The UK Competition and Markets Authority (“CMA”) recently published its infringement decision of 7 December 2016 that imposed a fine on Pfizer1 and Flynn Pharma2 (“Flynn”) for abusing their respective dominant positions by charging excessive and unfair prices for phenytoin sodium capsules (“Phenytoin”).

In Europe, Aspen Pharmacare was recently fined by the Italian Competition Authority for similar practices, and is currently under investigation by the European Commission (“Commission”) for having allegedly implemented excessive prices in several EU Member states on five cancer drugs.

This sends a very clear message to pharmaceutical companies: competition authorities in the EU are willing to investigate drugs’ price levels in spite of national price regulations set by health authorities.

Summary of CMA’s findings

In 2012, Pfizer sold its UK Market Authorizations (“MAs”) for its Phenytoin brand Epanutin to Flynn, a pharmaceutical company specializing in the acquisition of so-called “end of life” products. Pfizer received a nominal fee of £13 and continued to manufacture its Phenytoin capsules, which it supplied exclusively to Flynn at prices that were up to 1,600% higher than what it charged customers prior to the transfer. At that time, the prices of Epanutin were regulated in the UK as part of Pfizer’s portfolio of branded drugs under the National Health Service (“NHS”) Pharmaceutical Price Regulation Scheme (“PPRS”).4

Flynn subsequently requested and obtained from the Medicines and Healthcare Products Regulatory Agency (“MHRA”) the approval to de-brand Epanutin. Consequently, the drug was withdrawn from the PPRS which allowed Flynn to significantly increase its prices.

Two product characteristics of Phenytoin severely limit customers’ ability to switch between different brands, namely its narrow therapeutic index and non-linear pharmacokinetics. These features mean that even small changes to the dose delivered to the circulation can give rise to a disproportionate change in drug’s level in the body. This may lead to therapeutic failure and toxic side effects, including the loss of seizure control. As a result, clinical guidance issued by the National Institute for Health and Care Excellence (“NICE”) and the Medicines and Healthcare Products Regulatory Agency (“MHRA”) recommends that patients who are stabilised on a particular manufacturer’s Phenytoin should not be switched to another manufacturer’s product.

The difficulties in switching to another brand meant that Flynn was able to increase the price it charged UK customers by up to 2,600% (while the price of Epanutin remained unchanged in other EU countries). This led to an annual increase of NHS’s expenditure on this product totalling €54 million.

The CMA opened a formal investigation in May 2013 following a complaint by the UK Department of Health (“DH”) that was lodged in September 2012.

CMA’s characterization of the excessive prices

The CMA’s infringement decision covers the excessive prices that Flynn was charged by Pfizer, and the excessive prices that Flynn charged its customers. It found that Pfizer and Flynn’s pricing practices constituted an abuse of their dominant position on the market for the manufacture of Phenytoin distributed in the UK and the market for the distribution of Phenytoin in the UK, respectively.

The CMA applied the cumulative two-stage test set forth by the European Court of Justice in its United Brands judgment to assess whether a price is unfairly high. The test involves assessing whether (i) the difference between the costs actually incurred and the price actually charged is excessive; and if so, (ii) whether a price has been imposed which is unfair either in itself or when compared to competing products.

In order to determine whether the difference between the product costs and the prices charged by Pfizer and Flynn were excessive, the CMA used the following benchmarks: (i) the rate of return of both companies on products other than Epanutin (between 5% and 19%); (ii) the target rate of return set by the PPRS (6%); and (iii) the rate of return of other pharmaceutical companies selling off-patent drugs (between 16.4% and 25.1%). The CMA’s assessment was also guided by the Commission’s infringement decision in Deutsche Post in which the imposition of a price 25% above the costs reasonably attributable to the product (i.e., the excess) was found to be excessive; and the judgment of the UK Competition Appeal Tribunal (“CAT”) in Albion Water II where an excess of at least 46.8% was considered excessive.

Based on the above factors, the CMA concluded that the prices charged by Pfizer to Flynn, and the prices charged by Flynn to wholesalers and pharmacists were excessive. In Pfizer’s case, the excess, including a reasonable rate of return, ranged between 29% (for 25 mg capsules) and 690% (for 300 mg capsules). The excess in Flynn’s prices, including a reasonable rate of return, varied between 31% (for 100 mg capsules) and 133% (for 25 mg capsules).

The CMA found that the unfairness limb of the United Brands test was satisfied since the price increases were not justified by any significant change in the costs of production. In particular, notwithstanding the fact that all of Pfizer’s European supplies of Epanutin are manufactured at its plant in Germany, prices in other EU Member States were considerably lower than those charged to UK customers. On this basis, the CMA rejected Pfizer’s argument that Phenytoin was produced at a loss. Moreover, the price increases were not justified by any significant changes in the costs of supply since the distribution of Phenytoin into the UK was undertaken by a third party (as opposed to Flynn) or by any new product-specific risks or innovation costs.

As part of its assessment, the CMA also relied on the parties’ contemporaneous internal documents as evidence. Those documents revealed that both parties pursued a common aim during negotiations for the transfer of Pfizer’s UK Phenytoin MAs, namely mitigating the risk of Pfizer suffering any reputational damage due to the price increases by deflecting negative customer reactions from Pfizer to Flynn. According to the CMA, Pfizer and Flynn were aware that the price increases would necessarily have an adverse effect on both (i) the NHS’s budget, and (ii) Epanutin users, since the NHS is required to procure the product for a category of patients under the UK health agencies’ clinical guidance.

Fines and remedies

The CMA fined Pfizer and Flynn approximately €95 million and €6 million, respectively. Due to the personal involvement of Flynn’s directors and senior management, in particular its CEO and Director, in the planning and implementation of the infringement, the CMA increased Flynn’s fine by an amount which was not disclosed in the public version of the decision.

In addition to the fines, the CMA’s directions ordered both companies to reduce their prices within 30 days. Although the directions stipulated that the Parties should be guided by the CMA’s decision when setting their revised prices, the CMA did not go as far as setting a price noting that it is not a price regulator and that the parties are responsible for assessing their own compliance with competition law. The companies were also ordered to notify the CMA of any price changes for a period of 10 years following the issue of the directions.

Both companies are currently appealing the CMA’s decision to the CAT. Flynn also made an unsuccessful application for interim relief to prevent the CMA’s directions from taking effect pending the outcome of its appeal arguing that it stood to suffer serious and irreparable harm including financial losses, a potentially permanent effect on market prices and changes to the organization of its business. Although the CAT found that Flynn would suffer significant irrecoverable financial harm, it concluded that this was outweighed by the potential harm to patients and the NHS.

If CAT upholds the CMA’s decision, several potential claimants, and in particular the NHS, may bring actions for damages against Pfizer and Flynn. The main hearing is scheduled to commence on 30 October, 2017.

Key Takeaways:

  • Due to political pressure, competition authorities seem to be willing to aggressively pursue excessive pricing cases in the pharmaceutical sector, a previously underused category of infringement; and
  • By referring to notions such as “excessive” or “reasonable” prices to determine whether pricing behaviour constitutes an abuse of dominance, the competition authorities have left themselves a significant margin of discretion.