The paper – a draft of which can be found here – discusses how competition law may be applied with regard to abuses of dominance involving patented pharmaceuticals. It argues that the pay for delay cases in both the US and the EU are only the first step in exploring the application of competition law to such products. The paper then examines abuses of the patent system with the aim to exclude competitors and, second, whether excessive prices can be sanctioned as regards IP-protected pharmaceutical products.
The paper is structured as follows:
- Section II investigates the interaction between IP and competition law. This has been covered extensively in previous emails, so I will merely summarise the basic points. Inasmuch as IP law creates temporary monopolies, this would seem to create a tension with competition law, but this tension is merely apparent. Both competition and IP law ultimately seek to promote consumer welfare, and the protection granted by IP law does not amount to market power. Moreover neither the nature nor the exercise of IP rights is absolute: as with all forms of property other, legal rules continue to apply to and coexist with IP rights.
- Section III provides a high-level overview of the interaction of competition and IP in the pharmaceutical sector. The current model of innovation in the pharmaceutical sector (unlike other sectors such as software) is heavily dependent on IP rights. Arguably as a result of this strong and central role of IP, dominant positions are created relatively frequently in this sector until generics or bio-similars can enter the market. As the price for new pharmaceuticals have increased remarkably over the recent years throughout the EU, this raises the question whether this may amount to exploitation of a dominant position.
- Section IV reviews the case law on dominance regarding IP protected pharmaceuticals. It breaks them down into two types of abuse:
- Exclusionary Abuses – This section reviews cases of parallel trade that build on the doctrine of exhaustion of IP rights; pay-for-delay cases, particularly Lundbeck; and cases of manipulation and deceit of patent offices, such as Astra Zeneca.
- Exploitative Abuses – This section is devoted to excessive pricing. It describes the two-pronged test developed by the CJEU in United Brands (i.e. is the price excessive by reference to costs; if so, are prices also unfair), before describing the limited number of cases where infringement decisions regarding excessive pricing have been reached in this sector.
- Section V argues that excessive pricing should also apply to pharmaceuticals that are protected by IP rights. It addresses a number of objections against pursuing excessive pricing cases regarding IP-protected brands:
- High prices encourage market entry, thereby promoting both dynamic and allocative efficiency – The preferred mechanism to reduce prices from a competition perspective would not be regulation or competition policy intervention, but a competitive response in the market. One common argument against excessive price cases is that high prices should attract new entrants into the market. In this context, IP rights may constitute barriers to market entry. Since entry is not a possibility, there is no concern about the effect of prices as signals for competitors to enter the market – which means that one of the main arguments against bringing excessive pricing cases does not apply as regards IP protected products. The same reasoning applies for orphan drugs, which enjoy a ten-year period of exclusivity on the specific disease (the ‘indication’) that they treat.
- Determination of prices should be left to the interplay of supply and demand – The authors do not dispute this as a rule. In the case of pharmaceutical products however, price pressures from the demand side tend to be weak due to people’s willingness to pay for drugs that are life-prolonging or that significantly improve the quality of life, the fact that prescribers and consumers often do not pay the price of pharmaceutical products, and the absence of sufficient buyer power.
- Excessive pricing cases undermine innovation and detract from risky investments – This argument holds that monopoly prices may be a reward for risky investments. Special caution is warranted in intervening with respect to products covered by IP rights because the misapplication of competition law might directly impede innovation. The authors accept this argument, but don’t see why it should detract from the application of excessive pricing. One should instead take into account ex-ante probabilities of success, and avoid the trap of capping profits on the handful of successful products without taking the ex-ante possibilities of failure into account.
- Difficulty in Estimating Prices – In many cases, pharmaceutical products face limited price constraints. When price constraints are too weak, pharmaceutical companies may price drugs far above the level that is necessary to recoup investments. The authors accept that expensive drugs should not be equated with excessive pricing as such. At the same time, the authors see no reason why excessive prices should not be found to exist for patented products that are under very limited price constraints. Instead, what is required is that the purpose of the IP right – to stimulate welfare enhancing innovation – is integrated into the excessive pricing assessment. In practical terms this means, as noted in the bullet above, that the analysis should take into account ex-ante probabilities of success when determining whether prices are successful.
Comment: I am unable to comment on the merits of this paper, since it has been published by a national competition authority that is a member to the OECD’s Competition Committee. I will merely say that the argument the paper advances is not reflected in enforcement practice – I am not aware of any case in an OECD country where an excessive pricing case has been brought against the pricing of a patented drug.