The Legal Test for Examining Excessive Pricing in
the Pharmaceutical Sector: a Bitter Pill?
Hester Kok
Amsterdam, 26 July 2019
European Competition Law and Regulation – LLM Track Hester.kok@student.uva.nl, 11827459
A
BSTRACTRecently the European Commission has opened its first investigation into excessive pricing practices in the pharmaceutical sector. This still ongoing investigation looks into whether Aspen Pharma has abused its dominant market position by engaging in excessive pricing practices with regard to cancer medicines.1
In the landmark case United Brands the Court of Justice of the European Union elaborated on a two-tier legal test which serves as a starting point for the examination of potential excessive pricing. According to the wording and structure of the test it may be argued that the legal norm is clear but the criteria is not. Competition authorities are confronted with a number of difficulties. The outcomes are neither consistent nor justified economically which emphasizes the need for legal predictability for pharmaceutical companies and the protection against exploitation for consumers.
Against this background, this thesis examines whether the current legal test for determining potential excessive pricing under Article 102 TFEU is suitable for identifying abusive pricing, in particular for off-patent pharmaceuticals.
To accurately answer this question the legal test established in United Brands will serve as a common thread in this research. This thesis describes the relevant basic concepts of excessive pricing and Article 102 TFEU to create clear understanding of the subject matter. By analysing relevant scientific literature, OECD documents and European case law it explores the economic approach to excessive pricing. In addition, it reviews the important features of the pharmaceutical sector. Especially by distinguishing pharmaceuticals under patent and off-patent. Further, it refers to a number of recent cases of national courts and competition authorities which considerably shape the scope and application of the current legal test to examine excessive prices. Finally, it describes the conditions for an effective test to examine excessive pricing. By applying those conditions to the current legal test it demonstrates which difficulties arise with the implementation of the test.
1 European Commission, ‘Antitrust: Commission opens formal investigation into Aspen Pharma’s pricing practices for
Within the United Brands doctrine it subsequently questions which tools are suitable for identifying abusive pricing of off-patent pharmaceuticals.
The main conclusion is that it remains very difficult to sufficiently distinguish between fair and unfair pricing practices of off-patent pharmaceuticals. However, under certain circumstances, especially in case of imperfect competition, the current legal test is found to be suitable to examine potential excessive pricing. On the other hand, the test is considered unclear and unpredictable creating ex post inconsistent and misleading outcomes.
Therefore, for an as accurate as possible application of the legal test the intervention of excessive pricing must be selective and carried out in a restrictive manner. Further, the difference between the price charged and the benchmark price must be sufficiently significant and persistent. In order to ensure strong evidence for proving abusive pricing, all available methods, for establishing excessive prices, should be combined. Only if other methods are unavailable the use of the price-cost analyse alone is sufficient.
T
ABLE OFC
ONTENTSABBREVIATIONS ... 5
INTRODUCTION ... 6
1 THE ABUSE OF DOMINANCE UNDER EUROPEAN COMPETITION LAW ... 8
1.1THE CONTEXT OF ARTICLE 102TFEU ... 8
1.1.1DEFINING THE RELEVANT MARKET ... 9
1.1.2EXPLOITATIVE ABUSE... 10
1.2THE CONCEPT OF EXCESSIVE PRICING... 10
1.2.1LEGAL METHODS FOR EXAMINING EXCESSIVE PRICING ... 11
1.2.2THE DEFINITION OF “ECONOMIC VALUE” IN UNITED BRANDS ... 12
1.2.3THE IMPLEMENTATION OF UNITED BRANDS TWO-TIER TEST ... 13
1.2.4“UNFAIRNESS” IN UNITED BRANDS ... 14
1.3CONCLUSION ... 16
2 SPECIFIC APPLICATION OF THE UNITED BRANDS LEGAL TEST ... 17
2.1THE ECONOMIC PRINCIPLES OF EXCESSIVE PRICING ... 17
2.1.1CONCLUSION ... 20
2.2THE APPLICATION OF THE UNITED BRANDS TEST IN PRACTICE ... 21
2.2.1 EXCESSIVE PRICING CASES WITHIN THE PHARMACEUTICAL SECTOR ... 21
2.2.2KEY FINDINGS ... 26
2.3CONCLUSION ... 28
3 PARTICULARITIES OF THE PHARMACEUTICAL SECTOR ... 29
3.1DIFFERENT PLAYERS WITHIN THE PHARMACEUTICAL SECTOR ... 29
3.2THE PRODUCT LIFE CYCLE OF PHARMACEUTICALS ... 30
3.3CONCLUSION ... 32
4 UNITED BRANDS AS A SUITABLE TOOL TO EXAMINE EXCESSIVE PRICES UNDER ARTICLE 102 TFEU ... 33
4.1CONDITIONS FOR AN EFFECTIVE TEST ... 33
4.2DIFFICULTIES WITH THE APPLICATION OF UNITED BRANDS TEST ... 34
PRICE-COST ANALYSIS ... 35
COMPARISON COMPETITORS ... 36
COMPARISON ACROSS MEMBER STATES ... 36
COMPARISON OVER TIME ... 37
SECOND-TIER OF THE LEGAL TEST ... 38
THE ECONOMIC VALUE TEST ... 38
ECONOMIC PRINCIPLES OF EXCESSIVE PRICING ... 39
4.3ANALYSIS:THE UNITED BRANDS TEST AS A SUITABLE TOOL ... 40
5 CONCLUSION ... 44
A
BBREVIATIONSACM Autoriteit Consument & Markt
AG Advocate-General
CAT Competition Appeal Tribunal
CMA Competition and Markets Authority
DCAT Danish Competition Appeals Tribunal
DCC Danish Competition and Consumer Authority
ECJ Court of Justice of the European Union
ICA Italian Competition Authority
IP Intellectual Property
OECD Organisation for Economic Co-operation and Development
R&D Research & Development
SSNIP Small but Significant and Non-transitory Increase in Price
TEU Treaty of the European Union
I
NTRODUCTIONOver the past years the heated debate on high prices in the pharmaceutical industry has significantly increased. So far, intervention concerning excessive pricing in the field of off-patent pharmaceuticals has been limited. But it recently has gotten the attention of competition authorities throughout Europe.
Commissioner Vestager stressed the importance of protecting customers against exploitation as being one of the primary objectives of European competition law.2 Subsequently, she notified
publicly that the Commission opened a, still pending, excessive pricing investigation against Aspen Pharma.3 The Dutch National Competition Authority (‘ACM’) also announced that
combatting excessive pricing of pharmaceuticals is one of its priorities in 2018 and 2019.4 In
this connection the ACM has started a sector inquiry into the pricing policy of pharmaceuticals for rheumatism and an investigation into the high prices charged by Leadiant Biosciences.5
From 2016 till present, the national authorities of Italy, United Kingdom and Denmark adopted infringement decisions relating to high prices of pharmaceuticals. Other investigations are ongoing.6
Competition authorities have been reluctant in the enforcement of proceedings against potential excessive pricing because it has proven difficult to determine whether a price is excessive and constitutes an abuse under Article 102 TFEU. This is problematic since high prices might lead to a direct loss of consumers’ welfare and it hinders the access to life-saving pharmaceuticals.
2 Margrethe Vestager, ‘Speech: Protecting consumers from exploitation. Chillin’ Competition Conference, Brussels’ (21
November 2016) https://ec.europa.eu/commission/commissioners/2014-2019/vestager/announcements/protecting-consumers-exploitation_en, accessed 9 April 2019.
3 European Commission, ‘Antitrust: Commission opens formal investigation into Aspen Pharma’s pricing practices for cancer
medicines’ (15 May 2017) http://europa.eu/rapid/press-release_IP-17-1323_en.htm, accessed 7 January 2019.
4 Authority for Consumers & Markets, 'ACM’s key priorities for 2018 and 2019: digital economy, green energy, prescription
drug prices, and ports’ (13 February 2018) https://www.acm.nl/en/publications/acms-key-priorities-2018-and-2019-digital-economy-green-energy-prescription-drug-prices-and-ports, accessed 9 April 2019.
5Authority for Consumers & Markets, ‘ACM Jaarverslag 2018’ (3 April 2019)
https://www.acm.nl/sites/default/files/documents/2019-04/jaarverslag-2018.pdf accessed 20 May 2019.
6 OECD, ‘Excessive Pricing in Pharmaceutical Markets- Note by the European Union’ (28 November 2018)
In its judgment United Brands the Court of Justice of the European Union (‘ECJ’) has developed a two-tier legal test which serves as a guidance in the enforcement of excessive pricing.7
According to the wording and structure of the test it may be argued that this test is vague and does not entail a conclusive set of conditions. Consequently, several cases have proved that the application of the current legal test is not always a suitable tool in practice. In particular for off-patent pharmaceuticals since those are an easier subject to be caught by Article 102 TFEU than on-patent drugs, as no Research & Development (‘R&D’)- and investment costs can justify the high prices.
The judgments AKKA/LAA and Pfizer/Flynn are relevant to take into account as the ECJ and Competition Appeal Tribunal (‘CAT’) brought more clarity about the examination of potential excessive pricing.8 Since not a lot of guidance is generally given upon the examination, this
thesis may provide more insight in the legal approach of excessive pricing of off-patent pharmaceuticals. It aims to answer the following research question:
“Is the current legal test for examining potential excessive pricing under Article 102 TFEU suitable for identifying abusive pricing of off-patent pharmaceuticals?”
This thesis attempts to determine under what circumstances the legal test from the cited case
United Brands offers adequate parameters to examine potential excessive pricing.
Chapter 1 covers the relevant basic concepts in order to create a clear understanding of what the subject matter entails. It describes the context of Article 102 TFEU and the legal method(s) to examine excessive pricing.
Chapter 2 identifies the economic approach of excessive pricing. Furthermore, it provides a brief overview of excessive pricing cases in the pharmaceutical industry wherein the United
Brands test has been applied.
Chapter 3 reviews the particularities of the pharmaceutical sector.
Chapter 4 analyses the conditions for an effective test and it identifies which difficulties arise with the application of the United Brands test. The chapter concludes with considering the most important outcomes, which form the basis for an in-depth analysis.
Finally, chapter 5 entails the conclusion and answers the research question.
7 C-27/76 United Brands [1978] ECLI:EU:C:1978:22.
8 C-177/16 AKKA/LAA [2017] ECLI:EU:C:2017:689; Pfizer/Flynn (2018), Competition Appeal Tribunal, 1275/1/12/17 and
1
T
HE ABUSE OF DOMINANCE UNDERE
UROPEAN COMPETITION LAW This chapter introduces the European competition policy and its rules on the abuse of a dominant position. It provides a general legal framework. The first section shortly points out the definition of ‘an abuse of dominance’ and its purpose in European competition policy. The second section discusses the notion of excessive prices and the current legal method to assess such pricing practices. The chapter finishes with a brief conclusion.1.1
T
HE CONTEXT OFA
RTICLE102
TFEU
Article 102 TFEU forms the core of the European competition policy, which has as its main goal the establishment of an integrated internal market.9 The enforcement of Article 102 TFEU
focuses on benefits for consumers such as better quality and lower prices by protecting an effective competitive process.10 When unilateral conduct of an undertaking exploits consumers,
for example by charging excessively high prices, it can be held accountable for infringing Article 102 TFEU.11
The notion of ‘dominance’ is the determinative factor whether conduct of an undertaking becomes subject to the application of Article 102 TFEU. In United Brands the ECJ stated that a dominant position:
“relates to a position of economic strength […]by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.”12
The reference to ‘independence’ relates to the degree of competitive constraints on the undertaking. Hence, when an undertaking is capable to increase profitably its prices above the competitive level for a period of time and these competitive constraints are not sufficiently effective, the conduct can be regarded as dominant.13
9 Article 3(3) TEU.
10 Commission, ‘Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive
exclusionary conduct by dominant undertakings’ COM (2009) C 45/02, page 209 para 1,5,6 [hereinafter: Guidelines Commission].
11 Ibid, para 7.
12 United Brands (n 7), para 65. 13 Guidelines Commission, para 10, 11.
1.1.1
D
EFINING THE RELEVANT MARKETIn Continental Can v Commission the ECJ stated that defining the relevant market is essential for any application of Article 102 TFEU,14 because it implies that effective competition
between particular goods/services exists.
First, it should be identified which products the particular market comprises and what the competitive constraints are on the company under scrutiny.15 The second step shows whether a
certain degree of interchangeability between the particular goods on the market exists.16
Establishing dominance is more likely when the relevant market is defined too narrow, thus fewer suitable alternatives are available. The classic method, the SSNIP-test, examines to what extent products are substitutable. It demonstrates how customers react to price changes if demand-side substitutes are available. Switching may lead to losing a great number of customers.17 Then the particular market is considered wider than the product in question. This
test is often found inadequate for the pharmaceutical market, since it leads to inconsistent outcomes. The actual purchasers of the pharmaceuticals do not prescribe the medication, so a direct link is lacking. This results in finding a very narrow relevant market. As the prescribers and consumers are insensitive to price changes, many pharmaceutical companies would hold a dominant position.18 It is hard to monitor whether changes in prescriptions also lead to changes
in prices. This method may lead to an extreme understatement of the competitive constraints and an incorrect establishment of dominance.19 Once the boundaries of the relevant market have
been accurately defined, market shares, the dynamics and conditions of the market are a good first indication for the existence of dominance. This entails the presence of actual competitors, the expansion and entry of potential competitors and countervailing buyer power.
14 C-6-72 Continental Can [1973] ECLI:EU:C:1973:22, para 32.
15 Robert O’Donoghue and A Jorge Padilla, The Law and Economics of Article 82 EC (1st edn, Hart Publishing 2006), page
63.
16 C-85/76 Hoffmann-La Roche v Commission [1979] ECLI:EU:C:1979:36, para 28. 17 O’Donoghue and Padilla (n 15), page 63.
18 Claudio Calcagno, Antoine Chapsal, Joshua White, ‘Economics of Excessive Pricing: An Application to the
Pharmaceutical Industry’ (2019) 10(3) Journal of European Competition Law & Practice <https://doi.org/10.1093/jeclap/lpy083> accessed 3 June 2019 [hereinafter: Calcagno].
19 CIBG, ‘Wet geneesmiddelenprijzen’ (2019) <https://www.farmatec.nl/prijsvorming/wet-geneesmiddelenprijzen> accessed
1.1.2
E
XPLOITATIVE ABUSEIn Hoffmann-La Roche v Commission the ECJ defined the concept of ‘abuse’:20
“[...]which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question the degree of competition is weakened and which, […] has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.”
Within the meaning of Article 102 TFEU abusive conduct can consist of exploitative, exclusionary and single market abuse. Exploitative abuses concern the situation that an undertaking reduces its output and increases the price above the competitive level.21 Then the
dominant undertaking takes advantage of its market power at the expense of customers that it would not have obtained under normal and effective competition.22 ‘Normal’ competition
entails that dominant undertakings should ‘compete on the merits’,23 i.e. offering lower prices,
wider choice and better quality.24
1.2
T
HE CONCEPT OF EXCESSIVE PRICINGArticle 102(a) TFEU illustrates the term ‘abusive’ in light of excessive prices:
“directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions.”
However, there does not exist a uniform accepted definition of “excessive” and “unfair”. Different interpretations by economists and theorists are being used. Economists explain excessive prices as those which are imposed significantly and persistently above the competitive level. According to the ECJ a price is excessive when it bears no reasonable relation with the “economic value” of the product in question.25 The ECJ subsequently developed a
legal test to determine the notion of abusive pricing, which is evaluated in the next paragraphs.
20 Hoffmann-La Roche (n 16), para 91.
21 O’Donoghue and Padilla (n 15), page 603; Richard Whish and David Bailey, Competition Law (9th edn, Oxford University
Press 2018), page 208.
22 O’Donoghue and Padilla (n 15), page 603; United Brands (n 37), para 249. 23 Whish (n 21), page 204.
24 Guidelines Commission, para 5.
1.2.1
L
EGAL METHODS FOR EXAMINING EXCESSIVE PRICINGQuestionable is whether a high price should be established as an abusive price. Article 102 TFEU does not explicitly mention ‘excessive’ but ‘unfair’. This means that unfairness goes further than excessiveness, but both must be proved to determine whether high prices are abusive.26 In a speech Commissioner Vestager emphasized that a fair outcome must be ensured,
and it is not just about protecting the competitive market.27 In general, competition on the merits
is an implication of a sense of fairness.28
In United Brands the ECJ introduced a two-tier legal test to establish whether a price is excessive. The first stage of the test assesses the relation between the actual costs and the price charged. By making a comparison, which shows the profit-margin, it can determine the ‘excessiveness’.29
The ECJ states in paragraph 251 of United Brands:
“This excess could, inter alia, be determined objectively if it were possible for it to be calculated by making a comparison between the selling price of the product in
question and its costs of production, which would disclose the amount of the profit margin […]”
ECJ has admitted that other methods can also be used for the examination of excessive pricing.30
The establishment of ‘unfairness’, in the second tier of the test, relates to the economic value of the product supplied. It examines whether the price is unfair in itself or when compared to competing products. 31 The ECJ concluded that the Commission failed to demonstrate that the
charged prices by United Brands had no relation to the economic value of the product.
26 Whish (n 21), page 738.
27 Margrethe Vestager, ‘Speech: Fighting for European values in a time of change. Europa Lecture, Leiden University’ (14
June 2017) <https://ec.europa.eu/commission/commissioners/2014-2019/vestager/announcements/fighting-european-values-time-change_en> accessed 15 April 2019.
28 Nathan Meershoek, ‘Excessive prices in the pharmaceutical sector: re-inventing United Brands as a fairness-mechanism’
(2018) 39 E.C.L.R. page 2 [hereinafter: Meershoek].
29 United Brands (n 7), para 251. 30 Ibid, para 253.
1.2.2
T
HE DEFINITION OF“
ECONOMIC VALUE”
INU
NITEDB
RANDSThe overarching question is whether the charged price has a relation with the economic value of the product supplied. However, little guidance has been given on the concept of ‘economic value’. In General Motors and British Leyland the Commission found that the prices should reflect the economic value of the product to its costs.32 Conversely, the economic theory relies
on the idea that the economic value is determined by the customers’ willingness to pay the charged price and costs of supply.33
In Port of Helsingborg the Commission has followed this theory and decided that a mere cost-plus approach was not conclusive for the analysis whether the price bears a relation with the economic value of the product. Non-cost related factors must also be taken into account, such as the demand for the product/service, the quality or the brand value of the product.34
Thus, in the pharmaceutical sector the life-saving nature, quality and efficiency of medicines should be reflected in the charged price.35 Consumers are willing to pay more for a product
when it has something specific what the consumer considers as more value. This does not mean that the production costs need to be higher.36 For that reason, even when there is a difference
between the price and costs exceeding the reasonable margin, it does not necessarily mean that the price must be considered as unfair.
32 226/84 British Leyland [1986] ECLI:EU:C:1986:421; 375/97 General Motors [1999] ECLI:EU:C:1999:408;
C-385/07 DSD [2009] ECLI:EU:C:2009:456.
33 O’Donoghue and Padilla (n 15), page 612.
34 Scandlines Sverige AB v Port of Helsingborg (Case COMP/A.36.568/D3) [2004] para 226-228/ 207.
35 Gianluca Faella, ‘Excessive Prices: the Aspen case’ (GCLC Lunch Talk, 11 November 2017). <https://www.coleurope.eu/sites/default/files/uploads/event/gianluca_faella.pdf>
Accessed 9 April 2019, slide 11.
1.2.3
T
HE IMPLEMENTATION OFU
NITEDB
RANDS TWO-
TIER TESTThe words “inter alia” in paragraph 251 of United Brands illustrate that more methods may be used in order to establish “excessiveness”. In this light, the national competition authorities and courts have developed several benchmarks elaborated upon United Brands for the application of the legal test: the cost-price analysis, price comparison across markets or competitors, geographic comparisons and comparisons over time.
Since it is not clear which benchmark must be used to determine excessive pricing, it depends on the facts of the case and the availability of evidence of sufficient benchmarks. This would in the end decide which comparison method(s) should be used. 37
The first stage of the test requires a price-cost analysis through assessing the difference between the price and actual costs incurred. By means of comparing all possible prices of competing products, a ‘benchmark price’ will be found which is uniform to products in the same industry.38
The benchmark price guarantees a sufficient profit-margin with respect to the incurred costs. If the profit-margin is significantly higher than the benchmark price for a longer period of time, the first step of the test has been fulfilled. 39
The third method regards to the comparison of prices prevailing in the markets of other Member States. In United Brands the prices of Chiquita bananas were found to be 138% higher in Denmark than in Ireland. This comparison shows that prices of the same product charged by the same company differ across areas. This benchmark can also serve to compare prices of a similar product charged by different companies in different Member States.40 There is no
minimum number of Member States that should be compared.41
37 O’Donoghue and Padilla (n 15), page 613; Eric van Damme and Wolf Sauter, ‘Bestaat er zoiets als een onbillijke prijs? Zaak
C-177/16 (AKKA/LAA) (2018) 21 Markt & Mededinging 200 [hereinafter: Van Damme].
38 Jonathan Faull and Ali Nikpay, The EC Law of Competition (2nd edn Oxford University Press 2007), point 4369 [hereinafter:
Faull and Nikpay].
39 Meershoek (n 28), page 3; O’Donoghue and Padilla (n 15), page 613.
40 Massimo Motta and Alexandre de Streel, Excessive Pricing in Competition Law: Never say Never? in The Pros and Cons of
High Prices (Kalmar: Swedish Competition Authority 2007) page 37 [hereinafter: Motta and Streel]; Port of Helsingborg (n
34).
The referred Member States must be selected carefully in accordance with objective, appropriate and verifiable criteria,42 such as consumption habits and economic- sociocultural
factors.43 This is important because the comparison is only useful when the price is suitably
comparable to prices of other markets that are normal and sufficiently competitive. If no obvious comparators exist it might be very hard to prove that prices are excessive.44
Finally, the possible changes in prices should be taken into account. In British Leyland the ECJ found that during the period under examination the prices had increased by 600%. These were found to be excessive since the difference could not be justified.
1.2.4
“U
NFAIRNESS”
INU
NITEDB
RANDSOnce it has been established that the price is excessive, it does not necessarily imply that the price is unlawful under Article 102(a) TFEU. High prices might even be important for the competitive process. It encourages potential competitors, creates incentives to innovate and produces economic growth. Therefore, in situations of contestable markets excessive prices should not be subject to the concerns of competition authorities.45
Also, the fact that a company possesses a monopoly position is not merely sufficient to be considered as abusive. It must be accompanied with anticompetitive conduct.46 Hence, the
second-tier of the test focuses on the anticompetitive behaviour and economic motives of the undertaking concerned.47 Possible economic justifications can be brought under this step.
42 AKKA/LAA (n 8), para 41. 43 Ibid, para 42.
44 Faull and Nikpay (n 38), point 4375; Port of Helsingborg (n 34); C-30/87 Bodson [1988] ECLI:EU:C:1988:225; Joined
Cases C-110/88, C-241/88 and C-242/88 Lucazeau (SACEM) [1989] ECLI:EU:C:1989:326; C-395/87 Tournier [1989] ECLI:EU:C:1989:319.
45 Mark Furse, ‘Excessive Prices, Unfair Prices and Economic Value: The Law of Excessive Pricing under Article 82 EC and
the Chapter II Prohibition’ (2008) 4 ECJ 59, page 78 [hereinafter: Furse].
46 AKKA/LAA (n 8), para 117. 47 Ibid, para 118.
To determine whether a price is abusive, the price must be unfair, either in itself, or comparing it to prices of competing products. In case of the former, it is necessary to assess that the excessive price bears no reasonable relation to the economic value of the product in question.48
The fact that Article 102(a) TFEU not merely prohibits excessive margins, but “unfair” prices, shows how crucial the economic value is for the determination of unfairness.
The judgement AKKA/LAA has been an important development for excessive pricing cases. The ECJ has clarified the (alternative) methodology for the examination of excessive pricing and to identify abusive prices. The ECJ followed Advocate-General (‘AG’) Wahl that no single method, test or a set criteria is accepted. Since no single approach is perfect and every method reveals some weakness, competition authorities should strive combining all available methods to avoid (minimise) the risk of errors.49 These methods rely on various forms of comparison.
The ECJ decided that to identify an abusive price the rate of return must be appreciable.50 This
means that there must be a ‘significant’ and ‘persistent’ difference between the price charged and the expected price in an effective competitive market.51 However, no minimum threshold
exists above which a rate must be considered as ‘appreciable higher’. Ensuring that a price is “significantly”, and not just merely, above the benchmark, avoids costly errors in determining an excessive price.52 The market is considered normal and sufficiently effective if it operates
fully competitive; the price is as closely set to the incurred costs.
Obviously, this depends on the specific circumstances and merits of competition in each individual case. Therefore intervention by the Commission differs considerably.53 It indicates
that competition authorities are granted a certain margin of manoeuvre.
It seems that excessive prices mainly appear in case of imperfect competition considering that monopoly prices may create entry barriers.54 In other words, the condition ‘persistent’
demonstrates that high entry barriers exist.
48 Whish (n 21), page 740.
49 C-177/16 AKKA/LAA [2017] ECLI:EU:C:2017:689, Opinion of AG Wahl, para 36-37, 43,45 [hereinafter: AG
Wahl].
50 AKKA/LAA (n 8) para 3. 51 Ibid, para 56.
52 O’Donoghue and Padilla (n 15), page 619. 53 AKKA/LAA (n 8), para 55.
AG Wahl argues that in the event of short periods of high prices, thus not continuously above the competitive price level, alongside with periods of lower prices, the price is unlikely to be abusive. This approach had been supported in General Motors.55
According AG Wahl, the lack of a rational economic explanation for high prices indicates an abusive price under Article 102 TFEU. The ECJ followed this approach.56 It is for the
undertaking in question to demonstrate the fairness of its prices by referring to objective factors.57
The judgment, however, does not explain how to imply the multiple test, i.e. what the criteria are. Despite the fact that the judgment left a lot of questions unanswered, it provided a limited element to the examination of excessive pricing: high prices must be significant and higher than benchmark prices to be considered as excessive. Thus, comparing by consistently using competitive benchmarks, which are not conflicting and whereof the outcomes are the same, is essential. In this regard, the increased attention and more often establishing excessive prices creates a deterrence effect for (dominant) companies to impose unfair high prices. The imposition of fines by competition authorities creates ex ante legal certainty. It is necessary that Article 102 TFEU is applied uniformly for an effective application.58
1.3
C
ONCLUSIONOne of the main objectives of European competition law is to ensure an integrated internal market by enforcing extensive competition policy. Exploitative abuse forms an important part of this policy since it distorts effective competition and harms consumers’ welfare. In order to control excessive pricing the ECJ introduced a two-tier legal test. The first part requires a price-cost analyse and the second-tier determines whether the price is unfair in itself or when compared with competing products, without having any reasonable relation with the economic value of the product in question. Many approaches may be used to establish excessive prices. In addition, it should assess to whether the dominant undertaking has made use of its market power by charging prices which it would not have been able to do so under sufficient effective competition.
55 C-26/75 General Motors Continental v Commission [1975] ECLI:EU:C:1975:150, para 16-20; AKKA/LAA (n 8), para 108. 56 AG Wahl (n 49), para 131.
57 AKKA/LAA (n 8) para 61. 58 Ibid, para 64.
2
S
PECIFIC APPLICATION OF THEU
NITEDB
RANDS LEGAL TESTThis section first explores the economic principles of excessive pricing. As is evident from the previous chapter the economic approach is inherent to the legal examination whether excessive pricing amounts to an abuse of dominance. It helps to structure the analysis under the two-tier legal test. The following sub-chapter embraces a brief overview of excessive pricing cases and their application of the legal test within the pharmaceutical sector.
2.1
T
HE ECONOMIC PRINCIPLES OF EXCESSIVE PRICINGIt is unclear what an ‘unfair price’ exactly entails in economics, it just provides a common sense to determine whether an excessive price is unfair.59 The reason for the absence of a clear
definition is because the term is subjective and involves a value judgment. It is therefore hard to directly defend ‘unfairness’ from economic theory.
In this light, the CAT in Pfizer/Flynn stated that:
“‘economic value’ is a legal rather than an economic concept […] It can include the
cost of production but also other elements of value to the purchaser. In this sense, the economic value of a product is highly fact-specific and very much a matter of judgment.”60
The fact that the ECJ has decided that economists may use several methods for the determination of excessive pricing61 shows that it is hard to provide a close set of conditions to
define “unfairness.”62 Moreover, it demonstrates that the price-cost analysis is not compulsory
in the examination of excessive prices.63
59 Pinar Akman, The Concept of Abuse in EU Competition Law: Law and Economic Approaches (1st edn, Hart publishing
2012), page 197 [hereinafter: Akman].
60 Pfizer/Flynn (n 8), para 407. 61 United Brands (n 7), para 253.
62 Peter Davis and Vivek Mani, ‘The Law and Economics of Excessive and Unfair Pricing: A Review and a Proposal’ (2018)
The Antitrust Bulletin 399, page 427 [hereinafter: Davis].
63 Margherita Colangelo and Claudia Desogus, ‘Antitrust Scrutiny of Excessive Prices in the Pharmaceutical Sector: A
Comparative Study of the Italian and UK Experiences’ (2018) 41(2) World Competition: Law and Economics Review <https://ssrn.com/abstract=3192334> accessed 4 June 2019, page 12 [hereinafter: Colangelo].
For a long time, economists have argued that the prices were and should be determined by market forces. Besides that, the economic value relates to the company’s economic effort to produce the product and the consumers’ willingness to pay a certain price. In normal functioning markets the competitive price is determined by both supply- and demand-side factors.64 Thus, the competitive level is naturally provided by the price that would occur in a
perfectly competitive market. Hence, a competitive equilibrium consists of a price not above the incremental cost of production and corresponds to the level of output.65 Further, the
allocation of resources must be allocatively and productively effective.
In case a company holds a legal or de facto monopoly position some economists argue that a monopoly price will be imposed: a price at which the dominant company earns the most profits. A company would not set its prices below the incremental costs of production because it would lose money on the marginal customers, but also not above the competitive price because its market share will immediately decrease.66
Pursuant the economic interpretation, a price is considered “unfair” when the increase is based on reasons unrelated to the costs or innovative activities, but to the exercise of market power. Thus, if the high price results from efficiency improvements by the dominant company this may lead to a higher profit, but the higher final price may not directly be considered as unfair in themselves.67 However, a single appropriate profit-margin does not exist in a competitive
market. Hence, the final prices must be taken into account while considering the profits.
Questionable is how the reasonable relation between price and value corresponds with the profit-margin in order to be consistently interpreted.68 In United Brands, a price is considered
fair when the price-cost margin is equal to the profit-margin. In AKKA/LAA the ECJ decided that there is no minimum threshold for appreciably to prove a significant and persistent difference. AG Wahl stated that the greater the gap between the price charged and the benchmark price, the more likely is it that an abuse exists.69
64 Davis (n 62), page 427.
65 O’Donoghue and Padilla (n 15), page 605. 66 Ibid.
67 Meershoek (n 28), page 2; Furse (n 45), page 4. 68 Van Damme (n 37).
To establish “unfairness” a proper evaluation of the relation between the price charged, the costs and economic value is important. When this gap between the costs and economic value is large, it seems to be simultaneous to the willingness of a customer to pay an unfairly high price.70
Companies which have a certain degree of market power are able and willing to set their prices higher than the cost of production. Besides that, it can also impose high prices at the expense of consumers which are unable to switch to another supplier, because a perfect pricing strategy would yield overall losses over a short period.
Intervening in excessive pricing in a free market where no or barely barriers exist, will cause even more harm to consumers than the high prices itself because the incentive of companies to innovate would decrease. This situation particularly occurs in dynamic industries being subject to the important competitive component innovation, such as the pharmaceutical sector.
Regarding the high economic profitability in those industries, prices need to be set much higher above the marginal costs in order to recoup their R&D- and investment costs.71 Therefore,
perfect pricing would also yield to lacking investment over the long term.72
In case of generic pharmaceuticals, competitors of generics will enter the market at the same time. This leads to that generic companies would be unable to fund their costs on some pharmaceuticals. When high returns are lacking the incentive to bring new generic pharmaceuticals on the market will be absent, in particular for specific treatments produced for only a few patients.73 These future innovation incentives show a potential tension between
‘fairness’ and ‘efficiency’.74
Therefore, it is essential that certainty about the “unfairness” of a price exists in order to attract investment and to ensure a balance between competition and the need for (life-saving) pharmaceuticals.
70 Van Damme (n 37).
71 O’Donoghue and Padilla (n 15), page 608. 72 Ibid.
73 Davis (n 62).
2.1.1
C
ONCLUSIONIt follows from above that it seems difficult to establish an unfair price according to the economic principles. First, a high price is not per se unfair and may even be welfare-enhancing where it promotes investments and incentives to innovation. Second, due to the self-correcting mechanism of the market intervention is not always necessary. In order to determine whether a high price is unfairly excessive the United Brands test requires to examine whether prices are high relative to a competitive benchmark based on evidence gathered through the cost-plus and/or profit-margin comparisons. In other words, it should examine whether the company is gaining excessive profits that it would not have obtained under normal and sufficiently effective competition.75
2.2
T
HE APPLICATION OF THEU
NITEDB
RANDS TEST IN PRACTICEThis sub-chapter provides a short overview of how several national competition authorities and courts have been dealing with excessive prices within the pharmaceutical sector. So far, infringement decisions have been given in the cases Napp, Pfizer/Flynn, CD Pharma and Aspen
Italy, others are in the pipeline.
2.2.1
EXCESSIVE PRICING CASES WITHIN THE PHARMACEUTICAL SECTORN
APPThe first case ever on excessive pricing within the pharmaceutical sector is the Napp case in the UK.76 Napp Pharmaceutical Holdings (Napp) was held to have abused its dominant position
by predatory pricing and by charging excessive prices on sustained release morphine. The prices were found to be excessive since the actual price was significant higher than what the competitive price for it would be. Secondly, the prices charged on sales to customers in the community were more than ten times higher than to hospitals.77 Finally, the profit-margin
exceeded the margins of other products and sales to markets.78 Napp failed to demonstrate any
investment evidence that could justify the high prices.
The CAT emphasized that it is necessary to demonstrate that the actual price is above the level that would exist in a competitive market. To determine whether Napp’s pricing structure constituted an unfair price it used a number of comparators: the price-cost analysis, a price comparison across markets, with its next most profitable competitor and to other competitors.79
It is however not defined how the outcome of the counterfactual should be transformed into a benchmark price in accordance with normal and sufficiently effective competition.80
It was also necessary to consider that no actual or potential competitive pressure was present to bring the charged price down to the competitive level. The take-away of this decision is the use of various methods to determine the involvement in excessive pricing.
76 Napp (2002), Competition Appeal Tribunal, CA98/2D/2001, [2002] CAT, para 403. 77 Faull and Nikpay (n 38), point 4377.
78 Whish (n 21), page 743. 79 Napp (n 76), para 392. 80 Davis (n 62), page 406.
P
FIZER/F
LYNNP
HARMAIn 2018 the CAT found that The Competition and Markets Authority (‘CMA’) wrongly applied the legal test deciding that Pfizer and Flynn Pharma charged excessive prices on a drug for epilepsy. It imposed a record fine of almost £90 million.
The CAT had followed the CMA in its argumentation that the relevant market is limited to Pfizer and Flynn, because customers are not willing or unable to switch to another drug without risking an adverse medical reaction. They have also been abusing their position through de-branding the medicine.
The CAT found that the CMA solely relied on the cost-plus approach to examine ‘excessiveness’ even though other methods were available. Application of the cost-plus approach produces a more defined concept of “normal and sufficiently effective competition” instead of factual competition where perfect competition is more an expectation.
Regarding the unfairness limb the CMA wrongly relied on the first alternative (‘unfair in itself’). The rate of return was above the 6%-threshold which was sufficient to establish ‘excess’. Since no demand-side or non-cost related factors existed, the charged prices were unfair in themselves as they were not “cost-justified.”81 Hence, the CMA did not properly
compare the prices with meaningful comparators to determine what the product “is worth”.82
Thus, for the establishment of excessiveness more than a narrow application of the cost-plus analysis is needed, if other valid methods are available to establish the hypothetical-counterfactual of the price.83 This case therefore principally stresses the importance to establish
a competitive benchmark price, as the CMA was reluctant to carefully compare the drug with competing products.84 It also should take the relevant costs into account, because as the ECJ in
SACEM II85 stated, inefficiencies caused by internal errors cannot justify unfair prices.
81 Pfizer/Flynn (2016), Competition and Markets Authority, Case CE/9742-13, para. 5.487; Pfizer/Flynn (n 8), para 405. 82 Pfizer/Flynn (n 8), para 362; 427.
83 Ibid, para 316.
84 Pfizer/Flynn (n 8), para 310.
Then it is possible to determine whether the company gains profits which it would not have obtained in an effective competitive market, rather than looking for a rate of return which demonstrates merely conditions of idealised competition.86
The relation between the two alternatives under the unfairness limb, according case law, is not cumulative. A breach of the law can succeed under both. If it is found that outcomes of different methods are conflicting the competition authority must assess both.87 According AG Wahl, the
second alternative has a control function, especially in light of highly inaccurate tests such as ‘unfairness’. Those non-cost related factors include a wide and thorough assessment within the principles of both Article 102 and United Brands.88
The CAT referred the case back to the CMA, since it cannot decide on the basis of incomplete facts. It has provided the CMA with clear instructions how to apply the United Brands test. These instructions are partially based on AG Wahl’s opinion in AKKA/LAA.89
CD
P
HARMAIn 2018 the Danish Competition Council (‘DCC’) decided that CD Pharma’s conduct was abusive since it increased the price of the drug Syntocinon for pregnant women.90
Since CD Pharma, together with competitor Orifarm, was the only player on the Danish market and in-elastic demand existed, it significantly raised its prices with 2,000%. To examine whether the charged prices were excessive the DCC made seven estimates of the profit-margin and mark-up from CD Pharma, which demonstrated that the profit-margin was approximately
86 Ibid, para 324.
87 Pfizer/Flynn (n 8), para 367.
88 Margaret Kyle, ‘Competition in the pharmaceutical sector: An overview of EU and national case law’ (Concurrences, 13
December 2018) < https://www.concurrences.com/en/bulletin/special-issues/competition-in-the-pharmaceutical-sector/competition-pharmaceutical-sector-an-overview-of-eu-and-national-case-law-en> accessed 29 April 2019 [hereinafter: Kyle]; Colangelo (n 63), page 17; Pfizer/Flynn (n 8), para 368.
89 Van Damme (n 37).
90 CD Pharma (2018), Danish Competition Council, Case 14/08469; Gorrissen Federspiel, ‘Competition Council finds that CD
Pharma abused its dominant position’ (Lexology, 5 April 2018) <https://www.lexology.com/library/detail.aspx?g=0d2dc8ab-917e-4104-80b1-801ce674272b> accessed 21 April 2019 [hereinafter: Federspiel].
80%-90%. The DCC also used the cost-plus approach which confirmed this finding.91 For the
second step of the test, DCC compared the actual price with the prices of competitor Orifarm. It assessed the price comparison over time and across other countries.92 It found that the
excessive prices could lead to a permanently higher price. CD Pharma was unable to provide economic justifications for the significant price increase.
Danish Competition Appeals Tribunal (‘DCAT’) confirmed the decision of the DCC.93 The
case is submitted to the Danish State Prosecutor for Serious Economic and International Crime for criminal prosecution because the DCC has not the authority to impose a fine, which is considered as a criminal penalty in Denmark.94
A
SPEN(I
TALY)
In 2016 the Italian Competition Authority (‘ICA’) imposed a fine of € 5,2 million on the pharmaceutical company Aspen for setting high prices for important cancer pharmaceuticals.95
Aspen acquired the marketing rights from the original manufacturer GlaxoSmithKline and then increased its prices between 300% - 1,500%. It also used aggressive strategies while negotiating these prices with the Italian Medicine Agency.
The ICA ordered Aspen to set fair prices for the off-patent pharmaceuticals. Aspen did not comply with those orders and the ICA started non-compliance proceedings. In 2018 the ICA determined that Aspen’s measures were in compliance with set orders.96
91 Federspiel [n 90]; Danish Competition and Consumer Authority, ‘Excessive Pricing in Pharmaceutical Markets’
(Competitive Markets and Consumer Welfare 2019) https://www.en.kfst.dk/media/54222/excessive-pricing.pdf accessed 17 July 2019 [hereinafter: DCCA].
92 David W Hull and Michael J Clancy, ‘The Application of EU Competition Law in the Pharmaceutical Sector’ (2018) 9
Journal of European Competition Law & Practice 389 [hereinafter: Hull]; DCCA (n 91); Danish Competition and Consumer Authority, ‘CD Pharma has abused its dominant position by increasing their price by 2,000 percent’ (31 January 2018) <https://www.en.kfst.dk/nyheder/kfst/english/decisions/2018-cd-pharma-has-abused-its-dominant-position-by-increasing-their-price-by-2-000-percent/> accessed 17 July 2019; DCCA (n 91).
93 DCCA (n 91).
94 OECD, ‘Excessive Pricing in Pharmaceutical Markets-Note by Denmark’ (25 October 2018) DAF/COMP/WD(2018)104. 95 Aspen Pharma (2017), Tribunale Amministrativo Regionale del Lazio, 8948/2017; Commission, ‘Report From the
Commission to the Council and the European Parliament Competition Enforcement in the Pharmaceutical Sector (2009-2017) European competition authorities working together for affordable and innovative medicines’ COM (2019) 17 final [hereinafter: Commission report].
96 OECD, ‘Summary of discussion of the Roundtable on Excessive Pricing in Pharmaceuticals’ (28 November 2018)
By using the two-tier test in United Brands, the ICA determined that Aspen abused its dominant position by charging excessive prices. The ICA decisions were upheld by the Administrative Regional court (TAR Lazio).97 Regarding the first-tier of the test, the charged prices by Aspen
were found excessive through comparing it with its costs. The assessment was based on the profit-margin and cost-plus analysis. Due to the lack of actual and potential substitutes it compared the prices with the previous prices of the drug in order to prove unfairness.
Accordingly, it upheld the ICA’s decision that Aspen could not justify the sudden price increase, as there were not any non-cost related factors or qualitative improvements to the pharmaceuticals.98 Therefore, the regional court confirmed the high fine imposed by the ICA
due to the abusive conduct and its duration.
A
SPENP
HARMA(EU)
Aspen Pharma is the first excessive pricing investigation in the pharmaceutical sector dealt by
the Commission. The investigation concerns five life-saving cancer pharmaceuticals in the EEA Member States, except from Italy as they have already decided on the pricing practices of
Aspen. The Commission will examine whether Aspen has unlawfully raised its prices by several
100%. It will also inquire whether its other conduct is abusive, i.e. hindering parallel trade and using abusive negotiation strategies with competition authorities.99 With this investigation the
EU wants to make companies alert not to engage in such anti-competitive practices for off-patent pharmaceuticals, by showing its intention and priority to investigate and prosecute these companies’ abusive conduct. The Commission has, however, not made a definitive decision yet.100
97 Commission report (n 84).
98 Hull (n 92); Michela Angeli, ‘The Tar Lazio’s judgement in the Italian Aspen case on the imposition of unfair prices under
art. 102(a) TFEU’ (2017) 4(2) Italian Antitrust Review < http://dx.doi.org/10.12870/iar-12861> accessed 21 April 2019, page 227.
99 Calcagno (n 18).
100 <http://ec.europa.eu/competition/antitrust/cases/dec_docs/40394/40394_235_3.pdf> accessed 21 April 2019; Commission
2.2.2
K
EY FINDINGSThe foregoing infringement decisions have several similarities. They all concern off-patent pharmaceuticals which are subject to sudden and manifest price increases for a longer period of time. No R&D- and investment costs can justify the high prices.
Second, all companies possess a large market share what support the argument that they had not been undermined to competitive pressure. Furthermore, the pharmaceuticals have a life-saving/‘health improvement’ nature and are crucial to patients. Since actual and potential suitable alternatives are lacking, the community is dependent on these dominant companies for access to pharmaceuticals produced by these companies. Finally, National Health Services and insurance companies could not influence the charged prices as they were under high pressure by means of aggressive negotiation strategies.101 As result, the demand was extremely inelastic.
Taken all these factors together the cases have shown that the market was not able to correct itself. Thus the intervention by competition authorities was justified while ensuring effective competition. The decisions also demonstrate that competition authorities used different methods to determine excessive pricing.
In Napp the CAT used a number of comparators in order to establish that the company infringed the prohibition of excessive pricing, because its prices were significantly higher than that would be expected in a competitive market.102
By contrast, the other cases did not successfully combine different comparisons to conclude ‘excessiveness’ of the price. They solely relied on the cost-price analysis and/or the cost-plus method, which is insufficient alone to examine excessive prices.
The Pfizer/Flynn decision is a very important development for the question whether the United
Brands test is a suitable tool to examine potential excessive pricing of off-patent
pharmaceuticals.
101 Pedro Caro de Sousa, ‘Excessive Pricing in Pharmaceutical Markets’ (CPI Europe Column January 2019)
<https://www.competitionpolicyinternational.com/excessive-pricing-in-pharmaceutical-markets/> accessed 23 April 2019 [hereinafter: De Sousa].
It stressed, inter alia, that a range of methods should be used, if available, to carefully establish a competitive benchmark price in order to determine whether a price is excessive. Considering the difficulties of the comparison methods it should rather complement the price-cost analysis as prima facie indication for excessive pricing,103 because when comparisons made with
fair-end-prices are lacking other prices which occur in competitive markets are assumed to be fair. By establishing a competitive benchmark price, it demonstrates the extent and quality that can be obtained and it reflects the price that would exist under conditions of normal and sufficiently effective competition.
The CAT has recognised that the existence of a ‘reasonable’ rate of return is a question of judgment and appreciation. This difference between the charged price and the benchmark price must be sufficiently significant and persistent in order to be excessive.104 The price is
considered ‘reasonable’ when the interests of patients, customers and suppliers are protected.105
Therefore, if prices increase with several hundred percent it might feel logic to conclude that the price is ‘unfair in itself’. In the said case the unfairness -in itself- was mainly proved based on the price being disconnected from the economic value. It seems that for this consideration that the burden of proof somewhat shifts to the accused since it has to provide objective justifications. The case clearly stresses that intervention in excessive pricing cases should not occur regularly and the decision must be “soundly based on proper evidence and analysis.”106
It seems that the examinations were mainly focused on the second-tier of the test. The innovative and investment components are missing in off-patent pharmaceutical cases, therefore objective and economic justifications will be unsuccessful, by advocating non-intervention against high prices.
103 Colangelo (n 63), page 13. 104 Pfizer/Flynn (n 8), para 443. 105 CMA (n 81), Para 5.19, 5.92. 106 Pfizer/Flynn (n 8).
2.3
C
ONCLUSIONIn the recent cases Pfizer/Flynn and Aspen Italy the competition authorities did not properly proceed on the basis of the unfairness limb of the legal test.107 Both took the same approach
which showed clearly that the backbone of examining excessive pricing pertains the price-cost analysis. Like the CMA highlighted a price is unfair when it is not “cost-justified”, thus a reasonable relation between the price of the product and its economic value is lacking. Therefore, the decisions stresses that the absence of non-cost related factors call for using sound and proper evidence for examining excessive pricing. Only relying on the price-cost analysis is insufficient, the evidence more widely available must be used and complement the price-cost analysis as prima facie indication for abusive prices.
3
P
ARTICULARITIES OF THE PHARMACEUTICAL SECTORFor an effective application of European competition policy and its enforcement within the pharmaceutical industry, the important features of the sector should be considered. This is essential to know in order to determine whether particular conduct of a dominant company amounts to distorting competition by imposing excessive prices, and to establish the relevant market.108 This chapter briefly reviews the different players, with different interests, at both the
supply- and demand side within the pharmaceutical sector. Secondly, it discusses the life cycle of pharmaceuticals.
3.1
D
IFFERENT PLAYERS WITHIN THE PHARMACEUTICAL SECTORAn overview of the different players at the supply- and demand side within the pharmaceutical sector require sound knowledge to understand and determine the structure of the market in question.
At the demand-side, the patient is the end-user of the pharmaceutical which usually bears partly the costs of the prescribed medication. This prescription, generally by doctors, is an advise consisting of which available medicine the patient should use. They do not contribute anything to the production costs of the pharmaceuticals.
Pharmacies possess a double role, on the one hand it advices the patient and on the other hand it provides the necessary pharmaceuticals to patients.
The insurance companies pay the health costs of patients. They are being financed by their members (and/or government).
The reimbursement system and the behavior of prescribers and pharmacies, while not paying the costs, contribute to the inelastic demand of essential pharmaceuticals.109 The pressure on
pharmacies to pay for a specific medicine also influences the demand. In particular, when the pharmaceutical has a life-saving/prolonging nature and appropriate alternatives are unavailable. In that case patients are willing to pay a very high price.
108 Commission Report (n 95), page 20. 109 Ibid, page 18; OECD (n 6), page 4.
This high inelasticity of demand may make the pharmaceutical sector more sensitive to unfair pricing practices than other sectors. It thereby limits competition and might damage the self-correcting mechanism of the market.110
At the supply-side various manufacturers, wholesalers and different pharmacies supply the pharmaceuticals. The manufacturers can produce originator-pharmaceuticals, generics or both.
The originator-pharmaceuticals are focused on R&D in order to deliver innovative pharmaceuticals on the market. Contrary to generic manufacturers, which produce similar products, but not innovative, after the latter has lost its exclusivity.111 The generics contain the
same active substances with the same qualitative elements as the originator-pharmaceutical. Generally, the prices of generics are much lower than the originator-pharmaceuticals, often to capture a part of the latter’s market share. In the situation that a company produces both, the company develops different business strategies for every single pharmaceutical.
Member States also play an important role. They are busy with the sale, the provision, pricing and reimbursement of on-patent pharmaceuticals. By means of regulation governments try i.e. to keep sustainable quality and safety of the pharmaceuticals at an affordable price, without interrupting innovative incentives.112
3.2
T
HE PRODUCT LIFE CYCLE OF PHARMACEUTICALSThe product life cycle of a pharmaceutical consists of three different phases. The first phase is the R&D for the innovation of pharmaceuticals, which is in general a very long, costly process and which includes a lot of risks. During the development of a new medicine the originators incur high costs, but do not earn revenues for recoupment and no reward for risk-taking.
When the pharmaceutical has been approved on safety and efficiency, the drug will be launched and sold on the market while enjoying product exclusivity based on intellectual property (‘IP’) rights. The grant of IP rights, i.e. the right to hold a patent, contribute to incentives to invest in new R&D-processes to develop new pharmaceuticals.
110 OECD (n 6), page 4.
111 Commission Report (n 95), page 18. 112 Ibid, page 19.
During this exclusivity period the originator-companies often enjoy very high profits, usually meant to recoup the successful investments.
IP rights are not unlimited. At a certain point generic pharmaceuticals are allowed to enter the market. This loss of exclusivity is the third phase of the pharmaceutical life cycle and the start of generic competition. This might lead to price drops up to 90%, because there are no R&D- and investment costs which can justify high prices.113 It makes pricing strategies for off-patent
pharmaceuticals an easier subject to be caught by Article 102 TFEU. Hence, so far all excessive pricing cases concern off-patent pharmaceuticals.
Inter-brand competition occurs among the generic and originator-companies. This is an apparent mechanism to lower prices and to provide easier access to old and effective health treatments.114 Generic pharmaceuticals might also contribute to promoting dynamic and
allocative efficiency. By interrupting the competitive market mechanism the incentive to entry the market would be eroded.
Yet, generic competition after the expiry of IP rights does not always occur. The number of generic suppliers has declined last years, due to the increased exit of generic manufacturers. This leaves one generic player in the particular market behind enjoying a monopoly position.115
An explanation might be the little expected profits when the relevant market is very small or market particularities that constitute entry barriers. In that case, anti-competitive prices arise. Since the market is not self-correcting, inter-brand competition reduces.
Besides that, the entry of a generic pharmaceutical can lead to decreasing sales for the originator-manufacturer, hence, the latter often applies several strategies to extend the exclusivity of the innovative drug.116
113 OECD (n 6), page 5.
114 OECD, ‘Excessive Prices in Pharmaceutical Markets. Background- Note by the Secretariat’ (27-28 November 2018)
DAF/COMP(2018)12, page 28.
115 De Sousa (n 101).; Abbot FM, ‘Excessive Pharmaceutical Prices and Competition Law: Doctrinal Development to Protect
Public Health’ (2016) 6 UC Irvine Law Review 281, page 301.
116 Chris Fonteijn, Ilan Akker and Wolf Sauter, ‘Reconciling competition and IP law: the case of patented pharmaceuticals and
dominance abuse’ (2018) ACM working paper <https://www.acm.nl/sites/default/files/documents/2018-03/acm-working-paper-reconciling-competition-and-ip-law-2018-03-07.pdf> accessed 2 June 2019, page 11 [hereinafter: ACM working paper].
Also, companies of off-patent pharmaceuticals may develop such strategies to successfully increase its prices, i.e. to identify a specific drug whose market is so small that it will hinder entry of potential competitors.117 This kind of distortive conduct associated with ‘deterrent’
effect has led to interventions against excessive pricing.118
3.3
C
ONCLUSIONThe above analysis shows that the increased excessive pricing cases of off-patent pharmaceuticals stresses the importance to take the particularities of the pharmaceutical sector into account. Competition of off-patent pharmaceuticals contribute to affordable prices and which make the pharmaceuticals widely available. However, several factors can reduce inter-brand competition leading to high prices and the increased difficulty to make essential pharmaceuticals available to patients. Reconciling the objective of an integrated competitive market with the incentives to develop new pharmaceuticals and to provide access to essential medicines, to satisfy the need of society, is a key focus area.
117 OECD (n 114), page 31.
4
U
NITEDB
RANDS AS A SUITABLE TOOL TO EXAMINE EXCESSIVE PRICES UNDER ARTICLE102
TFEU
This chapter embraces an in-depth analysis on the suitability of the current legal test to examine potential excessive pricing under Article 102 TFEU for identifying abusive pricing of off-patent pharmaceuticals. Therefore, it first investigates the conditions for an effective test. The second section discusses the difficulties with the application of the current test. The chapter finishes with analyzing under what circumstances the legal norm in United Brands is suitable for examining excessive pricing.
4.1
C
ONDITIONS FOR AN EFFECTIVE TESTAkman and Pinar119 point out that every legal prohibition must be dissuasive and should
accurately identify whether the conduct in question constitutes a breach.120 In order to assess
whether the legal test in United Brands meets these objectives, “an effective test should satisfy four criteria (1) it should be well defined, (2) provide ex ante legal certainty, (3) be simple to implement, and (4) improve welfare. The first three criteria relate to the definition of an abuse, while the last criterion mainly concerns remedies.”121 It is relevant that these criteria would be
precisely defined before establishing whether the legal test is appropriate for the examination of potential excessive pricing under Article 102 TFEU.
The first criterion is necessary in order to know what conduct constitutes an abuse and what other conditions might lead to an abuse. Secondly, the test must provide ex ante legal certainty to enable companies to set their pricing policy without making any infringement of the law. The third criterion is met if all relevant information is easily accessible for the determination whether the high price is excessive. Finally, in order to improve welfare, exploitation of consumers should be prevented and the current law should have a deterrent effect without interrupting investment and innovation incentives.122
119 Pinar Akman and Luke Garrod, ‘When are excessive prices unfair?’ (2011) 7 Journal of Competition Law & Economics
403 [hereinafter: Akman and Garrod].
120 Ibid. 121 Ibid. 122 Ibid.
