In May 2020, the Austrian Federal Competition Authority (AFCA) filed an application with the Cartel Court for a declaratory judgment against Merck Sharp & Dohme GmbH (MSD), which has its head office in Vienna, for abuse of a dominant market position through predatory pricing in relation to the drug Temodal®.
In March 2021, MSD offered commitments before the Cartel Court to dispel these concerns of abuse of a dominant position. It is the AFCA’s view that the commitments are adequate to address the competition concerns.
Economic sector concerned: Temodal® (agent: Temozolomide) is used in oncology to treat brain tumours such as glioblastoma.
Glioblastoma is the most frequent type of brain tumour in adults. Some 350 people develop this type of tumour in Austria every year. Drugs containing Temozolomide are regularly used for treating this type of particularly aggressive brain tumour.
In November 2016, the European Commission conducted a dawn raid at MSD due to suspected breaches of Article 102 TFEU in relation to predatory pricing when selling Temodal® to hospitals. The AFCA started its investigations in Austria in 2018 and, after completing them in May 2020, filed an application with the Cartel Court to establish the company’s dominant market position.
AFCA conducts in-depth market survey
In the course of its investigations, the AFCA conducted an in-depth survey of the market for the cancer drug with the agent Temozolomide, also taking a closer look at the company’s alleged predatory strategy.
The investigations yielded the following results:
- Affected market: the market for the agent Temozolomide in the area of hospitals (intramural area)
- Market power: with a market share of more than 85% for the agent Temozolomide, the company dominates the affected market
- Predatory strategy: the company is pursuing a predatory strategy that makes it difficult for generic drugs to enter the market
- Negative effects: the alleged predatory strategy is expected to increase the costs for the healthcare system in the long term, and to impact negatively on security of supply in the affected market.
Affected market and market power
In Austria, the market for drugs containing Temozolomide is divided into the intramural (hospitals) and the extramural area (doctors’ surgeries) due to different competition conditions.
AFCA’s allegations relate to the hospital area.
According to AFCA calculations, the company holds a market share of more than 85% for medicines containing the agent Temozolomide in the hospital sector and of around 90% with regard to doctors’ practices.
Patients are usually given their first dose of Temodal® as inpatients at the hospital where they are being treated, with the hospital (or the hospital pharmacy) obtaining the medicine directly from the manufacturer and paying for it directly. For subsequent doses, treatment continues on an out-patient basis, with the medicine being prescribed by specialist doctors in their practices. These doctors are usually the same doctors that treated the patients at the hospital.
Due to the structure of this system, the AFCA assumes strong lock-in effects in favour of the first prescription. Lock-in effects mean that customers remain loyal to a particular product and are unlikely to switch to another one. In this case, hospital doctors have no incentive to prescribe other products containing Temozolomide.
Predatory pricing impedes market entries
The company’s predatory strategy gave hospitals no incentive to switch to generic drugs containing the same agent, thus impeding the successful market entries of generic drug manufacturers.
According to the AFCA, MSD accepted losses from selling the medicine to hospitals below cost in order to drive other competitors from the market. Subsequent prescriptions after patients had been discharged from hospital were written by doctors in their practices. This meant that the subsequent doses of the prescription-only drug were purchased in pharmacies, offsetting the manufacturer’s initial losses on the doses administered in the hospital setting.
As part of a strategy to foreclose generic manufacturers’ access to hospitals after the expiry of patent protection for Temodal®, price undercutting was allegedly carried out, prices were set below cost and free samples were made available. In some cases, hospitals were at times only given free samples for the initial dispensing.
Based on the company’s predatory strategy, hospitals had no incentive to switch to cheaper generic medicines, which precluded generic drug manufacturers from entering the market during the period of the alleged infringement.
Negative effects: higher costs for the healthcare system and impact on security of supply
Hospitals benefited directly from lower costs when prescribing the medicine for the first time. However, when the more expensive drug continues to be prescribed by doctors in their practices, the price disadvantages over the cheaper generic drug will be felt in the medium term. Overall, this ultimately means higher costs for the healthcare system. Security of supply is another factor to be considered: with more providers of medicines in the market, deliveries will be more reliable too. The company’s commitments should address these negative effects.
The company and the AFCA reached an agreement before the Cartel Court on the following commitments:
1. Discontinuation of predatory strategy
The company undertakes not to set prices for Temodal® products below average variable costs for hospitals (intramural area), based on the relevant offer or order.
2. Submission of cost calculation to AFCA
The company undertakes to submit a confidential calculation of the average variable costs to the AFCA within two months of this commitment taking effect.
3. Compliance with antitrust provisions
The company expressly undertakes to adhere to fair competition and to comply with applicable national and international antitrust provisions, particularly with the rules applicable to abuse of a dominant market position, which it repudiates and will not tolerate in any way. This specifically also includes any proactive foreclosure of new market competitors.
4. Compliance measures
In order to prevent breaches, the company will install an internal control system and hold regular, mandatory compliance training seminars for its employees.
5. Minimum validity of ten years
Commitments 1, 3 and 4 are valid for a period of at least ten years. If the company has a dominant position in the market for the sale of Temozolomide products to hospitals or doctors’ practices in Austria, the commitment will also apply after that period.
If the company breaches these commitments, the AFCA may apply to the Cartel Court for a fine.
The Cartel Court’s decision is final.