EU Wades Into Uncharted Waters With Excessive Pricing Case

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By Eleanor Tyler

The European Union’s new investigation into Aspen Pharmacare Holdings Ltd., a first in the EU, could add clarity to unanswered legal questions about massive generic drug price increases.

In announcing the investigation into Aspen’s pricing on several cancer drugs on May 15, the EU alleged, “Aspen has imposed very significant and unjustified price increases of up to several hundred percent, so-called ‘price gouging.’”

The commission also is reviewing whether Aspen threatened to withdraw “niche medicines” if EU member states balked at the price hikes.

The EU case stands out because the EU has never brought an excessive pricing case in pharmaceuticals. The probe could guide consensus on best methods for these cases in countries that have laws against excessive pricing by a dominant firm. The EU’s action could answer questions about how high the price needs to be to warrant intervention, how to determine a fair price in a broken market, and what remedies effectively fix the problem.

Currently, “there is no place to turn for standards” on exploitative conduct by a dominant market player, said Eleanor Fox, a professor of trade regulation at New York University School of Law.

Pattern and Practice

“Drug companies historically have had leeway to set their price, but skyrocketing prices in recent years have increased the likelihood of a competition claim,” Michael Carrier, a professor at Rutgers Law School, told Bloomberg BNA.

The pattern of conduct antitrust enforcers target for excessive pricing is generally the same, said George Washington University Law School professor Donald Baker. A company buys the patent-expired rights to a drug for which there is a captive patient population with little alternative. The company then increases the price sharply without any increases in costs or other market changes.

These cases are ripe for enforcement because they don’t threaten to stifle innovation, Baker told Bloomberg BNA. They lack the tensions of challenging patent-holder premiums or attacking a company with a large market share because it has developed a much better, more desirable product.

Baker served as chief of the Justice Department’s antitrust division in 1976-77.

Gaming the System

EU member states have brought several cases over drug pricing recently. The U.K.'s Competition and Markets Authority (CMA) fined Pfizer Inc. and Flynn Pharma Ltd. 90 million pounds ($116.5 million) in December for boosting the price of an anti-seizure drug by 2,600 percent “overnight after the drug was deliberately de-branded in September 2012,” CMA said.

The scheme, in which Pfizer sold the U.K. distribution rights to Flynn and rebranded the drug as a generic, moved the drug outside of price regulations.

“The companies deliberately exploited the opportunity offered by de-branding to hike up the price,” said Philip Marsden, Chairman of the Case Decision Group for the CMA’s investigation in announcing the fines. “There is no justification for such rises.”

The companies have appealed, contending that the prices are fair and below those for equivalent drugs.

In October, Italy fined Aspen Pharmacare and several subsidiaries 5.2 million euros ($5.7 million) for price gouging on most of the same drugs involved in the EU probe. Italy’s competition authority said Aspen bought the suite of related patent-expired cancer drugs with the purpose of blackmailing national drug agencies into accepting price increases on threat of losing access to an entire class of vital medication.

Aspen disputes the authority’s findings and has appealed, arguing that its price is fair and even low compared to alternative treatments—the same arguments Pfizer and Flynn are advancing in the U.K.

Few Guideposts

Excessive pricing cases are rare because they are risky: few are brought and fewer are won. The EU has brought only a handful of cases over the past several decades, and other countries with similar laws are just starting to weigh in.

Baker noted an “obvious tension” between wanting to encourage innovation—and permitting a premium to innovating firms on their products—and not letting a monopolist overcharge the public. Deciding on a fair markup in that context requires care, he said. And there isn’t agreement on what methods are appropriate to measure a fair price, a fair markup, or an adequate remedy for the violation.

Because of these questions, Baker is “strongly of the view” that the International Competition Network, an international policy group made up of competition enforcers, should study the issues and provide guidance to member countries about excessive pricing enforcement. In the meantime, the law develops piecemeal with each case.

Further, proving excessive pricing is difficult. The EU will have to establish that Aspen is dominant in a given market, then it must establish exactly how different the firm’s pricing is from what it would have obtained in a competitive market. In a heavily regulated industry like pharmaceuticals, there are a patchwork of laws and distribution networks in each member country to take into account. Making the case against Aspen across the EU will be laborious.

In both the U.K. and Italian cases, the drug companies have appealed, arguing their prices are fair both in themselves and compared to competing products. They also say they aren’t dominant firms.

The methods the EU chooses to measure “excessive” and “unfair” in the Aspen case will illuminate how it sees price functioning in drug markets. The case could also show which methodologies are robust enough to use in an EU court.

What is the Remedy?

The EU can fine a company up to 10 percent of worldwide overall revenue for a violation, but that doesn’t fix the pricing problem going forward. A market remedy, which involves deciding on a lower “fair market” price and then holding prices at that level, can be tricky.

In the U.K. dispute, CMA gave Pfizer and Flynn between 30 working days and four months to reduce their respective prices to a set level. During their appeal, the drug companies have complied with the order and continue to supply the U.K. market.

The broader problem is whether competition authorities will have to monitor drug prices in the long term to ensure that gouging doesn’t recur.

Authorities don’t relish that prospect. “We also need to be careful that we don’t end up with competition authorities taking the place of the market,” EU competition commissioner Margrethe Vestager said in a November speech in Brussels. “The last thing we should be doing is to set ourselves up as a regulator, deciding on the right price.”

To contact the reporter on this story: Eleanor Tyler in Washington at etyler@bna.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bna.com

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