The Italian Council of State upholds the Competition Authority’s €3.2M fine for abuse of dominance by negotiating an unjustifiably high reimbursement price for an “orphan” drug (Leadiant Biosciences)

Background

Leadiant (formerly Sigma Tau) markets two CDCA Leadiant products for the treatment of the rare disease cerebrotendinous xanthomatosis (“CTX”) in Italy. Before CDCA Leadiant became available, patients with CTX were treated with off-label drugs with the same active ingredient, chenodeoxycholic acid (CDCA). The cost (EUR 36 per capsule or less) was much lower than the cost of CDCA Leadiant.

In 2006, Leadiant (Sigma Tau) purchased the CDCA-based drug Chenofalk (later renamed Xenbilox), which was not intended for the treatment of CTX and could not be properly marketed for off-label use. In order to offer the CDCA-based drug on-label to Europeans with CTX, Leadiant made plans to repurpose the active ingredient (i.e., have it certified for a different therapeutic purpose) and file an application with the European Medicines Agency (EMA) to designate it an orphan drug pursuant to Regulation EC No. 141/2000 (meaning it would be given special status as a drug used to treat a very rare disease or disorder). Leadiant also planned to seek a new pan-European Marketing Authorization (MA) for the new drug, CDCA Leadiant.

As an orphan drug, CDCA Leadiant has benefited and continues to benefit from multiple statutory incentives, including market exclusivity for 10 years (i.e., during market exclusivity authorities cannot grant authorization for another drug for the same disease), regardless of patent protection under patent law. In 2017, after first issuing a negative opinion,
the EMA came around to support maintaining the orphan designation for CDCA Leadiant and confirmed that plain cholic acid and CDCA had different clinical outcomes.

On December 18, 2019, Leadiant reached an agreement with the AIFA (renewed on March 2, 2022) for reimbursement of CDCA Leadiant (“Agreement”). The Agreement positioned the drug in reimbursable class A and granted the NHS a 55% discount, a maximum selling price of EUR 6,297.75/package of 100 capsules, a maximum expenditure ceiling of EUR 2.8 million/year, and other financial commitments (valued at EUR 6.8 million) in the form of statutory “payback” obligations.

However, in 2019 the ICA (and the Spanish, Dutch, and Belgian competition authorities) received a complaint about an excessive CDCA Leadiant price increase and launched an investigation into abuse of dominance.^[3] On May 17, 2022, the ICA fined Leadiant approximately EUR 3.2 million for charging the NHS an unjustifiably high price for CDCA Leadiant. In addition, the ICA ordered Leadiant to cease the contested conduct and undertake fair negotiations with the AIFA. In July 2023, the Regional Administrative Court of Lazio upheld the ICA decision.^[4]

Decision of the Council of State

The Council of State judgement confirmed Leadiant’s abuse of dominance. The Council of State focused on several factors:

• Leadiant’s unfair conduct during price negotiations with the AIFA and the scope of the ICA’s power in regulated markets;
• That the agreed upon price was excessive and unfair;
• Leadiant’s dominant position and the abusive nature of its overall conduct;
• Applicable sanctions.
  Generally, by rejecting the first (and most common) grounds for appeal—lack of effective judicial review by the first-instance court—the Council of State made it clear from the outset that it would maintain that the first-instance court had correctly reviewed the ICA’s assessment and reasoning to the full extent permitted by the margin of technical discretion granted to the ICA, i.e., in part by reviewing the correctness, reliability, and logical soundness of references to and application of technical and scientific knowledge (e.g., economic and clinical evaluations).

1. Unfairness of negotiations with the AIFA and the ICA’s powers in regulated markets

The Council of State confirmed that the Company engaged in dilatory and obstructive conduct toward the AIFA while negotiating the reimbursement price. Specifically, Leadiant failed to provide documentation and information that the AIFA requested about R&D investments and improvements involved in on-label registration of CDCA Leadiant. The court confirmed that these were needed to justify Leadiant’s proposed price and the large price difference between CDCA Leadiant and off-label Xenbilox.

The court argued that the information was necessary to assess whether the reimbursement price proposed for CDCA Leadiant was excessive, since the ordinary cost-effectiveness criterion pursuant to sector legislation (Article 48 of law decree No. 269/2003) could not be applied. The cost-effectiveness criterion uses the prices of similar drugs in the same therapeutic category and the comparative daily cost of alternative drugs with the same therapeutic indications for comparison. The same norm allows a “prize price” for newly authorized drugs and specifically for orphan drugs to be used. However, for an orphan drug by definition there is no alternative drug with the same or similar therapeutic indications and, thus, no means for comparison. For a newly authorized orphan drug, the AIFA can review production costs and R&D investments to evaluate the proposed price. However, Leadiant only provided the AIFA with that documentation and information after the ICA undertook its investigation of abuse of dominance (approximately one year after the first of several AIFA requests went unanswered). The court also noted that nothing in that documentation provided sufficient justification for the proposed price, given the disproportionately lower value of documented costs and investments and of documented benefits for patients compared to the proposed price. Also, the drug’s added therapeutic value could not be measured based on the consumer’s willingness to pay, as a consumer generally will pay any price for a life-saving drug with no therapeutic alternatives.

Finally, the court found that the dilatory and obstructive (and thus unfair) nature of Leadiant’s overall conduct was corroborated by the Company’s refusal to supply the orphan drug to hospitals free of charge for “compassionate use,” as it would not have seen any profit for supplying the orphan drug in Italy, thus jeopardizing the Company’s bargaining power in negotiations with the AIFA. The argument that this was the real motivation for its refusal was disputed by the appellant—which argued that the motivation was lack of regulatory conditions for compassionate use—but the court confirmed it with internal Leadiant correspondence collected during the ICA investigation.

Considering that no blatant breach of regulatory norms was found, Leadiant’s conduct with the AIFA was analyzed by the court under the framework applied to “regulatory gaming” or “abuse of rights” to the detriment of competition. Under Italian law, an “abuse of right” is conduct that is technically lawful, as it does not breach any norms and can pertain to the exercise of a right, but nonetheless pursues an objective that goes beyond the scope of the claimed right and instead aims to obtain another improper or unlawful objective (e.g., a restriction or delay of genuine competition on the merits). Further, the court noted that abuse of dominance pursuant to Article 102 TFEU is typically conduct that is perfectly lawful and compliant with sector regulations and other legislation, but nonetheless its real objectives or effects are anti-competitive. The court confirmed that the ICA had full jurisdiction over these aspects of the conduct and did not violate regulatory powers under Article 102 TFEU, national legislation, or regulations in the pharmaceutical field.

2. Agreed upon price was excessive and unfair: Application of the twofold test from United Brands

The Council of State reviewed the ICA’s and first-instance court’s finding of “excessive” and “unfair” drug pricing.

In accordance with European Court of Justice guidance on excessive pricing from previous cases (United Brands^[5]), the Council of State analysis used a twofold test: (i) examining whether the gap between the price for the medicine actually charged on the market and the hypothetical price that the company would have charged in the presence of effective market competition (the “reference price”) is “excessive” or “disproportionate,” meaning that the actual price bears no reasonable connection to the reference price estimated using various methodologies, including the “objective” methodology of considering the dominant company’s margins (calculated using production and marketing costs); (ii) if the price is deemed excessive or disproportionate, considering whether the actual price itself can be deemed unfair in absolute terms (i.e., in comparison to costs borne by the manufacturer to produce and market the product) or, alternatively, in relation to competing products on the relevant market or in other jurisdictions. The objective of this second part of the test was to establish whether the high price was the result of exploitation of Leadiant’s dominant market power or evolved due to legitimate economic factors. The scenarios considered in both parts of the test must be in play for a price to be deemed abusive pursuant to Article 102 TFEU.

In this case, the court confirmed the ICA analysis, which deemed the CDCA Leadiant price agreed upon with the AIFA both excessive/disproportionate and unfair.

For the first part of the test (excessive/disproportionate price), the Council of State confirmed the ICA finding that there was a disproportionate gap between the production and commercialization costs of CDCA Leadiant and the agreed upon reimbursement price. The court reviewed the methodology used by the ICA to calculate the difference and noted that it had correctly applied two alternative methodologies for greater reliability, and both confirmed that the price was excessive. The two methodologies were (i) the Internal Rate of Return (IRR) financial methodology and (ii) the cost-plus accounting methodology. IRR was calculated based on all costs and investments related to manufacture and marketing of CDCA Leadiant starting with efforts to repurpose Xenbilox as CDCA Leadiant; that was then compared to actual and estimated incremental revenues generated from sales of Xenbilox and CDCA Leadiant during that period through expiration of market exclusivity (in 2027). The resulting IRR (from 45% to 53%, depending on estimated sales of Xenbilox off-label in case of hypothetical unavailability of CDCA Leadiant) was then compared to the level of adequate cost of capital of the repurposing project (WACC^[6]), which Leadiant had estimated as 15% based on the risk level of the plans it made back in 2014. The ICA found that IRR would be tantamount to at least 300% of the cost of capital, meaning that disproportionate profits would be generated compared to adequate cost of capital according to Leadiant. The ICA also used the cost-plus methodology, which measures profitability based on Leadiant’s direct and indirect costs for Italy in relation to CDCA Leadiant, including a reasonable margin (set at 21%). Based on this methodology, at the agreed upon reimbursement price the estimated profit for CDCA Leadiant would be 63% higher than cost-plus profit through 2020 and then would be as much as 96% higher from 2021 to 2027.

With regard to the second part of the test (unfairness of the excessive price), the appellant claimed that the ICA’s and the first-instance court’s assessments relied on vague, partial, and subjective analysis based on the concept of “unfairness” of the excessiveness of the price and that they failed to analyze the prices of any of the available comparator drugs. Leadiant argued that potential comparators do not have to be substitutable drugs in the same geographic market but instead can be the same or similar drugs (even those not substitutable with CDCA Leadiant) in other geographic markets. However, the Council of State rejected these arguments and confirmed that consolidated CJEU case law on this issue consistently considers the two criteria to establish unfairness (unfairness “in itself,” based on the size of the margin and absence of sufficient justification, and unfairness based on comparative analysis with available comparators) as alternative and not cumulative. Case law says that joint application of the criteria is preferable but not mandatory. Therefore, the ICA and the lower court were correct that no reliable or significant comparator was available to corroborate or debunk the assessment of unfairness of the price “in itself.” Lack of viable comparators was substantiated by irreconcilable differences with price-setting regimes in countries where CDCA Leadiant’s price was approved by regulators, as well as a lack of therapeutic similarity or overlapping characteristics with other orphan drugs. Any such comparative assessment was therefore moot.

Ultimately, according to the Council of State, the “in itself” unfairness of the price was substantiated mainly by a lack of documented significant investments and quality improvements made to CDCA Leadiant (with respect to off-label use of CDCA-based drugs) that would have delivered extra-economic benefits to patients and, thus, justified the large price increase. The court also highlighted the intrinsic unfairness of Leadiant’s contempt in its negotiations with the AIFA in general. Relatedly, the court stated that the unfairness of the price could not be ruled out for the sole reason that it had been agreed upon and approved by the AIFA. This was particularly true in this case, where the AIFA did not have any countervailing power to impose a better price unilaterally or bargain for one. Indeed, CDCA Leadiant is an essential, irreplaceable, and life-saving drug, and the AIFA urgently needed to deliver it to patients at an affordable price.

3. Leadiant’s dominant position

The Council of State carried out a full review of the ICA’s reasoning and market analysis to determine whether it was technically and logically sound. Relying in part on established case law, it easily confirmed that the ICA correctly identified the product market based on therapeutic substitutability of the medicine and its therapeutic class in the Anatomical Therapeutic Chemical (ATC) classification system, which was ATC5. With respect to the market’s geographic area, the court also confirmed that the ICA correctly limited the scope of competition to Italy because regulatory, institutional, and economic barriers led it to exclude significant cross-border trade and competition from other European countries.

4. Sanctions

Finally, the Council of State upheld the ICA fine of approximately EUR 3.2 million that Leadiant was ordered to pay.

The Council of State noted that this fine is high compared to the value of the Italian market for the drug, but also found it appropriate given the importance of the legal rights endangered by Leadiant’s conduct. By charging such an excessively onerous price, Leadiant endangered the rights to pharmaceutical assistance and health of patients affected by a rare and potentially fatal disease who need this indispensable drug. The seriousness of Leadiant’s conduct was further exacerbated by the AIFA finding itself in a weak bargaining position, as it urgently needed to provide the life-saving drug to patients at an affordable price.

Conclusions

This is the second fine from the ICA for excessive pricing on the part of dominant pharma companies to be confirmed by courts in Italy—the first was the seminal Aspen case.^[7] The judgement is an important reminder for undertakings producing drugs to treat rare diseases that their potential designation as “orphan” drugs—though requiring specific protection and incentives for investment in innovation, as recognized by EU law—does not make them immune to issues of excessive pricing. To the contrary, such manufacturers bear an even heavier responsibility in negotiating with the AIFA and must apply sector regulation with greater caution to avoid conduct that can be deemed “unfair.” Not only did the Council of State confirm the lawfulness of the ICA decision, but it provided guidance for dominant undertakings to avoid becoming embroiled in investigations of abuse of a dominant position. Notably, the mere fact that a similar or even higher price for the same drug has already been agreed upon by regulators in other EU jurisdictions does not rule out a finding of abuse in Italy.

In principle, the Council of State clarified that formal compliance with sector regulations does not ensure compliance with competition law. Specifically, companies that operate in intensely regulated sectors, such as the pharmaceutical industry, should keep in mind that even if they comply with national and EU sector regulations, they may still find themselves in violation of competition rules and be sanctioned by the ICA for “abuse of a right” or “misuse of regulation” (aka “regulatory gaming”).

The risk is particularly high for pharmaceutical undertakings because of both the high fines levied by the ICA—even if the value of the market concerned is small in absolute terms—and the risk of claims for compensation of damages from the NHS. Recently the Italian Supreme Civil Court (Corte di Cassazione) awarded damages to the NHS after the ICA uncovered abuse in the form of a dominant company’s misuse of the divisional patent system.^[8]

This article has been published also on Concurrences.com on March 29, 2024.

[1]With judgement No. 2967 of March 29, 2024

[2]Antitrust Authority Order No. 30156 of May 17, 2022.

[3]Click here to see our previous article on the AGCM investigation for further facts and background.

[4]TAR Lazio judgment of July 20, 2023, No. 12230.

[5]CJEU judgement 14 February 1978 in Case C-27/76, United Brands and United Brands Continental/Commission.

[6]Weighted average cost of capital.

[7]Click here to see our previous report on this case.

[8]Click here to see our report on this case.