off-label) the same disease can belong to the same relevant market. From a geographical standpoint, markets in the pharma sector are national in scope, due to the differences in the regulatory framework and in the reimbursement/purchasing policies of the different countries. 2. According to CJEU caselaw, an undertaking can be deemed to hold a dominant market position based on the specific circumstances of each case and especially if its market share is higher than 40%. If an undertaking has a market share of more than 50%, a rebuttable presumption of dominance applies. 3. CJEU, Case 27/76, United Brands

Company and United Brands Continentaal

BV v Commission of the European

Communities, Judgment of the Court of 14 February 1978, ECLI:EU:C:1978:22. 4. CJEU, Case C-177/16, Biedrība “Autortiesību un komunicēšanās konsultāciju aģentūra – Latvijas Autoru apvienība”

Konkurences padome, Opinion of

Advocate General Wahl delivered on 6

April 2017, ECLI:EU:C:2017:286. 5. Competition authorities should also consider that, as is well known, the pharma sector is not entirely harmonised at EU level: for example, although marketing authorisations may be issued under the centralised procedure established by Regulation (EC) No. 726/2004, the pricing and reimbursement mechanisms are still regulated at national level. The mechanisms may therefore differ between Member States and are merely required to meet certain transparency criteria set out in Council Directive 89/105/EEC. 6. See AGCM decision Decision No. 26185 of 29 September 2016, in Case A480 –

INCREMENTO PREZZO FARMACI ASPEN. 7. See, for example, the investigation opened by the AGCM in Case A524 –

LEADIANT BIOSCENCES/FARMACO

PER LA CURA DELLA XANTOMATOSI

CEREBROTENDINEA and by the Dutch

Authority for Consumers and Markets.

For further cases of investigations into excessive pricing in the EU, see the

CD Pharma case in Denmark and the investigations conducted in the UK against

Actavis UK in relation to the pricing of

Liothyronine and Hydrocortisone tablets. 8. TAR Lazio, judgment no. 8945 of 26 July 2017, Aspen Pharma Trading Limited and

Others v. AGCM.

Sara Lembo

Sara Lembo is a partner of the EU law, competition and regulatory practice at BonelliErede and she is a member of the Healthcare and Life Sciences Focus Team. She gained significant experience in complex litigation having assisted leading multinational pharmaceutical companies before the Antitrust Authority in cartel and abuse of dominance cases, and in the subsequent judicial appeal phases and action for damages. She has also developed great experience in the implementation and management of antitrust compliance programmes.

Email: sara.lembo@belex.com