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Inside Life Sciences

Excessive pricing of pharmaceuticals: the UK perspective
Inside Life Sciences

Inside Life SciencesIssue 2 | July 2017

Date
27 July 2017

Natasha Pearman Managing Associate

Following fines of £5.2 million and £84.2 million against Flynn Pharma and Pfizer respectively in December last year, the CMA has now published its decision in relation to excessive pricing of Epanutin (known generically as phenytoin), a branded medicine used in the treatment of epilepsy.


Excessive pricing of pharmaceuticals: the UK perspective

Following fines of £5.2 million and £84.2 million against Flynn Pharma and Pfizer respectively in December last year, the CMA has now published its decision in relation to excessive pricing of Epanutin (known generically as phenytoin), a branded medicine used in the treatment of epilepsy. This is the first time the CMA (or its predecessor the OFT) has pursued a pure excessive pricing case and it represents a watershed in the development of competition case law in this area. The CMA is not alone however in pursuing cases of this nature; competition authorities across the globe are now intervening in the pricing of medicines. The CMA is widely respected as a leading authority and no doubt many competition authorities will be reviewing its decision for guidance. Further developments are expected in what is becoming an increasingly controversial area.

The case demonstrates that competition authorities will intervene in cases even where companies are not doing anything which they are not permitted to do under relevant regulations (i.e. debranding a generic) if those companies may be dominant.  The difficulty now facing pharma companies is understanding when they may be occupying a position of dominance.

Background

Epanutin is a branded medicine used in the treatment of epilepsy. It's an old drug which has been long off-patent. Pfizer was the owner of the marketing authorisation ("MA") for Epanutin and also manufactured it. When Pfizer owned Epanutin, its price was regulated under the NHS's Pharmaceutical Price Regulation Scheme ("PPRS").

In 2012, Pfizer transferred the MA for Epanutin to Flynn Pharma (for a nominal value). Flynn genericised Epanutin, and the product was withdrawn from the PPRS and no longer subject to any form of price regulation. Pfizer continued to manufacture and supply Flynn with the product under the terms of the transfer. For continuity of supply issues, and to ensure patients were not accidentally switched product, the MHRA required Flynn to include a manufacturer’s designation in the names of Flynn’s Products – i.e. 'Phenytoin Sodium Flynn Hard Capsules'. This has raised a number of side issues (for example the extent to which Epanutin was truly genericised and the parallel import disputes which resulted).

As a result of debranding, the prices of phenytoin increased overnight by:

  • 25mg: 2,285%
  • 50mg: 2,285%
  • 100mg: 1,808%
  • 300mg: 1,928%

Prior to September 2012, the NHS annual expenditure for phenytoin was approximately £2 million. By 2013, this was approximately £50 million; approx. £42 million in 2014; and approximately £37 million in 2015.

The CMA's decision is lengthy at over 500 pages, and we set out below a high level summary of some of the more interesting points.

DH policy to refer excessive pricing cases to the CMA

The Department of Health (DH) had referred the case to the CMA to investigate, making it clear that "there was nothing further that it could do to address the situation and that while Flynn claimed that the prices were justified, the DH was unable to assess the validity of Flynn's claims". The CMA's decision also states that "DH now has a policy of referring suspected cases of excessive prices directly to the CMA". It may be therefore that we will see more cases of this nature.

Even with its new powers under the Health Service Medical Suppliers (Costs) Act 2017, it is likely that the DH will continue to work with the CMA when assessing prices.

Dominance and narrow product market definition

MHRA guidance issued in 2013 provides that, once patients are stabilised on a manufacturer's product, they are not to be switched. At the time of the infringement, there was one other supplier of phenytoin capsules (NRIM). However it was not deemed to be a competitive constraint because switching rarely occurred, and most newly diagnosed patients would not be prescribed phenytoin as it is typically a third-line treatment. Similarly, a tablet version of the drug was also deemed not to be interchangeable because of patient continuity issues.

Together with other evidence, including how pharmacists issued "open" prescriptions, this led the CMA to define the relevant markets in an unprecedentedly narrow way:

  • The manufacture of Pfizer-manufactured phenytoin sodium capsules that are distributed in the UK (which includes parallel imports as they are distributed in the UK) – in which Pfizer, unsurprisingly, had a 100% market share;
  • The distribution of Pfizer-manufactured phenytoin sodium capsules that are distributed in the UK (which includes parallel imports as they are distributed in the UK) – in which Flynn had a market share between 60-90% over the relevant period as it faced some competition from PIs.

The CMA recognises that "this represents a very narrow product market definition". Product market definition in pharma is usually quite narrow, where often the molecule is the market. In this case though, even the same molecule was not in the same market because of manufacturer variations and the effect that any slight change could have on patients. Whilst there are facts of this case which make it very specific, the approach to market definition could still be relevant to, for example, biologics and their "generic" equivalents biosimilars which are also not considered to be interchangeable.

It is also interesting, and a thus far novel concept, that two companies in a vertical supply relationship were each found to be dominant at their respective levels of the supply chain.

Neither the NHS nor DH were able to constrain Flynn or Pfizer's behaviour

A finding of dominance is not simply an assessment of market shares; dominance arises where a company can act independently of its competitors and customers. In this regard, the NHS was the biggest customer of the products. The CMA concluded that the NHS did not have sufficient buyer power for the following reasons:

  • the NHS structure meant it was difficult for it to exert buyer power over Pfizer and Flynn;
  • CCGs are not able to exercise any choice of product;
  • the DH does not have material countervailing buyer power through the power to regulate prices of phenytoin sodium capsules.

Excessive pricing abuse

The CMA identified that, for both Flynn and Pfizer, a 6% Return on Sales ("ROS") was the appropriate benchmark to assess the extent to which their prices were excessive. ROS does not use any measure of assets employed.

It is notable that a 6% ROS was also the benchmark under the PPRS, but the CMA justified 6% on the basis of other factors, including the fact that the parties (especially Flynn) had made little sunk cost investment.

The CMA acknowledged that, in relation to Pfizer, ROS was perhaps not the best methodology to use. However, Pfizer was unable to provide the necessary information which would have been required to calculate an accurate Return on Capital Employed for phenytoin capsules alone.

The CMA calculated that Pfizer’s excesses on all four capsule strengths of Pfizer’s products amounted to at least £49m - £57m million between September 2012 and June 2016. Flynn's excesses on all four capsule strengths of Flynn’s Products amounted to at least £27.5m - £32.5m between September 2012 and June 2016.

The CMA also identified the prices as being unfair. This involved the CMA considering, amongst other issues, the prices paid prior to the increases; Pfizer's conduct in other EU Member States (where the prices were significantly lower than the UK); the limited value that Flynn added; and its exposure to commercial risk.