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Investigation leading to CMA's largest fine being imposed on Pfizer leads UK government to legislate to allow them to intervene in the market for pharmaceuticals, medical devices and medical services

14/12/2016

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United Kingdom

The Competition and Markets Authority has published its decision to impose a fine of nearly £90M on Pfizer and its distributor, Flynn Pharma in relation to huge price inflation in the UK market.

On 7 December 2016 the Competition and Markets Authority (UK regulator for anti-trust) ("CMA") published its decision to impose a fine of nearly £90M on Pfizer and its distributor, Flynn Pharma in relation to huge price inflation in the UK market.

From the publicly available information, the facts of this case are fairly stark:  In September 2012 Pfizer's product, phenytoin sodium capsules to prevent and control seizures, were de-branded (from Epanutin).  This took the product out of the PPRS, which imposes limits on profit margins for companies which are members of the ABPI or who have separately sign-up to participate in the PPRS for branded products.  This meant that pricing for this product should theoretically have been subject to the effects of generic competition.  However, for this particular product (used to treat around 48,000 patients in the UK), patient switching is apparently considered not to be possible because such a switch can affect the control of seizures and consequently to be seriously detrimental to health.

Following the change from branded to un-branded name, the price charged by Pfizer to its distributor, Flynn Pharma, rose by between 780% and 1,600%.  The prices charged by Flynn Pharma to UK wholesalers and pharmacies rose by between 2,300% and 2,600%.

The CMA found that both Pfizer and Flynn Pharma had a dominant position and that they abused that dominant position by charging excessive and unfair prices.  The CMA imposed its highest fine ever, and the fine on Flynn Pharma amounted to 10% of its worldwide turnover.  The CMA also ordered the companies to reduce their prices to ones which are not excessive and unfair within between 30 working days and four months of the decision.

Pfizer have said that they are appealing "all aspects of the decision".  We don't have the benefit of seeing Pfizer's arguments that their activities did not breach competition law.  In any appeal they will have to succeed in arguing either they did not have a dominant position, or that if they did have a dominant position, that they did not abuse it.  Pfizer have said that they were previously making the drug at a loss.  That must have been a pretty substantial loss if in order to achieve a margin that was neither excessive or unfair it was necessary to increase prices by the eye-watering proportions in this case.   The CMA have calculated from figures provided by Pfizer that the losses sustained at previous prices would have been recovered within two months of the new pricing.

The price rises in this case of themselves indicate the potential presence of a dominant position and would not generally be expected to be found in a normally operating and genuinely competitive market.  It will therefore be particularly interesting to see Pfizer's explanation for these very substantial price rises when this goes to appeal. 

The government's reaction to this investigation, which was opened in May 2013, is to put through the legislative process the Health Service Medical Supplies Bill ("the Bill").  That Bill is currently on its way through the House of Lords, having progressed at speed through all readings in the House of Commons.  It is therefore highly likely to make it onto the statute book.  That Bill and its associated regulations essentially amend the provisions of the National Health Service Act 2006 and amongst other things provide the government with more extensive powers to demand information about pricing, revenue and profits and to allow the government to implement a claw-back of monies from manufacturers of products sold under the statutory scheme.

The government had previously trusted that the PPRS would control profits for branded medicinal products and that competition in the market for generics would control prices for products under the statutory scheme.  Following the investigation, the faith of the government in the operation of the free market to act as a break on excessive pricing under the statutory scheme has been broken.  Once the Bill and the related secondary regulation are on the statute book, should any case with similar facts arise, the government is likely to use its broader powers to more quickly investigate significant price rises and to order a repayment of profits rather than to wait more than three years as in this case, for the CMA to reach a decision.  It is unfortunate, although perhaps not surprising, that the lack of trust which has arisen as a result of this case has meant that the government has also strengthened similar provisions for the medical device industry and the industry for the provision of health services, even though market forces are likely not to operate in exactly the same way for those industries.  It is a case of the whole class being punished for the misdemeanours of one or two students.

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