By Jonathan Parker, Hanna Roos, Hayley Pizzey and James Fagan
The Competition Appeal Tribunal (the CAT) in the UK heard on 17 January 2017 an application by Flynn Pharma Ltd and Flynn Pharma (Holdings) Ltd (together Flynn) to suspend the Competition and Markets Authority’s (the CMA) direction to reduce the price of an epilepsy drug. The CMA had given the direction as part of its unfair pricing decision in December 2016. In its judgment on 19 January 2017, the CAT dismissed the interim application.
The case is significant because it concerns the first CMA decision on excessive pricing, and a substantial fine of £90 million by the CMA for an alleged abuse of a dominant market position by Flynn and Pfizer Ltd and Pfizer Inc. (together Pfizer). The interim relief judgment also highlights the CAT’s focus on the public health impact when assessing the need for interim relief. Flynn and Pfizer are expected to file their appeal of the CMA’s December decision by 7 February 2017, and the CAT’s determination of their appeal is anticipated later this year.
The CMA’s decision and directions
The CMA decided in December 2016 that Flynn and Pfizer had abused their dominant market position in the UK by charging excessive and unfair prices for their epilepsy drug.
The CMA found that Flynn de-branded a prescription drug Epanutin (phenytoin sodium) in September 2012, apparently to avoid the National Health Service’s (the NHS) strict rules on how much it can pay for branded drugs, and re-categorised the drug as a generic. The drug was sold by Pfizer to Flynn, and then by Flynn to the NHS.
The CMA’s decision alleges that the companies had increased the price by as much as 2,600% in breach of Chapter II of the UK Competition Act 1998 and/or Article 102 of the Treaty on the Functioning of the European Union.
The CMA ordered the companies to pay a fine of £90 million and to reduce their prices for Epanutin. The directions require each of Pfizer and Flynn to implement price reductions within 30 working days of the decision (i.e. by 23 January 2017).
The non-confidential text of the CMA decision has not been published.
The CAT’s decision on interim relief
Flynn applied to the CAT for a temporary suspension of the CMA’s direction to reduce prices, pending the final outcome of its appeal against the CMA’s decision. Pfizer, the CMA and the Department of Health (which triggered the investigation by complaining to the CMA), submitted observations.
The decision considered the five-fold test for interim relief: 1) the prima facie merits of Flynn’s case, 2) the need for urgent relief, 3) whether Flynn would suffer significant damage if the relief was not granted, 4) effect on competition and third party interests if the relief was granted, and 5) the balance of interests, taking into account all the relevant circumstances.
The CAT agreed that Flynn had an urgent case which had prima facie merit. It however rejected Flynn’s argument that Flynn would be likely to suffer significant damage if interim relief was not granted.
Flynn advanced four main arguments regarding the harm it would suffer by following the directions:
- Unworkable directions: The directions are not capable of sensible implementation as they are vague and unworkable, for example because the decision does not specify how much Flynn should reduce its prices by.
- Interference in business: The CMA’s cost allocation methodology and 6% return on sales (which the CMA considered reasonable) would amount to a gross interference in Flynn’s business operations and commercial policy.
- Irreversible price reduction: The reduced prices would be likely to be irreversible if Flynn’s appeal were to succeed because new competitors will enter the market and it will not be commercially feasible for Flynn to increase prices due to this competition.
- Irrevocable reduction in revenue: Implementing the directions would result in an immediate and substantial reduction of revenue. These would be irrecoverable if Flynn were to succeed in its appeal because the CMA did not offer a cross-undertaking in damages.
The CAT considered that the unworkability argument was “significantly weakened” by the fact that Flynn admitted to having a contingency plan for compliance with the price reduction timetable, and that Pfizer had not applied for interim relief and stated that it would (reluctantly) comply with the directions pending hearing of Flynn and Pfizer’s appeal. The CAT also felt that Flynn was able to come to its own view on what price would likely be viewed by the CMA as a genuine effort to comply with the decision, and that Flynn had been given some margin for error in setting a new price.
The CAT also viewed the subsequent arguments as “highly speculative”. For example, the CAT agreed with Flynn (contrary to the CMA’s position) that the loss appeared to have a “significant core” and was irrecoverable in the sense that the CMA offered no compensation. However, the CAT considered that there must be something more than financial loss such as a “demonstrable threat to the applicant’s continuation in business”. It made reference particularly to Flynn’s significant cash reserves, that it would be able to continue to make a return on its costs albeit on a smaller scale than before, and that its financial loss was put into context by the “very substantial benefit” it had obtained from prior sales.
Public health concerns
When considering the last two limbs of the interim relief test, the CAT balanced the perceived harm to the public against the harm to the supplier, and found that public interest concerns weighed more heavily in the balance. It understood harm to the public to mean harm to patients who have been denied funds diverted to purchasing Flynn’s product. It considered important that the harm was financial (by limiting the NHS resources available for other conditions), but also non-pecuniary given that patients could not be adequately compensated monetarily in later years for the effects of denied treatment.
The CAT accepted that the case law does not establish that perceived harm to public health will always over-ride the economic interests of businesses, but held that public health may merit special consideration in the hierarchy of interest when weighing up different kinds of harm.
The CAT’s decision is of note because it emphasises that public health – and specifically patient health considerations – can outweigh the financial damage to the supplier.
The decision appears to create a high burden for pharmaceutical companies applying for interim relief going forward. Following the CAT’s interpretation, relief requires for example a demonstration of imminent existential threat due to the impact of a competition authority’s decision. If a company has in place business contingency plans and generous cash reserves, these might, in light of the CAT’s reasoning, weigh against a finding that the company’s continuation in business is threatened.
The CAT will make its final determination of the appeal after the parties have completed their submissions.
Meanwhile, the CMA’s focus in the pharmaceutical sector is expected to continue. The CMA has opened 12 market investigations during the last two years. A quarter of those relate to the pharma sector, suggesting a relatively intense focus on this market. In addition to pricing scrutiny, the CMA has e.g. issued a fine totalling £45 million in February 2016 against GlaxoSmithKline plc and others for payments and other ‘value transfers’ which the CMA has characterised as delaying the entry into the UK market of generic versions of the anti-depressant drug paroxetine. The cases appear to be moving through the regulator more quickly than in the past.
This post was prepared with the assistance of Denisa Chytilova and Magdalena Nasuto in the London office of Latham & Watkins.
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