The Competition and Markets Authority (CMA), the UK competition regulator, has been busy since its creation in 2014. It has imposed record fines for competition law infringements across a range of sectors, and secured its first director disqualifications and criminal convictions. It has been particularly active in the pharmaceutical sector, which has been in the crosshairs of competition regulators worldwide.
The CMA has over ten current investigations in the sector, and its findings of anticompetitive conduct by various companies were partly responsible for parliament tightening pricing controls on medicines sold to the NHS. However, key CMA decisions have recently been overturned on appeal, leaving question marks over its future approach.
Anticompetitive behaviour can cause significant damage to reputation and brand, particularly in the pharma sector where it tends to come at the expense of patients and taxpayers. The regulatory consequences are also severe, including substantial fines, director disqualification, up to five years in prison and exclusion from public procurement. Customers can also now bring class action claims to recover any excess prices paid.
A particular issue for the pharmaceutical sector is the law against abuse of a dominant market position. Patents are of course essential to the creation of new products, by incentivising risk-taking, innovation and huge R&D investment, but their monopoly nature can easily confer a dominant market position. Even once patents expire dominant positions can survive, for example where it is not advisable for existing patients to switch medication, and efforts to prevent generic entry may be illegal. The CMA has recently been very active in these areas.
Pfizer and Flynn Pharma
The CMA’s investigations into large drug price increases were recently set back by the Competition Appeal Tribunal (CAT) in Pfizer and Flynn Pharma. Pfizer and distributor Flynn Pharma were fined by the CMA in December 2016 for charging excessive prices for capsules of the epilepsy medication phenytoin sodium. Pfizer had sold the distribution rights for the branded drug Epanutin to Flynn, which then relaunched it as an unbranded generic (at the time the UK’s price control legislation applied only to branded products). The CMA found that Flynn had increased the price charged to wholesalers and pharmacies by up to 2,600%, while Pfizer increased its manufacturer price by up to 1,600%. The NHS’ spend on the drug increased from £2 million in 2012 to more than £50 million in 2013 – many epilepsy sufferers use the drug, and switching medication can risk loss of seizure control.
The CMA concluded that both Pfizer and Flynn had abused dominant market positions by charging excessive prices. Pfizer was fined a UK-record £84.2 million (representing 0.2% of the group’s worldwide turnover) while Flynn was hit with the maximum possible fine of 10% of its worldwide group turnover (£5.2 million).
Pfizer and Flynn each appealed to the CAT, which in June 2018 partially reduced the CMA’s decisions. The CAT agreed that both parties were dominant but was not satisfied with the CMA’s conclusion that they had abused that dominance, saying that it had failed to build a case which was “objective, appropriate and verifiable”. The CMA had been wrong to focus on the degree to which the prices charged by Pfizer and Flynn materially exceeded the relevant input costs plus a reasonable rate of return (deemed in this case to be 6%) over other potentially relevant arguments, such as Pfizer and Flynn’s claims that prices charged for phenytoin sodium capsules were at all material times substantially lower than the prices of phenytoin sodium tablets.
Although the decisions were overturned, the CAT’s reasoning was principally focused on process failures – i.e. failing to fully consider certain matters before reaching a conclusion. The CAT expressly stated that it was “not saying that no finding of abuse could be made in this case”. It has therefore remitted the case back to the CMA for reconsideration in light of the CAT’s judgment. While the CAT refused each of the parties’ applications for permission to appeal its decision, they can renew those in the Court of Appeal. At the time of writing it remains to be seen whether they will do so.
Whether or not there is a further appeal, the CAT’s judgment is likely to have a knock-on effect on the CMA’s other ongoing investigations into alleged excessive pricing in the sector, as a more detailed approach to the key tests will be necessary. Those cases may yet be put on hold if the Court of Appeal agrees to review the CAT’s decision.
Actavis and Concordia
In December 2016 the CMA accused Actavis UK of abusing dominance by raising prices for unbranded hydrocortisone tablets, which in March 2016 were 9,500% – 12,000% more expensive than they had been in April 2008, when another company had sold the tablets as a branded product. By 2015 the NHS’ annual spend on hydrocortisone tablets had risen from around £522,000 to £70 million. Similarly, in November 2017 the CMA alleged that Concordia had abused a dominant market position by over-charging for liothyronine tablets, used to treat thyroid problems. The CMA found that, despite production costs being “broadly stable”, the pack price charged to the NHS rose from £4.46 in 2007 (before the drug was de-branded), to £258.19 by July 2017. Both investigations are ongoing, and no doubt all the parties will be closely reviewing the CAT’s judgment in Pfizer/Flynn.
The CMA has also separately alleged that Actavis UK and Concordia entered into anticompetitive agreements in relation to generic hydrocortisone tablets, with Actavis prolonging its dominant market position by incentivising Concordia to delay introduction of competing drugs. This investigation also remains live, but similar allegations of “pay for delay” and abuse of dominance, this time relating to the antidepressant paroxetine, resulted in fines totalling £45 million being imposed on various companies in 2016. That decision was appealed, with the CAT deciding in March 2018 to dismiss some grounds but refer others to the European Court of Justice. This is therefore another area of competition law that is not yet fully settled.
Looking to the future
The pricing of de-branded medicines is now more tightly controlled by the Health Service Medical Supplies (Costs) Act 2017, and the recent appeal decisions may make new investigations into past price increases less likely. However, the CMA has recently repeated its concerns about the impact very large price increases have on the NHS, and so may be determined to maintain its focus on the sector. ‘Pay for delay’ allegations, at least, should remain high priorities.
Competition law compliance is an essential part of good corporate governance for businesses of all types and sizes, but the CMA’s recent focus on pharma should make it a top priority for the sector regardless of what happens in the current appeals.
Charles Livingstone is a partner and Adam McCabe is a senior solicitor in the Government, Regulation and Competition team at Brodies LLP
