CMA’s full decision on Pfizer/Flynn excessive pricing focuses on intention and evidence

The CMA’s decision relies heavily on evidence of the parties’ intentions in applying competition rules.

On 15 June 2017, the UK Competition and Markets Authority (CMA) published the full non-confidential version of its decision to fine Pfizer and Flynn a record £84.2m for their excessive and unfair pricing of phenytoin sodium capsules (used in treating epilepsy) in the UK.

The CMA’s reasoning focuses heavily on the fact that both the parties had no reasonable explanation for the price increase (for example, an increased costs base, or increased capital expenditure). The CMA also looked at the fact that the parties had engaged in discussions as to how such a price increase would negatively affect the NHS and, if an intentional price hike was discovered, the effect upon Pfizer’s reputation. For instance, it considered Pfizer’s negotiations with another party prior to granting Flynn the distribution contract for the capsules, as well as emails and discussions between the parties.

The CMA also accounted for the fact that the parties were fully aware there was no effective competition for the capsules, as patients were not able to be switched to another, cheaper drug in light of guidance issued by the UK Medicines & Healthcare Products Regulatory Agency. As a result, there would always be a need for the capsules, however small.

As to the question of what would have been a reasonable approach to price, the CMA considers that a dominant company’s price will be unfairly high and infringe competition law if it has no reasonable relation to the economic value of the product being sold. The CMA stated that this is attained when:

  • the difference between price and the costs actually incurred plus a reasonable rate of return is excessive (Cost Plus Approach), and
  • the price is either unfair in itself or unfair when compared to competing products. 

This is based on the existing case law, which recognises that the Cost Plus Approach is one of the ways in which a price might be seen to be excessive. In this case, the CMA decided that a reasonable rate of return would be 6% (ie Pfizer and Flynn could charge a price that reflected their costs and a 6% margin). The parties’ margins were well beyond this (29%-705%, depending on the pack size of the capsules in question). However, the CMA emphasised that this 6% figure was very specific to the facts of the case and no manufacturer was prohibited from making a more generous rate of return per se.

The CMA’s decision shows that its excessive pricing analysis focuses heavily on evidence. The CMA did not believe Pfizer’s argument that it needed to charge high prices as a result of capital investment, because it could not prove it. Equally, the CMA found lots of evidence of Pfizer’s intention to hike prices and the wrestling of conscience by senior management in increasing the prices.

The CMA’s decision in this case is very specific to the facts. Excessive pricing in any case remains a hot topic for competition authorities - the CMA and the EU Commission are both looking at excessive pricing in the pharmaceutical sector, and the General Court of the EU is due to consider the issue in the Latvian copyright case (following an opinion issued by the Advocate-General, whose approach to the issue of excessive pricing is similar to that of the CMA in the Pfizer/Flynn decision).

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