News Update Competition
ACM imposes heavy fine on pharma company Leadiant for abuse of dominance
30 July 2021
30 July 2021
The Dutch Competition Authority ("ACM") fined Leadiant EUR 19.5 million for abusing its dominant position on the small market of drugs based on chenodeoxycholic acid ("CDCA") used for the treatment of cerebrotendinous xanthomatosis ("CTX") by employing an excessive pricing strategy. Excessive pricing in the pharmaceutical sector has come under growing public and political pressure, and the European Commission ("Commission") and National Competition Authorities ("NCAs") have initiated various investigations over the last couple of years.Some of the most notable cases concern the Italian NCA's fine in 2016 for excessive pricing of off-patent cancer medicines by pharmaceutical company Aspen, the legally binding commitments imposed by the Commission on Aspen earlier this year and the United Kingdom's NCA for excessive pricing of thyroid drugs by Advanz Pharma, HgCapital and Cinven.
The ACM indicated in 2018 that it would pay more attention to excessive pricing in the pharmaceutical sector. Earlier this month, the ACM announced its first decision in this field by fining EUR 19.5 million on pharmaceutical company Leadiant.
BackgroundThe case revolves around a series of price increases by Leadiant of a CDCA-based drug that is used for the treatment of CTX, a rare genetic disease. CDCA has been used in the Netherlands to treat CTX since the 1970s but was originally used and registered for the treatment of gallstones. For a good life expectancy, CTX patients heavily depend on CDCA.
Leadiant did not develop its CDCA-based drug. It acquired the drug from another pharmaceutical company in 2008 and also bought out other CDCA-based drug producers. At this point in time, the drug was sold in the Netherlands for EUR 46 for 100 capsules. After acquiring the drug, Leadiant increased its price three times.
- In 2009, it increased the price to EUR 885 for 100 capsules.
- In 2014, it increased the price to EUR 3,103 for 100 capsules after applying for the drug's orphan designation and related marketing authorisation. The orphan designation was obtained by the end of 2014.
- In 2017, Leadiant obtained marketing authorisation – which under the EU Orphan Regulation results in market exclusivity in the EU for ten years. Leadiant increased the price to EUR 14,000 for 100 capsules.
The price of EUR 14,000 for 100 capsules amounts to a 300-fold price increase, compared to its original price at the time of the drug's acquisition by Leadiant.
The ACM's decisionThe ACM fined Leadiant for excessive pricing of the drug from June 2017 to December 2019.
The ACM established that Leadiant had a dominant position during the infringement period as it had a 100% market share. Despite the market exclusivity of the designated orphan drug, the ACM considered two potential alternatives for the treatment of CTX: (i) the drug Kolbam and (ii) the compounded preparation of CDCA (exempted from the marketing authorisation requirement) by the Amsterdam University Medical Centre ("Amsterdam UMC"). However, the ACM noted that these alternatives were not available to patients during the infringement period. Kolbam was not prescribed in the Netherlands while Amsterdam UMC was temporarily not able to produce the compounded preparation of CDCA due to Leadiant's complaints that the raw materials sourced by Amsterdam UMC were impure. Amsterdam UMC had been forced earlier to source its raw materials from outside the EU as the only EU supplier (Leadiant's supplier) was forbidden by Leadiant to supply Amsterdam UMC.
The ACM established that Leadiant had abused its dominant position, whereas Leadiant argued that it had no dominant position, and that if it had a dominant position, it did not abuse it.
Firstly, the ACM held that the price Leadiant charged since June 2017 was excessive. The ACM based this on information received from Leadiant during the investigation. The ACM examined the costs and revenues that were attributable to Leadiant's application for orphan designation and marketing authorisation ("Project"). It considered Leadiant's investments for this purpose from the start of the Project in 2014, as well as all costs incurred by Leadiant to produce and distribute the CDCA-based drug. The ACM believed the risk of failure of obtaining the orphan designation and marketing authorisation to be very low. In terms of revenues, the ACM considered the revenues from the price increase in 2014, as well as all revenues from the sale of the medicinal product under the orphan designation. The ACM believes, in view of Leadiant's very high rate of return on the project, Leadiant would already have made a substantial profit if it had asked a price of less than 1/3 of the price it collected. The ACM based its assessment on a required rate of return of 15%.
Secondly, the ACM concluded that Leadiant's excessive price was also unfair in itself and when compared to competing products. Leadiant had namely obtained the orphan designation and marketing authorisation due to the small number of CTX patients but not because of innovation. There was no additional therapeutic benefit as the exact same drug had existed for several decades before obtaining the orphan designation. That made the price excessive in itself. The ACM further compared the price of Leadiant's CDCA-based drug to earlier versions (molecularly identical) of the drug that were also sold by Leadiant as well as to the currently used compounded preparation of CDCA. Based on this, the ACM concluded that a price of EUR 14,000 for 100 capsules was excessive.
Finally, the ACM's investigation also showed that Leadiant had not sufficiently shown intention to agree to a lower price than that of EUR 14,000. Leadiant namely asserted that it had always meant to negotiate with the health care insurers and the Ministry of Health, Welfare and Sport ("VWS") to come to a lower price. According to Leadiant, the health care insurers and VWS deliberately impeded these negotiations. However, the ACM found that it was Leadiant who did not fulfil its responsibility to effectively and seriously negotiate to agree on a non-excessive price.
Excessive pricing in the pharmaceutical sectorExcessive pricing by companies that have a dominant position is prohibited under EU competition rules. The concept of excessive pricing was developed for the first time by the European Court of Justice ("CJEU") in the United Brands case and was more recently reiterated in other cases such as the AKKA/LAA case. According to the CJEU, a price is excessive if it has no reasonable relation to the economic value of the product. This is the case if:
- the price-cost margin is excessive; and
- the price imposed is either unfair in itself or when compared to competing products.
In practice, this standard of proof is not easily met. This is especially true in the pharmaceutical sector where market dynamics are often shaped by intellectual property rights and market access conditions, sometimes resulting in monopolies. It is worth recalling that monopolists (whether of a natural or regulatory nature) can be expected to charge a monopoly price. High prices and potentially very high prices of medicines are not grounds to justify intervention as this would de facto equate a monopoly with abuse of dominance. In addition, high prices of medicines can very well be justified, also without a monopoly position to recoup R&D costs, to cover project risks or by its sheer added therapeutic value.
As the case law stands today, there is no single method, test or set of criteria generally accepted to determine an excessive price. The suitability of any method depends on the specificities of the case, and sometimes, a combination of methods is necessary. In addition, there seems to be a general understanding amongst legal practitioners and economists that competition authorities should only intervene when it feels certain that, regardless of the limitations and uncertainties surrounding the calculation of the benchmark price, the difference between that price and the actual price is of such magnitude that almost no doubt remains as to the latter’s abusive nature, even when taking specific facts and circumstances into account.
In short, charging high prices by a dominant undertaking will only result in abuse through excessive pricing under very specific facts and circumstances.
Further thoughtsGiven the high standards to prove abuse of excessive pricing, it is remarkable that the ACM investigated this case. There are, however, other pending investigations into Leadiant's pricing practice in Spain, Italy and Belgium.
The summary of the decision suggests that the ACM has tried to prove that Leadiant's price was not only excessive and unfair in itself but also when compared to competing products. The United Brands doctrine only requires that either the excessive price is unfair in itself or that the excessive price is unfair when compared to competing products.
It remains to be seen whether the courts will follow ACM's decision when appealed. Leadiant has already announced that it will appeal the decision. However, this decision shows, as well as the other pending investigations, that NCAs now have taken up the challenge to investigate excessive pricing practices and enforce if deemed necessary.