Competition authorities debate the circumstances in which intervention against alleged excessive pricing practice in the pharmaceutical sector may be justified
11 December 2018
In recent years, consumer organisations have been monitoring the evolution of medicine prices in the EU and have, in some cases, called for the intervention of competition authorities to protect citizens’ rights to affordable healthcare. In the context of this resurgence of interest in excessive pricing in the pharmaceutical sector, on 28 November 2018, the Organisation for Economic Cooperation and Development (OECD) held a round table discussion on the issue. The debate focused on the much disputed question of the circumstances in which intervention on the basis of competition rules may be justified. In preparation for this discussion, the Secretariat of the OECD issued a Background Note setting out a number of reasons in favour and against intervention and the European Commission (EC) and several Member States similarly submitted written contributions on the topic.
In its policy paper, the EC expresses the view that competition authorities should be “mindful of their obligation to effectively enforce Article 102 TFEU in its entirety, i.e. including the prohibition of unfair pricing” which “applies to all pharmaceutical products, like it applies to any other product or service”. Acknowledging that there are difficulties in pursuing companies for excessive pricing of pharmaceuticals (such as determining when a price is excessive and what price is acceptable as a remedy), the EC advocates a prudent competition policy in which intervention is warranted under stringent conditions - for example, where market forces fail to bring prices back to normal levels within a reasonable time frame and where competition authorities factor investments, risk-taking and innovation into their assessment of unfairness.
Member States such as Italy and the UK have generally endorsed the EC’s position in their contributions to the OECD, emphasizing that competition law intervention against excessive pricing in the pharmaceutical sector may be justified in cases of market failure and lack of effective regulatory solution. The Netherlands seem to have adopted a more interventionist approach than other Member States – for example, seeing no objection, in principle, to intervention even where medicinal products are still patent-protected.
Based on the OECD round table discussions, this post outlines the arguments in favour of and against using competition law to address practices of alleged excessive pricing in the pharmaceutical sector.
KEY ARGUMENTS IN FAVOUR OF AND AGAINST USING COMPETITION LAW TO ADDRESS EXCESSIVE PRICING PRACTICES IN THE PHARMACEUTICAL SECTOR
The case for competition law intervention to address excessive pricing practices in the pharmaceutical industry is certainly not obvious. The Background Note prepared by the OECD for the round table on excessive prices in pharmaceutical markets acknowledges this point and summarises the main arguments for engaging or not engaging in competition enforcement against excessive prices.
First, at a conceptual level, intervening through enforcement action against excessive prices seems counter intuitive given that prices play an important signalling function in markets: high prices indicate to entrants that entry is likely to be profitable. In the words of Advocate General Wahl: “In particular, there is simply no need to apply that provision [against high prices practiced by dominant undertakings] in a free and competitive market: with no barriers to entry, high prices should normally attract new entrants. The market would accordingly self-correct”. Thus, in the absence of significant barriers to entry, any enforcement action against excessive prices might not only be unnecessary, but could actually perpetuate the existing market structure by blocking efficient signals to promote market entry.
Second, interference with high prices may disincentive investment and innovation, to the detriment of consumer welfare. This is a particularly relevant risk in the pharmaceutical area, where R&D investments are high and risky, but of paramount importance. Indeed, pharmaceutical companies generally charge high prices for currently marketed, successful medicines in order to recoup past R&D investments (also for ‘failed’ medicines, which never reached the market) and to generate sufficient funding for future R&D investments. In such cases, enforcement action against excessive prices could dampen innovation incentives, likely reducing in turn the introduction of new or improved pharmaceutical products on the market. This argument applies with even more force where pharmaceutical products are covered by IP rights, which are intended exactly to reward their owners for risky R&D investments by granting them a period of protection during which they are free to charge monopoly prices.
A third, practical argument relates to the challenge of identifying appropriate assessment standards. Over time, competition authorities and courts have used different methods (all with their own shortcomings) to determine whether prices are ‘excessive’. Usually, they would examine prices relative to production costs and assess whether such prices (or margins) are disproportionate, by comparing them to appropriate benchmarks. Such price-cost analysis seems particularly challenging in the pharmaceutical industry, due to the pricing and cost structures of pharmaceutical companies being opaque. In addition, establishing an appropriate benchmark to determine whether prices (or margins) are ‘excessive’ is not straightforward, particularly where no comparable products exist in the market. Moreover, as the industry is characterised by significant R&D investment, competitive prices can be expected to be well above marginal productions costs. (The assessment of whether prices are excessive and unfair has also been perceived to be particularly complex in light of other particularities of pharmaceutical markets, such as the fact that demand is less influenced by price due to the often indispensable nature of medicines and a frequent separation of roles of consumer, decision-maker (health professional) and payer (health insurance and/or government).
Fourth, where price regulation may be called for, competition authorities and courts are ill-equipped to design and implement suitable remedies. Indeed, price regulation requires in-depth market knowledge and permanent monitoring and should rather be reserved to specialised regulators rather than to a competition authority or court.
These difficulties (specifically in establishing when prices are excessive/unfair and in designing and implementing suitable remedies) are further exacerbated by the fact that pricing of pharmaceuticals is a complex matter. In particular, (i) prices for pharmaceutical products are often heavily regulated; (ii) prices not only cover costs related to a specific pharmaceutical product, but are also intended to cover costs - in particular, R&D investment - related to other ‘failed’ and future pharmaceutical products; and (iii) the allocation of certain R&D expenses to a specific pharmaceutical product may prove difficult, as it is not inconceivable that a certain piece of R&D forms the common basis for several pharmaceutical products.
Ultimately, this gives rise to significant risks of enforcement errors, where the implications of such an error can be very severe and arguably outweigh the negative consequences of mistakenly failing to intervene. Most notably, over-intervention seriously risks curtailing pharmaceutical companies’ incentives to invest and innovate to the detriment of consumer welfare, whereas high prices following under-intervention may actually invite market entry - thus allowing the market to self-correct.
The main argument in favour of using competition law to address alleged cases of excessive pricing in the pharmaceutical area is that enforcement action may be justified and the most timely option in cases where regulation is not available/appropriate (e.g., for non-patented drugs), markets fail to self-correct and the risk of chilling incentives to innovate is limited.
The OECD round table discussion overall recognises that excessive pricing is typically viewed as a temporary and self-correcting market failure or, conversely, as a problem to be addressed through sector-specific regulation. Competition law enforcement action is warranted only in exceptional cases and on the basis of robust assessment standards.
However, it is fair to say that competition authorities and courts in the EU still struggle to determine whether a price is excessive or not and, if so, whether it is unfair. Whilst some guidance may be derived from a few precedents (see, in particular, the United Brands case: “the questions therefore to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products”) and the Court of Justice’s preliminary ruling in the AKKA/LAA case has contributed to shed light on some relevant questions, it is still the general view that this remains a less than clear area of the law – especially in pharmaceutical markets.
Whilst the Netherlands does not exclude enforcement action also where patent-protected drugs are involved, the risk of false positives seems particularly pronounced here: the benchmark price and unfairness assessment is arguably more complex in such cases, given how costly and complex the R&D process and uncertain the market returns are, and the heightened risk that enforcement action at this stage in a medicine’s life cycle may negatively affect innovation incentives. As the Italian competition authority acknowledges in its contribution to the OECD, “intervention should …be limited to cases where the risk of distorting dynamic competition is very limited, if non-existent”.