On 7 June 2018, the UK Competition Appeal Tribunal (CAT) rendered its judgment on the appeals lodged by Pfizer and Flynn against the decision of the Competition and Markets Authority (CMA) imposing fines on the two companies for allegedly engaging in excessive pricing practices.
The CAT found that the CMA had incorrectly applied the United Brands test (referring to a seminal ruling by the European Court of Justice) by failing to appropriately consider the right economic value of the products at issue and by insufficiently taking into account comparable products.
The Pfizer/Flynn case was closely watched given the surge in pharmaceutical excessive pricing investigations developing throughout Europe over the last few years. These cases include Aspen in Italy and in the EU, and CD Pharma in Denmark [see our April 2018 Newsletter]. The judgment is likely to prove influential in both ongoing and future cases on excessive pricing in Europe.
The Pfizer/Flynn case centers around an anti-epilepsy drug called phenytoin sodium, previously sold in the UK by Pfizer under the brand name Epanutin. The case concerned an established product in the sense that it had gone off-patent and its revenues were in progressive decline. In fact, given that it was turning into a loss-making drug, Pfizer started to consider strategic options for the product around 2009. This resulted in a transfer of the Marketing Authorization (MA) in 2012 by Pfizer to Flynn, a pharmaceutical wholesaler specialized in niche products, after which Flynn genericized the product (that is, re-launching the exact same – formerly branded – product as one having the status of a "generic" under the regulatory regime).
This move allowed Flynn (and Pfizer) to benefit from – what has been referred to by the UK Secretary of State as – a "loophole" in UK pharmaceutical pricing regulations, as a result of which Flynn could start commercializing the product at substantially increased price levels.
This resulted in a complaint filed by the UK Department of Health (DH) to the CMA. After investigating the matter, the CMA found that both Pfizer and Flynn had abused their dominant positions (at the manufacturer and wholesale levels, respectively) by engaging in excessive pricing for the re-launched product.
The CAT ruling examines the CMA's findings on the existence of dominance as well as the reasoning regarding excessive prices.
As regards dominance, the CAT examined in detail whether the comparatively narrow market definition put forward by the CMA was tenable. The CMA had reasoned that the relevant market was limited to 'Pfizer produced phenytoin sodium capsules' (including parallel trades in that specific product). By way of comparison, the European Commission – when assessing pharmaceutical mergers – has so far not gone beyond a specific form of a molecule when defining markets. The parties argued that at least the phenytoin sodium capsules produced by NRIM, which entered the market after Flynn started commercializing Pfizer's genericized capsules, should be included in the relevant market.
In proposing the narrow relevant market, the CMA relied heavily on what was referred to as 'Continuity of Supply', meaning that the applicable UK clinical guidance for epilepsy medicines has the effect that patients who are stabilised on a particular manufacturer's phenytoin sodium capsule are generally maintained on that manufacturer's capsule and should not be switched to another manufacturer's capsule for safety reasons.
The CAT examined detailed evidence on the dispensing practice of pharmacies and found that Continuity of Supply indeed had a significant impact in that respect, tending to favour the existing supplier of products on which patients were already stabilised. However, as there was clearly still a degree (even if limited) of switching from Flynn to NRIM, the CAT also looked into price and volume relations. There it found that price interaction was relatively limited and no convincing evidence of price competition had been submitted. Also, internal documents of the parties showed that neither considered the other as a vigorous competitor. Hence, the CAT concluded that while some competitive interaction was probably there, "this interaction was limited in its scope and effect" and therefore the narrow market definition was upheld.
The CAT also sided with the CMA on the existence of dominance for the parties at their respective market levels given (i) their high market shares, (ii) their pricing behaviour and profitability of their pricing conduct, (iii) the weak competitive constraints from NRIM and parallel imports, (iv) high barriers to entry, and (v) the absence of sufficient countervailing buyer power held by the NHS.
The CAT went on to examine whether the CMA had accurately established the existence of excessive pricing on the part of Pfizer and Flynn. In doing so, it analyzed in detail the appropriate application of what is known as the United Brands-test in light of, among other things, more recent case law. The result is a detailed, and what is likely to be an authoritative, interpretation of the legal test for excessive pricing (summarized in paragraph 443 of the judgment). On that basis, the CAT analysed the CMA's approach taken in its infringement decision.
First, in assessing whether the prices for the relevant capsules were in fact excessive (i.e., the first limb of the test), the CMA had compared the companies' prices to the outcome of a 'cost plus analysis'. That cost plus approach took into account (i) various direct and indirect costs incurred by Pfizer and Flynn in relation to the product, and (ii) what the CMA considered to be a reasonable rate of return. The CMA found that the prices of the companies exceeded the level of cost plus and qualified the difference as sufficiently large to be deemed excessive.
The CMA subsequently assessed whether the prices were also unfair (i.e., the second limb of the test). In that context it looked at the economic value of the capsules and sought to determine whether there were any non-cost related factors which would increase the economic value of the capsule product beyond the level of cost plus. The CMA concluded that there were no such factors, pointing to the fact that it was an old drug which had long been off-patent and had been superseded by other treatments. In addition, a large price increase had been implemented for the product in September 2012 that could not be explained by increased costs or innovations.
Having established that there was no additional economic value in the capsules beyond the level of cost plus, the CMA found that Pfizer's and Flynn's prices were 'unfair in themselves', as they bore no reasonable relation to the economic value of the product. The CMA considered that it was not necessary for it to reach a conclusion as to whether those prices were also unfair when compared to competing products.
The CAT found that the CMA had made various errors in applying the United Brands-test. As regards the issue of excessiveness of the prices, it found that the CMA was wrong to restrict its assessment to a cost plus approach, rather than seeking to establish a benchmark price (or range) that would have pertained in circumstances of normal and sufficiently effective competition. In other words, the determination of excessiveness requires a benchmark. Cost plus is not, in isolation, a sufficient method for establishing excessiveness if other methods are available and, particularly, if they suggest different results. Indeed, the CAT pointed out that "an authority cannot simply choose that method of calculating the excess that was most favourable to establishing an infringement, to the exclusion of other methods." On cost plus, the CAT was also unconvinced that the 6% rate of return which had been borrowed by the CMA from the regulatory framework for branded drugs (PPRS) was a reasonable rate of return for Pfizer and Flynn.
Next, the CAT found that while United Brands presents two alternatives for an authority to support a finding that a price is unfair – i.e., the price is unfair in itself or the price is unfair compared to competing products – this does not entail that an authority always has an unfettered choice. Specifically, under circumstances where there are indications that the alternatives could result in conflicting outcomes, the authority is held to examine this by looking at both alternatives. The CMA had not done so but had limited itself to a finding of unfairness 'in itself'. The CMA found that in this case the CMA should indeed also have looked in more detail at the relationship between the price of the capsules and the price of competing products (tablets in particular).
Finally, on the issue of whether the price bears no reasonable relationship to economic value of the product – which the CAT finds should be analyzed after assessing the unfairness of the price – the CAT agrees with the applicants that the CMA should have examined the value deriving from patient benefits and also here should have taken other products into account.
Given the various errors made, the CAT set aside the CMA decision in as far as it concerns the finding on abuse. The CAT also observed that the judgment does not imply a finding that the prices were not excessive. Discussions between the parties will now continue before the CAT on whether the case will be referred back to the CMA.
This article was published in the Competition Law Newsletter of July 2018. Other articles in this newsletter:
- General Court delivers judgments on the scope of dawn raid decisions
- General market studies are insufficient proof to establish dominance, two Dutch District Courts rule