Excessive prices in the pharmaceutical sector in the EU: The Aspen Decision

Law & Economics Webinar organised by Concurrences, in partnership with Covington & Burling and CRA, with Miranda Cole (Partner, Covington & Burling), Raphaël de Coninck (Vice President, CRA), Horst Henschen (Of Counsel, Covington & Burling), Harald Mische (Case Handler - Antitrust: Pharma and Health services, DG COMP), Lluís Sauri Romero (Head of Unit - CET, DG COMP) and Tom Viebig (Case Handler - Antitrust: Pharma and Health services, DG COMP).

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Miranda Cole introduced the panel, mentioning that the purpose of the discussion is not to engage in an autopsy of the decision, but rather to understand its implications for the future. It will also be interesting to put the decision back into the context of other recent excessive pricing cases whether it be Pfizer/Flynn, which is now referred to the U.K. Competition and Markets Author¬ity; the Italian approach to Aspen’s conduct as well; the Danish decision in CD Pharma; and Gazprom, which is the only other relatively recent excessive pricing case from the Commission. One should also go back to the Commission’s 2020 Communication on Pharmaceutical Strategy for Europe, which aims at ensuring access to affordable medicines for patients and sup¬porting competitiveness, innovation, and sustainability of the EU pharmaceutical indus¬try.

Regarding the medicines in Aspen, an important element of context is that they were off-patent. This makes it unlikely that there had been an R&D effort that could justify the pricing. In another matter, Pfizer/Flynn, the Commission ruled out that efficiencies in manufacturing would act as justification in a similar case.

Tom Viebig reminded the audience that Aspen is the first excessive pricing case pursued by the Commission in the pharmaceutical sector. This case is an ex officio investigation into Aspen’s pricing practices for six off-patent life-prolonging or even life-saving medicines. They are used in the treatment of certain types of blood cancer like multiple myeloma or leukaemia. The investigation covered the entire European Economic Area (EEA) except Italy where a separate infringement decision was taken in 2016. The investigation showed that Aspen’s price increases were several hundred per cent, allowing it to earn consistently very high-profit margins as of 2012–2013. There has been no competitive entry bringing down these prices. Aspen also implemented a pan-European strategy to push through these steep price increases by threatening national authorities that if the price increases were not accepted the medicines would be withdrawn from reimbursement or even from the market altogether. In terms of market definitions, the starting point was to look for therapeutic substitutes for these medicines. Research showed that other medicines were not alternatives to Aspen’s products, or at least not for the relevant patient groups. On market shares, Aspen held very dominant positions, often 100 per cent across the EEA with no competitor being able to constrain Aspen and its pricing. In addition, national health authorities could not constrain Aspen. For several patient groups, there was simply no alternative to Aspen’s medicines, and authorities had no choice but to accept Aspen’s price increases of several hundred per cent, or even up to 1000 per¬cent for some medicines in several countries.

The legal test, in this case, is the one that was set out in the 1978 United Brands judgment. This test requires the Commission to demonstrate that profits are excessive and that the price is unfair either in itself or when compared to competing products. If both limbs are met, this is sufficient to find an abuse. On excessive profits -the first condition-, one needs to refer to the costs. To define indirect ones, the Commission had to choose the most appropriate allocation method between revenue-, volume-, or cost-of-goods-based allocation. Then, looking at profit margins, it is necessary to define what a reasonable margin is. The reasonable profit margin is a “plus” element that is added to the company’s actual costs, leading to a hypothetical cost-plus benchmark. Here, it was found that, on top of a reasonable return, Aspen earned additional profits roughly three times the level of cost-plus. On price unfairness -the second condition-, EU courts have accepted comparator tests, such as a comparison across prod¬ucts, comparison of the same product over time, and comparison across geographic markets. But in the present case, the Commission found no suitable comparator and therefore had to answer the following questions: is there anything that can legitimately explain the extremely high-profit margins of Aspen in terms of commercial risk? Innovation? Therapeutic improvement? Distribution challenges? Exceptional efficiency? It seems there were no such justifications as these medicines did not require any more R&D in any dimension. Furthermore, internal documents showed that Aspen raised prices with the sole aim to exploit its market power and the dependency of health systems on these medicines.

All these elements drove the Commission’s very strong concerns that the prices were unfair in themselves and overall that there was excessive pricing. As a remedy, Aspen committed to reduce its prices across the EEA by 73 per cent on average for ten years. In addition, Aspen committed to either supply the products or to make available the marketing authorizations to a buyer. These commitments provide for significant immediate and long-lasting price decreases for all concerned medicines in all the countries where they are currently sold.

Horst Henschen mentioned that enforcers are often reluctant to start an excessive price case, both for legal and policy reasons. These cases always bring up the delicate question of how far competition authorities are willing to get involved in price regulation. He also underlined the solution-orientated approach of the Commission which chose to discuss remedies with Aspen instead of imposing a fine.

Harald Mische highlighted the importance of the case, given that products at hand were life-saving or life-prolonging medicines that are reimbursed by health insurances. He reminded the audience that, even though enforcers typically prioritize exclusionary conducts, prohibition of excessive pricing applies to any kind of product -including in particular off-patent products such as the ones that the case was about. Furthermore, Aspen implemented various measures including threats of product withdrawals or restriction of supplies that allowed it to impose its prices across Europe – these considerations were not taken into consideration at the time of the launch of the investigation because the Commission did not yet have the evidence of them.

On the opportunity of commitments, the Commission’s choice to go for the Arti¬cle 9 remedies instead of a fine was guided by the will to provide an effective, broad, and quick remedy as fast as possible. These commitments cover 120 product-market combinations in twenty-five Member States in which Aspen will decrease or has already decreased or is in the process of decreasing its prices on aver¬age by 73 per cent. To complement, Aspen will be guaranteeing supplies in the market for five years, and for the period of an additional five years, it either guarantees the supplies or -in case of market exit- would offer its marketing authorizations to a potential entrant. On the legal framework, the Commission had to choose between the United Brands test or comparator tests but found no suitable candidate for comparison. For this reason, within the United Brands test, the Commission also opted for the unfairness in itself test.

The United Brands test required the Commission to demonstrate a significant excess in profits. In determining the excess, the Decision took into account that companies need to earn a reasonable profit margin, which the Commission determined based on a representative sample of similar firms. When it comes to the significance of the excess, the decision recognizes that the dominant undertaking too may have to adapt its prices in reaction to cost changes or market conditions and that companies need to have a certain margin of commercial manoeuvre in this respect. Moreover, the excessiveness of profits needs to be persistent and significant to qualify as abuse. The question of profit and price justification is also central as numerous considerations can be relevant for assessing whether there is a problem with such excess giventhe the absence of innovation, pro-competitive risk-taking, production efficiencies etc.

Lluís Sauri Romero pointed that, on economic reasoning, looking at the operating profit and the relation between the revenues and the costs specific for the products at hand was in spirit closer to what the Court required in United Brands. Relevant indicators in doing so are inter alia gross margin and EBITDA. Both have their specificities, and this is why the Aspen decision reports both the gross margins and the EBITDA both in terms of the measures of Aspen’s profitability but also in the context of a benchmark. In Aspen, many of the relevant assets were intangible assets of indefinite duration, meaning that they were not subject to linear or periodic depreciation and amortization but to one-off impairments, making EBIT measures less appropriate for the assessment. The measure of capital employed also came with some caveats: Aspen had not identified any par¬ticular intangible assets or tangible assets that were related specifically to the products, which created an identification challenge. A notable effort was also put into identifying costs that were not only specific to the products and specific to the geographic markets at hand and trying to keep an open approach to the allocation of indirect costs, including from headquarters and different companies in the group.

On the benchmark that was used in Aspen, it was made based on a sample of twenty-three companies that were observed over time measuring gross margins and EBITDA. Assembling this sample required the team to identify dimensions on which “similarity” to Aspen’s products that were subject to the investigation was relevant for the assessment. It is even possible that the sample includes non-competitive markets (markets with significant barriers to entry for instance), making it relatively lenient. In sum, reasons to think that the sample was not skewed towards markets that had low levels of profitability. If anything, the sample may have been polluted by too-profitable markets. The decision reports prominently the central measure of this sample and the median to demonstrate that Aspen’s profitability for the relevant products in the relevant markets was considerably superior to this median (and to the vast majority of comparators). References to the distribution of the sample are nonetheless also present in the decision. However, once this observation is made, the second limb (on unfairness) of the United Brands remains to be tackled. The assessment of the second limb condition included identifying the possible sources for the observed level of profits and questioning if it is justified, for instance, by R&D effort, innovation, or efficiency.

Raphaël De Coninck reflected on the benchmarking chosen by the Commission in this case. It chose to focus on profits, taking a cost-plus approach and building a bench¬mark to compare the profitability of Aspen and see whether it could be said to be excessive (or how one could find excessiveness compared to a benchmark). Its result was the elaboration of a sample of firms and the measure of their median profitability to be compared with Aspen’s. However, it may seem odd to expect a dominant firm such as Aspen to price in the same way as in very competitive markets. This question can be important in the definition of an appropriate sample.

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