Excessive Pricing, ‘Pay-For-Delay’ and Rebates: A New Era of Enforcement in the Pharmaceutical Industry

by Shearman & Sterling LLP
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The European Commission (EC) and other national competition authorities (NCAs) have traditionally shied away from investigating allegations of excessive pricing and appearing as price regulators. Commissioner Vestager warned that such investigations should only be commenced with caution. The pharmaceutical sector, however, has recently seen an uptick in excessive pricing investigations, both across Europe and worldwide. Since the EC’s 2008 pharmaceutical inquiry and corresponding inquiries of NCAs, regulators have also instigated other abuse of dominance and anti-competitive agreement probes in the industry.

Resurgence of Excessive Pricing

There is an inherent difficulty in identifying the point at which a price becomes ‘excessive.’ Traditionally, the EU courts proposed a two-step test, identifying whether: (i) a difference between costs incurred and prices charged was excessive; and (ii) whether prices were unfair in themselves, or by comparison to other products.1  The Court of Justice of the European Union (CJEU)’s judgment in AKKA has confirmed that although there is not a single method to determine whether prices are excessive, the comparison of prices between member states is a valid method of doing so, provided any differences are significant and persistent and can therefore be regarded as appreciable.2

In May 2017, the EC commenced its first pharmaceutical excessive pricing investigation against Aspen,3 alleging price increases of cancer drugs following the expiration of their patent protection, as well as threats by Aspen to remove such drugs from multiple markets. The medication was old, cheap to produce and little investment had been made on its improvement. In instigating the investigation, Commissioner Vestager commented that although entities should generally be rewarded for producing such medication “when the price of a drug suddenly goes up by several hundred percent, this is something the Commission may look at.”4 All four of the drugs subject to the EC’s investigation together with another drug had been considered in a corresponding investigation against Aspen by the Italian competition authority; fines of €5.2 million were imposed in September 2016, upheld by national courts in August 2017. In October 2017, South African authorities withdrew excessive pricing investigations against Aspen, and the company announced a probe had been commenced against it by the U.K. Competition and Markets Authority (CMA).

The U.K. has also seen a recent upsurge in pharmaceutical excessive pricing cases; in December 2016, the CMA imposed fines on Pfizer and Flynn Pharma (FP) of £84.2 million (a record CMA fine) and £5.2 million, respectively, where a de-branded anti-epilepsy drug was sold at excessive price increases of up to 1600% by Pfizer and 2600% by FP. The CMA’s lead investigator in the case noted that there was “no justification” for the price rises, particularly when the “capsules [were] a very old drug for which there has been no recent innovation or significant investment,”5 also ordering the parties to reduce their prices. The cases have been appealed to the Competition Appeal Tribunal (CAT);  submissions  were made in late 2017, and judgments have been reserved.

Shortly after the Pfizer decision, the CMA issued a statement of objections (SO) to Actavis, amended in August 2017 to include Intas Pharmaceuticals and Accord Healthcare, alleging prices increases for 10 mg and 20 mg hydrocortisone tablets by over 12,000% and 9,500%, respectively. The CMA also issued an SO to Concordia in November 2017, provisionally finding a 6,000% price increase in a thyroid drug despite its stable production costs; per pack, costs of the drug were preliminarily found to have increased by almost 57 times between 2007 and 2017.

Outside of Europe, South Africa launched excessive pricing investigations in June 2017 relating to Roche’s herceptin drug and Pfizer’s lung cancer medication. China’s National Development & Reform Commission also published decisions sanctioning Chinese pharmaceutical companies for excessive pricing of off- patent products in August 2017.

There is therefore an indication of a global uptick in excessive pricing cases, which seem to fall in line with a distinct pattern – investigations into off-patent medicines used for the treatment of limited patient populations, with a longstanding presence on the market and minimal to no R&D investment.

Other Investigations

Prior to its 2008 inquiry, the EC had only found one abuse of dominance in the pharmaceutical industry against AstraZeneca,6  which in 2005 was found to have abused its  dominant position by misusing patent and regulatory systems to exclude new entrants from the market. Other NCAs have followed suit more recently: The CMA in May 2017 issued an SO against Merck Sharp & Dohme, alleging that its offer of discounts on the infliximab drug was an abuse of dominance, likely to restrict competition from biosimilar copies of the drug. In December 2017, the Romanian authorities commenced proceedings against Roche, claiming it had abused its market power in tenders for drug supplies to hospitals. 

More recent cases against pharmaceutical companies by the EC have included the 2014 Servier case, which found the company to have breached Article 102 TFEU by acquiring technology allowing generic drug manufacturers to produce products without breaching Servier’s patents, thereby closing their avenues to entry.7 Servier had also been found to breach Article 101 TFEU  by concluding settlement agreements with generic manufacturers, which agreed in return for payments to restrain their product from entering the market before expiration of Servier’s patent. Such ‘pay-for-delay’ agreements were also held to be unlawful in the EC’s case against Lundbeck and generic drug manufacturers in 2013, imposing fines totaling approximately €110 million.8  The nature of such agreements as infringements of Article 101 TFEU  by effectively amounting to market sharing agreements was further upheld by the General Court (GC) in September 2016.9

Lundbeck’s pending appeal to the CJEU,10 as well as Servier’s pending appeal before the GC,11 will be instructive on how the EC will classify ‘pay-for-delay’ agreements in the future. Nonetheless, the CMA already has a track record of finding such agreements to be anti-competitive: In February 2016, it imposed a fine of £45 million on GlaxoSmithKline and others for entering into ‘pay-for- delay’ agreements, on the basis that they deprived the U.K. National Health Service (NHS) of price reductions that would otherwise arise from earlier entry of generic medicines (the case was appealed to the CAT, with a judgment pending). The CMA also issued an SO in March 2017 against Actavis and Concordia for entering into a ‘pay-for-delay’ agreement for three years.

Conclusion

It remains to be seen whether the prevalence of excessive pricing and other contentious investigations in the pharmaceutical sector will continue. Recent EU court guidance on when prices can be classified as ‘excessive,’ worldwide antitrust probes against pharmaceuticals and more general national pharmaceutical sector inquiries (as commenced, for instance, by France’s competition authority in November 2017) may incentivize the EC and NCAs to push on with such cases. Pharmaceutical companies should therefore be  wary of regulator investigation, particularly when divesting longstanding off-patent products or entering into agreements with generic drug manufacturers.

Investigations may also shed light on another outstanding question: whether abusive behavior in the pharmaceutical sector should be managed by antitrust regulation at all, or if sector-specific regulation is preferable. In the U.K., new legislative proposals seek to allow the Health Minister to require companies to reduce prices of generic drugs, in addition to existing regulation on the sale of branded medicines to the NHS. The potential support for any such movements will ideally be drawn out through the many pending  pharmaceutical sector investigations and inquiries across the globe.

Footnotes

1. Case C-27/76, United Brands v. Commission (EU:C:1978:22).
2. Case C-177/16, Autortiesību un komunicēšanās konsultāciju aģentūra/Latvijas Autoru apvienība v. Konkurences padome (EU:C:2017:689).
3. Case COMP/40394 – Aspen.
4. Commission press release IP/17/1323.
5. UK Competition and Markets Authority Press Release “CMA fines Pfizer and Flynn £90 million for drug price hike to NHS.” 
6. Case COMP/A.37.507/F3 – AstraZeneca.
7. Case COMP/AT.39612 – Perindopril (Servier).
8. Case COMP/AT.39226 – Lundbeck.
9. Case T-472/13, Lundbeck v. Commission (EU:T:2016:449).
10. Case C-591/16 – Lundbeck v. Commission (pending).
11. Case T-691/14, Servier and Others v. Commission (pending).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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