Disclaimer: the views expressed in this article are only those of the author, and do not represent the views of any associated organisation.
The recent focus on ‘fairness’ in competition law and policy circles has brought a wave of excessive pricing cases in Europe, many of which are in the pharmaceutical sector. This short blog post discusses:
the key commonality across the cases, and in particular, the importance of entry barriers in the overall assessment
whether competition authorities are well-placed to intervene in this market and set the relevant benchmark for prices, or whether the assessment of the appropriate price level should be left to the health authorities or regulator, and
the importance of the process of price setting in addition to the level of prices in an assessment of fairness of price in the pharmaceutical market, and more broadly.
The recent focus on ‘fairness’ in competition law and policy circles has brought a wave of excessive pricing cases in Europe, many of which are in the pharmaceutical sector. Italy led the way in October 2016 when the competition authority fined the South African pharmaceutical company Aspen €5.2 million for significantly increasing the price of four cancer drugs. The UK Competition and Markets Authority (CMA) followed suit when it fined Pfizer and the generic supplier Flynn Pharma almost £90 million for excessive pricing of an anti-epilepsy medicine. Since then, the CMA has opened six more investigations into the sector (before the completion of the Competition Appeal Tribunal’s hearing of the appeal of the CMA’s decision in Flynn). They may not all be excessive pricing cases, but they all relate to pharmaceutical pricing (for one case, the CMA has issued a Statement of Objections about excessive pricing). The European Commission has also opened an investigation into Aspen’s pricing of certain cancer drugs across Europe.
Is there a common thread?
Be it an allegation of excessive pricing under Article 102 and/or that of an anti-competitive agreement under Article 101 (as seems to be the case for some of the CMA cases) , the authorities are concerned about the impact of the conduct on the prices of pharmaceutical products. In Flynn, for example, the concern was about large price increases (in some cases, up to 2,000% or more) implemented by Flynn Pharma following its acquisition of the branded product from Pfizer (which developed the product) and subsequent ‘de-branding’ of the product (i.e. Flynn sold the phenytoin sodium capsules by its generic name). This effectively meant that the product could not be regulated by the UK health authority and Flynn was free to set any price. Notably, Flynn was the only generic supplier of phenytoin sodium capsules in the UK. This was similar to the Aspen case in Italy. In another ongoing investigation in the UK, the CMA has raised concerns about anti-competitive agreements between Concordia and Actavis UK, as well as excessive pricing by Actavis for the same drug.
A key question common to most of these cases is whether there are entry barriers and consequently a failure of the normal market mechanisms of the generics medicine sector. Take Flynn, for example. The product is for a small patient population and there were clinical guidelines that recommended ‘continuity of supply’ (meaning that patients who are stable on the medicine should not be switched to another formulation of the same medicine offered by another manufacturer). These features—i.e. small market size and low chance of patients switching and new entrants gaining share—effectively mean that the incentive for new generic entry is low and this may hinder reductions in price following entry—a phenomenon that is observed in many markets that go generic. This was highlighted by the CMA as one important reason that Flynn was the only generic supplier. It appears that many of the other cases share this feature of having one or a limited number of generic suppliers.
So, how do we deal with this potential market failure?
The spate of cases opened by competition authorities suggests that they have taken up the baton on correcting any potential market failure in the pharmaceutical sector through Articles 101 and/or 102. Furthermore, they are using the less used tool of excessive pricing. This throws up some challenges for the competition authorities; notably that of determining the benchmark for assessing whether prices are excessive.
This is of course a general challenge for any excessive pricing case, and it is arguably one reason why these cases have been few and far between. There is plenty of debate still among competition practitioners about the right legal test for excessive pricing (and fairness) in general: is it the ‘two-limb’ test of the Court of Justice of the EU (CJEU) involving price-cost tests and comparison with other products, as in United Brands, or the approach of the UK Court of Appeal in AttheRaces, involving economic value and distortion to competition?
For example, one aspect of the pharmaceutical sector is that the price of a specific medicine may be set as part of a pricing strategy for a wider portfolio of medicines. This portfolio pricing plays a part in the product offering of a pharmaceutical company towards pharmacies, and when negotiating with the relevant health authority, and it may involve very low margins on specific products and higher margins on others. In essence, the prices of a specific product may not reflect the appropriate costs and competitive environment for that product in isolation from others. This raises a question of whether, and how, one can assess prices relative to the costs of the specific product. Another question that is relevant in this sector is that of the trade-off between the short term and the long term. In particular, should the potential effect of a price increase today on the incentives to enter tomorrow be taken into account, and if so, how? Of course, this is relevant if there are no insurmountable entry barriers such that high prices can lead to subsequent entry.
In any event, the question of benchmarking the price does bring us to the question of whether competition authorities are best placed to carry out such an assessment. This is particularly pertinent in the presence of a sector regulator or a body such as the relevant department of health, which may be better equipped to assess the level of prices of specific products. Some practitioners are of the view that excessive pricing cases should be brought only when a set of conditions are fulfilled, one of which is that there is no sector regulator with specific expertise (of course, in the pharmaceutical sector, the challenge is that the health authority may be able to assess the price better but is the final customer at the same time). Furthermore, there is a dilemma for competition authorities because if it sets the benchmark, there is a risk of it becoming a de facto price regulator. On the other hand, if it does not set a benchmark (as with Flynn) and leaves open the question of when exactly an increase in price crosses the legitimate threshold, this creates significant legal uncertainty for businesses.
Where does this lead us?
Having said that, there could be circumstances where there may be an argument for competition authorities to scrutinise the pricing of pharmaceutical products (and prices in other regulated markets more broadly). For example, this could be when there are concerns about the fairness of the process of price setting, in addition to the level of prices. For instance, the Commission in the Aspen case, is looking at both the level of pricing and the interaction between Aspen and the relevant health authorities. While the Commission’s investigation is ongoing and its findings are yet to be seen, this suggests that where the negotiation process between the manufacturer and the regulator is not working well, intervention by the competition authority may be required. This also aligns with the general view about the importance of the fairness of the process by which outcomes are reached, over and above the fairness of the outcomes themselves.