Excessive prices in pharmaceutical markets: The Italian Aspen case and the UK Pfizer/Flynn Pharma case
In a speech delivered at the Chilling’ Competition
Conference,[1] held on 21
November 2016, the EU Competition Commissioner addressed the issue of the
application of competition provisions to exploitative abuses. In what appeared
to be an endorsement for a more active competition enforcement against this type
of anti-competitive business practices, she said that, though the Commission
does not intend to act as a price regulator, there can still be times when the
regulatory intervention is needed. Amongst the fields where the Commission’s
action to regulate excessive prices may be necessary is the pharmaceutical
industry. Mrs Vestager also said that the best option to deal with unjustifiably
high-priced drugs is sector-specific regulation. However, as illustrated by the
Aspen[2]
case decided by the Italian Competition Authority (ICA) and by Pfizer/Flynn Pharma[3]
case decided by the UK’s Competition Market Authority (CMA), reliance on competition
rules may sometimes be desirable to regulate excessive pricing practices in the
pharmaceutical industry.
The Aspen case
In Aspen the
ICA imposed a fine of more than EUR 5 million on the Aspen group (Aspen) for
charging excessive prices on the so-called ‘Cosmos drugs’. These were
pharmaceutical products that were prepared with the active principles of chlorambucil,
melphalan, mercaptopurine and tioguanine. The therapeutic function of the
Cosmos drugs was mainly to treat cancer pathologies, especially those affecting
younger and older patients. Importantly, Aspen had bought the marketing rights to
the Cosmos drugs from the originator GlaxoSmithKline (GSK) in 2009.
The ICA found that Aspen
enjoyed a dominant position in the markets for the manufacturing and
commercialization of drugs containing the active ingredients of chlorambucil,
melphalan, mercaptopurine and tioguanine. Indeed, Aspen was the only firm to
have a market authorization for the sale of drugs containing the active
principles indicated above. Furthermore, a credible competition from other
manufacturers was unlikely due to the inelastic nature of the demand for those
anti-cancer drugs. Potential rivals had little financial incentive to start
competing with Aspen due to the small dimension of the relevant markets.
Finally, the market power of Aspen was not counterbalanced by the buying power
of the Italian Pharmaceutical Authority (AIFA). This was reflected by the fact
that AIFA accepted all the onerous terms proposed by Aspen when negotiating the
new prices of the drugs.
According to the ICA, Aspen
abused its dominant position by taking an aggressive stance in negotiating the
new selling prices of the Cosmos drugs with AIFA in the following ways. First, Aspen
asked repeatedly for a re-classification of the Cosmos drugs from the ‘A’ and
‘H’ classes to the ‘C’ class, under which the full purchase costs had to be met
by patients. Second, Aspen continuously threatened to discontinue the supply of
Cosmos drugs had AIFA refused to agree on the requested price increases. If Aspen
had stopped selling the Cosmos drugs in Italy, it would have been necessary to
import them from overseas with the ensuing higher costs for health authorities
and patients. Third, Aspen made improper use of the stock allocation mechanism
to strategically exploit the scarcity of the drugs in the Italian market.
Evidence collected by the ICA indicated that the quantities of Cosmos drugs
marketed in Italy by Aspen pending the negotiations with AIFA were insufficient
to meet the whole demand for the drugs.
Acting in this way, Aspen
succeeded in obtaining price increase of between 300%- 1,500% compared to the
prices charged before. The ICA took the view that Aspen was a clear-cut excessive price case, which was relatively
easy to established due to the peculiarity of the facts of the case. Importantly,
since the Cosmos drugs were on sale for several decades, all the expenses for
the research & development and promotion expenses, which are common justification
for the high prices of drugs, had been already sustained by the originator GSK.
Therefore, the higher prices demanded by Aspen were unconnected to its
production costs and investments in research & development activities and
did not result in the improvement of the quality of products.
To assess whether the
Aspen’s prices were excessive, the ICA employed the two-limb test set out in United Brands[4].
The first step of the test required a
price-cost comparative analysis. To this end, the ICA compared the prices and costs
of Aspen on the basis of the ‘cost plus’ methodology and also by calculating the
contribution of the revenues generated by the sale of each of the Cosmos drug
to the net operating profit of Aspen. Both
the methodologies showed that the sales revenues obtained by Aspen by charging
the new prices were well above the production costs. Under the second limb of
the United Brand test, the ICA drew the conclusion that the Aspen prices were
unfair. Considering that the starting prices of the Cosmos drugs covered the
R&D investments and the marginal costs, charging of the contested higher prices
increased by a considerable extent the margin profit of Aspen. Moreover,
according to the ICA, there was no justification for such higher prices for
manifold reasons. At the time of the acquisition of the Cosmos drugs from GSK,
the drugs already generated a positive gross margin. And the returns achieved
by Aspen on the investments made for the acquisition of the trademark rights to
the Cosmos drugs were substantial and much larger than the cost of capital in
the pharma industry. Despite the price increases, there was no additional benefit
for patients and the national health system because the quality of products was
not improved. In contrast, the new prices had negative economic effects on the
national health system, which had to pay more to purchase the Cosmos drugs.
The Pfizer/Flynn Pharma case
The CMA has imposed a £
84.2 million fine on the originator Pfizer and a £ 5.2 million on the
distributor Flynn Pharma for charging excessive prices on phenytoin sodium
capsules, an anti-epilepsy drug. Until September 2012, Pfizer produced and sold
phenytoin sodium capsules under the trade name of Epanautin and the prices of
the drugs were regulated. In September 2012 Pfizer sold its UK distribution
rights to Epanautin to Flynn Pharma. The purchaser de-branded or genericized
the drug, which was then no longer subject to price regulation. Afterwards,
Pfizer supplied phenytoin sodium capsules to Flynn Pharma at prices between
780% and 1,600% higher than the prices it had previously charged. On its part,
Flynn Pharma resale the drugs to UK wholesalers and pharmacies at prices
between 2,300% and 2,600% higher than the prices the purchasers used to pay for
the drugs before.
The CMA held that by
applying this pricing policy Pfizer and Flynn Pharma had abused their
respective position infringing Article 102 TFEU and the corresponding national
provision. Indeed, the CMA found the prices charged by the parties to be excessive
and unfair. Though the drug Epanutin was making losses before the de-brand
arrangement, the CMA estimated that the losses would have been recovered within
2 months of the price increase. Moreover, by de-branding the parties increased the
prices for a drug many patients needed. Those who were taking phenytoin sodium
capsules could no switch to other drugs without the risk of incurring serious
health consequences. The new pricing policy of Pfizer and Flynn Pharma also
rose the costs to be borne by the UK national health system and patients. It
was not justified because phenytoin sodium capsules were a very old drug and
there was no recent innovation or significant investment.
Conclusion
The Aspen and Pfizer/Flynn Pharma
cases referred to a scenario in which the acting competition authorities believed
that their intervention was necessary to deal with the excessive pricing
practices implemented by the dominant pharma companies. More precisely, the
questions is which circumstances of Aspen
and Pfizer/Flynn Pharma drew the
attention of the ICA and CMA triggering their intervention. First, the price
increases made by the competition infringers were huge, ranging from a minimum
of 300% to a maximum of 2,600%. Second, the price rise was unjustified as the ensuing
revenues were not use to fund product innovation or other investments. Higher prices
were also unjustified taking into consideration that that all the drugs
concerned were marketed since long and, therefore, the related R&D expenses
were likely to be already covered. A third relevant factor was the highly sensitive
nature of the pharmaceutical products concerned. The Cosmos drugs were
particularly suitable for the weakest categories of patients, such as the
elderly and children, while interrupting Epanautin therapies could have serious
risks for the health of patients. Fourth, the competition infringers apparently
employed lawful tools or procedures to pursue exploitative strategies. To this
end, Aspen relied on the stock allocation mechanism, whereas Pfizer and Flynn
Pharma employed the de-branding procedure.
Arguably, the findings in
Aspen and Pfizer/Flynn Pharma may be also embraced by other competition
authorities that in future might open an antitrust investigation against excessive
pricing practices that appear to be like those examined by the ICA and the CMA.
To avoid competition liabilities, pharmaceutical companies should carefully
revise their pricing policies to make sure that price increases are not
abnormal and unconnected to innovation and investment. As for fine-setting, in Pfizer/Flynn Pharma the CMA took rather
a strict approach in determining the amount of the competition fines levied on
the parties. The fine imposed on Flynn Pharma corresponded to its 10% worldwide.
Although the press release of the CMA does not indicate the proportion between
the fine imposed on Pfizer and its worldwide turnover of Pfizer, the CMA
highlighted that this was a record fine. On the contrary, the amount of the
financial penalty levied by the ICA on Aspen was probably below the 10%
threshold of its total turnover, which was undisclosed in the decision. Indeed,
the ICA considered that Aspen had effectively implemented an antitrust compliance
programme and applied to it the corresponding attenuating circumstance provided
for in the ICA’s Fining Guidelines, granting to the infringer a fine reduction.
[2] Italian Competition Authority (Autorità Garante del
Mercato e della Concorrenza, decision of
29 September 2016, Case A-480, Incremento Prezzo Farmaci Aspen (Aspen), http://www.agcm.it/component/joomdoc/allegati-news/A480_chiusura.pdf/download.html.
[3] Competition Market Authority, Case CE/9742-13, https://www.gov.uk/cma-cases/investigation-into-the-supply-of-pharmaceutical-products .
[4] Case 22/76, United Brands v
Commission, [1978] ECR 207.
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