Public Law

On Friday news broke that, from November, the Cancer Drugs Fund in England will stop funding 16 medicines used in 23 cancer treatments. The cuts, made in light of predictions that the Fund is due to be £100m over budget, mean that the number of funded therapies has been halved from 84 to 41 since the beginning of 2015.

The cost of drugs, and in particular the effect on prices where pharmaceutical companies are alleged to have abused a dominant market position, is an issue the CMA has recently been considering.

 

Exploitative abuse – excessive pricing

Last month the CMA announced that it had issued a statement of objections to Pfizer and Flynn Pharma. Pfizer manufactures phenytoin sodium capsules, which help to prevent and control epileptic seizures for over 50,000 patients in the UK. Pfizer supplies the drugs to Flynn Pharma, which distributes them to pharmacies and wholesalers in the UK.

The CMA alleges that these pharmaceutical suppliers abused a dominant market position in breach of UK and EU competition law. In particular, it claims that from September 2012 Pfizer and Flynn charged excessive and unfair prices, which is considered an “exploitative abuse” of a dominant position as it has an adverse effect on customers directly (as opposed to an exclusionary abuse, which indirectly affects customers by hindering competition itself).

Establishing an abuse of dominance requires clear arguments and evidence to support: (a) the market definition; (b) a dominant position within that market; and (c) an abuse of that dominant position. Market dominance is not itself unlawful, and so an ability to charge excessive prices (e.g. because you hold a patent or exclusive licence over the only product in the market) is not an abuse. An abuse only arises if the dominant firm takes advantage of its dominance, and this must be proved by evidence. Actual excessive pricing must be shown; the critical test is whether a price bears “no reasonable relation to the economic value of the product”. It is not enough just to demonstrate that the price is substantially in excess of the costs of production on the supply side.

In this instance, the CMA alleges that Pfizer sold the drug to Flynn at prices 8 to 17 times higher than those Pfizer had charged customers for the drug before it sold the distribution rights to Flynn in September 2012. In turn, Flynn sold the drug at prices between 25 and 27 times higher than those Pfizer had previously charged. The NHS spent approximately £2.3 million on phenytoin sodium capsules annually prior to September 2012, but in 2013 the annual spend ballooned to over £50 million, and remained over £40 million in 2014.

Both Pfizer and Flynn have until October to make written and oral representations on the CMA’s statement of objections, which the CMA will consider before it makes a final decision. The investigation has been running since May 2013, illustrating how lengthy and involved these matters can be.

Exclusionary abuse – discounts and rebates

The CMA has also had to grapple with exclusionary abuses of dominance, which prevent the development of competition in a market and so indirectly affect consumers.

In June 2014 the CMA opened an investigation into conduct in the pharmaceutical sector, based on concerns arising out of suspected discounts and rebates by an unnamed party. One year later, the CMA announced that it had closed its investigation on the grounds of administrative priorities. It concluded that the conduct in question would have a limited (if indeed any) impact on consumer welfare.

Although the CMA decided not to take its investigation any further, it did provide general guidance on some of the circumstances in which the provision of rebates or discounts by a dominant company can raise competition concerns.

Concerns are unlikely to arise where the rebate or discount scheme simply passes cost savings from increased volumes on to the consumer, by reducing the price of additional units once a particular volume has been purchased.

However, a dominant business offering certain discounts or rebates with a “loyalty-inducing or fidelity-building” effect may exclude or limit other firms’ ability to compete. In particular, competition concerns will arise where a rebate or discount scheme offers customers a lower price on all units, including a retroactive (or ‘roll back’) rebate on units purchased before the relevant volume threshold was reached. This makes it more difficult for others to compete for the customer’s business, as their price for supplying additional units will not only have to be lower than the dominant business’s, but also compensate the customer for the loss of the rebate on units already purchased. Concerns are also likely to arise if a customer only becomes entitled to the discount or rebate if it purchases units from the dominant company that a competitor could otherwise have supplied.

Conclusion

The CMA was careful to point out that its decision not to pursue its exclusionary conduct investigation does not imply that it will not prioritise investigations into suspected loyalty-inducing discount schemes in the future. It may of course be that the evidence was just not there to establish the abuse of dominance in this case, but another case may be more clear-cut.

 

However, the differing treatment of these two cases might suggest that the CMA will be more willing to spend its resources on abuse cases where there appears to be a more direct impact on the ultimate consumer. The continuing cost pressures on drug-purchasing bodies are likely to keep the pricing of pharmaceutical products under the CMA’s microscope for the foreseeable future.

 

Government, Regulation and Competition Law

Brodies’ market-leading government, regulation & competition team advises local authorities, public bodies and commercial clients in judicial reviews, statutory appeals and in bringing and defending regulatory enforcement action.
Government, Regulation and Competition Law