The European Commission struck down on pharma pricing. Shook Aspen - and the whole forest?
The debate about “fairness” of pharmaceutical pricing is as vigorous as ever. In fact, the spotlight that Covid has put on healthcare systems has, if anything, intensified the likelihood of ongoing enforcement in this area.
Similarly ongoing is the debate about whether antitrust enforcement action is the appropriate tool to slash drug prices considered to be “excessive”. Even with the EC’s recent settlement with Aspen, which reduced the price of certain cancer medicines by 70+ percent, the role of enforcement agencies remains uncertain.
And does the settlement herald the EC’s emergence as a price-regulator of last resort? Not likely.
The EC began investigating Aspen’s pricing in May 2017. The purpose was to determine whether the company had abused a dominant position by charging excessively high prices for six cancer medicines, for which patent protection had expired decades earlier.
The Italian antitrust authority had previously found Aspen guilty of just that and imposed a fine of EUR 5.2 million, but the EC’s probe was broader. According to Aspen, the cancer medicines in question were not widely used and generated European sales of “merely” EUR 28 million.
When the EC closed the investigation in February this year, Aspen had committed to changing its pricing practices and the EC’s decision made those commitments binding. But, in keeping with such “commitment” or “Article 9” proceedings, there was no definitive conclusion that Aspen had infringed EU antitrust law: relevant markets were not defined, no dominant position was established, and the pricing conduct was not found “abusive”. Such decisions state the EC’s preliminary findings without recording a prohibition or imposing fines. The preliminary findings do not bind any court, in the event that a customer were to seek compensation for damages suffered as a result of the allegedly excessive prices it paid in the past years.
Why, then, has the Aspen decision been labelled a milestone?
For the EC, the resolution was the first of its kind: it has rarely taken enforcement action regarding “excessive” pricing, and never before in the pharmaceutical sector. The case represented an opportunity for Executive Vice-President Margrethe Vestager, the EU’s chief antitrust enforcer, to send “a strong signal to other dominant pharmaceutical companies not to engage in abusive pricing practices to exploit our health systems.”
The EC was able to do so without (virtually) any risk that anyone would challenge its preliminary findings, or the resolution more generally, in court. Subject to the effectiveness of the firm’s commitments, that is an expedient and pragmatic path to a definitive outcome.
Aspen explicitly disagreed with the EC’s preliminary findings, and yet made commitments to address those concerns. It promised to:
- reduce its net prices for the six cancer drugs in Europe by on average 73% for 10 years; and
- continue supplying those medicines for five years, and then either continue to supply or offer its marketing authorisation to other suppliers for an additional five years.
The Article 9 procedure involves a trade-off. The firm offers commitments which, in this case, related to a modest proportion of its sales (around 4% of its approximately EUR 745 million sales in Europe in 2020). And, in return, it must abide by its pledges but avoids a finding of an infringement and a possible fine. However, stiff fines (up to 10% of the firm’s annual turnover) can be imposed if the firm is found to be in breach of the commitments.
What is the impact of a settlement, for others beyond the EC and Aspen?
A commitment decision binds the EC and the firms to which it is addressed. It does not bind EU Member States’ competition authorities. It seems unlikely, though, that a national authority would investigate this particular matter further, in the wake of the Italian and the EC decisions. A commitment decision also does not bind national courts in private damages litigation. So any aggrieved customer would need to fully support a claim without the benefit of an infringement decision.
In any event, the impact of the price reduction is likely limited for EU Member States’ healthcare systems. The value of sales of all oncology medicines in the EU may have doubled in the past decade; but annual sales of Aspen’s were around EUR 28 million, and the daily cost per patient reported to be around EUR 3 per day. In comparison, BMS’s Revlimid (lenalidomide), identified as one of Europe’s top selling oncology drugs, generated around EUR 1.8 billion sales in Europe in 2017.
Also, since there is no need for the EC to prove that an infringement actually occurred, commitment decisions do not contain a full-fledged legal and economic assessment of the relevant conduct, nor do they rely on a voluminous amount of evidence solid enough to withstand appellate scrutiny. The full Aspen decision is yet to be published, but such decisions, beyond a summary of the Commission’s preliminary findings, typically do not give firm guidance on novel or complex legal issues.
The EC has traditionally abstained from pursuing instances of suspected abuse of dominance in the form of excessive pricing – precisely because the assessment is complex and given the wider policy issues at stake, including the question whether competition authorities should take on a price regulation role. In this particular case, the investigation followed on, and expanded to other Member States, an infringement in Italy. That may, at least in part, explain the Aspen exception.
Why did the EC take issue with Aspen’s prices?
High prices are not prohibited outright. They are illegal only if charged by a dominant firm and if they are at a level which bears “no reasonable relation to the economic value of the product”. This involves an assessment on whether the price cost margin is “excessive”, and whether the price is “unfair” either in itself or when compared to competing products. But case-law does not establish a specific standard. In the pharmaceutical sector, of course, prices are often determined by specific regulation or reimbursement terms and, as in many markets may be set by reference to competing products rather than by reference to cost. An additional feature of pharmaceutical markets is that returns are often judged by reference to a portfolio of products, rather than on a per item basis: with the burden of generating returns sufficient to cover risky R&D activities frequently borne by only a few “blockbuster” products.
The Aspen-case does not provide a more general antitrust standard on what constitutes an “abusive” price. The conduct that the EC noted was that, after the firm acquired the relevant medicines from GSK, it increased prices often by several hundred percent. The EC stated that this had been possible, since the well-established cancer drugs were no substitutes and the negotiating power of customers (in many cases, Member State health system monopsonists) was limited. Aspen had also threatened to withdraw the medicines from the market in some instances.
Determining “excessiveness” and “unfairness” raises serious difficulties. The main problem is how to establish an appropriate benchmark price. Should production or total costs be considered? How should agencies assess multiproduct firms where costs (and returns) are shared among several products? How to identify products that are sufficiently similar to the product under investigation? When can high prices be economically justified? Although multiple methods can be employed, they all reveal inherent weaknesses. It is therefore no surprise that competition authorities have been reluctant to pursue excessive pricing cases to date.
The EC compared Aspen’s costs, revenues and profitability with that of 20 other “similar companies” in the industry. It goes without saying that such a comparison is fraught with extreme difficulty, among multi-product firms that compete in multiple markets. Yet, the EC stated that Aspen’s average prices exceeded its costs by almost 300%. And the firm had failed to persuade the EC that those high profit levels could be objectively justified, given that patent protection expired half a century earlier.
Is there scope for “excessive pricing” enforcement in the pharmaceutical sector?
The particular features of the pharmaceutical sector make it even more challenging to draw a clear line between high, lawful prices and excessive, abusive prices. This calls into question whether intervention under excessive pricing provisions is warranted in the first place.
- Generally, the pharmaceutical sector is highly regulated. Sector-specific regulators are better equipped than “generalist” competition authorities to regulate pricing. In any event, markets tend to self-correct and excessive profits typically attract new entrants and thus increased competition: indeed many countries rely on this principle in relation to generics products, in particular. So, while on first sight lowering drug prices may appear to benefit consumer welfare – which is exactly what competition law intervention aims to protect – it is in fact dubious that pricing interventions actually benefit consumers as they may deter further entry and investment in the industry.
- In the EU, each country has different pricing and reimbursement systems, and is free to set the “right” price for medicines based on its own health and economic priorities. That makes it extremely complicated for the EC to set a pan-European standard for “fair” pharma prices. Unsurprisingly, a DG COMP Director commented shortly after the EC opened the Aspen investigation that antitrust intervention “is a big hammer” that should be used “under limited circumstances”. Yet, the settlement confirms that situations that attract EC antitrust intervention can arise even in a highly regulated sector.
- Antitrust intervention in an R&D driven industry must also factor in longer-term effects on innovation. Notwithstanding certain very high introductory reference prices, studies show that the investment return on pharmaceutical R&D has decreased progressively and significantly over the past decade. This is in particular due to increasing R&D costs, more effective procurement practices and, as a result, reduced peak sales for new medicines. Where the medicines in question have been off patent for half a century, agencies may believe that antitrust intervention poses a low risk of reducing R&D incentives. But serious risks undoubtedly arise in respect of new or patented medicines in particular.
The Aspen case illustrates the political and competition agency profile in relation to pharmaceutical prices. The fact that the EC pursued this matter is significant for that reason, but it is acknowledged to be an unusual case, and the legal implications of such a settlement are between the parties rather than providing a wider guide to the market (or indeed other agencies).
At national level in some European countries (UK, Belgium, Netherlands, Italy), national competition authorities are investigating or litigating antitrust cases involving allegations of excessive pharma pricing. Given the specificities of the various cases, and beyond a common denominator of expired patents, there are no obvious links between other cases and this settlement.