Court of Appeal Judgment confirms that Pfizer and Flynn should not yet be fined for excessive pricing of anti-epilepsy drug

In a key competition case in the pharmaceutical sector, the Court of Appeal has upheld the Competition Appeal Tribunal's (the "CAT") decision to quash the £90 million fines imposed in 2016 by the UK regulator, the Competition and Markets Authority ("CMA") on Pfizer Inc. ("Pfizer) and Flynn Pharma ("Flynn"). The Judgment also clarifies the analysis required to determine whether the prices a dominant company charges for its products are excessive and therefore abusive under competition law.

Background

Phenytoin sodium capsules are an anti-epilepsy drug which was sold under the brand name "Epanutin" by Pfizer. After selling Flynn the right to market Phenytoin capsules in the UK in 2012, Pfizer continued to manufacture and supply the product to Flynn who sold it largely to the NHS.

Shortly after acquiring the rights, Flynn de-branded Epanutin and continued to sell it as a generic medicine in the UK. This meant that it was no longer price regulated and so Flynn significantly increased the price of Phenytoin virtually overnight. The price for 100mg packs went from £2.21 as "Epanutin" to £54.87 on average as a generic – a price increase of 2,400%.

The UK Department of Health complained to the CMA's predecessor, the Office of Fair Trading, which launched an investigation into potential abuse of dominance. In 2016, the CMA found that both Pfizer and Flynn had infringed competition law by charging excessive and unfair prices in the UK for phenytoin sodium capsules. A record fine of £90 million was imposed on the two pharmaceutical companies (£84.2 million on Pfizer and £5.2 million on Flynn). The CMA also issued directions ordering both companies to reduce their prices, which they have done.

The CMA's decision was then appealed by Pfizer and Flynn and in June 2018, the CAT upheld the CMA's finding that Pfizer and Flynn were dominant but quashed the imposition of fines as it considered that the CMA's conclusion on abuse were in error. In short, the CAT found that:

• The CMA did not correctly apply the legal test for finding that prices were excessive and unfair as set out in the United Brands case [Judgment of 14 February 1978, C-27/76 United Brands and United Brands Continentaal v Commission, EU:C:1978:22] as it relied solely on a "cost plus" methodology. Under the United Brands test, which is considered as the critical reference point for analysis, there are essentially two steps. First, it should be considered whether the difference between the costs incurred and the price charged by a dominant company is excessive; and second, if it is excessive, it should be determined whether the price charged is unfair either by itself or compared to competing products. If it is, the conduct will be abusive. The CMA "cost plus analysis" only looked at the costs of producing the medicines and a reasonable rate of return to determine that the price were excessive;
• The CMA did not sufficiently take into consideration comparable products such as phenytoin tablets; and
• The CMA did not correctly assess the correct economic value for the medicine.

The Court of Appeal's Judgment

Flynn, Pfizer and the CMA subsequently appealed the CAT's ruling and, in its Judgment handed down on 10 March 2020, the Court of Appeal largely upheld the CAT's findings. While the Court rejected the CMA's claim that the fines imposed against Pfizer and Flynn should be reinstated, it also referred elements of the decision back to the CMA for further analysis.

Particularly, the Court found that:

• The CMA should not ignore a prima facie valid argument that a price is fair. Instead, it should analyse both alternatives of the United Brands test (as set out above) to determine whether a price is both excessive and unfair;
• While the CMA is not required in every case to investigate fully comparators raised by the parties that prima facie demonstrate that the prices charged were fair, in this case, the CMA did not evaluate the comparators in any way and so its investigation was not sufficiently thorough;
• Contrary to the CAT's ruling, the CMA is not required to adopt one particular approach to determine whether prices are excessive. As such it did not need to go beyond the "cost plus" analysis it adopted, and it did not need to establish a hypothetical benchmark price against which to compare the actual pricing; and
• The CMA is required to review its analysis on the patient benefit in assessing the economic value of the medicine. This aspect was referred back to the CMA for further consideration.

Why it matters

With this Judgment, the Court of Appeal provides guidance on the methodology expected from the CMA to determine whether prices are unfair and excessive in the pharmaceutical sector. Almost seven years after the launch of the investigation, it is now for the CMA to review elements referred back by the Court of Appeal and to decide on whether fines should be imposed to Pfizer and Flynn and their amount.

Cases of unfair prices are rare in competition law and the Phenytoin case is one of the leading cases in the UK. This is demonstrated by the intervention by the European Commission in the proceedings, which is unusual in national cases. While Pfizer and Flynn have escaped financial penalties for their conduct at this stage, that may change in due course. With the referral back to the CMA for further determination of the case, the Court of Appeal has ensured that the case will continue to be closely scrutinised by both competition authorities and pharmaceutical companies in the EU for the foreseeable future.

Paolo Palmigiano and Louisa Penny explored the impact of competition law on the pharmaceutical sector on 26 March 2020, watch a recording of the webinar here.