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Regulators get aggressive on matters excessive

Published on 29/06/17 at 10:31am

Gustaf Duhs, Partner at Stevens & Bolton, discusses the recent cases of regulators becoming firmer with drug companies over their drug pricing. He examines why this issue has arisen recently, after relative quiet on the topic over the last decade, and how business need to react to these changing headwinds.

On the 15 May 2017 the European Commission confirmed that it had opened a formal investigation into the pricing of certain cancer medicines sold by Aspen Pharma. This is the latest in a spate of regulatory investigations and government interventions in relation to pharmaceutical pricing. So what are the latest UK and EU developments and why we are seeing an apparent increase in such cases?

The European Commission’s press release regarding the Aspen investigation states that they plan to ”investigate information indicating that Aspen has imposed very significant and unjustified price increases of up to several hundred percent, so-called 'price gouging'. The Commission has information that, for example, to impose such price increases, Aspen has threatened to withdraw the medicines in question in some Member States and has actually done so in certain cases.” The investigation is set to cover the whole of the EEA except for Italy, as the Italian competition authority had already taken an infringement decision against Aspen in respect of this behaviour in September last year.

This follows close on the heels of similar action in the UK:

  • Firstly in relation to the anti-epilepsy drug phenytoin sodium. In that case the CMA took an infringement decision against Pfizer and Flynn Pharma in respect of price rises, in some cases of up to 2600%. The case is currently under appeal to the Competition Appeal Tribunal.
  • Secondly an ongoing investigation of Concordia in respect of hydrocortisone tablets where the price of generic 10 mg tablets are reported to have been increased by more than 12,000%.

Further scrutiny of drug prices in the UK is likely to result from the Health Service Medical Supplies (Costs) Act 2017 which obtained royal assent on 27 April. The Act has three key aims. First, it will allow the Government to ‘beef up’ the statutory price regulation scheme for branded medicines, bringing it more in line with the voluntary Pharmaceutical Price Regulation Scheme (PPRS). Second, it will enable the Government to step in to control dramatic price increases in unbranded generics, an issue which has attracted considerable adverse media attention recently. Third, it will create a comprehensive statutory power to require sales and other information from manufacturers, distributors and suppliers at all levels of the supply chain.

Draft regulations on the new statutory scheme have been published, which are subject to consultation. These include a payment back of a fixed percentage of income from relevant medicines. The draft regulations do not contain any figures, but the statutory scheme is likely to be less attractive to companies with larger portfolios of new products.

In relation to the information requirements, an MP commented during the passage of the Bill: “We cannot underestimate the importance of having more consistent, viable and useful information gathering, because information is power.”

So, the detail of how the Government will exercise the powers granted in the Act is subject to discussion. What is clear at this stage, though, is that this very short Act has the potential to introduce significant change. All eyes will be on how the balance between the statutory and voluntary pricing schemes for branded medicines evolves in future, and on the approach the Government takes to control excessive generic prices – specifically, how an excessive or unfair price will be identified.

Motivation behind recent developments

Other than this recent period, excessive pricing has always been a somewhat underemployed competition law infringement. The reason why is partly apparent from the somewhat delphic test that is applied, which is set out by the European Courts and asks “whether the differences between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products“. It is immediately clear that this raises difficult questions such as the costs to be taken into account, the meaning of excessive and unfairness in this context, and what competing products should be compared. But possibly even more challenging are the following policy issues in this area:

  • A liberal market economy should encourage investment and growth and ultimately enable companies to recoup investments. Preventing high prices risks chilling incentives.
  • Excessive prices should, barring very particular circumstances, encourage new entry and/or prove unsustainable in the long run and
  • Demarcating between a price that is acceptable and one that is excessive risks turning competition regulators into price regulators, a duty they are not typically resourced to perform.

It is for these reasons that regulation in this areas has been sporadic at best. Indeed in the UK the last excessive pricing case was the Napp decision in 2001, in which the UK competition authority decided that Napp had excessively priced sustained release morphine in the community segment, and cases at EU level are equally rare. So, why such an apparent concerted action in relation to drug pricing? The explanation is likely to be a mixture of economics, politics and regulatory fashion.

The primary purpose of the Act is to limit the NHS’s spiraling drugs bill: NHS spend on medicines is estimated to have been over £15.2 billion in 2015-16 and, as Secretary of State for Health, Jeremy Hunt, stated, these costs can “only continue to grow”.

Of course the competition cases of the European Commission, the CMA and other national competition authorities will have the same impact of limiting the ability or appetite for companies to raise prices, and will also potentially enable the national health authorities impacted by price rises to recoup some of the money paid out by way of so called ‘follow on damages’. But it would probably be wrong to view these as political decisions.

The Competition regulators in the UK and at an EU level typically emphasise their independence from matters political. More likely they take on cases based on considerations such as safeguarding consumer welfare, or prioritising particularly egregious infringements, often based on complaints or whistleblowing rather than their own initiative.

Inevitably the regulatory spotlight travels around and when it fixes on a particular sector and/or activity there tends to be a collection of cases. In this context it is probably now fair to say that excessive pricing case have now become fashionable.

Key issues for businesses

In challenging times it is perhaps no surprise that there are increasing steps to regulate and/or reduce the price of medicines. The main concern of life sciences businesses will be that this new spate of regulation should not discourage investment or research and development, and particularly that it should not lead to an inappropriate and/or inflexible benchmark as to what constitutes a lawful price.

What is clear is that businesses in the life sciences sector need to pay careful attention to developments in this area and seek to ensure that they are up to speed with the implications of the new regulations and cases. Cases going through the regulators and the courts will undoubtedly provide further guidance on the distinction between a lawful and lawful prices. Ultimately in relation to excessive pricing the regulatory spotlight is likely to focus elsewhere. In the meantime, business are advised to stay clear of, or seek specific advice in relation to, dramatic price hikes. A stitch in time saves nine may well be an appropriate phrase in this context.

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