[Ip-health] Response to Suerie Moon's Posting of OECD excessive pricing background paper

Frederick Abbott FAbbott at law.fsu.edu
Thu Oct 25 14:35:55 PDT 2018


Suerie,

I thought I might provide a brief reaction to the message accompanying your posting of the OECD background paper on excessive pricing in the pharmaceuticals market.

I take away both negative and positive elements from the paper.

The OECD is a group of higher income countries, and the views expressed by and through the organization tend to reflect the interests of those higher income states. The competition authorities of the OECD member states are active participants in its competition-related meetings and policy recommendations, and the views of these authorities tend to be fairly "conservative" in the sense that it is usually not their objective to push the boundaries of existing jurisprudence. That said, this is a group with considerable expertise (and influence) in the competition arena.

The general perspective in the recent background paper regarding excessive pricing is largely consistent with a 2011 OECD Report on the subject which expressed considerable caution, including from the EU competition authorities, regarding use of excessive pricing doctrine.

On the negative side, the background paper seems to endorse the view expressed by Advocate General Wahl in his opinion to the CJEU in the Latvian Copyright case (citing Justice Scalia), suggesting that competition authorities should go beyond the requirements of Article 102 of the TFEU (dominant position) in addressing excessive pricing, as interpreted by the CJEU in the United Brands case, and employ multiple redundant analyses before reaching a conclusion. The view of AG Wahl was taken up by the UK Competition Appeal Tribunal (CAT) in rejecting a determination of excessive pricing of an anti-epilepsy drug made against Pfizer and Flynn by the UK Competition and Markets Authority (CMA), notwithstanding a very thorough analysis by the CMA. Without belaboring the details of this particular case, the OECD background paper advocates the idea of "stringent screens" in bringing excessive pricing actions, potentially favoring actions involving generic products with sudden and significant price increases, and where competition (e.g. market entry) is substantially limited for one reason or another.

On the more positive side, the background paper does not discount the value at least of causes of action that meet the screening criteria. From my standpoint, those are the "easy" or "easier" cases, but still important, so some progress is made.

The background paper refers to my work in setting out potential methodologies for analyzing excessive pricing involving patented originator products, and it does a reasonably good job in explaining what I suggested. Without going into the details, the paper is available here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2719095. I pointed out that R&D costs are not, in fact, a "black box", and that it is possible to make a reasonable assessment of the risk-adjusted R&D costs for new medicines. Among other things, I noted that there is a distinction in the level of risk depending on the type of research, whether lower risk "follow-on" such as new dosages, formulations, routes of administration, etc., on one hand, and higher risk such as when the underlying cause of disease and potential mechanisms of action of new drugs may be unknown (or less known). But, even in the high-risk category, it is possible to identify the reasonably related research paths taken on the road to a successful outcome, and to undertake an assessment that incorporates failure as well as success.

The OECD background paper does not say this methodology is unworkable, but rather suggests it may be too complicated for effective use by competition authorities. The suggestion is that drug and/or price regulators may be better placed to analyze R&D costs and the reasonableness of prices, and that these regulators might be more effective in adopting solutions.

I have not argued that competition law and excessive pricing actions are the "first-best" solution to addressing unreasonably high pharmaceutical prices. I have, however, pointed out that the political branches and regulators have not been effective in placing limits on pricing, and that competition law can be used to address that regulatory gap. Moreover, the OECD background paper does not address one of the major obstacles to assessment of pricing practices which is the refusal of originator companies to provide R&D data, which is something that can be addressed in the context of competition law enforcement. It might also be addressed in the preparation of formal government market studies where production of evidence could be compelled.

The OECD background paper recommends the undertaking of market studies in the pharmaceutical sector with a view toward developing proposals (advocacy) for potential regulatory or legislative action, as opposed to direct enforcement of competition law on the basis of excessive pricing  in specific cases.

I briefly refer back to the concern I addressed at the Global Congress with the Pfizer/Flynn case in which the UK CAT partially rejected and remanded the decision of the CMA. If the decision of the CAT survives appeal, it has the potential to make future prosecutions of excessive pricing actions significantly more difficult. Pfizer/Flynn was about as clear cut a case of abusive excessive pricing as you are going to find, with Pfizer executives musing in email about public perceptions regarding its fleecing of the NHS in a period of budgetary constraint. Competition authorities and judges are a relatively small group and follow jurisprudential developments in various jurisdictions. A substantial number of competition statutes addressing excessive pricing are based on the CJEU's decision in United Brands, including that of South Africa. So, the Pfizer/Flynn case, which involves CJEU precedent, is worth attention.

My overall reaction to the background paper is that there are positive and negative elements. The paper accepts the utility of excessive pricing doctrine in limited "screened" contexts involving generic products, and recognizes that many governments are concerned about the high price of pharmaceuticals -- and that some action might well be taken. It expresses caution about using excessive pricing doctrine when things are more complicated, e.g., the originator context, mainly (it appears to me) because of complexity and potential inefficiency. But, it does not reject the idea that there are methodologies that may be used to analyze originator R&D costs in the competition context, even if it is not ready to sign off on the project.

Of course, I would have been much happier with the background paper if it had strongly advocated the use of excessive pricing doctrine to address high pharmaceutical prices, including in the originator context. But, this is a slow-moving field, and it is not easy to generate significant change. We can hope that the drafters of the background paper can be persuaded to take a more positive view of the value of excessive pricing doctrine in the next go-round.

All best, Fred

Frederick M. Abbott
Edward Ball Eminent Scholar
Professor of International Law
Florida State University College of law
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