The Competition Appeal Tribunal has quashed the record fine imposed on Pfizer and Flynn Pharma, levied by the CMA on the two companies for charging “excessive and unfair” prices for an epilepsy drug sold to the NHS. The judgment throws up key legal questions over whether competition authorities should act as price regulators and may have serious implications for the CMA’s ongoing enforcement drive against large pharmaceutical companies.

Background: the CMA’s decision in 2016

Back in December 2016, we reported that the Competition and Markets Authority (CMA) had imposed a record fine of £84.2 million on Pfizer, and £5.2 million on Flynn Pharma, for imposing excessive and unfair prices for phenytoin sodium capsules, an anti-epilepsy drug. The CMA held that the NHS had been grossly overcharged for the capsules, with prices rising by more than 1,000% as soon the products were de-branded (or genericised), and thus no longer subject to price regulation.

CAT annuls the CMA’s decision: analysis of alleged “abuse” is insufficient

Despite this stark “before-and-after” price differential, on 8 June 2018 the Competition Appeal Tribunal (CAT) annulled the CMA’s decision that the price rises amounted to an abuse of dominance contrary to Article 102 of the TFEU and the Chapter II prohibition of the Competition Act 1998.

A dominant position

The CAT agreed with the CMA’s findings that Pfizer (as manufacturer) and Flynn Pharma (as distributor) held a dominant position in relation to the supply of these specific capsules and rejected arguments that the relevant market should include a wider range of anti-epilepsy drugs. The CAT confirmed the CMA’s view that there was limited substitutability between the Pfizer-Flynn capsules and any other products, including capsules manufactured and supplied by NRIM Limited. The CAT also dismissed the appellants’ contention that the NHS exerted sufficient countervailing buyer power to cancel out any such market power, concluding that:

“We … do not think that the [Department of Health] was, in fact, exercising, or able to exercise, buyer power in a way that effectively constrained Pfizer or Flynn’s conduct”

Insufficient evidence of abuse

Nevertheless, under UK and EU competition law, merely having a dominant position is not prohibited. It is only if companies abuse their positions of dominance that a breach of competition law can be found. The CAT found that the CMA’s conclusions of abuse of dominance were in error. In particular:

  • the CAT criticised the narrow approach that the CMA had taken to evaluating whether the prices set by Pfizer and Flynn were excessive. The CMA based its analysis almost entirely on a “Cost Plus” assessment. Cost Plus in this context was composed of: (a) the costs that Pfizer and Flynn each incurred in respect of each of their capsule products, including direct costs and an appropriate apportionment of indirect, or common, costs; and (b) a reasonable rate of return of 6%, with this figure being derived primarily from the Pharmaceutical Price Regulation Scheme (PPRS);
  • the CAT also found that the CMA was wrong to disregard Pfizer and Flynn’s arguments that it was relevant to consider whether the prices charged were “unfair” by reference to the prices charged for phenytoin sodium tablets (manufactured and supplied in the UK by Teva). The CMA should have considered in more detail the evidence that the prices for Pfizer-Flynn capsules had, at all material times, been substantially below those for phenytoin tablets, and that it was possible that the price of phenytoin tablets was an appropriate benchmark to assess whether the Pfizer-Flynn prices were “unfair” as a matter of law. The CAT ultimately found that “… the phenytoin tablet as a meaningful comparator should not have been wholly rejected on the grounds relied on by the CMA”; and
  • when considering the unfairness of a price, it is incumbent on a competition regulator to assess whether the price complained of bears “no reasonable relation to the economic value of the product supplied.” The CAT considered that the CMA should have recognised that when considering the “economic value” of the Pfizer-Flynn capsules, it should take the demand-side value of the capsules into account because of their therapeutic benefits to patients. This implied that the capsules were more valuable than a simple “Cost Plus” model would assume. The CAT drew a parallel with the Court of Appeal’s previous judgment in the Attheraces litigation in which it was established that, although pre-race horse-racing data costs very little to produce, it was clearly valuable to buyers (e.g. bookmakers), and this economic value could legitimately be incorporated within the final sale price without amounting to abusive

For these reasons the CAT annulled the CMA’s decision. However, the CAT was at pains to point out that it is not ruling out the possibility that Pfizer and Flynn Pharma did, in fact, abuse a dominant position contrary to UK and EU competition law. The CAT’s concern is that the CMA’s decision in December 2016 did not evidence such a finding in a sufficiently robust way:

“In overturning the CMA’s findings of abuse of dominance we are not saying that no finding of abuse could be made in this case”.

“… we are not concluding that the benchmark price, on the right methodology, would not have given rise to a finding of excessiveness; rather we do not consider that the approach actually adopted is a sufficient basis for that finding”.

“We agree that a large price rise, sustained over a considerable period, may be indicative of an abuse of a dominant position that needs to be examined, and we understand the weight that the CMA placed on this matter. However, whilst this may be a valid reason for a competition authority to investigate a case, it should not be confused with the test for unfair pricing itself” .

Next steps in this case: likely remittal back to the CMA and possible further appeal

Accordingly, the CAT is proposing to remit the matter, insofar as it deals with abuse, back to the CMA, presumably with the expectation that the CMA will repeat its analysis, but second time around taking into account the specific guidance that the CAT has set out in its judgment. The CAT summarises this guidance at paragraph 443 of its judgment. In particular, the CAT advises that a competition authority should:

  • “… consider a range of possible analyses … the authority is not entitled to select one basis of analysis and ignore others that are also credible”;
  • “… give due consideration to any prima facie convincing argument that the pricing is actually fair”; and
  • “… assess what is the economic value of the product, and whether the price charged in practice bears no reasonable relation to it.”

The CMA may take up the CAT’s invitation to conduct a revised assessment, using this guidance as a tool to ensure that its next decision is more robust and does not suffer from the same procedural defects as found by the CAT on this occasion. Alternatively, the CMA may pursue an appeal against what it considers to be a “disappointing” judgment, which would be heard by the Court of Appeal.

In either case, the CMA has also stated in response to the judgment that it will not be deterred from investigating situations where it identifies unfairly high pharmaceutical prices. In its statement, the CMA made clear that it:

“… continues to have serious concerns about the very big price increases that have occurred for this and several other generic drugs, which have cost the NHS tens of millions of pounds.”

Wider implications of the judgment: in the UK and Europe

This statement by the CMA is particularly interesting because the CMA has at least two other ongoing investigations into alleged excessive pricing in the pharmaceutical sector. The CMA will need to consider its next move very carefully as it will have direct implications not only for any renewed penalties it may impose on Pfizer and Flynn Pharma, but also on these other investigation where similarly large fines had been expected.

As the CAT emphasised at the outset of its judgment:

Cases of pure unfair pricing are rare in competition law. Authorities find them difficult to bring and are, rightly, wary of casting themselves in the role of price regulators. Generally, price control is better left to sectoral regulators”).

Although the CMA’s statement in the immediate aftermath of this judgment suggests that it will maintain its scrutiny on cases of this kind, particularly in the pharmaceutical sector, it may be that this judgment ultimately signals a return to the orthodoxy – i.e. competition authorities leaving issues of this kind for governments and/or price regulators with statutory powers to resolve them.

The CAT’s judgment may also create ripples of concern within competition authorities across Europe, given that the European Commission and a number of national competition authorities in Europe, including in Italy – most notably in relation to prices set by Aspen Pharma for certain cancer drugs – have been investigating similar issues of excessive and unfair pricing in the pharmaceutical sector. Given the presumption of innocence in favour of the companies under investigation, the CAT has emphasised the importance of competition authorities building a case that is “objective, appropriate and verifiable”.