Napp Pharmaceutical Holdings Ltd & Ors v Office of Communications

Factual and Procedural Background

This judgment concerns the substantive appeal by Company A and its subsidiaries ("Applicant") against the decision of the Director General of Fair Trading ("the Director") dated 30 March 2001 ("the Decision") which found that Company A had abused a dominant position in the supply of sustained release morphine tablets and capsules in the United Kingdom, contrary to the Chapter II prohibition of the Competition Act 1998, and imposed a penalty of £3.21 million. The Director also issued directions dated 4 May 2001 ("the Directions") regulating the prices at which Company A's products are to be sold.

Company A is a pharmaceutical company with a dominant market share of around 95% in the relevant market. The market is divided into two segments: the community segment, where general practitioners prescribe and community pharmacists dispense, and the hospital segment, where hospitals purchase directly. Company A maintained high prices in the community segment and offered substantial discounts to hospitals, often below direct costs.

The Director's investigation began following a complaint and involved extensive document production and several procedural stages before the Competition Commission Appeal Tribunal ("the Tribunal"). The Tribunal held hearings, considered witness statements, and dealt with procedural applications including challenges to evidence and the framing of issues.

Legal Issues Presented

1. Whether Company A holds a dominant position in the market for sustained release morphine tablets and capsules in the United Kingdom.
2. Whether Company A abused its dominant position by selectively discounting prices to hospitals below direct costs with the effect and intention of eliminating competition.
3. Whether Company A charged excessive prices in the community segment of the market contrary to the Chapter II prohibition.
4. Whether the penalty imposed by the Director was appropriate, including whether the infringement was committed intentionally or negligently.
5. The appropriateness and legality of the Directions regulating Company A's pricing.

Arguments of the Parties

Applicant's Arguments

• Company A did not dispute the factual data on discounts and market shares but argued its conduct was not abusive.
• Company A contended that discounts to hospitals, though below direct costs, were incrementally profitable on a "net revenue" basis due to a "follow-on effect" whereby hospital sales generated profitable community sales.
• It was argued that competitors also enjoyed similar "linkages" between hospital and community sales, thus competition was on a level playing field.
• Company A submitted that the market situation changed after the withdrawal of a competitor and the emergence of another, which altered competitive dynamics.
• Company A denied any intention to eliminate competition, asserting its pricing policy was a legitimate competitive response.
• Company A relied on the Pharmaceutical Price Regulation Scheme (PPRS) to argue that its prices were reasonable and that excessive pricing was prevented by this scheme.
• Company A challenged the Director's methodology and comparators used to establish excessive pricing.
• It was argued that the Director's case changed during the proceedings and that reliance on pre-1 March 2000 conduct was impermissible retroactive application.
• Company A contended the penalty should be reduced or cancelled on grounds including novelty of infringement, cooperation, lack of loss to consumers, and delay by the Director.
• Company A challenged the legality and scope of the Directions, arguing they exceeded the Director's powers and distorted competition.

Respondent's Arguments

• The Director maintained that Company A holds a superdominant position with market shares exceeding 90% and significant barriers to entry.
• The Director argued that Company A abused its dominant position by selectively discounting hospital prices below direct costs to exclude competitors and maintain excessive prices in the community segment.
• The "net revenue" defense was rejected as conceptually flawed and factually unsustainable; selective below-cost pricing was abusive irrespective of any follow-on sales.
• The Director relied on established case law including AKZO, Tetra Pak II, Compagnie Maritime Belge, and Irish Sugar to support findings of abuse.
• It was submitted that the PPRS does not exempt Company A from competition law prohibitions and is irrelevant where anti-competitive conduct shields excessive prices.
• The Director asserted that the infringement was committed intentionally or, at least, negligently, as Company A must have known its conduct was anti-competitive.
• The penalty was justified as severe but proportionate, reflecting seriousness, deterrence, duration, and estimated gain from infringement.
• The Director defended the Directions as appropriate and within statutory powers to bring the infringement to an end.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal found that Company A holds a superdominant position in the supply of sustained release morphine tablets and capsules in the United Kingdom, with market shares exceeding 90% in both hospital and community segments, supported by significant barriers to entry including regulatory requirements, first mover advantage, and strategic pricing barriers.

Company A's selective pricing policy involved offering discounts to hospitals that were below direct costs on certain tablet strengths where it faced competition, while maintaining high prices in the community segment. The Tribunal applied the AKZO test to find that such below-cost pricing by a dominant undertaking is abusive, without the need to prove intent. The "net revenue" defense based on follow-on sales from hospitals to the community was rejected as conceptually flawed and factually unsupported. The Tribunal clarified that the "follow-on effect" relied on by Company A was not mechanistic or reliably quantifiable and that "hospital influence" as a broader concept was the true strategic value protected by predatory pricing.

The Tribunal concluded that Company A's conduct had the object and effect of excluding competitors from the hospital segment, thereby foreclosing the essential gateway to the community segment and protecting its excessive prices and market share. This exclusionary conduct was pursued intentionally, as evidenced by internal documents and pricing strategies aimed at matching or undercutting competitors' prices selectively.

Regarding excessive pricing in the community segment, the Tribunal found Company A's prices significantly above competitive levels, with no effective competitive pressure to reduce them. The Pharmaceutical Price Regulation Scheme (PPRS) was held not to exempt Company A from competition law obligations, particularly where anti-competitive conduct shielded excessive prices.

The Tribunal rejected arguments that the Director impermissibly changed his case during proceedings, holding that the abuse of excessive pricing and exclusionary conduct in the hospital segment are interrelated but distinct abuses, both properly found on the merits.

On penalty, the Tribunal held that the infringement was committed intentionally or negligently, warranting a severe financial penalty. The Director's methodology for calculating the penalty, including consideration of Company A's gain from infringement and duration, was broadly accepted, but the Tribunal reduced the penalty to £2.2 million to reflect mitigating factors such as the novelty of the abuse and the PPRS context.

The Directions requiring Company A to reduce NHS list prices by 15% and to set hospital prices at no less than 20% of the reduced list price were upheld as appropriate and within the Director's powers to bring the infringement to an end, though the Tribunal expressed concern about the possibility of pricing below cost under the Directions and invited the Director to keep this under review.

Holding and Implications

The Tribunal's final decision is to DISMISS THE APPEAL by Company A, confirming that it has infringed the Chapter II prohibition of the Competition Act 1998 by abusing its dominant position through predatory pricing in the hospital segment and excessive pricing in the community segment of the sustained release morphine market in the United Kingdom.

The penalty imposed on Company A is varied and fixed at £2.2 million, with interest payable from 30 June 2001 until payment. The Directions issued by the Director are confirmed. The Tribunal did not set any new precedent but applied established principles of competition law to the facts, reinforcing the application of the AKZO and related jurisprudence to pricing practices in pharmaceutical markets.

Both parties are provisionally to bear their own costs, subject to further submissions.