What makes a price excessive? The CAT weighs in on Pfizer and Flynn Pharma’s pricing

By Becky Ellis and Sandra Mapara

On 7 June 2018, the Competition Appeal Tribunal (CAT) set aside parts of the Competition and Markets Authority's (CMA) decision to fine Pfizer, and its distributor Flynn Pharma, for abuse of dominance by imposing excessive prices for Pfizer’s anti-epilepsy drug. The CAT's judgment is likely to be a blow for the regulator whose findings of abuse were described as ‘wrongly based’ by the CAT. The CAT stressed that findings of excessive pricing must be based on the correct legal basis and sound analysis of the evidence.

Background

In the pharmaceutical sector, generic drugs (i.e. de-branded drugs whose patent has expired) are not subject to the same price regulations as branded in-patent drugs, under the assumption that outside of the patent competitors can enter the market and competition will keep prices down. However, if the market conditions are right, de-branding can give companies an opportunity to raise their prices. In September 2012, Pfizer de-branded its anti-epilepsy drug and raised its wholesale price. The drug was distributed by Flynn Pharma and subsequently sold on to the NHS. The price increase of up to 2,600% resulted in an increase in the NHS's bill for the drug (from c. £2 million in 2012 to £50 million in 2013) which is prescribed to approximately 48,000 patients in the UK.

This was investigated by the CMA and in December 2016, the CMA found that Pfizer and Flynn Pharma had abused their dominant positions by imposing excessive prices for the anti-epilepsy drug. Pfizer was fined a record £84.2 million and Flynn Pharma was fined £5.2 million.

Excessive pricing

Competition law prohibits the abuse of a dominant position. This includes a prohibition on the imposition of 'unfair purchase and selling prices' by dominant companies. The leading case on excessive pricing (United Brands [1978]) defined an excessive price as a price that has no reasonable relation to the economic value of the product supplied. This is determined by establishing:

1. whether the difference between costs actually incurred and the price actually charged is excessive (Limb 1); and if so
2. whether a price has been imposed which is either unfair in itself or when compared to competing products (Limb 2) (together, the United Brands test).

However, while the Court of Justice of the European Union (the ECJ) stated that the United Brands test is not the only test that can be used to assess whether a price is unfair, findings of excessive pricing in competition law have typically been rare. This is because of the difficulties in establishing whether a price is so high that it has a detrimental impact on competition.

The CMA’s decision

In assessing whether the prices were excessive, the CMA considered how much the companies prices exceeded the 'cost plus' which was calculated through considering direct and indirect costs and allowing for a reasonable rate of return of 6%. The CMA concluded that Pfizer and Flynn Pharma's prices were excessive and unfair in themselves because they significantly and consistently exceeded the cost plus. For example, Pfizer’s price for a pack of 100mg capsules exceeded the cost plus by at least 705%, while Flynn Pharma’s price for a pack of 25mg capsules exceeded the cost plus by at least 133%. The CMA also concluded that the prices were unfair in themselves because they bore no reasonable relation to the economic value of the drug. For this reason, the CMA found that it was not necessary to assess whether the prices were unfair when compared to competing products and, in any event, it considered that there were no other products which provided a meaningful comparison. The CMA directed the parties to reduce their prices and, in addition, imposed substantial fines. The parties subsequently appealed the CMA’s decision.

The CAT’s judgment

On 7 June 2018, the CAT upheld the CMA’s findings that Pfizer and Flynn Pharma held dominant positions in their respective markets. However, it set aside the CMA’s finding of abuse of their dominant positions on the basis that the CMA had not applied the United Brands test correctly. The CAT held that:

1. the CMA was wrong in law to rely only on the ‘cost plus’ approach in determining whether the prices were excessive, and instead it should have identified a benchmark price (or range) that reflected normal and sufficiently effective competition
2. the CMA had incorrectly relied only on its conclusion that the prices were unfair in themselves, and should have also properly assessed the prices of meaningful comparators in order to reach the conclusion that the prices were unfair. While the CAT accepted that the options under Limb 2 are alternatives, it considered that an authority must consider whether a prima facie valid argument that a price is fair under one alternative undermines the finding of unfairness on the other alternative
3. in assessing whether the prices had any reasonable relation to the economic value of the drug, the CMA had failed to take into account non-cost factors such as the benefit of the drug to patients.

What makes a price excessive?

The CAT has set out a framework to be used when investigating whether a price is excessive under the United Brands test. In seeking to establish whether a price is excessive, the CMA (or other person seeking to rely on the finding) should:

1. consider a range of possible analyses to establish a benchmark price (or range) that reflects normal and sufficiently effective competition. The criteria for selection of the analysis and application must be objective, appropriate and verifiable
2. compare the actual price with that benchmark price
3. consider whether this difference is sufficiently significant and persistent to be excessive under Limb 1
4. if the price is found to be excessive, consider whether the price is unfair in itself or when compared to competing products under Limb 2 giving due consideration to any prima facie convincing argument that the price is actually fair in itself or when compared to a competing product
5. if the price is unfair, consider the economic value of the product and assess whether the price charged bears a reasonable relation to it
6. consider any objective justification put forward by the dominant undertaking.

The CAT did not conclude on whether an abuse had been committed and provisionally concluded that the case should be remitted back to the CMA for further consideration.

Comment

In its judgment, the CAT noted that pure unfair pricing cases are rare in competition law and competition authorities are rightly 'wary of casting themselves in the role of price regulators'. The judgment sends a clear message to competition authorities that they should tread carefully when investigating whether a price is excessive. Due to the nature of the public interests potentially at stake in this case (including that of the government, tax payers and patients) the CAT considered that clarity of the law in this area is important and that decisions should be soundly based on proper evidence and analysis.

The CAT’s judgment also inevitably has wider implications for the CMA and other public bodies. In recent years, the CMA has opened several investigations into excessive pricing in the pharmaceutical sector, including Actavis UK: Hydrocortisone tablets (2016) and Concordia: Liothyronine tablets (2017). The CMA has announced that these on-going investigations will now be delayed in light of the judgment. The CMA has sought permission to appeal the CAT’s judgment in the Court of Appeal.

How can Burges Salmon help?

If you have any questions on the issues raised in this article, please contact Chris Worrall or your usual Burges Salmon contact.