Introduction
On 10 March 2020, the Court of Appeal dismissed the UK Competition and Markets Authority (CMA)’s attempt to reinstate fines imposed on pharmaceutical manufacturer Pfizer Limited (Pfizer) and pharmaceutical distributor Flynn Pharma Limited (Flynn). The Court of Appeal declined to re-impose fines of £84.2m and £5.2m on Pfizer and Flynn respectively for excessive pricing of phenytoin sodium capsules (an anti-epilepsy drug used by approximately 48,000 patients to control seizures) between 2012 and 2016. The CMA said that it nevertheless welcomed the Court of Appeal’s judgment, saying that it was an important step in clarifying the law on excessive pricing.
Background
Before September 2012 Pfizer manufactured and sold phenytoin sodium capsules (the anti-epilepsy drug) to wholesalers and pharmacies in the UK, under the brand name Epanutin. As a branded drug, the price was regulated. In September 2012, Pfizer sold the UK distribution rights for Epanutin to Flynn. Flynn proceeded to de-brand/genericise Epanutin, meaning it was no longer subject to price regulation. Pfizer then continued to manufacture phenytoin sodium capsules and supply them to Flynn, but at prices between 780% and 1,600% higher than it was previously charging to distributors in the UK (prices which were significantly higher than Pfizer’s prices for the same drug in other European countries). Flynn then sold the capsules to pharmacies and wholesalers in the UK at prices between 2,300% and 2,600% higher than previously.
In May 2013, the CMA opened an investigation in relation to a possible breach of the Chapter II prohibition in the UK Competition Act 1998 and Article 102 TFEU.
CMA decision
On 7 December 2016, the CMA issued a decision finding that Pfizer and Flynn held a dominant position in their respective markets for the manufacture and distribution of the anti-epilepsy drug, and that both had abused their dominant position through imposing unfair prices for the drug. The CMA found that both (a) Pfizer’s supply prices to Flynn, and (b) Flynn’s selling prices, were both excessive and unfair and thus a breach of the competition rules. The CMA then imposed a fine of £84.2m and £5.2m on Pfizer and Flynn respectively (the former being a record amount under UK competition law).
UK Competition Appeal Tribunal decision
On 7 June 2018, the CAT handed down its judgment on the appeals by Pfizer and Flynn against the decision of the CMA, which partially set aside the CMA’s decision of 2016. The CAT upheld the CMA’s findings that Pfizer and Flynn both held dominant positions in their respective markets. However, the CAT quashed the fines imposed by the CMA. The CAT found that the CMA’s conclusions on abuse of dominance were in error, as the CMA had erred in its application of the legal test in determining whether the prices were unfair, in particular its reliance on the Cost Plus approach (whereby the CMA had found that Pfizer’s and Flynn’s prices were excessive as they materially exceeded their costs in addition to a reasonable rate of return). Further, the CMA failed to consider the accurate economic value of the anti-epilepsy drugs, and had not given sufficient weight to other comparable products (in particular phenytoin sodium tablets).
Court of Appeal decision
On 10 March 2020, the Court of Appeal handed down its judgment. It held the CAT was “entitled to reach the factual conclusions it did”, in finding that the fines against Pfizer and Flynn had not been sufficiently considered in the light of comparable products available, and that the CMA had erred in its economic valuation of the anti-epilepsy drug. The Court of Appeal therefore rejected the CMA’s appeal that the fines should be reinstated. However, the Court of Appeal agreed with the CMA that the CAT was wrong to require the CMA to go beyond a Cost Plus calculation in order to determine whether the prices charged by Pfizer and Flynn were excessive.
Following the ruling of the Court of the Appeal, the CMA has commented that it will now “carefully review” those elements of the case which have now been deferred back to it. The CMA’s Chief Executive, Andrea Coscelli commented: “Today’s judgment is a good result. The CMA was right to appeal the CAT’s judgment. We will now get on with the elements of the case against Pfizer and Flynn Pharma that the court has decided to refer back to us.”
