27 August 2015
Whilst the European Commission has shifted its focus to e-commerce and all things digital (see here, here, here and here), the CMA has put the spotlight back on pharma – this time, looking at pricing issues. On 6 August 2015, the CMA issued a statement of objections to Pfizer and Flynn Pharma alleging abuse of a dominant position in relation to the supply of the anti-epilepsy drug Epanutin. The drug started receiving media attention in late 2012, when Pfizer transferred the marketing of it to Flynn Pharma and the price increased from £0.66 per 28 capsules to £15.74. Epanutin was still to be made by Pfizer, in the same factory, but now had a new name with the active ingredient, ‘Phenytoin Sodium Flynn Hard Capsules’ (although the capsules themselves are still marked ‘Epanutin’).
Once Pfizer had transferred the marketing rights of Epanutin to Flynn Pharma, Epanutin was no longer a branded drug and outside price regulation. In theory, generic markets are competitive, so the prices of generics are not directly regulated (although special rules still apply to reimbursement). Yet three years after Epanutin’s move to the generic market, there’s still no direct competitor and the market has apparently failed to self-regulate. Add to that the fact Epanutin has a very narrow therapeutic index, and there is said to be a difficulty in switching to close substitutes. As a result, the Epanutin capsules reportedly still account for 85% of the market – and the CMA is investigating whether Pfizer/Flynn may have abused a possible dominant position.
The abuse under investigation consists in the charging of excessive and unfair prices – which is usually a difficult abuse to establish because of the challenges around establishing what a price “should” be in a free market economy.
So when does a price become “excessive”? This is an area with limited case law (but some theory), and generally we look first to bananas for guidance – but the bananas test is far from definitive and there are a number of ways to assess excessive prices (as the Court of Appeal pointed out when it went to the races and considered the right way to assess prices for media deals). A factor which is usually relevant is the profit margin, but – unlike for predatory (unfairly low) pricing - there’s no bright line test. And after all, the opportunity to make large profits is what attracts companies into business, a factor which is particularly relevant in industries built on complex inventions yet where the actual costs of production may not be that high. The OFT did record an early success in the pharma/excessive pricing arena, but that case focussed on price differentials between hospital and community segments of the market, and was also able to rely on data from certain sufficiently comparable third party products. The Court of Appeal’s wrestle with excessive pricing produced a decision that shows how difficult it is to estimate economic value – especially in industries where production costs are not a good guide. Here, with no obvious comparator and only a steep price increase to go on (which Flynn Pharma has stated was necessary in order to maintain the drug on the market), it’s difficult to judge whether the price of Epanutin is excessive and unfair in a competition law sense. Of course NHS funds are stretched and price increases are often unwelcome, but the CMA will need to be wary of a decision that may limit companies’ abilities to make profits.
Finding the balance between prohibiting excessive prices and sufficiently rewarding innovation is a tricky area that is usually avoided by regulators. In the end, we hope any decision manages the complexities in a way that gives those manufacturing generic drugs some clarity on pricing in the UK market and when risks may arise.
18 August 2015
Interim mandatory relief to compel a company to continue doing something it wanted to stop doing is one of the more draconian remedies in the legal arsenal. Yet the last few years have seen enough such cases in the competition law context to suggest that it is a real weapon for claimants and a real risk for dominant companies. Examples in the UK alone include Barclays Bank, which was compelled to keep providing banking services and O2 which was required earlier this month to maintain SIM card services to a downstream user of those services, pending a full trial. The pharma sector in the UK has also seen its fair share of cases in which such relief was sought. The majority of those have been refused (notably in Chemistree v. Abbvie, upheld by the Court of Appeal - see here for our post on the first instance decision), although in one case (Intecare v. Aventis, 2009, not reported) a short-term obligation to continue to supply pending full hearing of the interim relief request was enforced. In the US, Actavis has also found itself on the receiving end of an obligation to continue to supply, pending a full court investigation of whether it had breached s. 2 of the Sherman Act (the US equivalent of Article 102 TFEU). Earlier this month, the Court of Appeals for the 2nd Circuit rejected a request to reconsider relief confirmed by the same court in May.
The issue arose from the decision taken by Actavis, the manufacturer of Alzheimer’s treatment Namenda, to switch patients from an immediate release (IR) version of the product onto a sustained release version (Namenda XR). Switching patients to the new XR product entailed a change to dosage regimens, from two tablets a day down to one. According to the case report, Actavis planned to (largely) withdraw the IR product in advance of patent expiry and thus to migrate patients, in the period immediately before patent expiry, into the new XR product – which enjoyed patent protection until 2029.
This is a type of life cycle management strategy which the competition authorities sometimes refer to as 'product-hopping'. It is not the first such case – in the EU, one of the abuses identified by the Commission in its AstraZeneca decision (later upheld by the CJEU) involved the withdrawal of a capsule form of a dominant product, in favour of a new tablet formulation. The facts in this case are somewhat closer to the UK Reckitt Benckiser decision, another abuse of dominance case, than to AstraZeneca. Unlike in AstraZeneca, there was no regulatory impediment preventing generic Namenda IR products from coming to market. Rather, there was a practical difficulty – once the IR product was withdrawn, there would be minimal prescriptions for the twice-daily product and thus (according to the interim assessment) very little generic substitution. The court determined, on an interim basis, that there were no substitutes for Namenda IR other than the XR version and that patients were very unlikely to go back to IR once they had been moved onto XR - a practice known as "reverse-commuting". This might be thought to be an acknowledgement of the real benefits offered by the new product, but the issue was addressed purely as one of practicality (requirement of a new prescription, acclimatising vulnerable patients to the new dosage regimen, etc).
The court acknowledged that neither the introduction of a new, arguably superior, product nor the withdrawal of an old product is anti-competitive in itself. Concerns arose because both strategies were carried out in combination, with a “coercive” effect upon customers/prescribers, who had no option other than to switch to the new product. In the particular context of the pharma sector, and given the impact of Actavis’s IP protection, the Court decided not to allow Actavis to implement its “hard switch”. Instead, the relief granted means that it has been left to the market to choose whether to favour the improved release profile of the XR version, or to take advantage of the cost-savings generated by the generic products. The grant of mandatory interim relief is often the end of the story, but perhaps Actavis will decide to take up the fight for its “right to product-hop” at a full trial.
6 August 2015
A perhaps under-publicised resource on DG Comp’s website are its periodic Competition Policy Newsletters and Competition Merger Briefs, which discuss notable legal developments (from the Commission’s perspective) over the preceding period. I happened across one such without entirely meaning to (only a competition lawyer could say such a thing...) an evening or two ago, which discusses “lessons learned” from last year’s Facebook/WhatsApp merger clearance. That was obviously an important decision, both in the sense that the Commission took on a merger which fell below the usual “bright line” jurisdictional thresholds, and in which it had to grapple with new business models set in a multi-sided market context, characterised by pervasive network effects. While the competitive importance of ‘big data’ was clear from the merger decision itself, the potential significance of such matters as privacy as a parameter of competition were perhaps less clearly enunciated. The Commission’s Policy Newsletter notes that, while the CJEU has held that personal data issues do not fall to be considered as matters of competition law (thanks to the Asnef-Equifax ruling), issues such as data privacy, as well as online security, may increasingly become a parameter of competition in the digital world. Merger analysis, which involves an element of crystal-ball gazing at the best of times, is obviously a particularly challenging area for the competition authorities. The recent report prepared at the behest of the European Parliament on ‘Challenges for Competition Policy in a Digital Economy’ raises the bar by speculating as to the dangers posed by “pre-emptive” merger activity in which an incumbent aims to “prevent a (potential) competitor from disrupting [its] business model by acquiring the company”, while also noting the obviously high risks of false positives in any such analysis. In fact, the EP report concludes that “in digital markets, the traditional step-by-step analytical approach [(1) market definition; (2) analysis of market power; (3) competitive effects] does not work because of strong dynamic feedback effects running from firm behaviour to market structure”. On the specific question of the impact of data on mergers, the report speculates that amendments to DP law may be in order, to mitigate potential future competition problems. For example, a consumer right to data portability could be introduced to increase switching between platforms and, potentially “multi-homing” (using multiple platforms).
Such conundrums are not only relevant to merger analysis, but may also play a role in future abuse of dominance cases. It is to be hoped that the competition authorities will not resort to a more static – and thus unrealistic – market analysis when looking at past or continuing alleged abuses...