a. Aspen (Italy)

The national competition authority (NCA) resorted to two types of profitability analyses in their Limb 1 analysis in the first pure excessive pricing case, Aspen (Italy). The first involved a measure of the gross profit margin (the difference between net sales and the cost of goods sold (COGS)). ^{Footnote 50} The NCA found profit margins (pre-price increase) of between 20–30% (for Leurakan) and 70–80% (for Purinethol) ^{Footnote 51} and costs of 30%. ^{Footnote 52} Thus, after the price increase of 300%–1,500%, they found that Aspen’s revenues significantly exceeded total costs. ^{Footnote 53} The second profitability measure assessed the difference between revenues and costs-plus. ^{Footnote 54} The latter included direct costs (COGS), indirect costs (supply chain management and marketing authorisation (MA) fees) ^{Footnote 55} and a rate of return on sales (ROS) regarded as reasonable. ^{Footnote 56} To establish reasonability, the NCA used the worldwide average ROS of the two largest generic companies (Teva and Mylan), which was 13%. ^{Footnote 57} They opted to assess ROS instead of return on capital because of the undertaking’s limited investments in R&D and lack of production and marketing activities. ^{Footnote 58} Again, they observed that Aspen’s revenues over costs were much higher than this costs-plus figure, with values ranging from 100–150% to 350–400%. ^{Footnote 59}

b. Pfizer/Flynn (UK)

In the next excessive pricing decision, Pfizer/Flynn (UK), ^{Footnote 60} the NCA conducted separate analyses for the producer, Pfizer, and the distributor, Flynn. For Pfizer, to calculate costs, the NCA used a long-run average cost measure that considered both direct costs and indirect costs. ^{Footnote 61} For direct costs, the NCA included COGS and distribution costs. ^{Footnote 62} For calculating indirect costs, where allocation of common costs was possible, the NCA used the output-based method of allocation, ^{Footnote 63} since sufficient data for an input-based analysis were not provided. ^{Footnote 64} The most appropriate volume-based measure for which data were available was sales volume by pack, ^{Footnote 65} but two other methods were also used as part of the sensitivity analysis. ^{Footnote 66} Secondly, the NCA determined the appropriate measure of profitability and considered three methods in this respect: return on capital employed (ROCE), gross margins and ROS, the latter being its primary measure in this case (like Aspen (Italy)). ^{Footnote 67} To determine a “reasonable” profitability threshold for calculating costs-plus, ^{Footnote 68} the NCA assessed the relevance of Pfizer’s internal ROS on its whole business, the allowed ROS under the Pharmaceutical Price Regulation Scheme (PPRS) and other companies’ ROS rates. ^{Footnote 69} They ultimately identified 6% as the appropriate benchmark. This was the ROS allowed by the applicable profit control scheme from which the product was removed after debranding (which enabled the price increase in the first place). ^{Footnote 70} This figure was slightly higher than Pfizer’s internal ROS. ^{Footnote 71} They also applied a 9% figure, based on other measures, to cross-check their subsequent findings. ^{Footnote 72} The NCA found that Pfizer’s revenues exceeded costs-plus by at least 29%, 100%, 705% and 690% for the different capsule strengths, ^{Footnote 73} totalling £49–57 million over the four-year period. ^{Footnote 74} The sensitivity analysis excesses were similarly large and deemed excessive. ^{Footnote 75}

As for Flynn, for direct costs, the NCA took account of purchase, distribution and sales costs. ^{Footnote 76} The NCA considered the same measures used for the assessment of Pfizer’s costs for the purposes of determining Flynn’s relevant indirect costs, ^{Footnote 77} profitability ^{Footnote 78} and the reasonable profitability measure. ^{Footnote 79} For the latter, however, it found that the PPRS rate was only somewhat appropriate for a benchmark of Flynn’s reasonable measure of profitability, ^{Footnote 80} since they were a distributor. In any event, they used the 6% figure in light of the nature of the capsules (“far from new and innovative”) and the nature of the activities undertaken and risk incurred by Flynn (a “nominal role” in distribution). ^{Footnote 81} The NCA found that Flynn’s revenues exceeded the costs-plus benchmark by at least 133%, 70%, 31% and 36% for the different capsule strengths, ^{Footnote 82} totalling £27.5–32.5 million. ^{Footnote 83} Both this primary analysis and the sensitivity analysis produced the same conclusion of excessiveness. ^{Footnote 84}

For both parties, the NCA found that there were no additional non-cost-related factors that put the economic value above the costs-plus benchmark. ^{Footnote 85} For this analysis, they took account of the characteristics of the medicines at issue (that they were “very old”, no longer “first or second line”, had long been sold at a much lower price and had no material change in costs). ^{Footnote 86} They also took account of the health payer’s willingness to pay the premium, highlighting that the health authorities were “actually paying the prices under protest”. ^{Footnote 87} On appeal, the Competition Appeal Tribunal (CAT) found several flaws with the NCA’s costs-plus methodology, arguing that it was not a sufficient basis for a finding of excessiveness and that the NCA should have assessed multiple bases of analysis, in particular a hypothetical benchmark price. ^{Footnote 88} However, Green LJ and Vos LJ of the Court of Appeal agreed this to be wrong in law. ^{Footnote 89} The CAT had also found that the decision “was defective in its treatment of the economic value that may be derived from patient benefit” (ie non-cost-related factors). ^{Footnote 90} They concluded that this factor should have been incorporated to some degree. ^{Footnote 91} The Court of Appeal agreed with this point. ^{Footnote 92} It remains to be determined how the NCA’s new finding of infringement took this into account.

c. CD Pharma (Denmark)

For what can be considered Limb 1, the NCA in CD Pharma (Denmark) undertook several price–cost comparisons. The relevant information is largely redacted, but it shows that all of these comparisons found profit margins of over 70%. ^{Footnote 93} The only exception was the estimate involving the costs considered relevant by CD Pharma. ^{Footnote 94} The calculation of costs actually incurred was slightly different in this case because CD Pharma was a parallel importer, buying the drug from Sigma-Tau. Thus, the NCA could use the purchase price as the main cost measure. ^{Footnote 95} Despite CD Pharma having no documentation of several other relevant costs, the NCA allowed the inclusion of the following: transport costs, distribution costs, cold storage costs, interest and overhead costs. ^{Footnote 96}

The central estimate of CD Pharma’s profit margin that the agency deemed the most accurate (but still apparently conservative) was 80–90%. ^{Footnote 97} The NCA does not appear to have settled on a reasonable measure of profitability but simply to have concluded that the profit margin was significant. ^{Footnote 98} The NCA moreover appears to place special emphasis on the fact that the UK NCA in Pfizer/Flynn used a 6% ROS figure for a pharmaceutical distributor (like CD Pharma). ^{Footnote 99} This comparison is peculiar, since it is not directly comparable to profit margin.

d. Leadiant (Netherlands)

Only a summary is available for the Leadiant (Netherlands) decision, but it nevertheless offers a considerable degree of insight into how the NCA assessed each limb. In the Limb 1 analysis, the “costs” accounted for included the distribution fee for wholesalers, ^{Footnote 100} as well as those costs associated with acquiring the orphan designation and MA, investments made in the drug, manufacturing and distribution costs and risks of failure. ^{Footnote 101} The NCA found that Leadiant’s chenodeoxycholic acid (CDCA) project of obtaining formal orphan status for the drug was low cost and low risk. ^{Footnote 102}

Without elaborating upon their underlying reasoning, the NCA stated that they used a 15% return on investment (ROI) figure as a reasonable measure of profitability. ^{Footnote 103} Likewise, in the absence of an indication of Leadiant’s own ROI, the NCA came to the conclusion, under the Limb 1 analysis, that Leadiant’s prices were “exorbitantly high” ^{Footnote 104} and hence excessive in the sense of this Limb.

e. Aspen (EU)

Finally, we turn to Aspen (EU). As this case was settled with commitments, the Commission provided only preliminary conclusions. Nevertheless, the authority gave substantial insight into how they would establish whether the Limb 1 threshold was met. For this Limb, they relied on the costs-plus analytical method. In that regard, they indicated how they calculated costs (direct and indirect), ^{Footnote 105} revenues (ie net sales, which included gross sales minus certain expenditures such as wholesale discounts, rebates, promotions and returns) ^{Footnote 106} and a reasonable measure of profitability. ^{Footnote 107} With respect to the latter and most decisive factor, the Commission primarily relied on a median earnings before interest, taxes, depreciation and amortisation (EBITDA) profit margin measure of a sample of other undertakings similar to Aspen, ^{Footnote 108} selected according to objective criteria. ^{Footnote 109} In essence, the criteria were that the comparator undertakings “sell mainly generic or off-patent branded medicines with at least a material part of their revenues stemming from medicines that are similar to the Products in terms of active substance”. ^{Footnote 110} Similar medicines were defined as those in the same Anatomical Therapeutic Classification (ATC)-2 category. ^{Footnote 111} The Commission also ensured that there were no indications that the comparator undertakings did not operate under conditions of sufficiently effective competition. ^{Footnote 112} The average EBITDA margin and hence reasonable measure of profitability for the sample was 23%. ^{Footnote 113} Thus, to assess whether or not the United Brands Limb 1 threshold was surpassed, the Commission assessed whether or not the undertaking’s revenues for each product during the relevant period exceeded costs plus 23%. ^{Footnote 114} They then calculated the average excess over costs-plus (280–300%). ^{Footnote 115} The Commission also presented their findings on excessiveness per product in the different geographical markets, which were often several hundred per cent higher than the 23% average. ^{Footnote 116} There were a few exceptions to this for some drugs below the profitability comparator in some Member States. ^{Footnote 117} The Commission thus preliminarily concluded that, overall, the profits were excessive under Limb 1. ^{Footnote 118}

The Commission then responded to Aspen’s counterarguments related to the Limb 1 analysis. Firstly, the Commission accepted that direct computation “of the capital employed in the Products and the associated cost of capital” could be an acceptable method to assess Limb 1 excessiveness. This would have been an alternative to the industry average EBITDA margin. However, the Commission noted that the relevant data were not readily available in this case. ^{Footnote 119} Moreover, the Commission also rejected the price of acquiring the cancer drug portfolio as a potential proxy for capital cost. The argument was that this was conceptually incoherent. Because the acquisition price is “likely to reflect mainly the capitalised value of future expected profits … as opposed to the value of the assets”, ^{Footnote 120} the acquisition price paid was “likely to significantly overstate the value of the underlying assets” and in turn to “significantly under-estimate the underlying profitability of the Products”. ^{Footnote 121} While the Commission could have further attempted to identify the underlying capital and costs thereof, they were confident that this would be unnecessary in light of the aforementioned “clear concerns identified in the Limb 1 analysis”. ^{Footnote 122} In any event, even using Aspen’s proposed cost of capital (acquisition cost), Aspen’s ROIs were still “several-fold greater”, thus “confirming” their profitability assessment. ^{Footnote 123}

a. Aspen (Italy)

In terms of how unfairness has been assessed, in Aspen (Italy), the NCA mostly relied on factors that can be considered to fall under Limb 2.1. The core aspect of the Limb 2 assessment was a comparison of Aspen’s prices over time. ^{Footnote 124} This analysis showed that the prices were 300–1,500% higher than the previous prices, which already guaranteed a profit. ^{Footnote 125} In terms of other factors considered in the unfairness analysis, the NCA noted that the prices were not justified by economic reasons. This was because the Italian pricing legal framework did not provide grounds for price increases not attributable to drug production cost increases. ^{Footnote 126} Moreover, even taking into account the US$300–400 million acquisition of the multi-country generic cancer drug portfolio, revenues remained 100–150% and 300–350% above cost. ^{Footnote 127} Returns were between 20–30% and 30–40% higher than the 8% generic industry average return on capital. ^{Footnote 128} The third ground for considering the prices as unfair was the lack of any non-economic benefits of the price increases for patients. ^{Footnote 129} Separate to an unfairness analysis but interpretable as a Limb 2.1 consideration, the NCA highlighted Aspen’s coercive negotiation strategy for obtaining the unfair price. ^{Footnote 130} Thus, the conclusion of unfairness was based predominantly on Limb 2.1 grounds, besides the comparison of returns to the generic industry 8% average.

b. Pfizer/Flynn (UK)

In the initial Pfizer/Flynn (UK) decision, under the Limb 2 analysis, the NCA first assessed whether there were any non-cost-related factors that were capable of increasing the economic value of the relevant product. ^{Footnote 131} They found that there were not. ^{Footnote 132} They did, however, find that the pricing was unfair on the basis of Limb 2.1. ^{Footnote 133} Their grounds were that the drug was very old and off-patent, that it was no longer a first- or second-line treatment, that it had been sold much cheaper for a long time and that the price increase was not based on any change in costs, R&D or risk level. ^{Footnote 134} “[F]or completeness”, ^{Footnote 135} the NCA also assessed whether any relevant (“meaningful”) ^{Footnote 136} comparators existed to conduct a comparative analysis under Limb 2.2. Three potential products were assessed in this regard. These included parallel imports, a generic version and a tablet version. None was deemed suitable. ^{Footnote 137} Nevertheless, on appeal, the CAT ruled that the NCA “did not properly assess the possible impact of meaningful comparators (in particular, phenytoin tablets)”. ^{Footnote 138} They held that the NCA did not consider the suitability of tablets as a comparator in “sufficient depth”, ^{Footnote 139} especially in relation to the “competitive conditions surrounding this drug”. ^{Footnote 140} The CAT concluded that there was enough material for the NCA to have considered, “at the very least, whether there was a prima facie case of fairness” or not under Limb 2.2. ^{Footnote 141}

This finding especially mattered because the CAT decided that the NCA was wrong to conclude that Limbs 2.1 and 2.2 were alternatives in that case. ^{Footnote 142} At the Court of Appeal, Green LJ agreed. He made a compelling argument that the NCA’s margin of manoeuvre, in terms of whether they assess Limbs 2.1 and/or 2.2, was limited. He forwarded that, while competition authorities are not always obliged to analyse both limbs, they cannot “ignore exculpatory evidence of another type if it is prima facie relevant” ^{Footnote 143} when presented by the undertaking(s). He reasoned that the United Brands “ruling is a far cry from saying that if [a competition authority] selects one method, but a defendant undertaking serves relevant exculpatory evidence upon some other basis then [a competition authority] can avoid fairly evaluating that evidence”. ^{Footnote 144}

Green LJ’s argument that evidence forwarded by undertakings must be assessed by the competition authority is not objectionable. However, his framing of the assessment of such arguments in this way, in the Limb 2 analysis, is inconsistent with the ECJ’s case law. ^{Footnote 145} The assessment of “exculpatory evidence” belongs under the objective justification stage of the analysis. Thus, competition authorities are only obliged to establish that the price is indicative of an abuse under Limb 2.1 or 2.2, and it is then open to an undertaking to submit such “exculpatory evidence” to demonstrate that the pricing practice was somehow justified and therefore not abusive. This includes evidence related to the Limb on which the authority did not rely for establishing that the price was indicative of an abuse. Overall, therefore, the CAT and the Court of Appeal are incorrect to take the position that Limbs 2.1 and 2.2 are “not (truly) standalone alternatives”. ^{Footnote 146}

c. CD Pharma (Denmark)

In CD Pharma (Denmark), the NCA compared the dominant undertaking’s prices to several benchmarks that fall under either Limb 2.1 or Limb 2.2. The first comparison was of CD Pharma’s prices during the relevant period to historical prices of Syntocinon on the Danish market over time (Limb 2.1). ^{Footnote 147} The increase compared to the highest historical price was approximately 2,000%. ^{Footnote 148} The NCA noted that no changes in product quality or in the prices of raw materials could explain the relevant increase. ^{Footnote 149} The second comparison was between CD Pharma’s prices during the relevant period to the prices of competitor Orifarm and former distributor Sobi (Limb 2.2). ^{Footnote 150} CD Pharma’s prices were 2,100% higher than Orifarm’s (a subsequent supplier) ^{Footnote 151} and 2,050% higher than Sobi’s (a previous supplier). ^{Footnote 152} The NCA also compared CD Pharma’s prices to the undertaking’s own prices in other (redacted) countries (Limb 2.2). ^{Footnote 153} While the differences between CD Pharma’s prices were usually in the range of several hundred per cent, in one country prices were 8,400% lower than those charged by CD Pharma in Denmark. ^{Footnote 154} Additionally, the NCA also assessed whether or not any other non-cost-related factors could imply a higher “economic value” for Syntocinon (Limb 2.1). ^{Footnote 155} They concluded that there were none. ^{Footnote 156} Thus, the NCA found that the prices were unfair in the sense of Limbs 2.1 and 2.2, on the basis of all three measures of unfairness. ^{Footnote 157}

d. Leadiant (Netherlands)

In the NCA’s summary of why, in the Leadiant (Netherlands) case, they considered the price unfair, they took account of factors pertinent to both Limbs 2.1 and 2.2. For Limb 2.1, these factors included the circumstances in which the orphan designation and orphan MA were obtained. In particular, they highlighted that the designation and MA were acquired without introducing a new innovation, additional therapeutic value or increased safety or efficacy. ^{Footnote 158} For Limb 2.2, they took into account the previous price of CDCA charged by other undertakings and by Leadiant. ^{Footnote 159} They also considered the price of the hospital-made CDCA from the Amsterdam University Medical Centre (Limb 2.2). ^{Footnote 160} Thus, their ultimate finding of unfairness was based on both Limb 2.1 and Limb 2.2 analyses. ^{Footnote 161}

e. Aspen (EU)

Finally, in Aspen (EU), the Commission assessed unfairness in the sense of Limb 2.1 and whether there were any relevant comparators for a Limb 2.2 analysis. The Commission considered the pricing unfair “in itself” for three core reasons. Firstly, the prices were unfair in themselves because there were no “legitimate reasons” underlying the prices and profits. This was in view of (1) the “nature” of Aspen’s products (old and off-patent, recovered R&D costs and highly inelastic demand) and (2) the fact that there had not been “any commercial risk-taking activity, nor innovation, nor investment, nor any material improvement regarding the Products”. ^{Footnote 162} Indeed, It was already a well-established portfolio and brand that, pre-acquisition, reaped profits nearly double the industry average. ^{Footnote 163} Aspen also did not carry out any R&D or add any improvements, ^{Footnote 164} did not make enhancements to commercialisation or distribution ^{Footnote 165} and moreover could not contribute to technical efficiency, since manufacturing was outsourced. ^{Footnote 166}

The second reason for considering the prices unfair in themselves was because the Commission found that the price increases were disproportionate to any existing increases in costs. ^{Footnote 167} So too were the magnitudes of the prices and profits vis-à-vis the comparative benchmarks derived from the aforementioned industry sample average. ^{Footnote 168} This was confirmed by Aspen’s evidenced strategy to exploit its market power and to increase profits. ^{Footnote 169} The preliminary conclusion that prices were unfair in themselves, derived from those three factors, was supplemented by “additional elements” of evidence. These included the coercive means and methods employed by Aspen to overcome the resistance of public authorities to the price increases. ^{Footnote 170}

The Commission acknowledged that it was unnecessary to assess whether or not the prices were also unfair in the sense of Limb 2.2 of United Brands, ^{Footnote 171} but it nevertheless assessed the availability of suitable comparators to address Aspen’s arguments. ^{Footnote 172} It concluded that recent generic entrants with prices broadly aligned to Aspen’s were not suitable comparators. The latter’s prices were unlikely to be reflective of sufficiently effective competition, since there were no more than two competitors on any of the relevant markets and because it takes longer for prices to drop to competitive levels in smaller markets. ^{Footnote 173} The Commission also deemed innovative medicines to be unsuitable comparators because they follow different pricing and reimbursement rules, in light of R&D-related efforts associated with patent-protected innovative products. Hence, they could not provide insight into price levels that would have reflected sufficiently effective competition for off-patent drugs. ^{Footnote 174} Having fulfilled both Limbs of the test, the Commission preliminarily concluded that in most of the relevant markets “Aspen’s prices may not have had, and continue not to have, any reasonable relation to the economic value of the Products supplied”. ^{Footnote 175}

*

These findings are summarised in Table 1. In particular, for each pharmaceutical case Table 1 documents whether or not the medicine was exclusivity protected, as well as the factors considered in the Limb 1 excessiveness assessment and the Limb 2 unfairness assessment. It includes information about the costs, measure of actual profitability and reasonable measure of profitability (Limb 1) and about the basis on which the price was considered unfair (Limb 2).

Table 1. Application of the United Brands test in pharmaceutical cases.

COGS = cost of goods sold; EBITDA = earnings before interest, taxes, depreciation and amortisation; MA = market authorisation; PPRS = Pharmaceutical Price Regulation Scheme; ROI = return on investment; ROS = return on sales.

Several observations to inform future cases in the pharmaceutical and other sectors emerge from the preceding outline of how competition authorities have applied Limbs 2.1 and 2.2 of United Brands in pharmaceutical cases.

Firstly, these analyses are very context-specific. The sheer breadth of the range of measures used to assess different factors suggests as much. For instance, and strikingly, a variety of measures have been used to assess reasonable profitability. Aspen (Italy) and Pfizer/Flynn (UK) used ROS, Leadiant (Netherlands) used ROI and Aspen (EU) used EBITDA profit margin. This variety highlights the imprecision of the expression “reasonable rate of return”; the term “reasonable measure of profitability” is preferable.

It can also be observed that, in line with the recommendation of Advocate General Wahl in AKKA/LAA, ^{Footnote 176} in many instances of both the Limb 1 and Limb 2 analyses, the competition authorities, of their own accord, relied on multiple measures instead of a single tool to verify whether or not a relevant criterion was fulfilled. Similarly, they often assessed both Limb 2.1 and Limb 2.2, despite only being obliged to establish unfairness under one of these Limbs (contrary to the understanding of the CAT and Court of Appeal). Indeed, even in the cases where the competition authority did not deem the prices unfair compared to competing products, this was only due to the lack of any relevant comparators.

The NCAs also tended to show due consideration for the alternatives proposed by the dominant undertakings. In particular, they would typically highlight why the proposed measure was unsuitable or would otherwise explain why the employment of the alternative measure would still demonstrate unreasonableness or unfairness. This comprehensive approach, assessing every suitable measure for which data are available, should instil confidence that these cases were not false positives. Of course, where one of multiple measures deployed to assess Limbs 1, 2.1 or 2.2 falls on appeal, it must be remembered that, as the case law makes apparent, it is perfectly valid to prove excessiveness (Limb 1) or unfairness (Limb 2) according to a single measure. Nevertheless, the Pfizer/Flynn saga highlights the importance of continued study, by both academics and competition authorities, of the excessive pricing theory of harm in pharmaceuticals.

Finally, given the range of different contexts in which the discussed pharmaceutical cases occurred, this body of case law can be relied upon to inspire future inquiries into how pharmaceutical costs should be calculated, what a reasonable measure of profitability is and/or what factors might indicate unfairness. This is most pertinent to future Article 102 TFEU excessive pricing cases, but it can also inform academic and public policy debates on this issue.