The UK competition authority, the Competition and Markets Authority (CMA), has announced that it is investigating yet another discount scheme offered by a pharmaceutical company.1 This comes only six months after closing a similar investigation into discounts in the same sector. It also comes on top of a statement of objections served on Pfizer and Flynn alleging excessive pricing of medicines. When this news is combined with its pending decision on an alleged pay-for-delay settlement, it is clear that the CMA has the pharmaceutical sector firmly in its focus.

The CMA's approach to discount schemes in the pharmaceutical sector and more broadly was set out in the statement it published on its website when closing its prior investigation without finding an infringement.2 Its approach to discounts must take into account the decisions of the European Commission and must be consistent with the case law of the General Court and the Court of Justice of the EU (CJEU). That case law now includes the judgment of the CJEU in Post Danmark II3delivered after the CMA closed its prior pharmaceutical discount investigation.

In assessing whether to continue the current investigation, the CMA will need to determine whether it has sufficient evidence to show that it is capable of restricting competition contrary to the Chapter II prohibition of the Act and/or Article 102 of the Treaty on the Functioning of the EU (TFEU). In doing so, the CMA must prove a number of features, which are discussed below. It must also be satisfied that the commencements and continuation of an investigation would be a proportionate use of its resources. In applying its prioritisation principles, the CMA will examine the extent to which the alleged discount scheme would likely have an adverse impact on consumer welfare. It is also relevant that, even if it could show some harm to the competitive process, a scheme that reduces prices to the NHS would rarely harm it in a way that could be recovered in damages.

This is unlike the situations where the Department of Health has pursued damages for the artificial inflation of drug prices by other forms of abusive conduct or through the operation of price-fixing agreements. In order to devote scarce resources, the CMA would therefore need to demonstrate that the investigation had strategic importance for it in the development of the law, in a manner not already available under decisions and cases of the European Commission and Courts. Alternatively, the CMA might believe that the pursuit of the investigation would act as a disincentive to other dominant companies to engage in fidelity discounts, which it regards as capable of being serious infringements of Chapter 2 of the Competition Act 1998 and Art 102 TFEU.

Where the CMA is satisfied that the investigation is worth continuing under its prioritisation principles, it must prove a number of substantive matters in order to have a convincing case.

Impact on National Health Service (NHS) decision making

First, the CMA must demonstrate that the discount scheme had a material impact on the manner in which the NHS decided which drugs to purchase and in what quantity. This might be a challenge if clinician choice - and therefore the volume of purchases - is driven principally by clinical guidelines, safety and efficacy profiles, the clinical needs of particular patient populations and other similar concerns. The preferences of clinicians is rarely driven by the price at which reimbursed drugs are purchased by the NHS. Where drugs are procured by the Commercial Medicines Unit of the Department of Health under the Public Contracts Regulations 2015, the framework agreements awarded to qualifying suppliers do not guarantee any, or any minimum orders. This reflects the fact that the volumes purchased are driven by physician demand and not by government planning criteria.

Dominance is an essential feature

Second, the CMA must show that the supplier held a dominant position in the relevant market. Only the discount schemes of dominant companies are capable of infringing competition law. To show dominance, the CMA must properly define the relevant product and geographical markets. The central principle of product market definition in pharmaceutical cases ought to be the same as in any other market. It should be an enquiry into the degree to which there is a competitive set of products that are sufficiently substitutable for the one(s) in question that they exert competitive pressure on them. There are differences in the application of this principle to pharmaceutical markets, due to the separation of the consumer (patient), the selector (physician) and the payer (NHS), but the question remains the same: which other products could have been selected by the physician in substitution for those that are being discounted. The choice is not driven principally by price, but the offer of a discount shows that price is at least one factor that is taken into account.

Until the European Commission's decision in the Servier pay-for-delay investigation, the definition of the relevant pharmaceutical product market has taken account of physician prescribing conduct, clinical guidelines and differences in technology. In Servier,4 currently under appeal, the European Commission found that the incumbent supplier was dominant in a market comprising only the molecule of the product in question - perindopril - in spite of the availability of other products that at least one-third of physicians regarded as being substitutable for over 80% of naïve patients. This is a worrying development in abuse of dominance cases, particularly where the conduct in question could not have been unlawful where carried on by a non-dominant undertaking.

The CMA may define the relevant geographical market as an area smaller than the whole UK. It may be confined by the CMA to the region(s), Clinical Commissioning Groups or Trusts to whom the discount was offered.

The potential impact on competition

Third, the CMA must prove that the discount scheme is capable of restricting competition. For this it will use the approach of the General Court of the EU in Intel,5 as supplemented by Post Danmark II. Under this approach, a discount scheme that is conditional on the purchaser taking all or most of its requirement for a particular kind of products from the dominant supplier would usually be regarded as abusive, because it is "designed to remove or restrict the purchaser's freedom to choose his sources of supply and to deny other producers access to the market […] Such rebates are designed, through the grant of a financial advantage, to prevent customers from obtaining their supplies from competing producers."6

However, a scheme that does not have an exclusivity condition, but does have a loyalty-inducing or fidelity-building effect, is also capable of being abusive. This will be the case where, in all the circumstances, particularly the criteria and rules governing the grant of the rebate, in providing an advantage not based on any economic service justifying it, the discount tends to remove or restrict the buyer's freedom to choose its sources of supply, to bar competitors from access to the market, to apply dissimilar conditions to equivalent transactions with other trading parties or to strengthen the dominant position by distorting competition.7

In closing its previous investigation into a pharmaceutical discount scheme, the CMA had particular regard to the capacity of retroactive discounts, which it refers to as "roll-back" schemes because the deepest discount or rebate earned by the purchaser will apply to all products purchased and not merely those above the volume threshold in question. It indicated in its closing statement that it would have particular concerns where:

  • there are units which a customer is required, or has a strong preference, to buy from the dominant company (such units may be referred to as the dominant company's 'assured base' or the 'non-contestable' share of the customer's demand); in pharmaceuticals, this would be the case for patients who are stable on existing therapies and will not usually be switched to other products on the basis of price only; it would also apply to patients who are contra-indicated for all other therapies;
  • there are also units which the customer needs and which the customer may be willing and able to purchase either from the dominant company or from a competitor to the dominant company (such units may be referred to as the 'contestable share' of the customer's demand or the 'contestable sales'); in pharmaceuticals, this would be the case for naïve patients for whom the physician may select either the products of the dominant supplier or those of competitors; the CMA will focus its attention on the impact of the discount scheme on the contestable part of the market; and
  • the grant of the rebate or discount is conditional on the customer purchasing some of the contestable sales from the dominant company (in other words, where the customer will be entitled to a rebate or discount if it purchases from the dominant company units that it might otherwise have chosen to buy from the competitor).

The CMA concluded that, where the above conditions are present, the dominant company's rebate or discount scheme is likely to make it more difficult for the competitor to compete for contestable sales. This is because the competitor would, in order to win those contestable sales, have to compensate the customer for the loss of the discount that it would have received on the assured base had it purchased those contestable sales from the dominant company.

Where such compensation would have to be so large that the challenger would have to offer products at a price that would not cover the dominant company's long-run average incremental costs, then it would foreclose a competitor even though it may be as efficient as the dominant supplier. The CMA considers this effect to be particularly clear where the customer is able to reduce overall spend on the dominant company's products by increasing the volume of contestable sales it purchases from the dominant company. In other words, where a higher volume costs a lower overall amount than a smaller one, the purchaser will be locked in to those additional sales. It would be irrational to purchase them elsewhere if it can effectively get them for free from the dominant supplier. It refers to this as "negative incremental prices." Any competitor challenging for sales of contestable volumes would necessarily incur losses.

Conclusion

The CMA, having decided to abandon its prior investigation, seems to be on the hunt for a more suitable discount case in the pharmaceutical sector. However, the challenges facing it in bringing a successful case are significant in the absence of clear evidence on dominance and potential for impact on competition.