25 October 2016

Excessive prices in the pharmaceutical industry: the Aspen case

1. Background

On 14 October 2016, the Italian Competition Authority (ICA) published a decision in which it found that Aspen, a pharmaceutical producer, abused its dominant position by charging excessive prices for the supply of life-saving drugs for cancer patients and imposed a fine equal to Euro 5.2 million (the Decision).

Antitrust authorities have historically been reluctant to intervene in cases of alleged excessive pricing on grounds that restricting a company’s ability to charge higher prices and thereby reducing its returns can negatively impact its incentives to invest and innovate. In addition, identifying excessive pricing is a complex exercise due to the challenges of establishing what a price "should" be in a free market economy.

Although by no means common, there have been several recent examples of abuse of dominance cases involving excessive pricing in other jurisdictions. In the United Kingdom, the CMA has issued Pfizer and Flynn Pharma a statement of objections alleging that the companies have abused a dominant position by charging excessive and unfair prices for an anti-epilepsy drug. In the United States a class action lawsuit has been filed against Gilead Sciences which alleges that Gilead has "abused its purported monopoly on Savaldi (a life-saving Hepatitis C drug) by charging discriminatory prices that apparently have no rational basis other than to inflate the company’s bottom line".

2. The investigation

In July 2014, the ICA received news that Aspen had obtained from AIFA (the Italian drug agency) price increases ranging from +257% to 1540% for the following products: Alkeran, Leukeran, Purinethol and Tioguanina (the Drugs). The Drugs are generics used for the treatment of leukaemia and myeloma.

On 19 November 2014, the ICA conducted unannounced inspections at Aspen’s premises in Italy and, simultaneously, unannounced inspections were carried out at Aspen’s premises in Ireland by the Irish Competition and Consumer Protection Commission (CCPC) following a cooperation request issued by the ICA on the basis of art. 22.1, Regulation (EC) 1/2003. This was the first time that the ICA had requested the assistance of a foreign antitrust authority.

The CCPC obtained a search warrant from the Dublin Metropolitan District Court. During the inspection the CCPC seized an external hard disk belonging to the General Director of Aspen Pharma Trading Limited from which documents relevant to the investigation were identified using search words.

As in other similar cases, legal issues relating to the inspections arose due to divergences between national laws concerning the requirements and the procedural safeguards for conducting unannounced inspections. In particular, Aspen challenged the lack of express authorisation from the ICA to conduct the inspection and alleged that the acquisition by CCPC of the hard drive was in breach of its fundamental rights as set out in art. 8, ECHR and art. 7 and 8 of the Charter of Fundamental Rights of the European Union. Given the crucial relevance of the documents seized by the CCPC to the ICA’s case, it is likely that this allegation will form one of the grounds of Aspen’s appeal of the Decision.

3. The Decision

3.1 Market definition and dominant position of Aspen

As its starting point in defining the relevant product market, the ICA followed the approach of previous pharmaceutical cases in using the third level of Anatomical Therapeutic Chemical (ATC) classification. The ICA then looked at narrower possible market definitions, stating that "it is clear that for the definition of markets for antitrust purposes it is fundamental to consider the therapeutic substitutability of the products". This analysis, based on reports issued by medical experts and scientific bodies, led to the conclusion that the relevant market for each Drug was the fifth (and last) ATC level which corresponds to the active ingredients present in the drug. Since at ATC5 level there were no competing drugs, Aspen was considered dominant in the supply of each of the Drugs.

Aspen argued that no previous decisions by the EU Commission or national competition authorities had ever concluded that the relevant market could be narrower than ATC4. It further argued that the ICA’s conclusion was based on a substitutability analysis which contained a methodological error known as "reverse cellophane fallacy". Aspen contended that the ICA’s substitutability analysis incorrectly used the actual prices charged by Aspen for the Drugs prior to the disputed price increases, which it claimed were artificially low because the pricing for the Drugs had not changed since they first came to market in the 1960s. Aspen argued that using these artificially low prices for the substitutability analysis would have caused other drugs to appear as weaker substitutes than they actually were and therefore lead to an overly narrow market definition and erroneous inferences of market power.

The ICA rejected this argument stating that "the absence of the therapeutic substitutability prevails over the economic substitutability. In the absence of a therapeutic substitutability, it is impossible to make any comparison between the Drugs and other products".

3.2 The abuse

In its Decision the ICA found that Aspen abused its dominant position by charging excessive prices in the Italian market for the Drugs. This conclusion was based on the twofold test set out by the European Court of Justice (ECJ) in United Brands.

First, the ICA showed that the price-cost margin for the Drugs was excessive using two different methodologies. With the first methodology the ICA measured the contribution margin of each Drug. The ICA found that before the price increase, the contribution margin of the Drugs was in line with the average contribution margin of the Aspen Group and exceeded the value of the direct and indirect costs. With the second methodology, the ICA compared the revenues generated by the new increased prices with a value referred to as "costs plus" (i.e. the sum of direct costs, the proportion of indirect costs allocated to each Drug and a profit margin). The difference was positive, with revenues being higher than costs by a factor of between 100% and 400%. On this basis, the ICA concluded that the difference between the costs actually incurred and the price actually charged by Aspen was excessive.

The Decision then addressed the second question posed by the ECJ in United Brands, i.e. whether a price has been imposed which is either unfair in itself or when compared to the price of competing products. Given the absence of competing products, the ICA excluded the possibility of benchmarking the new prices charged by Aspen for the Drugs with other products. It also excluded the possibility of comparing the prices charged by Aspen for the Drugs in Italy with the prices charged for the Drugs in other countries on the basis of different national regulations and the fact that Aspen had implemented a pan-European strategy to increase the prices.

The ICA maintained that it was possible to conclude that the prices charged by Aspen were unfair on the basis of various factors, including: (i) the high level of the price increases imposed by Aspen; (ii) the absence of economic justifications (e.g. a variation in production costs) for the price increases; (iii) the prices increases were not linked to an improvement in the quality of the Drugs or other benefits for patients; (iv) the nature of the products (life saving drugs) specifically destined to a category of weak patients (children and the elderly); (v) the damage for the Italian healthcare system which faced a cost increases for the Drugs from Euro 1,5 million in 2013 to Euro 6,4 million in 2014.

The ICA also examined the strategy adopted by Aspen to obtain the price increases. First, Aspen submitted several requests to AIFA to delist the Drugs from Class A (drugs eligible for total reimbursement from the national health service) to Class C (drugs which are non-refundable). The reason for the reclassification was that drugs belonging to Class C are priced by the supplier and this would have allowed Aspen to align its prices with those charged in other EU countries. After AIFA rejected these requests, Aspen threatened to cease supplying the Drugs in Italy, which would have forced Italian patients to purchase the Drugs from other EU countries at the higher prices. At the same time Aspen implemented an "Oncology Allocation Programme" which, according to the Decision, reduced the availability of the Drugs in the Italian market. All these circumstances were considered by the ICA as an aggressive negotiation strategy aimed at forcing AIFA to approve the price increases requested by Aspen.

4. The fine

The ICA issued a significant fine of Euro 5.2 million applying both the "entry fee" and the "overall size fee".

According to the Fining Guidelines adopted by the ICA in 2014, the "entry fee" has the function of deterring undertakings from committing the most serious antitrust infringements, whereas the aim of the "overall size fee" is to ensure a sufficient deterrent effect when the value of sales to which the infringement relates and on the basis of which the basic amount of the fine is calculated, represents only a small proportion of the global revenues of the addressee of the infringement decision.

5. Conclusion

The reluctance of antitrust authorities to take action against abuse of dominance involving excessive pricing appears to be coming to an end, at least in the pharmaceutical sector. The points of contention are well known and often play out in the same way: a pharmaceutical company develops a life-saving drug, but with limited competition complaints of excessive pricing soon arise. It is at this point that antitrust authorities enter the scene with a difficult role to play in light of the strong competing interests of protecting national budgets without undermining investment and innovation in the pharmaceutical industry.

The task for the antitrust authorities is indeed a challenging one, as shown by the Aspen case. The authority first needs to find adequate scientific and economic evidence and then carry out the complex assessment to define the relevant market(s) and determine whether the prices may be considered excessive.

It is abundantly clear the pharmaceutical sector will remain under heavy scrutiny and companies should be vigilant in light of the significance of the potential consequences of infringements. In the Aspen case the ICA applied a fine which approximately equalled the increase in revenues gained by Aspen as a result of the disputed price increases. Aspen is now also at risk of follow-on damages actions, where the claimants will attempt to recover the difference between the initial price and the increased prices. Pursuant to the Damages Directive, which is expected to be implemented by the end of the year, the Decision (once final) will be binding in all Italian Courts and this increases the chances of success of the follow-on actions. It is therefore no surprise that the CEO of Aspen has already declared his intention to appeal the Decision.

Emilio De Giorgi +39 02 29049492
Partner Emilio.DeGiorgi@allenovery.com

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