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Excessive Pricing In Pharmaceutical Market: An Application of Economic Principles To Elude Practical

I. Introduction

Section 4 of the Competition Act, 2002 elucidating abuse of dominant position forms one of the core provision of the Indian Competition Law. With the developing arena of competition law, there are a multitude of propositions that are being deliberated upon by practitioners and academicians, alike. One such serious bone of contention exists on the issue whether the competition authorities under Section 4 of the Competition Act, 2002 have to intrude to restrain the prices that are excessive in nature.[1]

On this issue, the European Union (“EU”) in its landmark judgment of United Brands , has lucidly opined that for a price to be unfair and excessive, there should be no reasonable relation to the economic value of the product supplied, which can be compared with the benchmark of product’s costs.[2] The judgment also elucidates that a price can be unfair in itself by comparing it to the above stated benchmarks or unfair in relation to the benchmark of competing products in the same relevant market.[3]

There is no water tight compartmentalisation for defining the unfair prices. Charging of prices which will maximise the profit of the manufacturer has to be essentially balanced between the market having perfect competition and a monopolistic market. However, there are no precise criteria for considering the violation of excessive pricing. EU has adopted the benchmark of economic value of the product rather than comparing the prices and cost of the product in cases of excessive prices. Various European judgments have reflected that prices cannot be called to be excessive even if they exceeded the costs, if the economic benefits deriving out of the services has balanced the profit maximising prices.[4]

The High Court of UK in the case involving the antitrust violation, in the form of charging excessive prices, had adopted the cost-plus approach[5] in reaching to the conclusion that competitive prices would be one where the manufacturer is able to recoup the costs of investment made. However, the judgement was overruled in appeal and it was opined that for determining an economic value of the product, the costs of the product and the willingness of the buyer in the relevant market should be taken into consideration.

The issue of intervention by the competition authorities in the cases of excessive pricing still remains a burning issue for all the stakeholders related to the field of competition law. It is advised by the stakeholders that there should be some determinate criteria to define the situation where antitrust enforcement can be proceeded with. Significant levels of investment in the Research and Development can be the most pivotal reason for non-intervention.[6]

II. Recent Cases in the Pharmaceutical Market

There has been resurgence in the cases of excessive prices or unfair pricing in EU[7] in the pharmaceutical industry.[8]

In the year 2016 the British Competition and Market Authority (“CMA”) has imposed the penalty on two drug makers, namely, Pfizer and Flynn, for charging unfair and excessive prices for the Phenytoin Sodium Capsules. In 2018 the United Kingdom Competition Appeal Tribunal overruled the Judgment of CMA and held that CMA erred in determining the right economic value of the product by taking into consideration the benchmark of comparable Products.[9] It further stated that CMA’s total reliance on the concept of reasonable rate of return by taking into consideration the myriad concept of near perfect competition was also erroneous as realistically, a market of effective competition is the most suitable.[10]

In the year 2016 the Italian Competition Authority fined Aspen for charging excessive pricing.[11] In the year 2017 the European Commission inducted its investigation for allegedly increasing the prices without any justified reasoning[12] following patent expiration.[13]

Furthermore, in 2018 the Danish Competition Council imposed penalty on CD pharma for charging unfair prices for the drug used to mitigate the pain of labour by indulging into the exclusive distribution agreement with the manufacturer and increases the prices by 2000 percent.[14]

As far as the case is concerned, it reflects the approach of the authority to initiate the investigation on the drug making companies, whose drugs are off patent or imperfectly covered under the pricing regulation, rather than allowing the patented drug manufacturer to recoup the cost of investment during the exclusivity period. Various authors argued for charging the antitrust provision in relation to excessive pricing on such patented drug manufacture.

III. Practical Snags in determining Excessive Prices

Different benchmarks in determining the excessive prices has created a chaos among the competition authorities in adopting an appropriate benchmark. In excessive pricing cases, adopting the level of costs as an appropriate benchmark, has had a lot of practical pitfalls. This has resulted into various incorrect judgments, and has created a reverse effect on the consumer because after post-intervention, company’s incentive of investment in Research and Development has significantly reduced[15].Some different types of traps that should be avoided by the competition authorities are as follows:

  • Defining the market very narrowly by excluding generic competitors to establish dominance is not indicative of dominance. Market definition on such subgroups is flawed because the prices of manufacturer also reflects the level of competition faced by the non-captive consumers and generic competitors.[16]

  • Determining excessiveness on the basis of cost plus approach is crude in nature. Return on sales is not an appropriate benchmark because there is no stagnant return on sales for a manufacturer and it wholly depends upon the product specification and customers’ demand.[17]

  • Excessive prices can only be determined by adopting different kinds of benchmark rather than sticking it to cost plus approach because similar goods will results into different return on sales as compared to the relative similar goods.[18] If the prices are ordinarily high in comparison to all the companies’ products, such prices ought to be considered as excessive in Nature.

  • While comparing the observed prices or margin with other comparable products, due diligence shall be on comparing the prices of a single product with average of the prices of all the portfolio products. Such benchmark will not provide explicit information on whether the single product prices are excessive or profit was excessive.[19]

  • Competition Authorities falls into the trap of “Reverse Cellophane Fallacy”[20], i.e. the price of the product in investigation is compared to the price of the regulated product. For ex: If a manufacturer increases the prices of drug after expiration of regulations, comparing the present price with the price of the product when its subject to regulations will not be the appropriate benchmark because prices are intentionally set low (even causing loss to the manufacturer) than being set by the market itself.

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Conclusion

A more serious question is always on the table that whether the competition policy is appropriate in the pharmaceutical market. The competition has to maintain the balance and recognise both type of errors i.e. Type I Error (False Positives) and Type II Error (False Negatives). Type II Error is the situation where competition authorities do not intervene where prices are excessive. On the other hand, Type I Error has serious consequences because it reduces the incentive of the company as they are not able to recoup its investments. Economic analyses conforming to United Brands Test are nuanced and challenging in the pharmaceutical market because the market of pharmaceutical industries is regulated by various price regulations, and if there has been a regulatory failure it has to be resolved amicably by entering into alternative bargaining between the buyer and seller. A more direct, transparent and effective way of addressing such pitfalls is to fix those very frameworks and make an appropriate and holistic benchmark in determining the antitrust violation in cases related to excessive pricing.

[1] https://www.kfst.dk/media/54222/excessive-pricing.pdf

[2] United Brands v Commission of the European Communities [1978], Case 27/76 (‘United Brands Judgment’).

[3] ibid.

[4] Scandlines Sverige AB v Port of Helsingborg [2004], Case COMP/A.36.568/D3 (‘Scandlines Sverige v Port of Helsingborg’).

[5] Attheraces Limited v The British Horseracing Board Limited [2007], EWHC 3015 (Ch).

[6] A. Ezrachi and D. Gilo, ‘Are Excessive Prices Really Self-Correcting?’, Journal of Competition Law and Economics (2009), 5(2), pp. 249–268;

[7] European Commission, Report from the Commission to the Council and the European Parliament: Competition Enforcement in the Pharmaceutical Sector (2009–2017), http://ec.europa.eu/competition/sectors/pharmaceuticals/report2019/report_en.pdf.

[8] Napp Pharmaceutical Holdings v Director-General of Fair Trading [2002], Case No. 1001-1/1/01.

[9] Flynn Pharma Limited and Flynn Pharma (Holdings Limited) v Competition and Markets Authority [2018], Case Nos: 1275-1276/1/12/17, Judgment, para 4 (‘CAT Flynn/Pfizer Judgment’).

[10] Ibid para 318.

[11] Namely chlorambucil, melphalan, mercaptopurine and tioguanine. The Italian Competition Authority, A480 – Price Increase of Aspen’s Drugs, Measure No. 26185, September 29, 2016 (‘ICA Aspen Decision’).

[12] ibid.

[13] EC Press Release, Antitrust: Commission opens formal investigation into Aspen Pharma’s pricing practices for cancer medicines, May 15, 2017, http://europa.eu/rapid/press-release_IP-17-1323_en.htm.

[14] Danish Competition and Consumer Authority Press Release, CD Pharma has abused its dominant position by increasing their price by 2,000 percent, January 31, 2018, https://www.en.kfst.dk/nyheder/kfst/english/decisions/2018-cd-pharma-has-abused-its-dominant-position-by-increasing-their-price-by-2-000-percent/.

[15] D. Geradin, The Necessary Limits to the Control of ‘Excessive’ Prices by Competition Authorities – A View from Europe, Tilburg University Legal Studies Working Paper. Available at SSRN: https://ssrn.com/ abstract=1022678.

[16] S. Vogler and J. Martikainen, ‘Pharmaceutical Pricing in Europe’ in Pharmaceutical Prices in the 21st Century (2015), p. 351 (‘Vogler and Martikainen’).

[17] OECD Policy Roundtables – Excessive Prices (2011), pp. 62–63.

[18] Cost and revenue allocation for multi-product companies operating multiple lines of business is particularly difficult’. See OECD Policy Roundtables – Excessive Prices (2011), Section 6.1.

[19] Supra note 16.

[20] D. J. Aron and D. E. Burnstein, Regulatory Policy and the Reverse Cellophane Fallacy (December 4, 2010), Journal of Competition Law and Economics, Vol. 6, Issue 4, pp. 973–994, 2010. Available at SSRN: https://ssrn.com/abstract= 1171292.

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