Aspen, one of the biggest pharmaceuticals giants, came into limelight when it acquired cancer treating drugs after their patent expired in 2009. The drugs were useful for the treatment of leukaemia, hematologic tumours etc. Across the European Economic Area, it is sold under different brand names and it is an extremely popular and important drug in treating these deadly diseases. Usually the price of the medicines falls significantly after they go off patent. The reason for this is that in the EU, national authorities of Member States can adopt pricing and reimbursement rules for treatments and medicines according to their wishes in accordance with their economic and health needs. When medicines go off patent, Member States have the liberty to influence the prices and encourage the competition to achieve lower prices. However, in Aspen’s case, curiously, a significant price increase was observed for all the life – saving medicines.
The European Commission had information indicating that Aspen had imposed an unjustified price increase of up to several hundred per cent, which is also known as ‘price gouging’. They also had information that to impose such prices, Aspen had threatened to withdraw the essential medicines and even did so in various cases. Therefore, the Commission believed that Aspen had breached Article 102 of the Treaty of Functioning of European Union (TFEU) which lays down the rules for the abuse of the dominance position and Article 54 of the European Economic Area (EEA) Agreement which forbids the imposition of unfair prices or unfair trading conditions on customers. This led to a formal investigation that was opened in May 2017, to investigate the concerns that the company had engaged in excessive pricing of these life-saving medicines.
In the current piece, the author will first briefly explain some relevant jurisprudence regarding excessive pricing, before analysing more closely the Aspen case and its outcome. The current case is an interesting read, not just because, rather than simply being fined, Aspen offered commitments to reduce the prices of six critical cancer medicines, which were accepted by the Commission, but also because at a moment when the world is in the grip of a deadly virus and life-saving medicines and vaccines are our only way ou it has become a necessity to regulate the prices offered by the pharmaceutical industry.
Article 102 (a) of the TFEU provides that an abuse of a dominant position may, in particular, consist in “directly or indirectly imposing unfair purchase or selling prices or other unfair trading condition.” The prohibition of Article 102 (a) applies to products and services, including pharmaceuticals products. Excessive pricing is clearly, a form of unfair prices. However, there is no definition for excess or excessive pricing. High rates are not outright forbidden. Competition authorities also do not prefer to intervene for excessive pricing. Market forces play a crucial role when the prices are raised by one company. The authorities intervene only if the price set by a dominant company is at a level that bears no fair connection to the economic worth of the goods. This entails determining whether the price cost margin is “excessive” and whether the price is “unfair” in and of itself or in comparison to competitive products.”
- Tests for Excessive Pricing
In the case of United Brands Company and United Brands Continental v Commission the EU Court of Justice attempted to define excessive pricing. It held that a price is excessive or unfair when it has “no reasonable relation to the economic value of the product (para 250)”. A number of methods were accepted in this case to determine whether price is excessive or not. Key emphasis was put in price and costs of the products. The Court held that price can be considered unfair when
“The dominant undertaking has made use of the opportunities arising out of its dominant position in such a way as to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition. In such circumstances the price exceeds the economic value of the product that would prevail under ‘normal and sufficiently effective competitive conditions’” (para. 250).
For establishing the price above the economic value the Court also took into account the excessiveness of “profit margin”.
In another, much more recent case of Autortiesību un komunicēšanās konsultāciju aģentūra / Latvijas Autoru apvienība v Konkurences padome, it was held that different methods can be combined, which are suitable and available depending on the circumstances of the case (para. 51), thereby reaffirming the United judgment.
In the case of Port of Helsingborg, the court explained that other non-cost related factors, like demand-side considerations, are also relevant factors in determining the economic value of the product (para. 226).
In sum, these cases have provided various guidelines to the authorities for excessive pricing. Still it is important to note that we still do not have a common benchmark which applies in all the cases uniformly. As explained earlier, different cases use different criteria to determine excessive pricing and thus they vary from case to case.
- Excessive Pricing and Pharmaceutical Industry
In recent years, there has been an increase in investigations by the European Commission and National Competition Authorities into the pricing practice of the pharmaceutical industry. However, pharmaceutical markets have important features that make it considerably different from the standard models for competitive market. There are various reasons as to why pharmaceutical sector is ill suited to excessive pricing investigation.
Firstly, the pharmaceutical sector is a dynamic industry where innovation is the key to be successful. They spend a hefty amount in Research and Development which is protected by patents. Intervention by competition authorities for excessive pricing will limit the rewards for innovation thus, limiting the invention of potentially life-saving drugs.
Secondly, the pharmaceutical market is highly regulated as it is. In case of other abuses like exclusionary behaviour, abuse of dominant position etc., the intervention of competition authorities seems appropriate. However, in the case of pricing, competition authority might not be the right tool for correcting it. One of the most important reasons is that the field is highly specialised and it requires deep industrial knowledge to take an informed decision to enforce a price. Such knowledge is difficult to achieve in a generalised institution like competition authorities. It is interesting to note that this issue has not been limited to just pharmaceutical industry. Other industries like the technology sector have raised similar questions and problems.
Thirdly, in the EU, as indicated, each country has different mechanisms in place for pricing and reimbursement of medicines, based on its own health and economic priorities. Thus, setting a pan-European standard for acceptable prices of medicines is a complicated task for the European Commission.
The Aspen case
In the case of Aspen, the European Commission came to the finding that the company’s prices were undoubtedly disproportionate. The Commission analysed the accounting books of the undertaking and concluded that Aspen had consistently earned high profits from its sale of medicines in Europe. The press release by the Commission explains that Aspen could achieve these prices because there were no alternative products available to these particular cancer medications in the market. Thus, the national authorities of the Member States did not have the option of switching the products and eventually succumbed to the pressure of supplying the essential drugs at whatever prices Aspen asked for.
These events led to Commission opening a formal investigation into Aspen Pharmaceuticals’ pricing practices for cancer medicines. In July, 2020, Commission published the proposed commitments by Aspen which the undertaking offered in accordance with Article 9(1) of the Council Regulation (EC) No 1/2003. This way, Aspen intended to address the Commission’s competition concerns.
The commitments, which were later accepted by the Commission, are as follows:
- Aspen promised to reduce the net prices of the cancer medicines by an average of 73% in the European Union and the EEA except in Italy as the national competition authority had fined the pharmaceutical giant, 5 million euros for abusing its dominant position in September 2016.
- The new reduced prices will apply for 10 years from the date of acceptance by the Commission. Moreover, they will be applied retrospectively with effect from October 1, 2019.
- The undertaking will not be allowed to withdraw from supplying the cancer drugs for at least five years. However, if it wishes to withdraw from supplying after the 5 years’ period, the market authorisation of the drugs will be available to other suppliers.
The Commission considered that Aspen’s final commitments offers a “fast, comprehensive and lasting solution to the competition concerns it had identified, and therefore has made them legally binding”, and concluded its formal investigation against Aspen Pharmaceuticals. If Commission finds any breach of these commitments by Aspen, it can impose a fine of up to 10% of the undertaking’s turnover even without having to establish a new infringement of EU competition rules.
The Aspen case is the latest decision of the European Commission on excessive pricing. As mentioned earlier, it is a common practice that competition authorities do not wish to intervene unnecessarily during price wars unless in extreme circumstances, especially because the pharmaceutical industry presents unique challenges. However, considering the goal of EU competition policy is to protect consumer welfare and since unfair prices affect the consumers and make the products more inaccessible, authorities must intervene for the greater good.
In the Aspen case, the Commission found the commitments offered by the undertaking provided for a fast, comprehensive and lasting solution and therefore refrained from imposing further requirements or a fine. The author of this contribution is, however, of the opinion that it was neither a fast decision, nor one that offers a lasting solution. It took almost 4 years of investigation to arrive at a conclusion which fails to provide for a common guideline for other pharmaceutical undertakings. The current case offered an apt opportunity to present accurate parameters and permissible pricing behaviour which could have a uniform application across all jurisdictions but the Commission failed to seize the opportunity.
Even though the pharmaceutical sector poses unique challenges to competition authorities, it is one of the most crucial sectors which need to be regulated regarding the prices. With the ongoing pandemic and development of vaccines, the call for a better regulated pharmaceutical industry is louder than ever before. It will be interesting to see whether competition regulators around the world will take up this task. Alternatively, a specialised committee could be set up to give proper guidelines. Unfortunately, for the time being, this looks like an elusive dream.