Introduction

The legal dispute between Flynn Pharma Limited, Flynn Pharma (Holdings) Limited, Pfizer Inc., and Pfizer Limited against the Competition and Markets Authority (CMA) centers on allegations of excessive and unfair pricing of phenytoin sodium capsules supplied to the National Health Service (NHS) in the United Kingdom. The CMA imposed substantial fines on both Flynn and Pfizer in 2016, accusing them of abusing their dominant market positions by setting prices significantly above competitive levels. Both pharmaceutical companies appealed the CMA's decision, leading to a comprehensive review by the Competition Appeals Tribunal (CAT).

Summary of the Judgment

The Competition Appeals Tribunal reviewed the CMA's decision to fine Flynn Pharma and Pfizer for unfair pricing practices. The Tribunal found that the CMA had erred in its application of the legal test for determining unfair pricing, primarily under the framework established by the United Brands case. The CMA's reliance on a "Cost Plus" approach, which incorporated a Return on Sales (ROS) rate derived from the Pharmaceutical Price Regulation Scheme (PPRS), was deemed inappropriate. Additionally, the Tribunal criticized the CMA for not adequately comparing the pricing of phenytoin sodium capsules with comparable products, notably phenytoin sodium tablets, thereby failing to establish a proper benchmark for economic value.

As a result of these findings, the Tribunal set aside the CMA's conclusions regarding the abuse of dominance and the associated penalties. The case was remitted back to the CMA for further consideration, with instructions to conduct a more robust analysis that aligns with established legal principles.

Analysis

Precedents Cited

• United Brands Ltd v Commission of the European Communities (C-27/76): Established the foundational framework for assessing abuse of dominant market positions, including the two-limb test for unfair pricing.
• Sirena v Eda (C-40/70): Early exploration of the concept of excessive pricing in the context of dominant positions.
• Napp Pharmaceutical Holdings Ltd v Director General of Fair Trading [2002] CAT 1: Addressed excessive pricing through a cost-plus approach.
• Attheraces Ltd v British Horseracing Board Ltd [2007] EWCA Civ 38: Clarified the relationship between downstream pricing and abuse allegations in a vertical market.
• Latvian Copyright Authority v Invitation Ltd (C-177/16): Recent case providing guidance on establishing benchmarks for unfair pricing.

Legal Reasoning

The Tribunal highlighted that the CMA incorrectly applied the United Brands test by relying predominantly on a "Cost Plus" methodology, which included a fixed ROS rate of 6% derived from the PPRS. This approach failed to establish a benchmark price reflecting normal competitive conditions. Instead, it adhered to an idealized notion of competition, detached from real-world market dynamics.

Furthermore, the CMA neglected to adequately compare the pricing of phenytoin sodium capsules with that of phenytoin sodium tablets, which could have served as a meaningful comparator. The Tribunal emphasized that establishing a proper benchmark is crucial for determining whether the prices set by dominant firms are excessive and, consequently, unfair.

The Tribunal also criticized the CMA's over-reliance on internal regulatory schemes like the PPRS, which are not designed to assess individual product pricing but rather to regulate profit margins across a portfolio of branded medicines.

Impact

This judgment serves as a pivotal reference for competition authorities, underscoring the necessity for a meticulous application of legal tests when assessing unfair pricing. It emphasizes the importance of setting appropriate benchmark prices that mirror normal competition and the need to consider comparable products to accurately gauge economic value.

Pharmaceutical companies and other entities in dominant market positions must now be more vigilant in how competition authorities assess their pricing strategies, ensuring compliance with established legal frameworks and the principles of fair competition.

Complex Concepts Simplified

United Brands Test

The United Brands test is a two-part legal framework used to determine if a dominant company's pricing practices constitute unfair pricing under competition law. The first limb assesses whether the price set by the dominant company is excessive in relation to the economic value of the product. The second limb evaluates whether the price is unfair either in itself or when compared to competing products.

Cost Plus Approach

The "Cost Plus" approach involves calculating the total cost of producing a product and adding a predefined profit margin. In this case, the CMA applied a ROS rate of 6% from the PPRS to determine what they deemed to be a reasonable return. However, this method was flawed as it did not consider the actual competitive market dynamics or set an appropriate benchmark price reflecting normal competition.

Pharmaceutical Price Regulation Scheme (PPRS)

The PPRS is a regulatory framework that governs the pricing of branded medicines in the UK. It sets target profit margins for pharmaceutical companies to ensure that drug prices remain reasonable. The CMA's application of a ROS rate derived from the PPRS was inappropriate for assessing the pricing of an individual product within a dominant market.

Conclusion

The Tribunal's decision in Flynn Pharma Ltd v CMA underscores the critical importance of accurately applying competition law tests to assess unfair pricing practices. By overturning the CMA's findings, the Tribunal clarified that competition authorities must establish benchmark prices that reflect normal competitive conditions and consider comparable products to determine economic value effectively.

For competition authorities, this judgment highlights the need for a balanced and fact-specific approach, avoiding over-reliance on internal regulatory schemes and ensuring that comparative analyses are thorough and objective. Pharmaceutical companies and other businesses operating in dominant markets must ensure their pricing strategies are compliant with these refined legal expectations to avoid allegations of abuse.