The UK Competition and Markets Authority (CMA) last week fined pharmaceutical companies Pfizer and Flynn £63 million and £6.7 million for engaging in excessive pricing. In the CMA’s view, the companies charged unfairly high prices for Phenytoin capsules, a genericised anti-epilepsy drug, in violation of competition law.
The CMA’s decision comes nearly six years after the CMA’s original infringement decision for the same conduct, and appeals to the Competition Appeal Tribunal (CAT) and Court of Appeal. The Court of Appeal had remitted the case to the CMA after clarifying the legal test for excessive pricing. The CMA has now arrived at the same substantive conclusion as in 2016, with Pfizer slightly better and Flynn slightly worse off regarding their respective level of fines.
How did we get here?
In September 2012, Pfizer sold the UK distribution rights for Phenytoin to Flynn, which genericised the drug. This meant it was no longer subject to price regulation. Flynn then sold the capsules at prices up to 2,600% higher than those previously charged. The CMA considered this constituted excessive pricing and issued a record £90 million fine.
Pfizer and Flynn appealed to the CAT, and the CAT quashed the CMA’s decision on 7 June 2018, identifying legal errors in the CMA’s decision. On appeal, the Court of Appeal then largely confirmed the CAT’s decision, finding that the CMA did not correctly apply the relevant legal test: in particular, it had failed to consider alternative, countervailing evidence adduced by Pfizer and Flynn.
When are prices excessive and unfair?
The excessive pricing case law has been thoroughly examined in the last six years of the Phenytoin saga. Under Article 102 and Chapter II, excessive and unfair pricing by a dominant firm can be an abuse of a dominant position where the prices bear no reasonable relation to the economic value of the product.
Only if a firm is dominant can there be an excessive pricing abuse. Establishing dominance in the context of the pharmaceutical sector is a complex exercise in itself – taking into account factors such as the countervailing buyer power of national healthcare providers and any applicable regulatory pricing regime.
It is not, however, illegal to hold a dominant position. Because the natural consequence of dominance is to price above the competitive level, supra-competitive prices also are not automatically prohibited. Otherwise, treating prices above the competitive level as abusive treats the dominant position itself as illegal. Instead, to find an excessive pricing abuse, there must be something more than a merely supra-competitive price.
Excessiveness and Unfairness
- Under limb one, agencies assess whether the price is excessive based on a comparison between the company’s costs actually incurred and the price actually charged.
- Limb two looks at whether the price charged is unfair in itself or when compared to competing products.
The judgement, however, also states that “other ways may be devised” for identifying excessive prices, leaving open the possibility for agencies to develop alternative methods.
The Latvian copyright society judgement provides additional guidance for determining whether a price is excessive: (1) comparisons with prices in other Member States may be appropriate if reference countries are selected “in accordance with objective, appropriate, and verifiable criteria”; and (2) excessive prices need to be “significantly” and “persistently” above the competitive level.
The United Brands legal test was discussed in detail in the appeals following the CMA’s original Phenytoin decision. Much of the debate turned on the disjunctive “or” in the second United Brands limb: the CMA said it only needed to show the price was unfair “in itself”; and it did not need to examine evidence of comparator products put forward by the defendants.
The Court of Appeal, however, disagreed, finding the “in itself” and “competing products” tests to be loose terms and not “genuine economic alternatives”. Instead, the Court held that if the defendants put forward evidence of appropriate comparator products, the CMA needs to examine that evidence fairly. It cannot shut its eyes to that evidence. The Court concluded that by relying only on the price being unfair in itself and ignoring the comparator evidence, the CMA had violated its duty to fairly evaluate all evidence. By contrast, the Court held that the CMA was under no obligation to construct a hypothetical benchmark price against which to measure the actual price charged.
The Court of Appeal’s interpretation of United Brands therefore imposes an evidential burden on the defendant to bring forward meaningful evidence to dispute the agency’s case. The burden then shifts to the agency to examine that evidence fairly and show that despite the evidence the test is still satisfied.
In this way, the Court of Appeal’s test works similarly to the Court of Justice’s Intel judgement, where a defendant can put forward evidence that its conduct will not foreclose as-efficient competitors, and the agency must then fairly evaluate that evidence. Indeed, the Court in Phenytoin referred approvingly to the Intel judgement, noting that “it makes clear that if an undertaking adduces evidence of a type unlike that which the competition authority relies upon to establish an abuse then the authority is under a duty to consider that evidence”.
Where does this leave us?
Last week’s decision confirms that the CMA will not give up on a case simply because it was found to have fallen below the evidential benchmark on a first try. If a case is remitted, the agency is willing to investigate further – with all the requests for information and procedural processes that this entails, even if this takes multiple years to get right.
Excessive and unfair pricing investigations have historically been rare both at UK and EU level. Agencies are reluctant to be seen as regulating prices, recognising the important role that pricing plays in clearing markets and stimulating entry and innovation. As Advocate General Wahl explained in Latvian Banks, such cases should be rare and exceptional, and agencies should be “extremely reluctant” to pursue them, especially in markets without legal barriers to entry.
More recently, however, there has been a trend for increased enforcement in this area. First, during the COVID-19 crisis, agencies sought to show they were acting to prevent consumer exploitation as a result of excessive prices (see our previous blogspot). Second, Phenytoin is the first of a string of excessive pricing investigations that the CMA has carried out in the past years: the Liothyronine and Hydrocortisone decisions both involved excessive pricing findings, leading to record-breaking fines of £100 million and £260 million respectively. Both cases are currently on appeal before the CAT and due to be heard later this year.
The high level of fines will no doubt serve as a serious warning to pharmaceutical companies. They underline the CMA’s concern of the sector overcharging the NHS. Various national competition authorities are also investigating other types of anticompetitive practices in the pharma lifecycle management. Exclusivity rebates offered to hospitals to prevent generic entry, predatory pricing practices, divisional patent filing and litigation strategies, and disparagement campaigns are all in the enforcement spotlight.