European Commission okays state aid for pharma companies
This article was originally published in Scrip
In good news for pharmaceutical companies hit by government austerity measures, the European Commission has okayed a German scheme that exempts struggling companies from the mandatory rebates and price freezes intended to cut costs. Firms should welcome the decision because it means EU countries can use state aid to balance controlling public spending with helping pharma companies survive in difficult conditions, says Johan Ysewyn, a partner at the law firm Covington & Burling.
In 2010, German authorities increased the mandatory rebate that companies must give public and private sick funds from 6% to 16% in a bid to keep drug spending under control and to make annual saving of €1.2bn a year. A price freeze was also introduced to stop companies getting around the rebate hike. However, companies were eligible for an exemption from the measures if they could prove their financial viability was under threat. By April 2013, some ten firms had been awarded an exemption. Further applications were suspended until the outcome of the investigation.
After a complaint from a pharmaceutical firm, the commission began an investigation in to whether derogations were anticompetitive and amounted to illegal state aid. The EU's Treaty of Lisbon generally prohibits state aid, which is defined as an advantage selectively awarded in relation to undertakings by national authorities that could distort the single market. However, the treaty acknowledges that some government intervention in the market is necessary and leaves room for governments to form policies that ensure a well-functioning and equitable economy.
On 27 March, the commission concluded that the derogation scheme did in fact constitute state aid because it boosts the costs of public sick funds and because the exemptions give certain firms a competitive advantage. However, the scheme is perfectly legal, the commission said, because it pursues an objective of common interest – that Germany is able to keep public health spending under control – and because the aid issued under the scheme is strictly limited. For example, strict controls are in place to ensure that the price freeze does actually place an unacceptable financial burden on the company applying for the derogation. In addition, the company also has to prove a direct causal link between the price freeze and rebates and the financial burden.
Mr Ysewyn points out that so far there has been little state aid for the pharmaceutical industry, but lots for others, such as the financial and aviation sectors. "This [state aid] is a good thing, it means that companies won't go out of business because of the rebates and price freeze … It enables companies to keep a level playing field. Member states can control public spending while allowing companies to survive, manufacture and conduct R&D," he said.
Matthias Heck, who heads the Brussels office of the BPI, the German pharmaceutical industry association, welcomes the commission's findings and points out that they are in line with the 1989 Transparency Directive on pharmaceutical pricing and reimbursement. This says that member states can indeed issue exemptions to a price freeze.
However, he believes it is important to properly understand a company's need to apply for an exemption and make sure there is no unfair competition. "Is it due to poor business decisions and lack of performance, or is it down to the intervention of the member state, for example imposing a price freeze, which is responsible for a financially challenging situation?"
The 16% rebates came to an end in December 2013 and now stand at 7%. The price freeze will remain in place until at least 2017.