This paper can be found here. At the time it was written, competition law had rarely been used to address “excessive pricing” of pharmaceutical products. This was a worldwide phenomenon. In the United States, federal courts have refused to apply excessive pricing as an antitrust doctrine, either with respect to pharmaceutical products or more generally. Courts in some other countries have been more receptive to considering the doctrine, but application of the doctrine has been sporadic at best, including with respect to pharmaceuticals.

Against this, the author argues that competition law and policy should develop robust doctrine to address excessive pricing in markets lacking adequate control mechanisms against exploitative behaviour. The article focuses specifically on the pharmaceutical sector because of its unique structure and social importance.

This piece is divided into two parts. The first addresses competition policy and why it is appropriate to develop a doctrine of excessive pricing to address distortions in the pharmaceutical sector. The second part addresses the technical aspect of how courts or administrative authorities may determine when prices are excessive, and identifies potential remedies. Looking at it in more detail:

A first section looks at the reasons for not using competition enforcement against excessive prices. It also reviews the US and EU systems.

Competition law and policy experts recognise that there is a paradox in the reluctance of courts and administrative authorities to tackle excessive pricing directly. There is a presumption that charging high prices (e.g., above marginal cost) will attract new market entrants who will eventually bring prices down. Recent US federal court decisions also express scepticism concerning the capacity of judges to determine what fair prices are, given that judges are not technical regulatory experts. While such an approach may work to protect consumers in general, its utility is limited in cases where the market does not adjust. This is the case of originator pharmaceutical markets where products benefit from legislatively granted exclusive marketing rights.

In  any event, high prices by a pristine monopolist are not infringements of US antitrust law. The author provides an overview of the case law in this regard – mainly the Trinko decision already described in the paper above. However, the author considers that there is no reason in principle why the Sherman Act should not address excessive pricing “as such.” The object of the Sherman Act is to protect the public from the harm that can result from the “oppressive” exercise of monopoly power. It is true that the holder of a patent on a unique and important medicine enjoys a lawful monopoly authorised by Congress. Nonetheless, the fact that a monopoly was acquired by lawful means does not entail that it may not be used “to oppress individuals and injure the public generally”.

A different objection to enforcement against exploitative pricing practices, which applies even in jurisdictions where enforcement against excessive prices is a possibility, is a belief that it is overly difficult to determine what constitutes an excessive price. In this respect, the author discusses the EU, Canada, South Africa, referring to the 2011 OECD Roundtable on Excessive Pricing (with which I have become too well acquainted). Even in these jurisdictions, competition authorities are reluctant to pursue excessive pricing cases on the following grounds: (1) that it is difficult to establish what is a reasonable price, and therefore to establish what price might be excessive; (2) that courts / competition agencies are not price control administrators; and (3) that a patent system was created by law and that it is for legislators to limit its effects. The author dismisses these arguments. As described in greater detail below, he believes that courts are able to identify reasonable / excessive prices. He also argues that court decisions regularly set prices, e.g. by assessing royalty levels in intellectual property disputes. As to legislative powers, competition law routinely interacts with patent law.

Instead, the author encourages further development and application of the excessive pricing doctrine by competition authorities and courts, particularly in the pharmaceutical sector. The arguments against application of excessive pricing doctrine are essentially arguments against government interference in the free market; but no market is “less free” than the pharmaceutical market, which is regulated every step of the way. As such, the author argues that, even in the context of patent protected pharmaceuticals, there is such a thing as a “reasonable price” and, conversely, an “excessive price” cognisable under competition law. The question, then, is how to determine whether a price is excessive.

The second section makes the case that it is indeed possible to determine the reasonable price of a pharmaceutical and to establish what price may be excessive.

There are various methodologies for determining whether a price is excessive. For example, governments outside the United States routinely determine what they are willing to pay for originator pharmaceutical products based on comparative pricing across baskets of countries (e.g. reference pricing).  An alternative type of reference pricing compares the prices demanded by originators with prices established between monopsony purchasers (e.g., government health programs) and monopoly suppliers (i.e., originator suppliers) where such procurement arrangements are in place. It is also possible for price to be based on the “value” to healthcare systems of a medicine in terms of alternative treatments. The author considers that this type of value assessment is essentially a “hostage” bargaining model: the drug is under the control of the monopoly patent owner, and the price of ransoming the drug is whatever the party seeking to obtain it can pay. A similar “value proposition” could be worked out for virtually any essential product, with deleterious consequences.

In any event, the logical starting point for determining whether the price of a product is unfair is the manufacturer’s cost of making the product, which is why this article focuses on cost/price methodologies. Once the cost is determined, the differential between cost and price is identifiable and a determination made as to whether that differential is “excessive”. In the case of originator pharmaceutical products, the cost must include the R&D that goes into discovery and refinement of the product, including the cost of clinical assessment. Because securing marketing approval for a pharmaceutical product involves trial and error, account reasonably must be taken of a risk factor.

Such an approach faces a number of difficulties. First and foremost, there is an absence of data on the cost of researching and developing originator pharmaceutical products. Some originator companies in the United States have cooperated with a group of academic researchers based at Tufts University, and the main aggregate numbers used by the Pharma industry to portray the costs of new drug R&D are sourced from reports issued by Tufts, which found that it takes at least 10 years and an average of $2.6 billion to develop and bring a new FDA-approved medicine to market ($2.558 billion using capitalized costs, and $1.395 billion using out-of-pocket costs). However, this study has been criticised on a number of grounds, including lack of transparency regarding the underlying data used by the researchers.

Thus, a major contribution of antitrust/competition litigation directed toward excessive pricing would be to require the originator industry to provide concrete data on its costs, which would be the ideal way for determining R&D costs. Nonetheless, there are alternative routes for securing relevant data, though perhaps less robust. These include: (1) assessing the cost of acquiring R&D and/or business entities engaged in R&D; (2) using costs reported to tax authorities; and (3) examining data provided to securities exchange officials (e.g., the U.S. Securities and Exchange Commission) for public securities filings.

The second difficulty is the incorporation of a risk factor into the excessive pricing analysis. In short, the author suggests that there are methodologies that can be used to calculate with some reasonable precision the cost of R&D incurred in developing a new drug and that take into account the risk of failure. Risk and failure are relevant to the cost of developing new drugs, and it is appropriate to account for expenditures on reasonably related R&D investments on the path to a successful result.

The author identifies two types of risk profiles for medicines: (i) low risk, where there are very low risk projects in which companies develop new delivery mechanisms, new dosages, and improved formulations but in which there is sufficient existing technology and knowledge of human biology to predict an outcome. Most new drugs fall within this general category of products for which research has low levels of uncertainty and high probability of success; (ii) high risk, comprising investments in disease treatments involving a large number of unknowns, such as the underlying cause of the disease / condition, or knowledge concerning the mechanisms for intervening in the causal biologic process. This type of research will generally be more expensive because it entails looking into more research paths that have to be explored but which do not yield commercially viable results. When  dealing with high risk medicines, one should begin by determining whether the cost of unsuccessful R&D are reasonably ancillary efforts to the development of the excessively priced drug. Whether an effort is reasonable is something that can be subject to judicial and factual assessment.

The third challenge is to identify the benchmark for determining whether a price is excessive. According to the author: ‘A reasonable way to determine whether the price of an originator pharmaceutical product is excessive is by comparing it to the cost of research, development, and production, and adding some amount for “future R&D.” Reasonably, the “normal” price of an originator drug would take the remainder of the exclusivity term (by way of example, ten years), calculate the anticipated demand for the product over that term (i.e. the potential level of sales), set a price that would compensate for the “all in cost,” and derive a price that would return the cost plus a reasonable increment to account for future R&D. (…) in the cases where pharmaceutical pricing is “stratospheric,” a judge or jury may not need a finely tuned methodology for determining when a price is unfairly excessive.

The last challenge concerns crafting appropriate remedies. The author thinks that it is an advantage of the US system that claimants may obtain treble damages. Other remedies may impose the pricing level of a pharmaceutical product, or even the distribution of excessive pricing profits to purchasers, including healthcare plans and individual patients and consumers.


This is an ambitious piece, and one of the most optimistic takes on the capabilities of antitrust I have ever seen. It is also one of two pieces I am aware of that advocates for bringing excessive pricing cases as regards IP-protected pharmaceuticals – which, in addition to benefitting from a state sponsored monopoly, are usually extremely regulated.

While the piece is thought-provoking, I personally struggle with a number of its arguments. For example, I have problems understanding how the idea that a market is not competitive because it is regulated leads to the conclusion that this is a market with ideal conditions to bring excessive pricing cases – or, to be more exact, in what circumstances this can be done, since one would expect regulation to constrain, when not outright fix, prices, making it exceedingly difficult to identify the relevant benchmark price.

Furthermore, and unsurprisingly given the concerns about institutional capacity I have expressed throughout these blogposts / emails, I am also not sure that decisions by competition agencies or courts would be well-placed should replace those of much more specialised and better staffed health regulators (an argument the author implicitly makes).  On a related point, I really struggle with the idea that calculating the benchmark price of a new pharmaceutical product is feasible – recent decades have demonstrated the difficulties that even expert State services devoted to this face – or that a risk ratio is easily identifiable.

Then again, maybe I am too orthodox in these matters. These ideas seem to be getting some traction: the Dutch competition authority has published a working paper pointing in this direction, which I reviewed here, as has the UN (admittedly, in a report co-written by the author of this paper).

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