UK Competition Appeal Tribunal Sets Out Framework to Assess Pharmaceutical Prices in Pfizer/Flynn Case

On June 7, 2018, the UK Competition Appeal Tribunal (CAT) issued its eagerly awaited judgment in the Pfizer/Flynn case. It set aside part of the decision by the UK’s Competition and Markets Authority (CMA) imposing significant fines on Pfizer and Flynn for charging alleged “excessive” and “unfair” prices for phenytoin sodium capsules.

The CAT judgment sets out a checklist to analyze whether prices for medicinal products are excessive and unfair within the meaning of EU competition law. The judgment also highlights the importance of assessing all the available evidence. Three of the CAT’s criticisms of the CMA decision stand out: (i) a simple “cost plus” analysis comparing the production costs with the sales price is not sufficient to find that a price is excessive; (ii) the mere fact that a price has increased over time is not sufficient to find that a price is unfair; and (iii) the competition authority must take into account the value of the product as perceived by patients in the “overall assessment of unfairness.”

The CAT is currently seeking written submissions from the parties before deciding whether to send the case back to the CMA. The CMA stated that it is considering an appeal. No matter the outcome of the case, the CAT judgment is authoritative and provides clear guidance for any competition authority having to assess whether prices charged by pharmaceutical companies are excessive and unfair.

Background

Pfizer manufactured and sold phenytoin sodium capsules, an anti-epilepsy drug (AED), to UK wholesalers and pharmacies prior to September 2012 under the brand name Epanutin. In September 2012, Pfizer sold the UK distribution rights to Flynn. Flynn allegedly debranded the drug, and as a result it was no longer subject to UK price regulation. Pfizer continued to manufacture phenytoin sodium capsules and started supplying them to Flynn at prices that were allegedly between 780 percent and 1,600 percent higher than those previously charged. Flynn then sold the products to UK wholesalers and pharmacies at prices between 2,300 percent and 2,600 percent higher than those they previously paid for the drug.

The CMA considered that, by doing so, the parties had each abused a dominant position on a narrowly defined market for phenytoin sodium capsules in the UK by charging excessive and unfair prices in violation of Article 102 of the Treaty on the Functioning of the European Union (TFEU) and Chapter II of the UK Competition Act 1998. In addition to imposing fines of nearly £90 million, the CMA also required that Pfizer and Flynn reduce their prices.

Market Definition and Dominance

The CMA considered whether other AEDs exercised “competitive pressure” on the Pfizer-manufactured phenytoin sodium capsules in the UK. It concluded that they did not, mainly because of the high degree of dependency of patients on the phenytoin sodium capsule on which they are stabilized. The CMA’s conclusion that both parties were dominant followed directly from this narrow market definition. The CAT did not overturn this conclusion.

Excessiveness and Unfairness Assessment

Pursuant to the so-called “United Brands test,” high prices constitute an abuse of a dominant position only if they are both excessive and unfair (C-27/76 United Brands v. Commission EU:C:1978:22).

The CMA used a “cost plus” approach to assess whether the prices were excessive. It considered that a return on sales of only six percent, which is the rate used within the UK Pharmaceutical Price Regulation Scheme (PPRS), would have been reasonable. The CMA moreover held that there were no demand-side or non-cost factors to support the assumption of a higher economic value of the capsules justifying prices above the “cost plus” level.

The CAT, however, ruled that the cost-plus approach cannot not be used “in isolation” if other methods are available, particularly if they suggest different results. Moreover, the CMA was not entitled simply to choose the method most favorable to the authority. Instead, it should have examined more closely the various comparator products and companies and other indicators (rather than only the PPRS six percent rate of return) to establish the benchmarking price or range.

According to the CAT, the CMA also wrongly determined that the prices were unfair. The case law permits two methods to assess unfairness: Prices can be (i) unfair “in themselves”; or (ii) unfair compared to other (competing) products. The CMA had chosen the first method, which was most favorable to it, and had applied that method without due regard to the comparators presented to it for analysis under the second method. The CAT further found that the CMA had not carefully analyzed the economic value of the product in terms of patient benefit. Finally, with regard to the substantial price increases that had taken place, the CAT clarified that a price comparison over time could not be considered “a sufficiently sound basis for arriving at a conclusion either as to the amount of any excess or in the overall assessment of unfairness” (para. 400).

Importance of the CAT Judgment

In many Member States, a court would limit its ruling to the reasons for annulling the competition authority’s decision. Not so the CAT: It set out a comprehensive checklist for the CMA to determine whether prices are excessive and unfair.

The CAT clarified that under the first limb of the United Brands test (excessiveness), a competition authority should consider a range of possible analyses to set a benchmark price (or range) that would “pertain under conditions of normal and sufficiently effective competition” (para. 443). The authority is not entitled in that context to select one basis of analysis and ignore others that are also credible. The benchmark price or range should subsequently be compared to the price charged in practice to determine whether it is excessive. Such an assessment has to be based on a number of additional factors, including the size and stability of the differential.

Once excessiveness is established, a competition authority is free to use either alternative to determine unfairness (unfairness in itself or unfairness compared to competing products). However, the authority has to consider any prima facie argument that the pricing is fair under the other alternative.

The next step is to determine the economic value of the product. It is only if a price is excessive and unfair and if (i) the price bears no reasonable relation to the economic value of the products; and (ii) the dominant company is reaping trading benefits that it would not reap under conditions of normal and sufficiently efficient competition, that a finding of an infringement of Article 102 TFEU can be made (provided of course there is no objective justification for the conduct).

Beyond this case, the CAT’s judgment will likely have a considerable impact on ongoing investigations and future cases. The CMA itself is currently assessing a number of cases. Moreover, following the Autorità Garante della Concorrenza e del Mercato’s decision in the Italian Aspen case (Case A480 – Price Increase of Aspen’s Drugs), the European Commission is investigating Aspen for allegedly having charged excessive and unfair prices for several cancer drugs in the European Economic Area except Italy (Case AT.40394 Aspen). Excessive pricing will therefore remain a “hot topic.”