The CMA expands its focus to drug pricing

December 2016

Competition law authorities hate the idea of getting involved in price determinations and, as a result, excessive pricing cases have suffered from middle-child syndrome for decades. However, it looks like things are about to change. On 7 December 2016, the Competition and Markets Authority ("CMA") announced its decision to impose a record fine of almost £90 million on Pfizer and Flynn Pharma for excessive pricing of anti-epilepsy drugs to the NHS. Prior to this, the CMA had announced on 25 October 2016 that it had launched a separate probe into potentially excessive pricing in relation to a number of other pharmaceutical companies that supply the NHS (only Concordia International has confirmed that it has been contacted by the CMA in connection with this probe). In addition, the European Commissioner for Competition, Margrethe Vestager, has suggested that there could be more intervention in excessive pricing cases in other EU member states. Thus, it could be that the winds of enforcement are finally changing, after a lengthy period in which excessive pricing investigations were carefully avoided by regulators.

In the CMA's latest decision, Pfizer and Flynn Pharma were both held to have abused their dominant market positions in the market for phenytoin sodium capsules. In September 2012 Pfizer sold the UK distribution rights of branded drug Epanutin® to Flynn. The CMA found that the price at which Pfizer then supplied the drug to Flynn Pharma was between between 780% and 1,600% higher than the historic price and as a result Flynn's sale prices had moved to between 2,300% and 2,600% higher than the price previously charged. This, the CMA, was abusive conduct on the part of both Pfizer and Flynn Pharma.

The CMA now appears to have expanded its focus on the pharma industry from "pay for delay" to pricing and has indicated that, in relation to the separate and on-going pharma investigation launched in October 2016, the prices of some thirty drugs currently being supplied to the NHS have increased by as much as 1,000% in the past five years. It therefore appears that the intense pressure on NHS resources may have persuaded the CMA to take more action in relation to pricing in the pharma sector after a lengthy hiatus. In recent times both the European Commission and the CMA have tended to shy away from excessive pricing cases; competition authorities are notoriously reluctant to act as price regulators, and there are high evidential burdens to overcome in relation to establishing this particular abuse. However, the CMA's predecessor, the Office of Fair Trading ("OFT") did have some success in relation to an excessive pricing case in the past. One of its first cases under the Competition Act 1998 was brought against Napp Pharmaceuticals, which resulted in the imposition of a fine of £3.2 million for its unfair and excessing pricing of sustained release morphine tablets. The CMA may also have been encouraged by developments within the European Competition Network where several similar pricing investigations are in progress.

This renewed focus on excessive prices is also echoed in the recent comments of Ms Vestager, which emphasised that there remains a place for excessive pricing investigations, particularly in relation to pharmaceutical markets:

"Often people’s health relies on drugs that are sold by just one company. That can be because the company has a patent. But it can also be that no one else is interested in coming in to the market, because there isn’t enough demand for the drug to make it worth their while. That isn't a problem in itself, if prices stay at a reasonable level. But there can be times when prices get so high that they just can’t be justified. After all, people rely on these medicines for their health, even their lives. The best answer is often to adjust regulation, or to give the health systems that buy those medicines better bargaining power. But […] there can be times when competition rules need to do their bit to deal with excessive prices."¹

Should the latest investigations result in infringement decisions the companies involved could face substantial administrative fines like those imposed on Pfizer and Flynn, which are capped at 10% of their worldwide group turnover. There can also be consequences for the individuals concerned; the CMA recently secured its first ever Director Disqualification Undertaking, from one of the participants in a price fixing agreement, who has agreed not to serve as a director for a period of five years.

In addition, the companies would face the daunting prospect of defending "follow on" damages actions by any customers which may have been forced to overpay for these drugs during the period of infringement. Such claims have been relatively few in the UK to date; however recent reforms brought about by the Consumer Rights Act ("CRA") have sought to improve access to justice in relation to competition law infringements. The CRA intends to establish the Competition Appeals Tribunal as an effective forum to ensure private damages actions can properly support public enforcement, and allow those that suffer as a result of anti-competitive conduct to be compensated. The CMA is expected to reach a decision on whether to pursue charges against the companies involved in the ongoing probe in February 2017.

In light of these developments, companies who benefit from significant market power, particularly in the pharmaceuticals sector would do well to consider their pricing strategies and, in particular, whether any substantial price increases imposed on recent years can be justified by anything other than a lack of effective competition.

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¹ Read the full announcement from the commission