In this article, we consider the issue of unfair pricing in the pharmaceutical market through two recent decisions - one from the Italian competition authority (Autorità) in Aspen

In this, we are informed by the recent opinion of Advocate General Wahl in an article 102 TFEU dispute between the competition authority and the authors' rights society in Latvia (Opinion in Case C-177/16 Latvijas Autoru apvieniba v Konkurences padome 6 April 2017, ECLI:EU:C:2017:286).

By way of background, both the Aspen (anti-cancer) and the Pfizer (anti-epilepsy) cases had a number of factual similarities from the point of view of applying competition law:

  • both concerned generic compounds which had been in use for some decades;
  • in both cases, the end-user price increase for the products prompting the investigations exceeded 1,000%;
  • in both cases, the price of the compounds had been regulated at lower levels until fairly recently.

Deciding if "unfair" pricing is unlawful

In United Brands (see 27/76 United Brands v Commission [1978] ECR 207, paras 251-253), the leading case on "unfair" (excessive) pricing, the Court of Justice of the European Union (CJEU) said that prices will be "unfair" where they "bear no reasonable relationship to the economic value of the products supplied" and put forward a three-part test to determine this:

  • is the difference between the costs "actually incurred" and the price charged excessive;
  • if so, is it either unfair "in itself "; or
  • when compared to competing products.

The CJEU then applied this method to the product market it had defined (in that case, bananas) to find that the Commission's decision that prices were unfair simply because of large margins could not be sustained. Simply having a very large margin on sales did not of itself mean that the price is abusive. Other factors needed to be considered. The alternatives defined by the CJEU - "unfair in itself " and the "benchmarking" method - have both been applied by the Commission and the CJEU in later cases.

AG Wahl's opinion also focused on these second and third alternatives of the steps above - the facts of his case allowed him to assume that pricing was substantially above cost.

He pointed out that evaluating steps two and three is an examination of the reasons for the margin observed - which nonetheless amounts to some degree of margin control (Opinion para 18). This is, of course, analogous to the pharmaceutical price control practised by the UK authorities under the UK price system - the Pharmaceutical Price Regulation Scheme (PPRS). According to the advocate general, the way in which this method should be used to assess margins is, first, to carry out the benchmarking exercise to see if the prices charged by the dominant undertaking are different from those charged in competitive markets elsewhere - or across time or by the undertaking in different countries (Opinion para 19). But there is not a single approved method of doing this: "in the absence of a ubiquitous test and given the limitations inherent in all existing methods, it is in my view crucial that … competition authorities should strive to examine a case by combining several methods among those which are accepted by standard economic thinking" (Opinion para 43).

Second, the temporal aspect of excessive pricing also needs to be factored into the method. If the differences revealed by the benchmarking exercise are only temporary, this would not justify a finding that prices are excessive. Third, a continued monitoring of the benchmarks and the dominant firm's prices effectively turns the competition authority into a sector regulator - something to be avoided (Opinion paras 103-105).

So, not only must the price under investigation be significantly above the available benchmarks, it must also be persistently above it (Opinion para 106).

Only if, after this benchmarking process has been done, there is a (significant and persistent) difference between the benchmarks and the price being charged by the dominant firm, should the question of whether the price is "unfair in itself " be considered. It is up to the dominant undertaking to advance objective justification for the differences observed between its prices and the benchmark value.

Unfair pricing and government pharma price controls

The UK control of pharmaceutical pricing - PPRS - regulates at the level of the business rather than the price of each individual product. Companies have some latitude as to the price they charge as long as their regulated margins remain within permitted limits. Pfizer - which is within the PPRS - sold the right to market its epilepsy product in the UK to a third party which was not within the PPRS. It continued to manufacture the product in Germany but otherwise had no further UK connection in relation to this product.

The new owner of the marketing rights genericised the drug to ensure it was definitely outside PPRS and then increased the price - overnight - by 2,600%. Pfizer in turn increased its (wholesale) prices to the UK supplier by more than 700% above its previous UK price to the NHS. The additional cost to the UK NHS (and UK taxpayer) was nearly £50m per year.

Although the full text of the decision has not yet been published, it is relatively easy to see how this case fits AG Wahl's matrix. The price of the product is clearly above its cost of production. The benchmarking exercise - comparing the price after the price rises with those beforehand appears to demonstrate conclusively that the price is substantially and persistently above the benchmark level.

However, it will be interesting to see whether the Competition and Markets Authority (CMA) used any other benchmarking techniques as required by AG Wahl's method - for example, comparison with prices charged in other EU member states. And the effect of the PPRS on this benchmarking exercise will also need to be taken into account. In particular, the UK is unusual in regulating (in effect) pharma companies' margins in its price control mechanism. Most EU countries rely on the amount their public health insurance bodies will reimburse for specific products to cap overall government expenditure and control - at least to some extent - prices charged.

As to whether the new charges are "unfair in themselves", the fact that the price to the NHS is recorded as increasing by 2,600% "overnight" is probably conclusive that "self-evident" unfairness was at play here. Again, however, the CMA will have needed to examine the issues with a greater degree of analysis than a simple "doesn't look fair" tag can give. But as AG Wahl noted, although it is for the competition authority to prove the essential elements of an infringement of article 102, "once an authority has recorded an excess between the actual price and the benchmark price, it is for the dominant undertaking…to provide the authority with a possible justification for the (real or apparent) higher prices" (Opinion paras 134-135, citing United Brands).

By contrast, in Aspen, the Autorità found it could not carry out the benchmarking test properly. There were no comparable products to the anti-cancer pharmaceuticals which the Autorità could use as a benchmark and, since Aspen's pricing policy (and price increases) were Europewide, there were no comparators from other EU markets.

So the Autorità moved directly to the question, "Is the price unfair in itself?" and concluded in the affirmative, based on the high level of the price increases imposed by Aspen in Italy (in the range of 250% to more than 1500%); the absence of any economic justification advanced by Aspen for these price increases; the lack of any link between the increased prices and improvements in the product supplied; the nature of the product - drugs to treat life-threatening diseases specifically formulated for children and elderly patients; and the quadrupling of the cost to the Italian healthcare system (to €6.4m) in a single year.

Given the difficulty of assessing unfairness "in itself", we suggest that the careful staged analysis of the Autorità may well in itself become a standard for answering the question, "Is the price unfair in itself?" - at least, when dealing with pharmaceutical products.

Cost plus pricing

The analysis in the cases considered the second and third questions of United Brands. But what of the first - does the price exceed the cost "actually incurred" by the dominant undertaking in producing the product?

The question of the "unfairness" of pricing only become relevant if the dominant firm's prices exceed the "economic value" of its products. The first step in assessing a product's economic value is to consider if the price exceeds the cost of the products. Determining the relevant costs is not a straightforward exercise, particularly for multiproduct companies where many of the costs are common and will need to be allocated between products, or where the products incorporate a significant element of IP.

The issue of cost allocation for R&D or IP-related costs did not arise in either Aspen or Pfizer. In both cases, the product was no longer protected by IP rights and the R&D costs associated with their development had long since been amortised.

"Cost", though, also includes a reasonable allowance for profit. In its Pfizer decision, the CMA indicated that a reasonable margin for this generic product would be up to a 6% return on sales (RoS). The new UK distributor, Flynn, appealed the CMA decision and applied to the Competition Appeal Tribunal for interim measures suspending the new pricing directions. In its response the CMA noted (see Flynn Pharma v CMA, Case 1274/1/12/16, [2017] CAT 1 para 46):

"The CMA has made no finding that Flynn's prices should not exceed cost plus 6%. The CMA considers that cost plus 6% is 'very generous' to Flynn, given: (1) the high level of return that this has generated in absolute terms; and (2) the low risks faced by Flynn and the minimal level of its activities. The CMA states that cost plus 6% is an 'upper bound' in the sense that a lower rate of return might also have been considered reasonable. Flynn must charge a price that bears a reasonable relation to the economic value of the capsules. It is not for the CMA to tell Flynn, it is ultimately for Flynn to charge prices which are compatible with EU and UK competition law. Flynn's complaint that the directions fail to lay down the scale of the required price reduction is, in effect, a complaint that the CMA failed to act like a price regulator. That is not the CMA's function."

The Tribunal did not directly address the arguments on the reasonableness or otherwise of the CMAs finding that 6% could be an acceptable profit margin, but it did decline to allow Flynn's application for interim relief. It is therefore possible that a 6% RoS may again become something of a standard for competition assessments of reasonable profits in generic markets.

Conclusion

The cases considered here are still either under appeal or likely to be challenged, so it is not yet possible to draw firm conclusions on "unfair" pricing of generic pharmaceuticals from them - far less on what amounts to "unfair" pricing for ethical products. However, the indications given by the competition authorities and AG Wahl provide some fairly clear pointers as to the parameters which generic suppliers will need to observe if they are to avoid abusing a dominant position they might hold on particular "therapeutic" markets.

Combined with the recent and parallel European Commission intervention with regard to Aspen for jurisdictions other than Italy, it is apparent that competition authorities will now be a force to be reckoned with in many pharmaceutical markets. Condemning "unfair" pricing may be economically difficult and practically uncertain - but it is (in some cases) politically and legally inevitable.

This article first appeared in the June 2017 edition of Competition Law Insight.