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Excessive price? Compared to what?

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Summary: On 7 June 2017, the Competition Appeal Tribunal (“CAT”) set aside parts of the Competition & Market Authority’s (“CMA”) decision in relation to the CMA’s finding that Pfizer and Flynn charged excessive and unfair prices for phenytoin sodium capsules and referred the matter back to the CMA for reconsideration. In doing so, the CAT also quashed the CMA’s record fines of nearly £90 million which it had imposed on Pfizer and Flynn.

In December 2016, the CMA issued an infringement decision against Pfizer and Flynn, finding that Pfizer’s supply prices to Flynn and Flynn’s selling prices for phenytoin sodium capsules (used to treat epilepsy) were excessive and in breach of Article 102 of the Treaty of the Functioning of the EU (“TFEU”) and Chapter II of the Competition Act 1998. The CMA imposed fines totalling nearly £90 million. Both Pfizer and Flynn appealed the decision to the CAT.

The CAT upheld the CMA’s finding that the relevant markets were the:

  1. manufacture of phenytoin sodium capsules distributed in the UK (as regards Pfizer); and
  2. distribution of Pfizer manufactured phenytoin sodium capsules in the UK (as regards Flynn Pharma)

and that they each held a dominant position on their respective markets. However, the CAT found that the CMA incorrectly applied the legal test for establishing that Pfizer and Flynn abused their dominant positions. The CAT reiterated the two-limb test, set down by the Court of Justice in United Brands, which must be satisfied to establish excessive pricing under EU or UK competition law:

  1. the “Excessive” Limb – the price must be ‘excessive’, with the Court of Justice in United Brands stating that this could be calculated as the difference between costs of production and the selling price; and
  2. the “Unfair” Limb – the price must be ‘unfair’, either in itself (which the CAT called “Alternative 1”) or when compared to competing products (“Alternative 2”).

Excessive

The CMA, in its decision, set a benchmark price for phenytoin sodium capsules by relying to a large extent on a regulatory scheme which controlled the reasonable rate of return for branded drugs supplied to the NHS. The CAT found that the CMA had placed too much reliance on the rate of return under that regulatory scheme when determining what could be considered a reasonable rate of return for Flynn and Pfizer.

Although United Brands expressly refers to the difference between costs of production and the selling price, the CAT did not consider it to be the only method available to the CMA. The CMA’s approach sought to identify a benchmark price in conditions of idealised competition. The CAT disagreed with this approach and found that the benchmark price must be set “under normal competition conditions in the real world”.

According to the CAT, the CMA should have set a benchmark price using “objective, appropriate and verifiable” criteria enabling it to properly examine comparator products and should not choose a method of calculating excess that is “most favourable to establishing an infringement to the exclusion of other methods”.

Unfair

The CAT considered that the CMA incorrectly relied on Alternative 1 by asserting that there was no legal obligation to have regard to comparators under the United Brands test. Although acknowledging that a breach of Article 102 could be established under Alternative 1 (where there is no meaningful comparator indicating the price is fair), the CMA is not able to ignore evidence pointing to fairness.

The CMA did consider whether it could conduct a comparison exercise (for example, phenytoin tablets, rather than capsules) but concluded that no product provided a meaningful comparison for these purposes. In the CAT’s view, this consideration was not conducted with sufficient depth or rigour. The CMA should have investigated possible comparators to see if they were meaningful based on “objective, verifiable and appropriate criteria” and where such a product, on its face, appears to be a good comparator, consider whether the product points to the price being fair.

Economic value

The CMA was also criticised in its assessment of the economic value of phenytoin capsules. One of the key questions that must be considered when assessing whether a price is unfair is where that price “bears no reasonable relation to the economic value of the product”. As such, determining economic value will be a fact specific exercise but the CAT indicates that appropriate weight must be placed on non-cost related factors such as the value customers attribute to the product (here, the patient benefit of the drug). The fact that a customer is dependent on the product may reduce its economic value but does not mean that zero value should be ascribed to its benefits.

The CAT has indicated that it is minded to remit the matter back to the CMA for further consideration, but has invited written submissions from the parties on this approach.

What Happens Next?

The CMA has publicly expressed its  disappointment in the CAT’s Judgment and is considering whether to appeal.

The CMA has a number of on-going cases looking at alleged excessive pricing in the pharmaceutical sector , all of which will be impacted by the CAT’s Judgment. The consequence of this ruling is likely to delay the conduct of these cases. On the basis of the CAT’s ruling additional economic analysis will be required to ensure that meaningful comparators are properly considered, in order to demonstrate that any prices charged were excessive as a matter of law.   

 

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