Excessive pricing has become a hot topic for the pharmaceutical sector in the last year, having been ignited by regulatory investigations in the UK and Italy.

In October last year, the Italian competition authority fined Aspen €5.2 million for abusing its dominant position to inflate the price of its cancer drugs.  Aspen appealed the decision and lost – and are now under investigation by the European Commission for similar conduct in other EU member states.  In December, the UK’s CMA fined Pfizer and Flynn a combined £90 million for excessive pricing in the manufacture and supply of phenytoin sodium capsules (and the appeal listed for late October looks set to raise some interesting issues).  The CMA also has ongoing pricing investigations into Actavis and Concordia, with a CMA decision on whether it will proceed with the investigation into Concordia due imminently.

Away from the pharmaceutical sector, the CJEU recently handed down judgment on a preliminary ruling in a Latvian case concerning questions on excessive pricing by collecting societies (a summary of the judgment can be found here).  The decision largely confirms existing principles, but does add some guidance for authorities investigating potentially abusive prices.  Below, we highlight the key points of each decision, and what these mean for the pharmaceutical sector.

What did the CMA say?

The CMA applied both limbs of the United Brands test to find that Pfizer and Flynn had abused a dominant position through the prices charged for their phenytoin sodium product (a treatment for epilepsy).  Under the first limb, the CMA had to determine whether the difference between costs incurred and price was ‘excessive’.  Costs were assessed on a ‘Cost Plus’ basis – i.e., costs plus a reasonable margin.  To determine a reasonable margin, the CMA took guidance from the Pharmaceutical Price Regulation Scheme and considered a 6% return on sales to be reasonable.  Pfizer’s prices exceeded Cost Plus by between 29% and 705%; Flynn’s prices exceeded cost plus by between 31% and 133%.  By comparison, the Competition Appeal Tribunal has previously held prices 47% above cost to be excessive, whilst the European Commission has found 25% above cost excessive.  Pfizer and Flynn’s uplifts were therefore sufficiently large to be deemed excessive.

The second limb examines whether the price is ‘unfair’, either in itself or when compared to competing products.  This first requires an assessment of economic value, and as the drug was an old drug superseded by other treatments with no recent innovation, this was found to simply be Cost Plus.  Due to the ultra-narrow market definition (a result of clinical guidance which recommended that epilepsy patients are maintained on specific brands of products), no other products could provide a reasonable benchmark for assessing whether prices were unfair compared to their inherent economic value.  Instead the CMA looked at whether the prices were unfair in themselves, which it stated is not a precise quantitative threshold, but is a matter of fact and degree.  In looking at the facts, including the significant scale of recent increases, the CMA found that as the prices bore no reasonable relationship to the economic value, they were indeed unfair in themselves.

And what did the CJEU say?

The CJEU confirmed that the United Brands test remains the appropriate test to assess unfair pricing.  However, citing the Advocate General’s opinion, the Court noted that there are a number of possible methods by which excessive pricing can be determined.  One of these methods is comparison across other Member States, which is valid as long as the reference Member States are “selected in accordance with objective, appropriate and verifiable criteria”.  Any appreciable difference could be taken as an indication of abuse, but relative purchasing power must be taken into account in any comparison.  Ultimately though, it is left to the competition authority to define its framework, with which it has a “certain margin of manoeuvre”.

As to the assessment of excessive and unfair prices, the CJEU considered an argument that the ‘excesses over cost’ in this case were not as great as those found in previous cases.  The Court was quick to dismiss this argument, saying that there is no minimum threshold above which a rate must be to qualify as “appreciably higher”.  This question must be established on the facts, but any such difference must be “significant and persistent” in order to amount to a potential abuse.  It is noted, though, that these factors are only indicative of an abuse; objective dissimilarities can justify this difference.

What next?

The CJEU judgment reinforces the CMA’s interpretation of the second United Brands limb that prices can be excessive in and of themselves, provided they are “significant[ly] and persistent[ly]” higher.  Indeed, both the CMA and the CJEU adopted similar positions regarding the lack of a particular quantitative threshold for excessive prices.

The method of comparing prices or rates with other EU markets is difficult to transpose into pharmaceutical markets, given the variance of regulations, market structure, and purchasing power.  On the other hand, the reference pricing system used by some member states already suggests that some measure of cross-border price comparison is relevant.  Nevertheless, while the CMA used the fact that drug price increases were not implemented in other Member States to justify the conclusion that the UK prices were unfair in themselves, more generally they said that comparisons with other Member States did not embody ‘sufficiently reliable comparators’.  Parallel imports were not considered to be a meaningful comparison, as those importers would be price takers who used the prices of the dominant companies.

However, the emphasis of the CJEU judgment is that finding whether prices are excessive and unfair is matter for national authorities and courts to determine in accordance with their own defined framework.  AG Wahl had suggested the combination of several methods, but this is not something that the CJEU appears to have endorsed.  Wahl also explicitly referred to the use of economics, and the suggestion by the CJEU of the inclusion of purchasing power parity in any analysis is perhaps a nod towards a more economic approach.

Overall, it remains the case that a sudden increase in price that cannot readily be explained, and is both significant and persistent, is likely to catch the attention of regulatory and competition bodies, in particular in priority areas such as pharma.

The appeal of the Pfizer/Flynn decision is due to come before the Competition Appeal Tribunal (CAT) later this year.  Central to the appellants’ case is the CMA’s use of the 6% benchmark for establishing Cost Plus benchmark.  The application of a figure derived from the PPRS scheme for branded drugs into a very different market context is one of the most controversial aspects of the decision.