Anticompetitive strategies in the pharmaceutical sector: what is the way out?

(Some notes for discussion at the “Game Changers” meeting, “for better and affordable medicines for Europe” organized by European Public Health Alliance, under the auspices of the Bulgarian Ministry of Health. November 21, 2017; Brussels).

1.Introductory remarks.

In his beautiful novel “Lord Jim”, Joseph Conrad describes the abuse of monopoly power by the Rajah Allang, the king of a remote place called Patusan.

“Rajah Allang –writes Conrad- pretended to be the only trader in his country, and the penalty for the breach of the monopoly was death; but his idea of trading was indistinguishable from the commonest forms of robbery”.

In my view, the main anti competition strategy in the pharmaceutical sector is, precisely, to consolidate, reinforce and expand the monopolies, the dominant position granted through patents, data exclusivity and supplementary protection certificates.

Unfotunately, there are two dramatic consequences of abusing dominant position in this field. On one hand, thousands of people here in Europe and all over the world suffer, and die prematurely due to lack of access to the medicines they need.

On the other hand, patients and health systems are losing a lot of resources that go to the profits of pharma companies, putting the sustainability of public health care services at risk.

Let’s see some numbers. According to the European Federation of Pharmaceutical Industries and Associations (EFPIA) the pharmaceutical market value at ex factory prices (in the EU-28 Member States) reached € 166 billion in 2015. We, the patients and the health systems are already paying that money.

How much are the manufacturing costs? We can estimate these costs from the European Pharmaceutical Sector Inquiry, where they calculated that pharma companies spent 21% of total sales in manufacturing. That means that pharma industries would have spent around € 35 billion. Then, why are we paying €166 billion? Because we pay a kind of "TAX" called "Patent”. An overprice that companies collect with the justification that this money is needed to finance R&D. The companies can collect this "TAX" thanks to the monopoly granted by governments, and we, consumers, patients, health services, are paying R&D through this "TAX" (see Baker, Jayadev, Stiglitz 2017).

So, in addition to the manufacturing costs, we are paying €131 billion. How much did pharma companies spent in R&D? According to EFPIA they spent only €26.5 billion in 2015.

It is a lot of money, but we if we are paying €131 billion in order to finance R&D through the patent system, where goes the difference? The difference, more than €104 billion, goes to profits and other related expenditures. It is not going to research.

A key point of this model is that a significant part of these profits, around €38 billion, are used in marketing strategies, advertising, sponsoring, lobbying, visits by sales staff to doctors and pharmacists, etc., in order to maintain the monopolies, justifying the astonishing increase in prices and delaying the entry of generics. That's the reason why it is very dificult to change the system.

The rest of the money goes to mergers and acquisitions, stock buybacks, remuneration of top executives, dividend payouts, lawyers and litigations, etc. Indeed, we could say that it is a very unfair and inefficient system for patients and health systems, but very profitable for some pharma companies.

How do companies abuse their dominant position?

Article 102 of the Treaty on the Functioning of the European Union explains that abuse of dominant position may consist in:

a)-imposing unfair prices.

b)-limiting markets to the prejudice of consumers.
c)-applying dissimilar conditions to equivalent transactions.

etc.

All these kind of abuses of monopoly power, that perhaps Conrad would have considered indistiguishable from the commonest forms of robbery, are being applied systematically in the pharmaceutical sector and should be prohibited by the EU authorities, according to article 102. (At the end I will discuss these three types of abuse of dominant position).

Is there a way out?

Yes. There are different initiatives and interesting strategies, that respond to different aspects of the problem (for example, improving transparency in order to negotiate better prices, abolishing the supplementary protection certificate, implementing compulsury licences, reducing data and market exclusivity, obtaining returns from direct public financing on research, etc.). But, in my view, the way out is Delinkage: delinking the financing of R&D from prices, and abolishing the patents for medicines.

The alternative to the current model is to finance directly researchers and research centres, using the money that we are spending paying over-prices. There are different ways of doing that, centralized and decentralized (National Institutes, grants, subsidies, prizes, contracts, etc.), and there are a lot of positive experiences (see University Allied for Essential Medicines, UAEM reports).

Research and development with direct public funding should reach the approval stage for commercialization. Afterwards, the pharmaceutical companies could manufacture the medicines at an affordable price (like generics).

With the resources that we are spending now we would be able to pay for the manufacturing (€35 Bn), and to dedicate the same €26.5 billion to open and collaborative research, with priorities related to health needs of the population and not only to commercial interests.

The rest of the money, more than €104 billion could be used to improve health conditions of the population. This money could be spent, for example in public health programmes, disease prevention, better nutrition, health promotion, and to reinforce public health care services improving quality, safety and access. And we could still save some money.

For the last 30 years we have been thinking and discussing prices and affordability of medicines within the framework designed by Pharma corporations. Now we have to change the framework, and we have to think with other perspective based on human rights, and considering drugs as public goods, rather than as financial products. We need to delink prices of medicines from the financing of R&D in order to guarantee access to medicines for all person who need them.

It is not an easy goal, it will take time, but in my humble opinion it is the only way out.

2. Is competition legislation being violated in the pharmaceutical sector?

2.1.

Imposing unfair prices.

In order to maximise their profits, companies may develop different strategies: the first one is to use their dominant position to impose the maximum price that patients and health systems can bear.

In my opinion, Article 102, point a) is being infringed when some pharma companies impose unfair prices to medicines.

How can we define a price as unfair?

In the Judgement of the Court of 14 February 1978, case 27 / 76, The Court of Justice discussed if a price could be considered unfair or excessive: this excess could be determined by making a comparison between the selling price of the product in question and its cost of production…

The Judgement stated that, in order to assess if a price has been imposed which is either unfair in itself or when compared to competing products the Commission should require the companies to produce particulars of all the constituent elements of its production costs.

Once we know the difference between production costs and prices, what proportion do we consider excessive? A disproportion between costs and prices about 100%, or 1,000%, or 10,000%?

Andrew Hill and other researchers have drawn attention to the difference between production costs and prices:
Sofosbuvir, with a cost of production of €55 per treatment, is sold at a price of €13,000. The difference between costs and prices is 20,000%.
Entecavir, with a cost of production of €36 per person / per year of treatment, has a price of €6,000. The difference between costs and prices amount to 16,000%.
Imatinib, with a cost of production of €180 per person / per year, is sold at a price of €30,000. The difference is 16,000%.

Insulin, with a cost per vial of 1€, has a price per vial, €100. The difference is 10,000%.

The anual cost for a combined treatment for HIV/AIDS with Tenoforvir, Embricitabine, and Efavirez, is €80. The price is around €7,000. The difference amount 8,000%.

Are these prices disproportionate?

Let’s be clear. Exorbitant prices are not aimed to finance R&D to discover new medicines. Hepatitis C drugs prices, cancer drug prices, HIV drug prices are not justified by the investment companies have done in R&D. Prices are fixed considering the maximum price that the market will bear.

In a paper published in JAMA last september, Prasad and Mailankody, studied 10 cancer drugs, comparing sales and R&D costs. In 4 years since approval, the total revenue from sales of these 10 drugs was $67.0 billion compared with total R&D spending of $7.2 billion. Expenditure on R&D was only 10.74% of sales. In other words, in less than 2 years they have covered R&D costs. If governments were not able to impose fair prices, then it would be reasonable to terminate the patent protection and date exclusivity when companies have recovered R&D costs.

In the case of Sofosbuvir, studied by US Senators Wyden and Grassley, R&D costs were recovered in the first year of sales.

The Aspen case:

Altroconsumo (Italian Consumer Organization) launched the case in 2015 after consumers complained about the shortages of these medicines. Then, the European Consumer Organization (BEUC) urged the European Commission to investigate this "unethical" practices of drug pricing, an example of abuse of dominant position.

In May 2017, the European Commission opened a formal investigation into concerns that Aspen Pharma had engaged in excessive pricing concerning five life-saving cancer medicines. The Commission will investigate whether Aspen has abused a dominant market position in breach of EU antitrust rules. It is the first investigation of the Commission about excessive pricing practices.

The Commissioner in charge of competition policy, said: “in this case we will be assessing whether Aspen is breaking EU competition rules by charging excessive prices for a number of medicines."

It would be an excelent opportunity for the Commission to define what prices should be considered Excessive Prices. This criteria should apply not only to a generic company who has increased prices in excess, but also to originator companies when they set unjustified prices from the begining.
For example, if a generics company uses its dominant position to increse prices 1,000%, from 10 to 100 euros, this is unfair; but also, when originator companies use their monopoly power to set prices at 10,000% over costs (including R&D costs), from 100 to 10,000 euros, they are abusing the dominant position granted by patents. These companies are imposing every day very significant and unjustified prices, and the Commission should investigate this infringement of article 102.

Given the importance of this issue to the European Union and its citizens, should not the Commission (in colaboration with the National Competition Authorities) routinely investigate the costs, prices and benefits of the 20 top selling drugs, and the 20 high priced drugs in the EU?

It is important to remind that the problem of astonishing and unfair prices is not going to be solved alone. In fact, prices of new medicines are escalating every day, putting the economic viability of public health care services at risk.

2.2.

Limiting markets to the prejudice of consumers, designing and implementing a network of strategies aimed to delay generics entrance.

Art 102, point b) is being infringed when companies abuse their dominant position “limiting production, markets or technical development to the prejudice of consumers".

The results of the Pharmaceutical sector inquiry carried out by the EU Commission in 2009, suggest that the behaviour of originator companies contribute to the obstacles for generic entry. Similarly, in 2014, the Chair of the OECD Competition Committee, when Discussing on Competition and Generic Pharmaceuticals, concluded that many examples were provided revealing questionable strategies developed by originator companies. “These cases –he said- showed that originator firms have quite some imagination when it comes to maximizing their profits”.

The list of strategies is very large:

Withdrawing medicines, shortages, delays on launching, weak patents, suplementary protection certificate and data exclusivity, evergreening of patents, patent clustering and divisional application, product hopping, pay for delay, product switching, trying to stop implementation of “flexibilities” like compulsory licenses, using voluntary licences to discourage competition, aquisition of generic companies and generic divisions of originator companies, defensig pricing strategies, disinformation tactics, patent litigation, strategies aimed at regulatory bodies, strategies aimed at doctors and pharmacists, strategies to block initiatives from health authorities to increase generic use, etc. And, of course, cumulative use of practices against generic companies.

2.3.

Differing Prices.

Pharma Companies offer different prices to different countries, different regions, different sick funds, or even different hospitals, through discrete negotiations, reaching agreements on prices that sometimes must be keeped secret.

Art 102 of the Treaty on the Functioning of the European Union states that abuse of dominant position may, in particular, consist in:

(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

In the Court Judgement of 14 of February 1978, case 27 /76, was stated that “the policy of differing prices, enabling a company to apply dissimilar conditions to equivalent transactions with other trading parties, was an abuse of a dominant position”.

We can observe that in the pharma sector differing prices are very common. Companies negotiate confidential agreements, setting differing prices in various European Countries. They explain that in that way they can charge lower prices to lower income countries: charity-like marketing. The reality is that this abuse of dominant position allow them to charge higher prices in relation to real costs everywhere. The maximum price that the market could bear in each country, far above production costs.

For example, the WHO Global report on Access to Hepatitis C treatment (October 2016) showed the differing prices charged in different countries. The document shows that prices of sofosbuvir differ more than 50% between EU countries. The report states that: to enable countries to successfully negotiate more affordable prices, greater market transparency is needed. And also indicates that: lessons learnt from the HIV field show that generic competition is more effective in driving down prices.

Confidential agreements imposed by some pharma companies are infringing art 102 of EU Treaty.
Applying the clasic principle “Divide and rule”, confidential agreements give the industry all the power to continue ruling pharmaceutical market, maximizing their benefits while patients and health services have to pay unfair, excessive prices.