This paper – which can be found here – is of particular interest because the authors were the case handlers in this case, which is one of the (very) few recent cases on excessive pricing.
The paper begins with a discussion of why enforcement against excessive pricing is frowned upon by competition agencies (and absolutely discarded in the US). First, there may be a negative impact on investment caused by limits to a company’s freedom to set prices, which may limit its ability to recover capital invested in research. Second, in normal conditions regulatory intervention is unnecessary: the market will self-correct, because excessive prices will stimulate the entry of competitors into the market. Third, as a rule competition authorities seek to avoid having to decide what is the ‘correct’ or ‘fair’ price, since this would require a judgement which is closer to the competences of a sectoral regulator. Fourth, the analysis of situations of excessive pricing faces significant difficulties in terms of data availability and standard of proof, which have led some to consider such an exercise a ‘daunting, if not, impossible task’.
Despite these difficulties, the European courts have gone on to develop a two stage approach for excessive pricing since the seminal judgment in United Brands. Recently, a number of jurisdictions in Europe and elsewhere – including Italy, the UK, the European Commission, Denmark and South Africa – have brought excessive pricing cases in the pharma sector. It is in this context that the authors describe their approach to the Aspen case in Italy.
A second section describes the facts of the case. It concerned a number of cancer medicines without therapeutic substitutes called Cosmo drugs. The drugs were developed long ago, during the 1950s and 1960s, and the IP protection had long expired when Aspen, a generics company, bought them from the originator, GlaxoSmithKline (GSK). The long commercialisation period of Cosmo drugs by GSK more than allowed for full amortisation of R&D and other expenses incurred with the drugs by the time of their acquisition by Aspen. These were niche products that lacked substitutes: there was only one market authorization for the sale of these drugs, and the small size of the market and the limited prospects of adequate financial rewards for market entry meant that potential competitors were unlikely to ever come into the market.
The Italian procedure for fixing prices on reimbursable drugs provides that agreements between the registration holder and AIFA (Agenzia Italiana del Farmaco, the Italian Pharma Agency) can be re-negotiated every second year. In 2013, Aspen started negotiations with AIFA aimed at increasing the price of Cosmos drugs and aligning it with the price charged in other EU countries. In the course of these negotiations, Aspen insisted that the Cosmos drugs should be categorised as not reimbursable; threatened to withdraw the Cosmos drugs from the market; and deliberately caused a shortage of Cosmo drugs in the Italian market during price negotiations. This aggressive conduct by Aspen – in a context where the Cosmos portfolio constituted lifesaving and irreplaceable drugs – led AIFA to agree to price increases of up to 1500%.
The third section argues that, in this case, the arguments against antitrust intervention did not apply. First, concerns with interfering with R&D and dynamic innovation in the pharmaceutical sector were not present. Second, in this case sectoral regulation was not better suited than antitrust intervention. The situation was subject to sectoral regulation (Cosmos drugs are reimbursed by the Italian health service and their price is subject to negotiations with AIFA), but this did not prevent the price increase. Given the absence of substitutes (actual and potential) for Cosmos drugs, and the preference of doctors and patients for therapeutic continuity, demand was extremely inelastic – leading to a willingness to pay that trended towards infinity. In this context, the regulatory framework was unable to prevent substantial anticompetitive effects from occurring.
The analysis then moves on to the application of the excessive price test in this case. The two-stage United Brands test requires: (i) verifying whether prices are excessive by reference to the reasonable economic value of the product; and (ii) that the price charged is either unfair in itself or by comparison to some other price. In other words, both a quantitative analysis and a qualitative assessment are required before a finding of excessive pricing.
Regarding the quantitative dimension, the prices were found to be excessive when compared to a number of benchmarks: (i) while the original prices already generated profits, the percentage gross margin increased between 300% and 1500%; (ii) the Return on Sales was between 150 and 400% higher than a cost-plus benchmark would have been; and (iii) the internal rate of return was two to four times in excess of the average rate of return for generics (which is 8%).
As to the qualitative dimension, it was found that Aspen’s practices were such as to make its prices unfair: (i) Aspen did not incur any R&D or marketing costs, and did not incur any business risk; (ii) evidence showed that Aspen’s negotiation with AIFA were conducted following a precise and comprehensive strategy, defined centrally and aimed at putting pressure on AIFA; (iii) while AIFA is normally a monopsonist, in this case it did not have any countervailing buyer power.
Ultimately, the misuse of the Italian national health services’ limited resources stemming from unjustified price increases was deemed unfair, particularly because the prices applied by Aspen did not have any non-cost related justification, such as improvements in quality or in the level of service. As a consequence, Aspen was fined EUR 5.6 million. On appeal, the Italian First Grade Administrative Court (TAR) confirmed the Italian competition authority’s decision.
In May 2017, the European Commission opened a formal investigation against Aspen to assess the same conduct in the entire European Economic Area, except Italy. This is the Commission’s first investigation into excessive pricing practices in the pharmaceutical industry. Furthermore, in June 2017 the South African NCA also started investigations against Aspen for excessive pricing [N.B. while not reflected in the piece, this investigation has been discontinued as regards Aspen].
Comment: This paper provides a detailed and comprehensive overview of the facts and reasons underpinning the decision to prohibit excessive pricing as regards the Cosmo drugs.
I suppose the only point I would add is that the practice included more than a pure pricing practice – the finding of unfairness related to the business conduct of Aspen as a whole, a bit like in the Pfizer/Flynn case (where the practice included attempts to prevent the entry of parallel imports into the UK). This may provide some guidance in the future regarding whether a pricing practice is unlawful or not; in any event, I am very interested in the outcome of ongoing excessive pricing cases in this area.