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05 April 2018
On January 31 2018 the Competition Council found that Swedish pharmaceutical distributor CD Pharma AB had abused its dominant position in Denmark by charging excessive prices (ie, a price increase of 2,000%). Excessive pricing cases are among the more unusual in competition law and are notoriously complex given the difficulty of proving that a price is excessive.
CD Pharma is a pharmaceutical company that distributes Syntocinon, a labour inducing drug. Amgros I/S is the purchaser of medicine for Danish public hospitals. In this case, a parallel importer, Orifarm A/S, won a contract to supply Syntocinon to Amgros from April 1 2014 to March 31 2015. However, just before the contract was due to start, Orifarm announced that it would be unable to fulfil its terms. According to the decision, Amgros had therefore been forced to buy from CD Pharma, the only alternative supplier in Denmark. Around that time, CD Pharma had raised the price of Syntocinon from Dkr45 to Dkr945 per package, corresponding to a price increase of approximately 2,000%. The price was lowered to Dkr225 per package in October 2014. Orifarm had won the contract by offering a price of Dkr43 per package, but it was able to deliver only 30% to 40% of the contract. CD Pharma delivered the rest.
The Competition Council found that CD Pharma had abused its dominant position in contravention of Section 11 of the Competition Act and Article 102 of the Treaty of the Functioning of the European Union by charging the excessive price of Dkr945 per package of Syntocinon. CD Pharma was ordered not to engage in similar behaviour in the future. The Competition Council is not authorised to issue fines, as a fine is considered a criminal penalty in Denmark. However, it did refer the case to the State Prosecutor for Serious Economic and International Crime for criminal prosecution.
CD Pharma was considered dominant as it enjoyed structural advantages in the form of an exclusive distribution agreement for Denmark with the manufacturer. Thus, according to the Competition Council, CD Pharma was the only alternative supplier. Research showed that the drug's former exclusive distributors had enjoyed dominant positions. Further, there were contractual, regulatory, commercial and IP barriers and the demand in the market for labour inducing drugs was relatively stable.
The Competition Council used the United Brands test to assess whether the price was excessive. Several analyses highlighted a large gap between costs and price – CD Pharma had a profit margin of 80% to 90%. Thus, the first part of the test was fulfilled. Second, comparisons to the prices of former exclusive distributors showed that CD Pharma charged approximately 2,000% more. Comparisons also showed that CD Pharma sold its products at significantly lower prices in other countries.
Abuse of dominance cases are rarely decided in Denmark, which is why they are always of interest. There are several elements in the above decision that could give rise to discussion. The case has been appealed to the Competition Appeals Tribunal.
First, the excessive pricing was considered not only exploitative, but also potentially exclusionary. Parallel importers tend not to have a steady supply source. If they fail to deliver, they may be met with a claim from their customers for replacement purchases. Thus, according to the Competition Council, the behaviour in question could lead to less incentives for parallel importers to bid on similar contracts, as they could be met with a high claim for replacement purchases in case of failure in delivery. For this reason, the case was more of a priority, as exclusionary behaviour is generally considered a more serious competition concern and since parallel importers are important for competition.
Second, CD Pharma was considered dominant from the day it entered the market and over the course of just one year. Normally, the establishment of dominance requires an assessment of a company's position over several years (usually two to three years), depending on the market. However, due to the specific circumstances and market barriers in this case, CD Pharma was considered dominant for the year in question.
Third, CD Pharma was a small player that was new to the market compared to Orifarm (Orifarm had a turnover of Dkr5.6 billion in 2014, whereas CD Pharma had a turnover of Dkr16.5 million in the same year). It could therefore be argued that CD Pharma had not established a position that made it independent of its competitors. However, according to the Competition Council, CD Pharma had occupied such a position in the market compared to Orifarm, as the latter was dependent on various supply sources around Europe as a parallel importer. The parties disagreed on whether Orifarm had made sufficient efforts to find a supplier in Europe. It was allegedly impossible to find a supply source that could deliver the drug in the right amount and form.
The above case is specific to the pharmaceutical sector, but is interesting given the increased focus on this sector and excessive pricing. In recent years, the European Commission and various national competition authorities have launched excessive pricing investigations in the pharmaceutical sector, which underlines the increased focus on this conduct.
It will be interesting to see whether the Competition Appeals Tribunal will uphold this decision, especially considering its unusual assessment of dominance.
For further information on this topic please contact Martin André Dittmer at Gorrissen Federspiel by telephone (+45 33 41 41 41) or email (email@example.com). The Gorrissen Federspiel website can be accessed at www.gorrissenfederspiel.com.
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