Competition law is an appropriate tool to prevent exploitative price hikes in Pharma

(by Sven Gallasch) On 15 May the European Commission formally opened an investigation into Aspen Pharma’s pricing practices concerning five life-saving cancer drugs. This European investigation represents the latest enforcement effort in a string of cases emerging across Europe, including in the United Kingdom and Italy. All investigations are focussed on pharmaceutical pricing practices and allege that their pricing strategies may be exploitative[1] and amount to an abuse of a dominant position.  The surge in these previously rare exploitative pricing cases, has set off alarm bells in the pharmaceutical sector, among legal counsel of big pharma and some academic commentators.

Generally, criticism and concerns about exploitative cases are the following:

  • Companies should be able to set the price for their product freely;
  • Remedies in exploitative pricing investigations can effectively amount to price regulation, which should be seen as the polar opposite to price competition and should therefore be either avoided or only used in the rarest of circumstances;
  • Determining the “right” price is extremely difficult and to a certain extent arbitrary; what is appropriate comparator? Other drugs with similar indications, the price of the drug in other countries, or the hospital drug price compared to the pharmacy prices?
  • In innovation-heavy sectors (such as the pharmaceutical sector), interference with pricing decisions by the competition authority might ultimately stifle innovation and therefore impede the development of new products such as life-saving drugs in the pharmaceutical sector
  • The competition authority’s ability to determine the “right” price is especially questionable in the context of innovation-heavy sectors, as it would potentially have to consider and evaluate the value of a given innovation.

Let me start by saying that I regard all these points as valid or at least as very important to consider carefully, and I am not arguing for a more aggressive competition law enforcement towards pharmaceutical prices in general. Originator companies should be incentivised and rewarded for their innovative efforts to create new drugs and there is nothing wrong with allowing them to reap monopoly profits for the assigned period of time. I also believe that price regulation should only be considered in failed markets where price competition is not feasible.

Having said that, I also believe that the aforementioned string of cases are not exploitative pricing cases in the “classical” sense, and the majority of the bullet-point concerns outlined above are not relevant.

These cases are not examples of a clash between IP law and antitrust…

The most striking common feature of all cases that have led to infringement decisions or that are currently under investigation is the fact that the underlying brand drug is no longer under patent protection. In the case of Aspen Pharma the relevant patents expired decades ago.[2] This has two important implications. Firstly, competition law intervention in these cases should have no negative impact on the incentive to innovate. The intervention does not take place at the point in time when the originator company could have an expectation to reap monopoly profits based on IP protection, that would allow them to recoup investment and rewards them for their innovation. Secondly, on a more general point, we do not have to delve into the discussion of static vs dynamic efficiencies and how or even whether competition law should be applied in the innovation setting.

…but they are examples of price hikes facilitated through conduct outside the scope of competition on the merits

In Pfizer and Flynn and Actavis UK, the parties under investigation have allegedly exploited a regulatory loophole. Under UK regulation, only brand drugs are subject to the “Pharmaceutical Price Regulation Scheme” (PPPRS), which is a voluntary scheme though which the price for brand drugs is regulated. As soon as the drug is no longer sold by a brand name but rather by an international non-proprietary name (INN), the drug is no longer subject to price regulation. The common wisdom is (or rather was) that generic price competition should drive the drug price down. Yet in these cases, the parties have de-branded or genericised the drug with the aim to circumvent price regulation so that they can increase the price by up to 2,600% (Pfizer and Flynn) and up to 12,000% (Actavis UK). In the case of Pfizer and Flynn, my colleagues Bruce Lyons and Farasat Bokhari have also rightly pointed out that the parties additionally “benefited” from the situation that patients were not able to switch to an alternative generic due to the nature of the treated illness.

Instead of regarding these cases as exploitative pricing cases, I would rather regard them as regulatory gaming cases similar to the Commission’s AstraZeneca[3] case and the CMA’s Reckitt Benckiser case[4]. Both cases concerned gaming strategies exploiting regulatory loopholes that allowed the respective companies to delay generic entry and prolong the period in which they can reap supra-competitive profits. What distinguishes the “exploitative pricing cases” from AstraZeneca and Reckitt Benckiser is the clear manifestation of the actual anticompetitive harm facilitated by the exploitation of pharmaceutical regulation.

The situation in the investigation against Aspen Pharma is slightly different. The company has not engaged in regulatory gaming to facilitate the price hikes. It rather threatened the purchasers during the price negotiations with the withdrawal of the drug from the relevant market. Although the drug withdrawal as such has not been found to be anticompetitive in AstraZeneca, the conduct in Aspen has to be distinguished from this case. Aspen Pharma did not withdraw the drug to minimise the erosion of profits. Nor can it provide objective justification for the withdrawal, such as public health concerns. Furthermore, the withdrawal makes no economic sense unless the motive is “price gouging”; a type of conduct that should not be regarded as part of the normal competitive process and thus should fall outside the scope of competition on the merits.

…which is straightforward to address by a relative price cap

These cases leave us with an apparently difficult problem – how to set the right price. As a starting point, setting a price cap should be feasible because the price for the brand drug is already regulated. A generic version of a brand drug should never be priced higher than its reference drug. This is not only in line with the abovementioned common wisdom but also reflects the lower costs of a generic company, which does not have the research and development spend of the brand drug. The UK is one of the few EU Member States that do not regulate the generic price (or at least its reimbursement price) in addition to the original brand. In the majority of Member States, generic drugs have to be a certain number of percentage points cheaper than the brand drug. Adopting a similar form of price cap regulation should not be controversial in the already heavily regulated pharmaceutical sector and would be a big step in the right direction.

The same rationale should be applied to brand drugs whose patent protection has expired. Their regulated price has been set while being under patent protection and factors such as the drug’s efficacy and its therapeutic benefit have been considered. I can see no apparent reason why this “evaluation” of the drug should increase once the relevant patents have expired. As a matter of fact one could argue that it should rather decrease.

Final thoughts

Exploitative pricing can in principle be addressed directly under EU and UK competition law. In the USA, this would be much harder as the authorities would have to construct a theory of harm based on exclusion leading to the extortionate prices. Exploitative pricing is also a very strong narrative which the parties have to rebut, similar to the Commission’s decision against Lundbeck over pay-for-delay, where the settlement agreements were essentially described as “cartel by contract”. It also needs to be remembered that due to the heavily price-regulated nature of the pharmaceutical sector, a number of key issues that make exploitative pricing investigations so contentious are less prevalent; hence competition authorities should feel more confident in addressing these excessive price hikes.

Finally, Bokhari and Lyons[5] argue that competition law is only used in these cases to mitigate some of the shortcomings of pharmaceutical regulation. They question whether competition law is the appropriate tool except as a short-term patch, and advocate changing the regulation itself in order to eradicate the root of the problem. However, I believe competition law should be used in these cases. Firstly, the competition authority can determine an appropriate price for a generic drug without having to establish the correct level of innovation and added therapeutic benefit of the drug (as might be necessary for a new drug); after all, generics have to be bioequivalent to the already price regulated brand drugs. Secondly, changing regulation is a lengthy process that might not be achievable. Meanwhile, such conduct should be prevented for the benefit of those who must pay for the drug, including the NHS.

 

[1] An exception to this string of exploitative pricing cases is the CMA’s investigation into the discount scheme for Ramicade operated by Merck Sharp & Dohme Limited. In the statement of objections from 23 May 2017 the theory of harm is based on exclusionary conduct. https://www.gov.uk/government/news/cma-issues-provisional-decision-in-relation-to-drug-firms-pricing

[2] As well as the current EU investigation, there has already been an Italian infringement decision.

[3] For more detail see my article ‘Astrazeneca V the Walker Process—A Real EU–US

Divergence or Just an Attempt to Compare Apples to Oranges?’ European Competition Journal,

7:3, 505-526 http://dx.doi.org/10.5235/ecj.v7n3.505

[4] For a detailed discussion about product hopping also discussing the CMA’s decision in Reckitt Benckiser see my article ‘A new dimension to EU pharma antitrust – product hopping and unilateral pay for delay’ European Competition Journal, 12:1, 137-158 http://dx.doi.org/10.1080/17441056.2016.1251192

[5] Bokhari and Lyons ‘Can drug price hikes via de-branding be prevented?’ in The Prescriber (April, 2017, pp.44-46).

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