EU competition law imposes significant constraints on the ability of dominant firms in the life sciences sector to freely determine the price of their products. Price cuts and loyalty-inducing rebates can be abusive. So can excessively high or discriminatory prices.  Vertically-integrated firms that control an important input must also ensure that the prices they charge upstream and downstream leave a sufficient margin to downstream competitors that rely on the upstream input.

Although these constraints apply only to firms that hold a dominant position on the relevant market where they are active, the importance of these limitations should not be underestimated considering that competition authorities are adopting very narrow market definitions.

Predatory Price Cutting

Charging prices below average variable costs (“AVC”) will generally be found to be abusive.  Prices below average total costs but above AVC are abusive only if they are determined as part of a plan for eliminating a competitor (see AKZO case).

Cases in the life sciences sector: In Napp Pharmaceuticals, the UK Office of Fair Trading (“OFT”) found that Napp was guilty of charging predatory prices for sustained release morphine to hospitals in the UK. The OFT considered that direct costs (defined as the cost of materials and direct labour) could serve as a proxy for AVC in this case, and found that Napp’s prices to hospitals were below such costs. In the GlaxoSmithKline case, the French competition authority held that GSK was guilty of predatory pricing in the market for sodic cefuromix (Zinnat injectable) — a market in which it did not hold a dominant position  —  in order to protect its dominance in the market for injectable acyclovir (Zovirax). The decision of the French competition authority was, however, overruled by the Court of Appeal which found that the links between the dominated market and the market where abuse took place were not sufficiently strong.

 

Loyalty-Inducing Rebates

Whilst “quantity rebates” linked solely to the volume of purchases from a dominant firm are normally considered not to be abusive, so-called “fidelity rebates” which are conditional on the customer obtaining all or most of its requirements from the dominant firm will generally infringe competition law. “Target rebates” which are conditional on the buyer achieving certain sales targets may also be abusive when they remove or restrict the buyer’s freedom to choose his source of supply.

Cases in the life sciences sector: In the Abbott case, Abbott had proposed to CAHP (Private Hospital Purchasing Syndicate) and CACIC (Purchasing Syndicate-Advice-Information for Clinics) a new pricing system for Isoflurane (an anaesthetic)  based on a projection of purchase quantities. A discount was granted if the quantity threshold was exceeded. The French competition authority indicated that these discounts reduced the ability of other parties to compete and it imposed a fine of EUR 304 890.

 

Tying / Multi-Product Rebates

Multi-product rebates (also called bundled rebates or mixed bundling), which involve making products jointly available at a discount, may amount to illegal tying.

Cases in the life sciences sector: The French competition authority  imposed in 2003 a fine of EUR 7.8 million on Sandoz for granting university hospitals discounts in the purchase price of Sandimmun and Néoral (two proprietary medicinal products based on cyclosporin), on condition that the hospital also purchased other Sandoz products (e.g., Vepeside, Sandocal, Miacalcic, Loxen, Icaz, Leponex, Parlodel). The competition authority found that Sandoz was abusing its dominant position in the market for cyclosporin to foreclose competitors in the markets for other pharmaceutical products. In Wyeth Hellas and Phadisco Ltd, the Cypriot competition authority imposed in 2009 fines of EUR 15.363 for Wyeth Hellas and EUR 384.637 for Phadisco.  The competition authority found that Wyeth Hellas and Phadisco had implemented an illegal bundled rebate scheme by offering a free quantity of Meningitec (meningococcal vaccine) with the purchase of a specific quantity of Prenevar (pneumonococcal vaccine).

 

Excessive Pricing

Prices may also be abusive if they are too high.  The criteria for assessing whether a price is excessive are the following: (i) the difference between the costs actually incurred and the price actually charged must be excessive; and if the answer to this question is in the affirmative, (ii) a price must have been imposed which was either unfair in itself or when compared to competing products.

Cases in the life sciences sector: In Napp Pharmaceuticals, the OFT found that the prices of sustained release morphine tablets (“MST”) charged to the “community segment” (i.e., patients under the care of their General Practitioner) were excessive.  The OFT’s finding was based on a comparison of the profit margin earned by Napp on sales of MST in the community segment with the profits earned on sales of MST to other markets (e.g., sales to the hospitals, export sales) and on sales of other products to the community. The OFT also sought to find a proxy for the competitive price of MST by looking at the prices of competitors and the price Napp charged over time.

 

Discriminatory Pricing

A dominant firm may also abuse its dominance by applying dissimilar conditions to equivalent transactions (or similar conditions to unequal transactions) with other trading parties, thereby placing them at a competitive disadvantage.

Cases in the life sciences sector: In 2006, the Latvian competition authority fined AGA SIA, a medical gas producer, for charging different prices to different buyers without any economic justification. In the same year, the Maltese competition authority fined the National Blood Transfusion Services, the State authority charged with the regulation of blood products in Malta, for providing public hospitals with blood products free of charge whilst charging commercial prices to private clinics.

 

Margin Squeeze

A “margin squeeze” is when a vertically-integrated firm charges a price for a product on the upstream market which, compared to the price it charges on the downstream market, does not allow an equally-efficient competitor to trade profitably in the downstream market.

Cases in the life sciences sector: In the Genzyme case, the OFT concluded that Genzyme had abused its dominant position in the market for the supply of Cerezyme (a drug for the treatment of Gaucher disease) and imposed a fine of £6.8 million.  Genzyme had decided to establish its own in-house delivery and home care services and had bundled it with the supply of the Cerezyme. The OFT found that by selling the bundle at the same price as the standalone drug, Genzyme was effectively eliminating homecare service providers from the downstream market.