CAT finds the CMA failed to establish excessive and unfair prices for phenytoin sodium

On 7 June 2018, the Competition Appeal Tribunal (CAT) set aside in part the 2016 decision of the Competition and Markets Authority (CMA) that Pfizer and Flynn Pharma had abused their dominant positions by setting excessive and unfair prices for the capsule form of the epilepsy drug phenytoin sodium.¹ The CAT, in reaching this conclusion, concluded that the CMA had failed to apply correctly the legal test set in the European Court of Justice (ECJ) United Brands case (C-27/76).² In particular, the CMA did not adequately determine the economic value of the drug by taking into account patient benefits and giving sufficient consideration to tablets as a potential comparable product. By emphasising the rigorous legal challenges faced by authorities when bringing excessive pricing cases, this ruling might slow down the current enforcement trend for excessive pricing cases, notably in the pharmaceutical sector, observed both in the UK and many other jurisdictions.

Background – increased number of excessive pricing investigations

Traditionally, competition authorities have been reluctant to pursue excessive pricing cases. Finding a party to have imposed an “excessive price” requires a judgement as to the appropriate market price, which puts competition authorities into a position akin to price regulators, rather than simply seeking to protect and promote effective competition. In particular, intrusive price regulation decreases companies’ incentives to innovate by depriving companies of the opportunity to earn high profits. Indeed, in many countries – including the US – the notion of “excessive pricing” does not exist as a legal concept in antitrust/competition law.

However, what has become a recent trend in Europe, and also elsewhere in the world, is the use of competition law in already heavily-regulated pharmaceuticals markets to seek to penalise material price increases in individual drug prices by pharmaceutical companies. These can be particularly pronounced in the UK where the product comes out of the UK regulatory pricing framework (under the Pharmaceutical Price Regulation Scheme (PPRS) and/or Drug Tariff) when it starts to be sold as a generic medicine (i.e. without any IP exclusivity). This is what happened in the Pfizer/Flynn case, and led to the CMA investigation. Indeed, prima facie price increases above 2,000%, 6,000% and even 12,000% in some of these cases may appear “excessive” to the observer, but this ignores the fact that the previous price was a regulated – and not a market – price, with the possibility that generic competitors could enter at any time. Addressing these concerns, competition authorities across Europe have launched cases in this area, but Pfizer/Flynn was in many ways the test case, following which the CMA has launched a series of investigations on the same legal basis, including issue of statements of objections against Actavis and Concordia for overcharging the NHS in relation to adrenal insufficiency and thyroid drugs respectively.

In Pfizer/Flynn, the CMA noted that Flynn’s decision to de-brand phenytoin sodium capsules to set their prices as a generic – so that they would no longer be covered by the PPRS – led to a price increase up to 2,600%. The CMA then compared the price of the drug with its Cost Plus benchmark (effectively, the costs of the product plus a 6% return on sales) to conclude that the prices were both (i) excessive and (ii) unfair in themselves, in line with the two-limb test defined by the European Court of Justice (ECJ) in United Brands nearly 40 years before. From a legal perspective, this allowed the CMA to avoid addressing the alternative second-leg of the United Brands test – finding the price of the product in question excessive by reference to the pricing of comparable products.

CAT judgment – rigorous legal analysis required to find excessive prices

In the recent Latvian Copyright (C177/16) case,³ the ECJ confirmed that this test remains relevant when assessing excessive pricing allegation. The CAT, however, found that the CMA was permitted to adopt this framework of analysis, but it failed to apply it correctly, up to a standard that would adequately protect the parties’ presumption of innocence. In particular, the CMA found that:

• The CMA’s Cost Plus analysis was too “theoretical” and inspired by “idealised competition” rather than effective competition. Rather than relying on one method conveniently indicating that prices were excessive, a more robust analysis should have been based on different converging methods;

• With respect to unfairness, the CAT conceded that the CMA could limit its assessment to determining whether the prices set were “unfair in themselves” without analysing comparable products. However, the CMA could not ignore compelling evidence brought by the parties that demonstrated that such comparable products existed. In particular, the CAT found that the fact that the tablet form of phenytoin sodium was 25% more expensive than the capsule form sold by Flynn should have been considered as potential comparator product by CMA as “a prima facie case of fairness”.

• Finally, when reaching its conclusion, the CMA also failed adequately to consider the economic value of the drug. To find that the price had no reasonable relation to it, the CMA could not: (i) merely recycle the Cost Plus analysis conducted under the excessive limb test; and (ii) should have given adequate weight to qualitative factors such as patient benefit.

The CAT concluded its judgment by helpfully setting out the appropriate framework of analysis to determine whether prices are excessive. This emphasises that an in-depth assessment is needed for the authority to discharge its burden of proof. In particular, the CMA cannot pick and choose the most favourable approach to its case, and ignore or fail to give appropriate weight to evidence put forward by the parties.

Next steps – will authorities continue to maintain excessive pricing as an enforcement priority?

The CAT set aside the CMA decision in part: it agreed with the CMA’s market definition and finding of a dominant position,. However, the CAT concluded that the CMA did not establish the existence of an abuse. As a result, the CAT suggested this part of the case be remitted to the CMA and has invited written submissions from the parties on this. The CMA has already announced that it is considering whether or not to appeal the judgment to have the CAT’s decision overturned and avoid a remittal.

This concern on CMA’s part is understandable, as not only does the judgment effectively set aside a decision imposing fines of more than £90 million but, more importantly, the CAT’s position may call into question the CMA’s broader enforcement policy and have a direct impact on the other excessive pricing pharmaceutical cases it is pursuing. The legal standard set in the CAT’s judgment requires the CMA to allocate significantly more resources to excessive pricing cases (in particular to conduct more in-depth assessments of more than one method to analyse prices) in order for them to be upheld on appeal.