Pharmaceutical companies beware: excessive pricing enforcement is thriving

By Floris ten Have | Stibbe

On 28 November 2018, the Organization for Economic Cooperation and Development (OECD) held a discussion on excessive pricing by pharmaceutical companies, which is a hot topic in enforcement practice throughout Europe.

Over the last few years, excessive pricing in the pharmaceutical industry has attracted the attention of the European Commission and national regulators. So far, it has led to the adoption of infringement decisions in Italy, UK and Denmark and more enforcement action seems on its way. In a recent paper, the Commission underlined that innovation and risk-taking do not preclude the application of the competition rules to unfair prices. The Dutch Authority for Consumers and Markets (ACM) found that it is possible to strike a balance between innovation and cost control when assessing excessive pharmaceutical prices under the competition rules by adding a touch of fairness into the equation. Clearly, given these developments, there is good reason for pharmaceutical companies to watch this space.

Although the OECD Secretariat and member states have submitted papers, this article focuses on the contributions of the ACM and the Commission.

European Commission

According to the Commission, the pharmaceutical sector is more susceptible to unfair pricing practices than other sectors because of the high inelasticity of demand, especially when patients are dependent on a drug. This is the result of the following factors: (i) patients do not pay for a number of medicines. At the same time prescribers neither consume nor pay them and national health services and insurance companies pay for medicines but have limited influence on prescription or consumption patterns, and (ii) health service providers may have limited bargaining power to negotiate prices with manufacturers.

The Commission acknowledged that the particularities of the pharmaceutical industry, such as product life cycles and the role of regulation by health authorities, need to be taken into account when assessing pricing practices by pharmaceutical companies. These features, however, do not rule out competition rules being applied to unfair pricing practices.

The Commission noted that competition authorities may face difficulties in determining whether prices are excessive, the correct price to adopt as a remedy to competition concerns and how an implemented remedy should be monitored. When considering the methods used to assess whether prices are excessive, the Commission alluded to a test adopted by the European Court of Justice in its seminal judgment in United Brands. This test considers two alternative criteria in determining excessive pricing practices: a price may be (i) unfair in itself or (ii) unfair compared to competing products. However, applying this test is not necessarily straightforward. Recently, for example, the UK Competition Appeal Tribunal found that the Competition and Markets Authority had misapplied the United Brands test in finding that Pfizer and Flynn Pharma unfairly priced their epilepsy drug [see our July 2018 Newsletter]. The Commission acknowledged that there are other tests besides the one adopted in United Brands to establish whether a price is abusive.

ACM

Similarly, in its submission to the OECD, the ACM again stressed that the existence of patent protection does not bar enforcement of the competition law prohibition on excessive pricing. This year the ACM has shown an increased interest in pricing in the pharmaceutical industry [see our March 2018 Newsletter]. More recently, the former chairman of the ACM together with two colleagues published a paper concerning the application of the competition rules to the pharmaceutical industry [see our April 2018 Newsletter]. In its OECD submission the ACM added a new element which was not yet fully developed in its previous paper, i.e. fairness.

In the context of fairness, the ACM argued that a stricter cost-based test should be applied to drugs that involve limited innovation in comparison with drugs that require significant investment in research and development. The ACM considered that the most important factors to take into account for the cost-based test are (i) the probability that a drug will be authorized and successful in the market and (ii) capital costs.

The ACM’s proposed framework raises many questions. It is likely that this approach will be tested in future cases. For example, the ACM recently received a complaint against Leadiant Biosciences for allegedly overpricing an orphan drug used for the treatment of a rare genetic disease. The ACM has also launched a sector inquiry into high prices of TNF inhibitors, a type of drug mainly used to treat rheumatisms.

This article was published in the Competition Law Newsletter of December 2018.

Compliments of Stibbe, a member of the EACCNY