UK Competition Appeal Tribunal quashes CMA’s excessive pricing decision against Pfizer and Flynn, but still finds abuse

• 17/12/2024
• News

The UK Competition Appeal Tribunal (CAT) recently delivered the latest instalment in the Pfizer/Flynn saga by annulling the decision re-imposed by the Competition and Markets Authority (CMA). The CAT instead conducted its own assessment of the conduct and ultimately imposed a fine similar to that imposed by the CMA.

In 2016 the CMA issued a decision finding that the prices of phenytoin sodium capsules sold by Pfizer and Flynn were excessive. Pfizer had manufactured and marketed these capsules until 2012, when it entered into arrangements with Flynn for their distribution in the UK on an exclusive basis. Flynn de-branded the capsules (thereby escaping price control) and significantly increased their price. The CMA found two separate abuses, one for Pfizer’s price to Flynn and another for Flynn’s prices to wholesalers and pharmacies.

The CMA’s decision was quashed by the CAT in 2018 (see Van Bael & Bellis Life Sciences News and Insights of 11 June 2018) and later by the Court of Appeal in 2020 (VBB on Competition Law, Volume 2020, No. 3), following which the CMA re-adopted the decision in 2022 again finding an abuse of dominance. Following a further appeal, the CAT issued the present judgment, in which it applied the standard framework (first established in the landmark United Brands case) to assess whether a price is excessive. First, it must be ascertained whether the price charged is excessive relative to the production costs plus a reasonable rate of profit (excessiveness limb). Second, the authority must establish whether the price is unfair either in itself or compared to relevant benchmarks (unfairness limb).

First Limb: Excessiveness Test

The CMA employed a “Cost-Plus” test, which compares (a) the parties’ cost of producing a unit of product (the product unit cost) plus a normal profit margin (reasonable rate of return), against (b) the price charged (the product unit price). In the judgment, the CAT identified multiple “fundamental” errors in the CMA’s application of the test to Flynn’s pricing, as follows:

• The CMA failed to include Flynn’s costs for acquiring the capsules from Pfizer.
• The CMA assessed Flynn’s reasonable rate of return based on its overall business, instead of focusing on the specific product at issue.
• The CMA incorrectly took the view that a price is automatically excessive if it fails the cost-plus test (i.e., if the product unit price is more than the product unit cost plus a reasonable rate of return). The CAT identified scenarios in which a higher price may not be excessive (e.g. in case the company is more efficient than rivals supplying the same product), although ultimately determined that such exceptions do not apply to this case.

In readopting the decision, the CAT carried out its own Cost-Plus test. Although the CAT explicitly acknowledged the fragility of its figures, it recalculated the product unit cost and reasonable rate of return for each company. It found that the prices charged were significantly higher and thus excessive.

• For Pfizer, the CAT calculated a reasonable rate of return at 15% in light of the fact that the product had been marketed for many years (meaning that the profit margin may be expected to decrease, not increase), there was a low risk of product liability litigation, and demand was inelastic. Pfizer’s profits significantly exceeded this level.
• For Flynn, the CAT adopted a lenient approach as it took the input purchase price into account and considered that a reasonable rate of return could not exceed 30%. However, even this was exceeded and, consequently, Flynn’s price was considered excessive as well.

Second Limb: Unfairness Test

The CMA considered that the prices at hand were unfair, because (i) they were significantly higher than the cost, (ii) they were higher than prices charged for the same products in other countries, and (iii) the features of the capsules did not provide any legitimate justification.

The CAT again criticised the CMA’s decision and argued that the assessment should have focused on why there is a “producer surplus” (i.e., why the price charged is higher than the company’s cost plus a reasonable rate of return). As in the excessiveness test (above), the CAT found fault with the CMA for taking the position that any producer surplus charged by a dominant undertaking is essentially automatically unfair in all cases. The CMA should have instead considered the economic value and medical benefits of the capsule products in order to determine whether the producer surplus was justified.

The CAT, therefore, carried out its own unfairness analysis and held that, for Pfizer, a portion of the surplus was legitimate since it was providing distinctive value to customers in the form of a differentiated product. However, according to the CAT, that distinctive value was limited to the provision of continuity of supply (i.e., the recommendation for patients to retain the same manufacturer), while similar medical benefits could be provided by differently manufactured capsules or tablets (which is relevant since there was evidence of switching). For Flynn, the CAT concluded that no producer surplus was justified as Flynn simply distributed the products and did not provide any additional services providing added value.

Both the CMA and the CAT also disregarded pricing in other countries since, as held by the CAT, this would assume that prices should be similar across different highly regulated markets.

Key Takeaways

This judgment provides an in-depth assessment of the numerous complicated factors to be considered when applying the United Brands test to determine whether a price is excessive. Importantly for pharmaceutical companies, the CAT confirmed that the mere existence of a price increase should not create the assumption of a violation, and also confirmed that it is important to consider the value delivered by medicines to patients and health systems, which may justify a producer surplus.