CMA's finding of abuse in Pfizer/Flynn unfair pricing decision annulled

The CMA's decision 

In December 2016, the CMA imposed an £84.2 million fine on Pfizer and a £5.2 million fine on its distributor Flynn after finding that both companies had abused their respective dominant positions by charging excessive prices in the UK for phenytoin sodium capsules, a legacy anti-epilepsy drug.  

Pfizer had sold the rights to distribute the drug to Flynn, which subsequently made the drug an unbranded generic, meaning that it was no longer subject to the PPRS price regulation scheme.  

The price that the NHS was charged for packs of the drug increased materially; overall NHS expenditure increased from around £2 million in 2012 to around £50 million in 2013.  

The CMA found that: 

• Pfizer and Flynn each held dominant positions in the relevant markets, namely for manufacture (Pfizer) and distribution (Flynn) of phenytoin sodium capsules.
• Pfizer had abused its dominant position by charging Flynn unfairly high selling prices, and Flynn had abuse its dominant position by charging its customers (wholesalers and pharmacies) unfairly high selling prices.   
• Separate abuses were incurred in relation to each of the different strengths of phenytoin sodium capsules.  

The CAT's judgment

The CAT upheld the CMA’s findings that Pfizer and Flynn each occupied a dominant position in the relevant markets.  

However, the CAT struck down the CMA's findings on abuse. The appeals focused in particular on the CMA's methodology for assessing when high prices will be abusive.  The key legal precedent relied upon by the CMA is United Brands, in which the Court of Justice set out a two-limb test:

• The price must be excessive, which could be determined by reference to the difference between the cost of production and the selling price (Excessive Limb)
• The price must be "unfair" either in itself (Test 1) or when compared to competing products (Test 2) (Unfair Limb)

There have been relatively few excessive pricing cases in the 40 years since the United Brands judgment.  This has often been explained by the challenges in determining what should be considered to be benchmark price which would have existed for the relevant products under conditions of normal and effective competition.  In this regard, two aspects of the CMA's application of the United Brands test were unusual:

• The adoption by the CMA of a 6% "Cost Plus" standard. This allowed each of Pfizer and Flynn a specified return on sales (ROS) based on their direct costs and a proportion of their indirect costs. For each of Pfizer and Flynn, a ROS of no more than 6% was considered reasonable, on the basis that this is the permissible price increase under the PPRS scheme. But the PPRS scheme applies across a portfolio of products, rather than to the individual products. 
• The CMA's unwillingness to have regard to the price of phenytoin sodium tablets (as distinct from capsules), which were more expensive than capsules on the basis that: (1) Pfizer’s and Flynn’s prices were unfair in themselves as they bore no reasonable relation to the economic value of the capsules, i.e. Test 1 of the Unfair Limb was satisfied; and (2) in any event, they were not comparable products, as capsules do not compete with tablets.  

In its judgment the CAT held that the CMA was wrong in law to confine its methodology for determining whether the drug prices were excessive by reference only to its "Cost Plus" test. 

The judgment summarises the eight steps the CAT considers that the CMA should have followed in order to determine whether Pfizer and Flynn's prices were abusive.

These steps included identifying a benchmark price or price range for phenytoin sodium capsules which would have applied in conditions of "normal and sufficiently effective competition".

In determining that benchmark price, the CMA should have given proper consideration to whether, amongst other things, phenytoin sodium tablets – the prices of which were higher than the prices for capsules – served as a meaningful price comparator. 

The CMA also erred in law in failing to have any regard to the benefit to patients of phenytoin capsules in determining their economic value.  

The CAT did not limit its criticism to the CMA's methodology for assessing when prices may be abusive.  The CAT also expressed concerns about the CMA's decision to impose a 400% uplift on Pfizer's fine for the purposes of deterrence.  The CAT concluded that it would "likely have regarded the very substantial uplift for deterrence applied to Pfizer as, on its face, difficult to justify and not required by the CMA’s own penalty guidance … If we had needed to come to a decision on the level of penalties to be applied to Pfizer in this case, we would have given the appropriate uplift for deterrence close scrutiny …"

Next steps

The judgment does not mark the end of the story.  The CAT has indicated that it is minded to remit the case back to the CMA for further consideration of abuse (and any consequential findings, including penalties).  The CMA has stated that it is disappointed that the CAT has not reached its own judgment, and that it is actively considering an appeal.  

The CAT's judgment will inevitably have implications for the CMA's on-going pharmaceutical investigations where those cases involve allegations of abuse of dominance.  At least two of those investigations have reached the statement of objections (SO) stage: an SO was issued in relation to hydrocortisone tablets in December 2016, and in relation to liothyronine in November 2017. Both of these investigations concern alleged unfair and excessive pricing.