It’s not about the money, money, money…

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It’s not about the money, money, money…

Assessing the appropriability of competition law in combatting exorbitant prices of pharmaceuticals protected by IP rights

Job Johannes Wilhelmus Julicher Rijswijkseplein 557

2516 LT ’s-Gravenhage Student number: 13869884 Phone number: +31636342073 E-mail: jobjulicher@gmail.com Date: 01-07-2022

Supervisor: Prof. Bostyn LL.M. Informatierecht Number of pages: 54 Word count: 14238

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Abstract

The pharmaceutical sector is one of the most intensive market segments when it comes to investments in Research & Development. The spoils of these risqué investment strategies entail information and know-how regarding the manufacturing, properties and efficacy of chemical compounds in treating a disease protected by patents, Supplementary Protection Certificates and Orphan Drug designations. As the vast majority of drug development efforts do not end up becoming commercially viable, Originator pharmaceutical companies heavily depend on exclusivity of their products to guarantee a return on investments and profits. The exclusion of competition combined with market regulation creates a market structure wherein contemporary market forces have limited to no effects on the high prices charged by Originators possessing an IP or related right. Excessive pricing of pharmaceutical drugs, prohibited on the basis of Article 102(a) TFEU has garnered increasing societal and political interest. This framework, primarily construed by case law, has in recent years been used by Competition Authorities against price-hikes of off-patent pharmaceuticals. This thesis explores the viability of – and alternatives to – this judicially developed doctrine in tempering the high prices of IP protected pharmaceuticals currently observed. It is submitted that, although intervention on grounds of Article 102(a) TFEU, has proven to be effective tool against excessive prices charged by pharmaceutical companies in cases concerning off- patent products, that framework does not lend itself appropriate for application against IP protected pharmaceuticals on grounds of deviating temporal, competitive and internal cost- price structures. Soaring prices for pharmaceuticals constitute a mere symptom of the structure of the pharmaceutical market and the patent law system, rather than an independent issue on its own. Therefore other parameters, benchmarks and solutions outside the realm of competition law are put forward and argued for, which could prove to be more suitable and sustainable than ex post intervention, risking the stifling of innovation while not tackling the cause.

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1. Introduction

The pharmaceutical sector is one of the most intensive market segments when it comes to Research & Development (R&D).¹ Intellectual Property (IP) and related rights are key to protect and incentivise R&D investments fundamental to developing innovative and high(er) quality medication.² In the pharmaceutical sector, R&D functions on a ‘high-risk high- reward’ basis: the vast majority of drug development efforts do not end up becoming commercially viable. Hence, the few products that do end up getting market access – even as extreme as 10% of the total drug supply making up 75% of the profits – are responsible for making up for the both the total overhead and investment costs of failed R&D-projects at large.³ Accordingly, pharmaceutical companies – operating in a field with extensive regulation concerning market access – heavily depend on patents to guarantee returns of their investments and profits.⁴

Entry from competing generic pharmaceutical producers (Generics) – who generally do not conduct such R&D investment projects and as such are able to charge lower prices – is said to be purposefully delayed for as long as possible, going beyond the expiration of a rightfully acquired exclusive right.⁵ If successful – either by collusion with Generics,⁶ or because of (external) market characteristics, i.e. small demand sides, inelastic demands due to

1 European Commission, ‘Report from the Commission to the Council and the European Parliament:

Competition Enforcement in the Pharmaceutical Sector (2009-2017)’ (Publications Office of the European Union 2019), 16.

2 OECD,’ Competition and Regulation Issues in the Pharmaceutical Industry [2000] DAFFE/CLP(2000)29, 34- 35; European Commission, ‘Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Pharmaceutical Strategy for Europe’ [2020] {SWD(2020) 286 final}, 11.

3 Ibid. 8; Fisch A., ‘Compulsory Licensing of Pharmaceutical Patents: an Unreasonable Solution to an

Unfortunate Problem’ 1994 Jurimetrics Journal 34(3), 304; OECD,’ Competition and Regulation Issues in the Pharmaceutical Industry [2000] DAFFE/CLP(2000)29, 8.

4 OECD, ‘Executive Summary of the Discussion on Competition and Generic Pharmaceuticals’ [2014]

DAF/COMP/M(2014)2/ANN6/FINAL, 4; Vondeling G, Ciao Q., Postma M. & Rozenbaum M., ‘The Impact of Patent Expiry on Drug Prices: A Systematic Literature Review’ 2018 Applied Health Economics and Health Policy 16(5), 654.

5 Abbas M., ‘Evergreening of pharmaceutical patents: A blithe disregard for the rationale of the patent system’

2019 Journal of Generic Medicines 15(2), 53; European Commission ‘Pharmaceutical Sector Inquiry Final Report’ [2009], para 996.

6 Hovenkamp E. & Lemus J., ‘Delayed entry settlements at the patent office’ 2018 International Review of Law and Economics 54, 30-38; Vinje T., ‘The Intellectual Property and Antitrust Review: European Union’ (The Law Reviews 15 July 2021) <https://thelawreviews.co.uk/title/the-intellectual-property-and-antitrust- review/european-union> accessed 18 February 2022; Bakhoum M., ‘Intellectual Property Rights (IPRs), Competition Law and Excessive Pricing of Medicines’ in: Correa C. & Hilty R. (eds.), Access to Medicines and Vaccines: Implementing Flexibilities Under Intellectual Property Law (Springer 2022), 283.

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indispensability, principal-agent problems and high entry barriers – monopolists can leverage their position and keep drug prices tremendously higher than in a competitive environment.⁷

1.1 Central issue

A form of abuse of dominance which has garnered growing attention from competition authorities (CAs) and courts over the last decade, especially in the context of pharmaceuticals, is excessive pricing. The latter is prohibited on the basis of Article 102(a) of the Treaty on the Functioning of the European Union (TFEU). Price exploitation could occur when a dominant – or monopoly – position is accrued on grounds of exclusivity rights by a pharmaceutical undertaking. Unfortunately, the framework established by the European Court of Justice (ECJ) regarding exploitative pricing can be difficult to apply when a dominant position is conferred by virtue of IP rights, given that they are considered as a legitimate reward for investing in uncertainty, i.e. novel innovative products required to make the business and all its failed projects lucrative.

The intricate relationship between competition law and IP law constitutes a longstanding topic of discussion. The fundamental concepts of market stabilisation and consumer welfare as a consequence of free competition seem – at least at a first glance – to be diametrically opposed to the conviction that innovation investments are rewarded by exclusive exploitation and protection of the (in)tangible products, standing at the heart of IP law.⁸

However, the notion that enforcing either one necessitates the other to yield is ill-conceived.

The European Commission (the Commission) and the European Courts have – in their guidelines, reports and judgments respectively – emphasised the connection between IP rights awarded in return for innovation with product and market improvements, and consequentially consumer welfare.⁹ Accordingly, scrutiny by CAs – either national executive bodies or the

7 Shadowen S., Leffler K. & Lukens J., ‘Anticompetitive Product Changes in the Pharmaceutical Industry’ 2009 Rutgers Law Journal 41(1), 11-13.

8 Fontijn C., Akker I. & Sauter W., ‘Reconciling competition and IP law: the case of patented pharmaceuticals and dominance abuse’ 2018 ACM Working Paper, 1; Motta M. & de Streel A., ‘Exploitative and exclusionary excessive prices in EU law’ in Ehlermann C.D. Anastasiu I. (eds).

9 Commission Communication, ‘Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements’ [2014] OJ C 89/3.

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Directorate-General Competition of the Commission – is warranted when the damage to market access and competition are not offset by efficiencies.¹⁰

1.2 Research question

This thesis attempts to examine the viability of siphoning the latest CA decisions made in the context of excessive pricing of pharmaceuticals. An analysis into the dogmatics of applicable legal doctrines, criteria, case law and executive decisions is conducted to assess whether pricing practices by pharmaceutical companies are capable of infringing competition law when market access – and hence competitive price restraints – is prevented by de jure monopolism, without compromising incentives safeguarded by either IP or competition law.

Accordingly, the central question to be answered in the end will read: Is the jurisprudentially developed framework concerning excessive prices sufficiently adequate – and if not, what alternatives solutions are conceivable – in situations where a pharmaceutical undertaking enjoys a dominant position by virtue of IP rights?

1.3 Structure and methodology

To formulate an answer to the research question, an analysis of three converging but separate legal regimes will be required: IP, competition, and pharmaceutical regulatory law.

Chapter two will provide a macro overview of regulatory law in the pharmaceutical sector, based upon literature from legal and economic academic fields and executive reports from the United States and the EU. Demand-supply distribution, legal procedures required prior to market entry and economic consequences will be the central topics of discussion.

Chapter three will lay down the objectives pursued, goals envisaged by and types of exclusivity rights applicable within the EU pharmaceutical market. An understanding of these characteristics is crucial in comprehending market functioning and gaining an insight in pricing strategies as a mere consequence of legal entry barriers.

The fourth chapter discusses at a glance the principles and objectives of, as well as the interconnection or – from some perspectives – conflicts between competition and IP law. An

10 Ibid. para 30. See also Commission Regulation 316/2014 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of technology transfer agreements [2014] OJ L 93/17, paras 4-5.

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understanding of the underlying ideas is necessary for the application thereof in the pharmaceutical market specifically.

The fifth chapter builds atop the general principles laid out in the previous chapter, providing a substantial analysis of the criteria enshrined within Article 102 TFEU and interpreted by the ECJ. This serves as a first more in-depth analysis of substantial competition law intervention.

The sixth chapter will zoom in onto the case law of the ECJ and decisions by the EC regarding excessive pricing as prohibited by Article 102(a) TFEU. The ECJ and the Commission have agreed upon applying a two-limb test in deciding whether a price constitutes an exploitative abuse when charged by a dominant undertaking. The research method applied here will be deductive in the sense that general principles and criteria will be distilled from case law, specifically the United Brands and the more recent AKAA/LAA cases.¹¹ Continuing within this framework, the decisions by CAs that have in recent years accumulated in the context of excessive pricing by some pharmaceutical companies of off- patent drugs – namely the Aspen fine in Italy and the subsequent EU commitment decisions,¹² Pfizer/Flynn in the United Kingdom (UK),¹³ and the recent Laediant decision in the Netherlands –¹⁴ will be examined.

The seventh chapter seeks to conclude whether the United Brands-test is appropriate in the situation wherein monopoly-prices are charged on grounds of IP rights, without compromising the legitimate goals pursued by either legal dogma. Complications, problems with, and alternative approaches to determine whether pricing is excessive in cases of patented pharmaceuticals, will be discussed and assessed. A quick glance at solutions outside the scope of Article 102(a) TFEU – namely amending Article 54 EPC or the usage of flexibilities mentioned in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) – will, for the sake of completeness, be contemplated.

11 Case 27/76 [1978], United Brands, ECLI:EU:C:1978:22; case C-177/16 [2017], AKKAA v LA, ECLI:EU:C:2017:689.

12 Case A480 –Autorita' Garante della Concorrenza e del Mercato decision of 29 September 2016: Price increase of Aspen’s drugs Measure No. 26185; case AT.40394 – Aspen, Commission decision of 10 February 2021 relating to a proceeding under Article 102 TFEU and Article 54 of the EEA Agreement C(2021) 724 final.

13 Case CE/9742-13 Decision of the Competition and Markets Authority Unfair pricing in respect of the supply of phenytoin sodium capsules in the UK.

14 Case ACM/20/041239, ‘Summary of decision on abuse of dominant position by Leadiant’ (1 July 2021) available at < https://www.acm.nl/sites/default/files/documents/summary-of-decision-on-abuse-of-dominant- position-by-leadiant.pdf>

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2. Pharmaceutical regulatory law: controlling supply and demand structures

The point of departure for this thesis will be an overview of elements inherent to the composition of EU healthcare systems and the position of pharmaceutical companies therein.

The pharmaceutical market differs substantially from more ‘conventional economic markets’:¹⁵ a trifecta of legal regimes is applicable in the sector, i.e. regulatory, competition and IP law. This chapter will discuss how pharmaceutical regulatory law is construed and the consequential ramifications thereof in terms of market structure.

Pharmaceutical industries fulfil a vital role within the public health sector, constituting one of the cornerstones whereupon healthcare systems are grounded. Innovative new drug compounds, combinations and R&D investments have been connected with longer life expectancies.¹⁶ Accordingly, governments are tasked with the delicate balancing act of both ensuring, on the one hand, access to and affordability of high quality medication for their respective populations, and that investments in innovation and manufacturing remain lucrative on the other.¹⁷ Two distinctive elements within the structure of the pharmaceutical market will be discussed: the requirement of a market authorisation (MA) to enter the supply- side; and national regulations regarding the demand-side of the market.

2.1 Market Authorisations

Pharmaceuticals are subject to extensive and layered patchworks of regulatory legislation:

commercial exploitation of a newly developed drug will be subject to regulatory barriers – or hurdles – that need to be passed at every phase leading up to and including market entry.¹⁸ In the EU, approval to market entry can be done in a two-fold manner: either a centralised EU- wide MA granted by the Commission after approval from the European Medicines Agency,¹⁹

15 Oxera Agenda, ‘Competition law in pharmaceuticals: a moving target?’ (Oxera 15 December 2008)

<https://www.oxera.com/insights/agenda/articles/competition-law-in-pharmaceuticals-a-moving-target/>

accessed 15 February 2022 1.

16 Frech H. and Miller Junior R., ‘The Productivity of Health Care and Pharmaceuticals: An International Comparison’ 1996 Research Program in Pharmaceutical Economics and Policy, 40; Lichtenberg F.,

‘Pharmaceutical Innovation, Mortality Reduction, and Economic Growth’ 1998 NBER Working Papers 6569, 29; OECD, ‘Excessive Prices in Pharmaceutical Markets’ [2018] DAF/COMP(2018)12, para 77.

17European Commission (n5), para 337.

18 OECD (n2), 7; Basarik H., ‘The Role of Article 102 in European Pharmaceutical Sector’ 2015 Global Antitrust Review 8, 33.

19 Regulation 726/2004 of the European Parliament and of the Council laying down Community procedures for the authorisation and supervision of medicinal products for human and veterinary use and establishing a European Medicines Agency [2004] OJ L 136.

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or a national MA, limited to the territory of to a specific Member State, may be applied for by drug developers.²⁰

The parameters whereby an examination for an MA is conducted ought to exclude economic considerations or factors, being centred around scientific assessments of quality, safety and efficacy of the pharmaceutical compound concerned.²¹ Indeed, as the procedure for MA has an autonomous position in determining market access – with its own procedures, timeframes and (administrative) costs – the pool of active suppliers in each related market is limited to those that meet the aforementioned qualitative criteria on the basis of their own development, testing and data accumulation efforts. This leads to a substantial barrier of entry for Generics, unable (or unwilling) to procure their own R&D facilities, left to wait until IP rights to the products in question have lapsed. Thus, the demand-side of pharmaceuticals is initially limited to an oligarchy of dominant innovative pharmaceutical developers, leaving little room to breach out the grasp of by buyers.

2.2 Public healthcare: financing and demand-side structures

Pricing and reimbursement strategies are a national competence within the EU.²² This means that Member States are each individually responsible for bargaining with pharmaceutical companies regarding price, and decide on which or how much medication is funded by public funds.²³ Medicine is commonly considered a merit good in the EU, i.e. required to be available to all that need it.²⁴ Hence, prices should not be a determinative or chilling factor on the decision whether to request medication.²⁵

Most Member States have a system providing universal healthcare to its citizens whereby coverage for medicines is facilitated directly or through third-party payers through insurance, leaving the patients with little to no insight in prices charged by suppliers.²⁶ Furthermore, doctors – not end-consumers – decide which product is best suited for treatment and thus prescribed to patients. Indeed, as the primary focus of doctors is providing effective

20 See European Commission (n5), para 299; Directive 2001/83 of the European Parliament and of the Council on the Community Code relating to medicinal products for human use [2001] OJ L 311.

21 Ibid., para 298; Recital 13 Regulation 726/2004; Article 126 Directive 2001/83.

22 Ibid. para 337; European Commission (n2), 9.

23 Akker I. & Sauter W., ‘Excessive pricing of pharmaceuticals in EU law: balancing competition, innovation and regulation’ 2021 SSRN Papers, 7.

24 OECD, ‘Excessive Prices in Pharmaceutical Markets’ [2018] DAF/COMP(2018)12, para 77.

25 OECD, ‘Competition Issues in the Distribution of Pharmaceuticals’ 2014 DAF/COMP/GF(2014)3, para 48.

26 Ibid., 47 OECD (n24), para 78; European Commission (n5), paras 125-127.

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treatment, the decisive factor for the choice of prescribed medication is therapeutic efficacy rather than price or the existence of (cheaper Generic) bio-equivalents.²⁷

2.3 Impact on market demand-side and structural consequences

Conjointly, the lack of confrontation with the full extent of prices, knowledge about quality, and choice in bio-equivalent options creates a price-disconnection in patients.²⁸ As neither doctors nor patients possess sufficient incentives to take prices into account when prescribing or requesting therapeutics, State governments or third-party insurers constitute the main bargaining party with pharmaceutical companies. Their main interest consists of keeping expenditures low to ensure that healthcare remains affordable for its citizens or members, respectively.²⁹

This fragmented demand chain – with diverging interests and assertions of which, and against what price pharmaceuticals ought to be on the market – embodies a classical ‘principal- agency’-problem: a market participant (principal) is represented by another (agent) in decision-making with non-aligning interests.³⁰ This constitutes a market failure, i.e.

obstructing conventional corrective market forces like decreased demand intertwined with increased prices from occurring naturally.

In conclusion, regulatory requirements dictating legal market access and demand-side fragmentation due to the organisation of (national) healthcare systems both significantly impede effective competitive processes on the market. As will be shown in chapter 5, these factors affect the assessment conducted by CAs under Article 102 TFEU.

27 Case T-321/05 [2010], AstraZeneca, ECLI:EU:T:2010:266, para 34.

28 Shadowen S., Leffler K. & Lukens J. (n7), 9-11.

29 European Commission (n1), 13-14.

30 Shadowen S., Leffler K. & Lukens J. (n7), 13.

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3. The spoils of R&D-investments: Patents, SPCs & Orphan drugs

As touched upon in chapter 1, pharmaceutical development requires extensive capital investments, trial-&-error, and manufacturing and R&D capacities whereof the commercial viability is prima facie uncertain. The fruits of these inputs entail essential information, i.e.

know-how regarding the manufacturing or efficacy of certain chemical compounds in treating a disease.³¹ If publicly disclosed, these intangible spoils become exploitable to all that desire it. As such, they form non-rivalrous goods: enjoyment by third parties cannot be (easily) prevented by the owner;³² neither does usage by one actor interfere with the others’

(intended) use.³³ Thus, in the absence of some sort of ex ante guarantee wherewith the returns of R&D-investment can be individually appropriated, innovation remains unattractive as an investment portfolio due to the risks of free-riding by competitors who have not incurred the costs of inception.³⁴

To tackle this problem, the concept of a temporally limited exclusive entitlement to exploitation of, i.e. ‘propertising’ intellectual assets has been construed in the form of IP.³⁵ After expiry, the results enter the public domain, freely usable by third parties

Exclusivity rights play a massive role in R&D-intensive industries such as the pharmaceutical sector.³⁶ The most relevant exclusivity rights for pharmaceutical products in this sector constitute patents, Supplementary Protection Certificates (SPCs), and orphan drug designations. The latter constitutes a regulatory exclusivity right as opposed to IP but produces effects similar and necessitates reference in order to draw parallels later in the analysis conducted in chapter 7.

31 Crampes C., Encauoua D. & Hollander A., ‘Competition and Intellectual Property in the European Union’ in: Clarke E. & Morgan E. (eds), New developments in UK and EU competition policy (Edgar Elgar Publishing 2007), 205.

32 López A., ‘Innovation and Appropriability, Empirical Evidence and Research Agenda’ in: WIPO, The Economics of Intellectual Property: Suggestions for Further Research in Developing Countries and Countries with Economies in Transition January (2009 World Intellectual Property), 2.

33 Fisher W., ‘Intellectual Property and Innovation: Theoretical, Empirical, and Historical Perspectives’ 2001 Beleidsstudies Technologie Economie 37, 1.

34 Posner R., ‘Intellectual Property: The Law and Economics Approach’ 2005 Journal of Economic Perspectives 19(2), 57.

35 Ibid. 58; see also case 187/80 [1981], Merck v Stephar, ECLI:EU:C:1981:180, para 9.

36 European Commission (n5), para 413.

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3.1 Patents

Patents confer exclusive exploitation rights to the rightsholder in terms of ‘inventions, processes, and other technical improvements’.³⁷ Patentability is determined by meeting the criteria of novelty, inventiveness and industrial application.³⁸ Patents produce an exclusionary effect on intangible concepts (corpus mysticum) embodied in a physical result of the ratio (corpus mechanicum),³⁹ granting the owner the autonomous right of utilisation, production and exploitation of the claimed invention, be it an object or process.⁴⁰

The European Patent Convention (EPC) – whereto all EU Member States are party – facilitates a system for applying for a European Patent at the European Patent Office (EPO).

Article 64 EPC stipulates that the grant of a European Patent results provides rights identical to national patents. Thus, patents are instruments facilitated and regulated by national law.⁴¹

Patents are valid for 20 years following application by virtue of Article 63 EPC, after which the subject matter becomes public domain. Indeed, a middle ground is found between the utilitarian argument of rewarding investments into innovation,⁴² and the requirement to expand public knowledge by, on the one hand granting exclusive rights to an invention, and on the other putting a temporal limit thereon.

Patents form a core instrument for business and innovation in pharmaceutical products.⁴³ They provide a relatively simple form of guaranteed protection for a period whereover not only the costs associated with the final commercialised product, but unsuccessful endeavours can be recouped and profits made by virtue of a monopoly-position on said product.⁴⁴ Since R&D in pharmaceuticals can be costly and risky, a relatively small group of global

37 Cooter R. & Ulen T., Law and Economics (6^th edn Berkely Law Books 2016), 113; Hernández F., ‘Article 102 TFEU: Patent Filings as an Abuse of Dominant Position after AstraZeneca: the Patent–Antitrust Interface under a new Perspective’ in: Figueroa P. , Guerrero A. (eds.), EU Law of Competition and Trade in the

Pharmaceutical Sector: (Edgar Elgar Publishing 2019), 223.

38Correa C., Trade related aspects of intellectual property rights: a commentary on the TRIPS agreement ( 2^nd edn OUP 2020); Tuominen N., ‘Patenting Strategies of the EU Pharmaceutical Industry’ 2012 World

Competition Law and Economics Review 35(1), 49.

39 Pozzo R., ‘Immanuel Kant on Intellectual Property’ 2006 Trans/Form/Ação 29(2).12-13.

40 Ullrich H., ‘Strategic patenting by the pharmaceutical industry’ in: Drexl J. & Nari L. (eds.), Pharmaceutical innovation, competition and patent law (Edgar Elgar Publishing 2013), 251; see also case 19/84 [1985], Pharmon v Hoechst, ECLI:EU:C:1985:304, para 25.

41 Whish R. & Bailey D., Competition Law (9th edn OUP 2018), 786.

42 See also case 187/80 (n35), para 10.

43 OECD (n2), 34.

44 Akker I. & Sauter W. (n23), 3.

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Originators conduct the majority of research, testing and creation of new compounds, consequently holding the bulk of patent portfolios. Contrasting this, smaller, more locally concentrated Generics have little R&D-capacity available, focussing instead on facilitating adequate supply of generic bio-equivalents of off-patented drugs and treatments.⁴⁵

Accordingly, prices are the highest during the period of (valid) patent protection; as the patent expires, market entry by Generics becomes possible, leading to – in some instances massive – price drops.⁴⁶ The latter occurs due to the ease and relatively low marginal costs of production and reverse-engineering of pharmaceuticals.⁴⁷

Pharmaceutical prices are generally found to be the highest during the period leading up to patent expiration.⁴⁸ ‘Patent life cycle strategies’, or ‘evergreening strategies’,⁴⁹ are implemented by Originators to prolong the duration of exclusivity and postpone market entry by Generics.⁵⁰ The practice of patenting molecularly identical compounds for the purpose of new medical (secondary) applications, formulas, dosage regimes additives or crystalline forms is permitted under Article 54(5) EPC, de facto delaying generic entry longer than the period of exclusivity granted for the original patent.⁵¹ This practice is not without controversy, as prices remain higher than they would be under competitive market conditions facilitated by other branded or Generic manufacturers.⁵²

45 Klepper G., ‘Pharmaceuticals’ in: Buigues P. & Jacquemin A., European Policies on Competition, Trade and Industry, (Edgar Elgar Publishing 1995), 330.

46 European Commission (n1), 19; European Commission (n5), para 1071.

47 Abbas M. (n5), 1; Ghidini G., Peritz R. & Ricolfi M. (eds), TRIPS and developing countries: towards a new IP world order? (Edward Elgar Publishing 2014), 125; Flint A. & Payne J., ‘Intellectual property rights and the potential for universal access to treatment: trips, acta and HIV/AIDS medicine’ 2013 Third World Quarter 34(3), 500–515.

48 See section 7 of De Jongh T., Radauer, A., Bostyn, S. & Poort J., ‘Effects of Supplementary Protection Mechanisms for Pharmaceutical Products’ 2018 Technopolis Group Final Report, for qualitative assessment of pricing for certain medications.

49 See for more substantial discussion on this topic Dwivedi G., Hallihosur S. & Rangan L., ‘Evergreening: A deceptive device in patent rights’ 2010 Technology in Society 32(4), 324-330 and Gurgula O., ‘Strategic Patenting by Pharmaceutical Companies – Should Competition Law Intervene?’ 2020 IIC - International Review of Intellectual Property and Competition Law 51(9), 1062-1085.

50 Explicit acknowledgement has been observed in European Commission (n5), para 996.

51 Ibid. para 990 ; European Commission (n1), 16; Kumar A. & Nanda A., ‘Ever-greening in Pharmaceuticals:

Strategies, Consequences and Provisions for Prevention in USA, EU, India and Other Countries’ 2017 Pharmaceutical Regulatory Affairs 6(1), 1.

52 Ibid. para 994.

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3.2 Supplementary Protection Certificates

Patent applications will usually be filed as soon as potential properties of a medication are identified.⁵³ Since market entry can take several years – due to the scientific and administrative assessments required for MA in section 2.1 – the de facto period of effective market exclusivity is shorter than envisaged by the EPC. Effective periods of potential exploitation of pharmaceuticals have been observed to be as short as six years,⁵⁴ with an average of eight and a half years.⁵⁵

Regulation 469/2009 has been construed to compensate for the temporal loss of exclusivity.⁵⁶ A pharmaceutical producer can apply for an SPC within 6 months after either the grant of the patent or MA, depending on which one is granted last.⁵⁷ The SPC holder is conferred identical rights derived from the original patent for the period between the patent application and grant of an MA, not exceeding 5 years in total.⁵⁸ This envisages a guaranteed minimal period of 15 years of exclusivity following MA.⁵⁹

SPCs have been shown to prolong the price level maintained during patent protection.⁶⁰ Ex Ante uncertainty about the rate of success in receiving an SPC for an Originator has led to academic discussion as to whether the period provided by an SPC is taken into account in R&D prioritisation. This has raised doubts as to whether price maintenance of prices charged during patent protection during SPC-exclusivity serves for the recoupment of investments, or merely creates opportunities for supplemental margin-squeezes.⁶¹

53 Tuominen N. (n38), 28; European Commission (n5), para 1114; De Jongh T., Radauer, A., Bostyn, S. & Poort J. (n48), 34.

54 Ibid., 29.

55 De Jongh T., Radauer, A., Bostyn, S. & Poort J. (n48), 30.

56 Regulation 469/2009 of the European Parliament and of the Council concerning the supplementary protection certificate for medicinal products [2009], OJ L 152.

57 Article 7 Regulation 469/2009.

58 Article 13 Regulation 469/2009.

59 Recital 9 Regulation 469/2009.

60 De Jongh T., Radauer, A., Bostyn, S. & Poort J. (n48), 157.

61 Ibid.

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3.3 Orphan Drug Designations

Lastly, in the context of this paper mention is required of ‘orphan medicinal products’, embodied in Regulation 141/2000.⁶² This category encapsulates pharmaceuticals intended for the prevention, diagnosis or treatment of rare medical conditions – affecting less than five in 10.000 people or otherwise seriously life threatening or debilitating – which do not create sufficient returns on investment under normal market conditions.⁶³ In order to assure that patients of these conditions receive the same quality treatment as others,⁶⁴ products which have not yet received an MA, or otherwise would add a significant benefit to those affected can opt for an orphan medical product designation.⁶⁵ Orphan drug designation leads to a regulatory market exclusivity for ten years.⁶⁶ It can be reduced to six years if it is discovered if the sale of the product is proven to become sufficiently profitable to not warrant a position of market exclusivity.⁶⁷

It is important to understand that orphan drug designations – being a regulatory exclusivity rather than IP right – does neither detract from nor depend on valid patents being vested on the underlying pharmaceutical compound. Orphan drug status can run concurrent with a valid patent or be awarded (long) after the (primary) patent has lapsed, leading to a renewed period of exclusivity, albeit on a different legal basis. This can lead to renewed guaranteed market exclusivity if orphan drug status is applied for after the covering patent(s) and SPCs have expired.

Just like patents and SPCs, Orphan drugs have become subject of debate for extending market exclusivity awarded, and thus facilitating high price maintenance, beyond its intended goal. Orphan drug designation can be stacked on top of additional orphan drug categories based on specific medical conditions as well as on SPCs and patents,⁶⁸ thereby creating cumulating exclusive market positions. Exploitation thereof has been pointed to as a means to prolong price levels far above competitive levels.⁶⁹

62 Regulation 141/2000 of the European Parliament and of the Council on orphan medicinal products [1999], OJ L 18.

63 Recitals 1 & 5 and Article 3(1) Regulation 141/2000.

64 Recital 2 Regulation 141/2000.

65 Article 3(1)(b) Regulation 141/2000.

66 Article 8(1) Regulation 141/2000.

67 Article 8(2) Regulation 141/2000.

68 De Jongh T., Radauer, A., Bostyn, S. & Poort J. (n48), 99-102.

69 Ibid. 102.

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The relevance of Orphan drugs for this paper will flow from the comparative analysis of the United Brands-test, as the first finding of infringement of Article 102(a) TFEU in case of an exclusivity right in the pharmaceutical sector concerned an orphan drug in the Dutch ACM’s Leadiant decision. Chapter 7 will show that several distinguished factors that are apparent in orphan drug situations, but absent in patented pharmaceuticals complicate the applicability of that framework on the latter.

4. Competition law: principles, objectives, and enforcement policies

Having discussed regulatory and IP law legal frameworks, the last legal discipline serves the leading role within the confinements of this thesis: competition law.

4.1 Purpose of competition law

The fundamental presumption within competition law is that competitive markets benefit society by virtue of lower prices, product improvements, diversity in (consumer) choice, greater efficiencies in productions and innovation.⁷⁰ Consumer welfare – traditionally considered the most important parameter and objective of competition law – is maximised under competition between suppliers.⁷¹ Other identified objectives are inter alia consumer protection against exploitation, wealth distribution and the protection of competitors.⁷²

4.2 Goals pursued by IP and competition law: Conflicting interests?

The belief that competitive markets convalesce consumer welfare is often juxtaposed with the concept of exclusivity rights and the underlying theory of promoting incentives to innovate - although constituting an objective pursued both by IP and competition law – with temporary monopolies.⁷³ Not rarely is it said that these disciplines are diametrically opposed.⁷⁴

70 Whish R. & Bailey D. (n41), 5.

71 Ibid.; European Commissioner Neelie Kroes, ‘Delivering Better Markets and Better Choices European Consumer and Competition Day London’ (15 September 2005)

<https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_05_512> accessed 16 April 2022.

72 Ibid. 18-22; Odudu O., ‘The Distributional Consequences of Antitrust’ in: Marsden P. (eds.), Handbook of Research in Trans-Atlantic Antitrust (Edward Elgar Publishing, 2007), 605-622; Fox E., ‘What Is Harm to Competition? Exclusionary Practices and Anticompetitive Effect’ 2002 Antitrust Law Journal 70(2), 371-411;

case C-8/08 [2009], T-Mobile, ECLI:EU:C:2009:343, para 38; Commission Communication, ‘Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings’ [2009] OJ C 45/7, para 6.

73 Commission Communication (n9), para 7.

74 Whish R. & Bailey D. (n41), 787-788.

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Nevertheless, the presence of IP on the market does not preclude the application of competition law per se. To the contrary, Articles 8(2) and 40(2) of TRIPS explicitly acknowledges the necessity to combat abusive leveraging of patents.⁷⁵ Generally however, the enjoyment of an IP right – including the preclusion of competitors to use the substance thereof –⁷⁶ is prima facie acceptable, save for exceptional circumstances.⁷⁷ This will be elaborated on in section 5.2 when discussing the concept of ‘dominance’.

Competition law intervention is warranted where the aforementioned effects and objectives are not realised on the market as a result of anti-competitive conduct unresolvable by ‘the invisible hand’, i.e. the competitive process itself.⁷⁸ Anti-competitive behaviour features a varia of conduct and/or agreements, from multi-lateral collusion – horizontal and vertical – between corporations prohibited by Article 101 TFEU to unilateral abuse of dominance by companies precluded by Article 102 TFEU. Conduct can be exclusionary in nature, whereby foreclosure of competitors to consolidate a more robust position is the effect (or object), and exploitative, wherewith leveraging of a position of competence to behave independently from market constraints to the detriment of consumers is meant.⁷⁹

4.

3 Change in attitude: contemporary objections against price-regulation

Exclusionary collusion has – in the context of the pharmaceutical industry –been the main focus of legal disputes in the past.⁸⁰ This is partly due to notion that price regulation is a task wherewith CAs should concern themselves. Under normal market conditions, whereby suppliers retrieve a supra-competitive profit margin on their products, market entry by competitors ought to reduce prices organically.⁸¹ Additionally, in cases where IP rights are concerned, the idea that independence from market forces to determine prices constitutes an

75 Kianzad B. ‘Excessive Pharmaceutical Prices as an Anticompetitive Practice in TRIPS and European Competition Law’ in: Mathis K. & Tor A. (eds), New Developments in Competition Law and Economics (Springer 2019), 208.

76 Case 238/87 [1988], Volvo v Veng, ECLI:EU:C:1988:477, para 8; case 53/87 [1988], CICCRA v Renault, ECLI:EU:C:1988:472, para 9.

77 Ibid., para 9; joined cases C-241/91 P and C-242/91 P [1995], Magill, ECLI:EU:C:1995:98, para 50; case T- 201/04 [2007], Microsoft, ECLI:EU:T:2007:289, para 331.

78 Kianzad B. (n75), 207; Hou L., ‘Excessive Prices within EU Competition Law’ 2011 European Competition Journal 7(1), 48.

80 See inter alia joined cases C-501/06 P, C-513/06 P, C-515/06 P and C-519/06 P [2009], GlaxoSmithKline &

Others v Commission, ECLI:EU:C:2009:610; case C-179/16 [2018], Hoffman-La Roche v Autorità Garante della Concorrenza e del Mercato, ECLI:EU:C:2018:25; case C-307/18 [2020], Generics(UK) & Others v CMA, ECLI:EU:C:2020:52 and case C-591/16 P [2021], Lundbeck, ECLI:EU:C:2021:243.

81 Ibid.; Akker I. & Sauter W. (n23), 2; Whish R. & Bailey D. (n41), 735-737.

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inherent reward for investments in innovation and technological progress, has created calls for caution and reluctance of CAs to intervene on pricing matters.⁸² Recently however, exploitative unilateral conduct has garnered increased consideration, not merely within the political,⁸³ academic or societal landscapes,⁸⁴ but from CAs as well.⁸⁵

Objections to interventions on grounds of pricing practices therefore seem to focus on whether enforcement should be pursued, rather than whether it is possible in the first place, since Article 102(a) TFEU explicitly provides for this ground of assessment. The next chapter will set apart the legal framework of this provision.

5. Abuse of dominance: Article 102 TFEU framework & criteria

Article 102 TFEU reads as follows:

‘Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States. [..]’

The underscored criteria ought to be met for this provision to be applicable. These will individually be discussed in the next segments.

5.1 Abuse

The first criterium concerns the conduct itself: the concept of abuse. Being dominant on any given market is not prohibited per se; preventing the acquisition of market power on the basis

82 Motta M. & de Streel A., ‘Excessive Pricing in Competition Law: Never say Never?’ in: Konkurrensverket, The Pros and Cons of High Prices (Leananders Grafiska 2007), 26-27; Brennan T., ‘Should Innovation Rationalize Supra-Competitive Prices? A Skeptical Speculation’ in: Konkurrensverket, The Pros and Cons of High Prices (Leananders Grafiska 2007), 89-90.

83 Margrethe Vestager, ‘Statement by Executive Vice-President Vestager on the Commission decision to accept commitments by Aspen to reduce prices for six off-patent cancer medicines by 73% addressing excessive pricing concerns' (10 February 2021)

<https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_21_526> accessed 16 April 2022.

84 Diederik Schrijvershof, Martijn van der Hel & Jeanne Pletterburg, ‘Pharma and medical devices controversial issues at ACM and NZa in 2019’ (18 February 2019) < https://www.maverick-law.com/en/blogs/pharma-and- medical-devices-controversial-issues-at-acm-and-nza-in-2019.html> accessed 29 March 2022; Marcel Levi,

‘Dure medicijnen? Het is vette woekerwinst die ten goede komt aan het farmabedrijf’ (9 April 2022)

<https://www.parool.nl/columns-opinie/dure-medicijnen-het-is-vette-woekerwinst-die-ten-goede-komt-aan-het- farmabedrijf~bcd99dc3/> accessed 9 April 2022.

85 Minn M., ‘Excessive pricing of pharmaceuticals in the EU: Balancing between Exploitation and Exploitative Abuse’ 2020 TalTech Journal of European Studies 10(3), 97; Akker I. & Sauter W. (n23), 1.

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of competition on the merits is not the purpose of Article 102 TFEU.⁸⁶ Indeed, competition on prices, quality, and choices is an acceptable way of becoming a dominant player.⁸⁷ The latter brings along responsibilities, however.

Dominant undertakings carry a special responsibility to not distort competition with their conduct.⁸⁸ As such, abuse must not be understood as merely referring to subjective, i.e.

intentional distortion:⁸⁹ it is an objective concept regarding the behaviour of a dominant undertaking which influences market structures, where the very presence of the undertaking weakens the degree of competition through recourse to methods different from those which condition normal competition and has the effect of hindering the maintenance or growth of competition.⁹⁰ The indirect link between safeguarding (growing) competition – whereof failure leads to further potential for the dominant undertaking to increase prices – and the positive impact thereof on consumer welfare, is paramount for justifying competition law intervention.⁹¹ In a very recent case, the ECJ has ruled that both intermediate and final consumers are taken into the assessment of effects on consumer welfare due to abusive conduct.⁹² This means that the loss of consumer welfare due to the conduct preventing competition does not need to be proven on an end-consumer level, but can be established in the downstream supply-line – such as health services or third party insurer-level – as well.

As mentioned in section 4.2, abuse of dominance can be either exclusionary or exploitative.

Most of the case law – as well as the Commission’s policy documents –⁹³ revolves around exclusionary abuse. Contrary to the indirect link between exclusionary conduct and consumer harm, it is straightforward in cases of exploitative pricing practices: the ‘quiet life’ that monopolists enjoy prevents prices from becoming competitive; hence, consumer welfare is directly affected.⁹⁴

86 Case C-413/14 P [2017], Intel v Commission, ECLI:EU:C:2017:632, para 133.

88 Case 322/81 [1983], Michelin I, ECLI:EU:C:1983:313, para 57 ; case C-457/10 P [2012], AstraZeneca, ECLI:EU:C:2012:770, para 134; case C-413/14 P (n86) para 135.

89 Case C-549/10 P [2012], Tomra Systems, ECLI:EU:C:2012:221, para 21.

90 Case 85/76 [1979], Hoffmann-La Roche, ECLI:EU:C:1979:36, para 91.

91 Commission Communication (n72), para 19; see also European Commissioner Neelie Kroes, ‘Preliminary Thoughts on Policy Review of Article 82 Speech at the Fordham Corporate Law Institute New York, 23rd September 2005’ (23 September 2005) <https://ec.europa.eu/commission/presscorner/detail/en/speech_05_537>

accessed 2 May 2022.

92 Case C-377/20 [2022], Servizio Elettrico Nazionale & ENEL v AGCM, ECLI:EU:C:2022:379, para 46.

93 Ibid. para 7.

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5.2 Dominance

Dominance is a complex concept, combining legal conceptions with economic analysis. In short, an undertaking is said to enjoy a dominant position on the relevant market when it is economically resilient enough to behave to an appreciable extent independently from its competitors, customers and ultimate(ly) consumers.⁹⁵ This is derived from an assessment on market power: if an undertaking is capable of (profitably) increasing prices above the competitive benchmark over a sustained significant timeframe – without requiring to take account of competitive constraints – its market power is substantial and therefore concluded to be dominant.⁹⁶ This binary criterium – an undertaking is either dominant or not – is essential to for the purposes of applying Article 102 TFEU: unilateral anticompetitive conduct is either in-or excluded from its scope.⁹⁷

Dominance is assessed within the context of the relevant market.⁹⁸ The relevant market is identified by a two-fold examination: on the one hand the product market,⁹⁹ and the geographical market on the other.¹⁰⁰

5.2.1 Product markets

Products which consumers consider interchangeable or substitutable – by reason of the products' characteristics, their prices and intended use – make up the relevant product market.¹⁰¹ Indeed, a market with no product differentiation needs no analysis, but in other cases, demand and supply side substitution, alongside potential competition, will be factors whereby product markets are identified.¹⁰² An often used test to assess whether products are interchangeable is the Small but Significant Non-Transitory Increase in Price (SNNIP)- Test:¹⁰³ if a small price increase by an undertaking causes consumers to opt for a different product, these products compete with one another. Generally speaking, the Commission (or

96 Ibid. para 11 ; case 27/76 (n11) para 65 ; case 85/76 (n90), para 38.

98 Case 6/72 [1973], Continental Can, ECLI:EU:C:1973:22, para. 32; case 27/76 (n11), para 10.

99 European Commission, ‘Notice on the definition of relevant market for the purposes of Community competition law’ [1997] OJ C 1997/372/5, para. 7.

100 Ibid. para 8.

101 Ibid. para. 7.

102 Ibid. para 13.

103 Ibid. paras 16-17.

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national CAs) will have a wide margin of discretion when conducting economic analyses related to market definition.¹⁰⁴

In the context of pharmaceuticals, product markets will be distinguished on the degree of therapeutic substitutability, i.e. the capacity of multiple different pharmaceuticals to be suitable for treatment of a disease, and economic substitutability, based on inter alia price, quality, innovative and promotional activities.¹⁰⁵

5.2.2 Geographic markets

Geographic markets comprise areas in which the conditions of competition are sufficiently homogeneous and distinguishable from neighbouring areas because the conditions of competition in the supply and demand of products or services are appreciably different.¹⁰⁶ As discussed supra, the conditions under which pharmaceuticals can be sold, prescribed, and reimbursed remain a competence of Member States. Moreover, patents are inherently limited to national jurisdictions;¹⁰⁷ although not a factor strictu sensu, it could be relevant to keep in mind when examining market power next. Accordingly, in its decisions the Commission has established geographic markets as national when scrutinising pharmaceutical undertakings’

conduct.¹⁰⁸

5.2.3 Competitive restraints

Having shown how the relevant market is determined, the next applicable topic is that of the qualitative criteria determining dominance. The mere ownership of an IP right does not prima facie confer a dominant position:¹⁰⁹ referring to the discussion of relevant markets, undertakings who enjoy IP rights can still be considered competitors – and hence lack sufficient market power – on the basis of economic and therapeutic substitutability with other undertakings offering products. Dominance is ascertained on the basis of market positions,

104 Batchelor B. & Healy M., ‘CJEU AstraZeneca judgment: groping towards a test for patent office dealings’

2013 European Competition Law Review 34(3), 171.

105 European Commission (n1), 15.

106 Commission Communication (n72) para. 8; case 27/76 (n11) para 39.

107 European Commission (n5), para 416.

108 case AT.40394 (n12), para 61; Case COMP/A 37.507/F3 – AstraZeneca, Commission Decision of 15 June 2005 relating to a proceeding under Article 82 of the EC Treaty and Article 54 of the EEA Agreement OJ L 332, para 503.

109 Case T-321/05 (n27), para 270; joined cases C-241/91 P and C-242/91 P (n77), para 46.

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barriers to entry and countervailing buying power exerted on an undertaking within individual markets.¹¹⁰

Firstly, market shares are an effective initial indicator of competitive forces undertakings exert on each other within a market. Market shares exceeding 70% are indicative of an undertaking enjoying a dominant position.¹¹¹ The same accounts – save for exceptional circumstances – for a market share between 50% and 70%.¹¹² An undertaking having less than 50% market share can still be considered dominant if competitors have low(er) market shares, or if other market dynamics are deemed significant.¹¹³

Secondly, IP rights – while ipso facto not bestowing an undertaking with a position of dominance – pose as legal barriers of entry to potential competitors. They can lessen competitive constraints for rightsholders and thus be relevant in assessing dominance, especially when actively enforced.¹¹⁴ Within pharmaceutical markets, additional legal regulatory barriers of entry further limit competitive constraints on Originators, like MAs obstructing entry by (generic) competitors. Furthermore, Originators enjoy specific economic advantages – inter alia first-mover advantages regarding new and innovative products and access to advanced R&D-capacities –over Generics (and other Originators), adding or consolidating strong dominant positions.¹¹⁵

Lastly, countervailing buying power, i.e. the capacity of buyers to switch from the would-be dominant undertaking to a competitor, is an important element in establishing market power.¹¹⁶ As discussed earlier however, in the case of patentholders, Originators will hold a de jure monopoly-position on the product or process concerned, leaving buyers, i.e.

governments or insurance companies, little to no option to switch suppliers. Bargaining power is therefore limited when therapeutic alternatives are not (yet) available or scarce.

110 Whish R. & Bailey D. (n41), 43-45.

111 Ibid. para 245.

112 Case C-62/86 [1991], AKZO, ECLI:EU:C:1991:286 paras 59-60.

113 Commission Communication (n72) para 13.

114 Whish R. & Bailey D. (n41), 191; case T-321/05 (n27), paras 273-75; case AT.39612 - Servier Commission Decision of 9 July 2014 relating to a proceeding under Article 101 and Article 102 of the Treaty on the Functioning of the European Union C(2014) 4955 final, paras 2571-2574.

115 Whish R. & Bailey D. (n41), 192.

116 Ibid. 45 & 194; Commission Communication (n72), para 18; case AT.39985 – Motorola, Commission Decision of 29 April 2014 addressed to Motorola Mobility LLC relating to proceedings under Article 102 of the Treaty on the Functioning of the European Union and Article 54 of the EEA Agreement C(2014) 2892 final, paras 239-267.

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In conclusion, dominance is determined by competitive constraints from competitors and customers on relevant product and geographic market(s) on specific undertakings. If the latter can operate free from competitive market forces, based on qualitative assessments of specific circumstances at play, it is assumed to enjoy a dominant position.

5.3 Effect on inter-Member State Trade

The last criterium of Article 102 TFEU is that the conduct affects trade between Member States. The ECJ has construed a broad notion of ‘affecting trade between Member States’, as not only the effects of conduct on a single Member State market ought to suffice, but so do the adverse effects on exports to other Member States.¹¹⁷ A dominant position covering the entirety of a Member State market will generally be considered to affect inter-Member State trade, as it will complicate foreign competitors from either entering that market or customers therein,¹¹⁸ or adversely affect customers’ capacity to export to other Member States.¹¹⁹ In practice, this legal hurdle does not cause substantial problems.

Having set apart the main requirements of Article 102 TFEU, the next chapter will incrementally zoom in on excessive pricing in general, followed by application thereof in pharmaceutical CA decisions, and concluding with a reflection on the limitations thereof in the context of high prices resulting from IP rights.

117 Joined cases 6/73 & 7/73 [1974], Commercial Solvents, ECLI:EU:C:1974:18, para. 33.

118 Commission Notice, ‘Guidelines on the effect on trade concept contained in Articles 81 and 82 of the Treaty’

[2004] OJ C 101, paras 94 & 95; see also case T-228/97 [1999], Irish Sugar, ECLI:EU:T:1999:246, para. 99.

119 Ibid. para 96.

It’s not about the money, money, money…