Competition law: Spotlight on the pharmaceutical sector

This article summarises recent UK competition law developments in the pharmaceutical sector

17 April 2020

Background

The pharmaceutical sector has been the focus of competition authorities around the globe, including the UK Competition and Markets Authority ('CMA') and the European Commission. A 2019 report by the European Commission revealed that between 2009 and 2017, EU Member State competition authorities and the European Commission adopted 29 infringement or commitment decisions in total against pharmaceutical companies and that fines were imposed in 87% of all infringement decisions.

Whilst pharmaceutical companies are subject to sector-specific regulation, the cases illustrate that this does not exempt them from competition law. Companies that infringe EU or UK competition law can be fined up to 10% of their worldwide turnover and have their agreements rendered void and unenforceable. In addition, findings of infringement can have serious reputational implications and can expose companies to damages claims by those harmed by the infringement.

We summarise below some of the recent CMA investigations and court cases in the sector which relate to infringements under Chapter I of the Competition Act 1998 (the 'Chapter I Prohibition') which prohibits anti-competitive agreements, and Chapter II of the Act (the 'Chapter II Prohibition') which prohibits abusive conduct by dominant firms.

Market sharing and information exchange

The CMA is currently investigating a number of market sharing and information exchange arrangements in the sector. For example, the CMA has issued a statement of objections alleging that two suppliers of Nitrofurantoin tablets (case 50511-1), AMCo and Morningside, and a wholesaler, Alliance Healthcare, entered into arrangements under which Alliance Healthcare would buy equal volumes of the drug from each of the two suppliers so that they would not compete. The CMA also alleges that the suppliers also committed to exclusively supply the drug to Alliance Healthcare and shared competitively sensitive pricing information with the aim of reducing competition between them. The CMA’s final decision is expected in Q4 of this year.

The CMA has also issued a statement of objections and provisionally found that Alliance Pharmaceuticals, Focus, Lexon and Medreich agreed not to compete for the supply of prescription-only prochlorperazine tablets (case 50511-2), which are used to treat nausea and dizziness. The CMA provisionally found that Lexon and Medreich were paid a share of the profits earned by Focus on the supply of the Alliance Pharmaceuticals product. The CMA’s decision is expected in Q3 of this year.

In March 2020, the CMA fined King and Accord-UK (which took control of Auden Mckenzie) £75,573 and £1,882,238 respectively for entering into market sharing arrangements in relation to the supply of nortriptyline tablets. The parties agreed to make a £1 million payment to the NHS by way of compensation. The CMA also fined King (£75,573), Alissa (£174,912) and Lexon (£1,220,383) for exchanging commercially sensitive information in relation to the supply of the tablets. King and Alissa received reduced fines as they admitted to exchanging commercially sensitive information. In addition, the CMA secured a director disqualification undertaking from one of the directors of King who has been disqualified from acting as a director for 7 years. 

Excessive pricing

The CMA’s investigations in the sector have historically been focused on excessive pricing by dominant firms, particularly where it relates to the prices charged by manufacturers for drugs supplied to the NHS and those prices exert a material and detrimental effect on the NHS as the ultimate customer of those drugs.  The CMA has a number of open investigations in the pharmaceutical sector relating to excessive pricing under the Chapter II Prohibition. For example, the CMA is currently investigating Actavis for allegedly charging excessive and unfair prices in relation to the supply of hydrocortisone tablets (case 50277-1) in the UK.

The CMA is also investigating Advanz Pharma for allegedly charging excessive and unfair pricing in relation to liothyronine tablets. In its supplementary statement of objections, the CMA stated that the price paid by the NHS for liothyronine tablets rose from £15.15 to £258.19 (an increase of 1,605%) from January 2009 to the end of July 2017. During that period, the CMA considers that Advanz Pharma was the only supplier of liothyronine tablets in the UK.

Pfizer/ Flynn Pharma appeal

In addition to the current CMA investigations, on 10 March 2020, the Court of Appeal issued its highly anticipated judgment, which answered some key questions on the application of the test for excessive pricing. The judgment relates to an appeal by the CMA against the Competition Appeal Tribunal’s (“CAT”) judgment regarding the CMA’s decision to fine Pfizer, and its distributor Flynn Pharma, for abuse of dominance by imposing excessive prices for Pfizer’s anti-epilepsy drug in 2016. When Pfizer and Flynn Pharma appealed the decision to the CAT, the CAT upheld the CMA’s findings that Pfizer and Flynn Pharma held dominant positions in their respective markets. However, it set aside the CMA’s finding of abuse on the basis that the CMA had not applied the test for excessive pricing set out in the United Brands [1978] case correctly (we published an article on the CAT’s decision here). The United Brands case defined an excessive price as a price that has no reasonable relation to the economic value of the product supplied, and is determined by establishing whether:

a) the difference between costs actually incurred and the price actually charged is excessive (Limb 1); and if so

b) a price has been imposed which is either unfair in itself or when compared to competing products (Limb 2).

The Court of Appeal answered the following key questions in relation to the application of the test for excessive pricing:  

  • Are the two alternative tests in Limb 2 ('in itself' or 'when compared to competing products') self-contained true alternatives? – The Court of Appeal held that the tests were alternatives; however, the CMA is required to give some consideration to prima facie valid comparators advanced evidentially by the undertakings, whether or not it chooses to proceed under the 'in itself' alternative.      
  • Is the CMA required to use a hypothetical benchmark price or range of prices (beyond the cost-plus calculation) as part of its evaluation of whether an actual price is excessive? – The Court of Appeal held that whilst, by the nature of the abuse there needs to be a benchmark, the choice of benchmark is for the CMA to make and can be based upon the costs of the undertaking being investigated or it can be based on comparables. It held that the CMA did not have to establish a benchmark price or a range of prices, beyond a cost plus calculation, in order to determine whether the prices charged by Pfizer and Flynn were excessive.        
  • Does the CMA have to consider any comparators raised by the undertaking as part of its defence? – The Court of Appeal held that there is an obligation on the CMA to properly and fairly evaluate comparator evidence adduced by the undertakings as part of their defences. It held that the CMA has a margin of manoeuvre (or appreciation/discretion) as to the methods and evidence that it resorts to in order to prove an abuse of unfair pricing.
  • What is the meaning and effect of the expression 'economic value'? – The Court of Appeal held that the economic value of a good or service is what a consumer is willing to pay for it, but this cannot serve as an adequate definition in an abuse case otherwise true value would be defined as anything that an exploitative and abusive dominant undertaking could get away with. It held that the CMA needs to factor in and evaluate economic value in its analysis; however, it is up to the CMA to consider where in the analysis this occurs.

 

The case has been remitted back to the CMA to reconsider the issue of abuse. It is also worth noting that Flynn Pharma also appealed the CAT’s decision as it was concerned that, upon remittal, the CMA would treat findings by the CAT as definitive and binding which would prevent it from re-arguing these points. However, given that the CAT had remitted the entire issue of abuse to the CMA, the CAT’s findings on abuse would not be binding. It is highly likely that the Court of Appeal’s judgment will affect how the test is applied in the ongoing CMA excessive pricing investigations in the pharmaceutical sector and beyond.  

Pay for delay

The CMA also has several investigations into suspected anti-competitive agreements under the Chapter I Prohibition, including so called ‘pay for delay’ arrangements, which have been of particular interest to competition authorities in recent years. In such arrangements, the incumbent originator company (which holds the original product rights) pays the generic company to give up, or delay, its plans to enter the market. Whilst these arrangements may be advantageous for both the originator, which reaps extra profits from extended market exclusivity, and the generic company, which receives a windfall profit from the originator, they have been held to be anti-competitive on the basis that they are akin to market sharing arrangements and delay price competition at the expense of healthcare systems. In most of these cases, the CMA also considered that by entering into the arrangements, the originator abused its dominant position.

Pay for delay arrangements are currently being investigated by the CMA in the following cases: 

  • Hydrocortisone tablets (case 50277-2) - the CMA is progressing its investigation into an alleged agreement between Concordia and Actavis UK under which Actavis UK incentivised Concordia not to enter the market with its own competing version of hydrocortisone tablets. The CMA is also alleging that the agreement constitutes an abuse of dominance by Actavis UK.
  • Hydrocortisone tablets (case 50277-3) - the CMA has issued a statement of objections alleging that Auden Mckenzie and Waymade entered into arrangements under which Auden Mckenzie made monthly payments to Waymade not to enter the market for the supply of hydrocortisone tablets in the UK. The CMA also alleges that, in making the payments, Auden Mckenzie may have abused its dominant position as it was the sole supplier of hydrocortisone tablets between July 2011 and April 2015. During this period, the annual costs incurred by the NHS for the medicine increased from £1.7 million to £3.7 million. In February 2020, the CMA consolidated the 3 investigations in relation to the supply of hydrocortisone tablets in the UK due to the interrelationship of the facts and allegations in these cases.
  • Fludrocortisone acetate tablets (case 50455) – The CMA is investigating an agreement between Aspen, Amilco and Tiofarma, under which it alleges that Aspen agreed to pay Amilco and Tiofarma to stay out of the UK market for fludrocortisone acetate tablets. The CMA provisionally found that the agreement between the parties contributed to the price of fludrocortisone acetate tablets supplied to the NHS increasing by up to 1800%. Aspen and Tiofarma have admitted that they took part in the anti-competitive arrangements and agreed to pay maximum fines of £2.1 million and £186,000 respectively, subject to a formal final infringement decision. As part of its settlement, Aspen also committed to pay the NHS £8 million by way of compensation and to ensure that there will be at least two suppliers of fludrocortisone in the UK to help the NHS access more competitive prices in the future.

In addition to the CMA investigations, there have been some recent pay for delay cases:

Generic paroxetine delay appeals

The case relates to appeals to the CAT against a decision in 2016 by the CMA to fine GlaxoSmithKline, Alpharma Limited and Generics (UK) Limited for entering into pay for delay arrangements regarding an anti-depressant medicine, paroxetine. The appeals relate to, inter alia, the CMA’s findings that GSK had entered into a settlement agreement (regarding a patent dispute), under which it agreed to make payments and other value transfers worth over £50 million to suppliers of generic versions of paroxetine with the aim of delaying their entry into the market for paroxetine. However, before making a final judgment, the CAT referred a series of questions to the European Court of Justice (the “ECJ”) for a preliminary ruling. On 30 January 2020, the ECJ handed down its preliminary ruling which confirmed, inter alia, that:

  • a manufacturer of originator medicines (which holds a manufacturing process patent for an active ingredient that is in the public domain) and a manufacturer of generic medicines who had not yet entered the market were potential competitors; and
  • a settlement agreement between a manufacturer of originator medicines and a manufacturer of generic medicines under which the manufacturer of generic medicines undertakes not to enter the market or challenge a patent in return for transfers of value, has the object of restricting competition.

The case has now been remitted to the CAT for final judgment which should be issued in the coming months.

 

Servier damages actions

This case relates to damages claims being brought by the Secretary of State for Health and various NHS bodies against the French pharmaceutical group, Servier, for losses (totalling £260 million) relating to an alleged pay for delay arrangement regarding its perindopril medicine. These claims were brought after the European Commission opened an investigation into, inter alia, pay for delay arrangements entered into by Servier and various generic pharmaceutical companies and abusive conduct by Servier. In 2014, the Commission imposed fines totalling 427.7 million on Servier and the companies. However in 2018, the General Court partially annulled the Commission’s decision, in particular its finding that Servier had abused its dominant position due to errors in market definition. As such Servier sought to rely on the General Court’s decision on the issue of abuse of dominance to argue that the claimants’ failed to mitigate their losses in the High Court proceedings. However, the High Court and Court of Appeal held that the findings of fact were not binding on the preliminary issues in the High Court damages proceedings. Servier was granted permission to appeal to the Supreme Court so it is expected that the appeal will be heard in 2020.

Comment

With the number of ongoing investigations in the pharmaceutical sector, it is likely that the CMA will continue to focus on anti-competitive behaviour in the sector over the coming months. The CMA’s recently published annual plan for 2020/21 states that one of its priorities is to protect consumers, including to ensure that the ‘NHS does not pay significantly more than it should for essential medicines and treatments, and that consumers who depend upon these drugs and treatments do not lose out’.

In addition, in response to the current COVID-19 pandemic, on 20 March 2020 the CMA issued an open letter warning pharmaceutical companies against capitalising on the current crisis by charging unjustifiably high prices for essential goods or making misleading claims around their efficacy. The CMA is on high alert for anti-competitive conduct and has stated that it will use all of the powers available to it to ensure that markets continue to work well during the COVID-19 pandemic.

Accordingly, companies operating in the sector should remain cautious to ensure that their conduct and arrangements are not anti-competitive during the crisis and beyond, particularly given the risk of high fines and follow-on damages claims that may follow.

Where appropriate, pharmaceutical companies should seek legal advice and ensure that they have appropriate competition law compliance programmes in place. Burges Salmon advises on a range of competition law matters in the pharmaceutical and healthcare sector. If you have any questions in relation to the issues raised in this article, please contact Chris Worrall or your usual Burges Salmon contact.

Written by Sandra Mapara 

Key contact

Chris Worrall

Chris Worrall Partner

  • Head of Competition
  • Mergers and Acquisitions
  • Financial Services

Subscribe to news and insight

Burges Salmon careers

We work hard to make sure Burges Salmon is a great place to work.
Find out more