Rebate systems are commonly used by pharmaceutical companies. A quantity-based rebate system, where a customer is offered lower prices on further units once a particular volume has been purchased, incentivises the customer to purchase more units. Higher sales volumes enables the pharmaceutical company to expand production and benefit from economies of scale. In essence, a rebate system is a means of offering a discount to particular purchasers. This is less of a cost to the pharmaceutical company than reducing the retail price of the product a whole would be (which might be an alternative way of increasing sales volumes).
However, rebate systems utilised by a dominant company can raise competition law concerns under Article 102 TFEU. This is particularly the case where a rebate system is ‘loyalty’ inducing, i.e. the customer is required to obtain all or almost all of the units it needs from the dominant company in order to benefit from the rebate. Other forms of rebate system can also be problematic if they could lead to the foreclosure of ‘as-efficient’ competitors. That is not always easy to assess. In Intel the CJEU has recently remitted a case on rebates to the General Court for further analysis of whether Intel’s conduct did actually foreclose any of its competitors. The question for the General Court will be whether Intel’s rebates, which were conditional on exclusivity, prevented competitors from accessing the market.
This area of law has the potential to be relevant to pharmaceutical companies as a result of the trend for competition authorities to adopt increasingly narrow market definitions in the pharmaceutical sector, often analysing markets at the ATC4 or ATC5 level, or even concluding that individual brands of molecules are in their own market. Where this is the case, there is an increased risk that a pharmaceutical company may be found dominant, and therefore at risk of infringing Article 102 TFEU through its rebate practices.
There has been significant activity in the pharmaceutical sector by the competition authorities in recent years, with successful investigations into pay-for-delay agreements, excessive pricing, and other on-going investigations in those areas. There are also signs that rebates might fall under the regulatory spotlight in the UK. Although a Competition and Markets Authority (“CMA”) investigation into a suspected loyalty-inducing discount scheme was closed in June 2015 on grounds of administrative priority, earlier this year the CMA issued a Statement of Objections to Merck Sharp & Dohme Limited (“MSD”) for the rebate system MSD uses for its product Remicade.
Remicade is the MSD brand name for infliximab, a chimeric monoclonal antibody used primarily in the treatment of patients with gastroenterology and rheumatology conditions such as Crohn’s disease, ulcerative colitis and rheumatoid arthritis. From late 2013 onwards MSD faced competition from two biosimilars (Inflectra and Remsima) produced by Hospira (now owned by Pfizer) and Celltrion Healthcare respectively.
There is little publicly available information about the content of the Statement of Objections. However a CMA press release indicates that MSD “broke competition law by abusing its dominant position through a discount scheme for Remicade that was likely to restrict competition from ‘biosimilar’ versions of infliximab that were new to the market”.
MSD issued a public statement in response to the CMA’s accusation, claiming that the “discounts in question meant that infliximab was competitively priced and offered savings to the UK National Health Service, without hindering competition”.
This raises one of the most challenging issues faced by competition regulators when dealing with rebates. It’s somewhat counterintuitive that a practice resulting in a lower price for the purchaser could be an abuse of dominance. This is especially true in the current political climate where the purchaser is the NHS, a body under intense pressure to make cost savings. However, the CMA will be seeking to put together a case showing that prices for infliximab would have been even lower but for MSD’s conduct, and/or that the lower prices were designed to put MSD’s competitors out of business. Indeed, the true focus of this case is likely to be on the total or partial foreclosure of the biosimilar competitor products.
Remicade is one of the first biological products and the competitive dynamics for biosimilars remain unexplored in competition case law. The very significant investments and clinical trials needed to launch a biosimilar product mean that the market dynamics are very different from generic equivalents to small molecule medicines. Indeed, biosimilars are often manufactured or marketed by major brand name companies. However, the competition authorities will be equally alive to conduct which deters, or reduces, entry by biosimilar products.
Indeed, recent reports suggest that the CMA is not the only forum in which anti-competitive conduct relating to Remicade has been alleged. In the US, where the product is marketed by J&J rather than Merck, similar allegations have been raised, this time by Pfizer, the manufacturer of Inflectra.
Given the high costs of manufacturing biologics like Remicade, and the consequential high selling prices, rebates can be an important tool for pharmaceutical companies to help increase sales. However, pharmaceutical companies should be aware of the competition risks they face if their rebate strategy makes it difficult for equally efficient companies to compete.
- See for example this Credit Suisse Report from 2016 indicating increasing use of rebates year-on-year in the US. Merck’s Pricing Action Transparency Report 2016 indicates that the value of the rebates it offers has increased significantly over the last five years (though note this figure is incorporated into an ‘average discount’ that includes other discounts offered to purchasers).
- C-413/14 P Intel v Commission.
- For example, the Commission Decision in Case 39612 Les Laboratoires Servier (on appeal to the General Court in Case T-691/14).
- For example, the CMA Decision in Case CE/9742-13 Pfizer/Flynn (on appeal to the Competition Appeal Tribunal)
- For example, Case T‑472/13 Lundbeck (on appeal to the CJEU in Case C-591/16 P), the Commission Decision in Case 39612 Les Laboratoires Servier (on appeal to the General Court in Case T-691/14), and the CMA decision in Case CE/9531-11 GSK.
- For example, the Italian Market Competition Authority’s decision in Aspen, and the CMA’s decision in Case CE/9742-13 Pfizer & Flynn.
- For example, the Commission is also investigating Aspen for excessive pricing (Case 40394), and the CMA is investigating Actavis for excessive pricing and a potential pay-for-delay agreement with Concordia.
- Case CE-9855-14.