High Court rejects application to discharge CMA search warrant

In its judgment yesterday, the High Court rejected an application by Concordia to have a CMA search warrant discharged in relation to two specific drugs (Carbimazole and Hydrocortisone).

Background

The CMA was granted warrants under section 28(1)(b) of the Competition Act 1998 by Mann J on 5 October 2017 following a without notice and private application.  The warrant applied to documents relating to an ongoing CMA investigation into alleged anti-competitive behaviour in respect of a number of pharmaceutical drugs.  The legislation itself provides that the CMA should be granted warrants where it suspects that relevant material might be otherwise concealed or destroyed.  Unusually, the CMA was seeking a warrant despite the fact that Concordia had been subject to, and was cooperating in, an ongoing investigation in respect of both Carbimazole and Hydrocortisone for some 18 months as at the date of the warrant and that Concordia had responded to numerous section 26 notices during this time.  When granting the warrant, Mann J stated that he was satisfied that the application was focussed on “different types of abuse”.  The fact that Concordia would have been on notice from the first formal section 26 request and therefore had already had ample time to destroy or conceal evidence was not sufficient to conclude that no such documents existed on Concordia’s premises.

The warrants themselves were executed on 10 October 2017 and Concordia applied to have the warrant discharged in respect of Carbimazole and Hydrocortisone on the same day.  The reasons given were that there could be no basis for the CMA to conclude that there was a risk that relevant documents would be concealed or destroyed as Concordia had been co-operating fully with the CMA in its ongoing investigation, a fact that had not been raised before Mann J.  Further, the CMA had sought to widen the investigation by suggesting that it was investigating other potential abuses, whereas in fact the CMA had only ever been investigating one particular alleged abuse (i.e. market sharing).

In the interim, the Court of Appeal had given its judgment that in hearing the main application to vary, the High Court must be able to review all relevant materials including any that are subject to public interest immunity. The Court of Appeal also stated that the appropriate time for the court to form a definitive view on what material is subject to public interest immunity (and therefore should be withheld from Concordia) is when the application to vary is made.  On 12 December 2018, having heard arguments from the CMA in a closed hearing, the High Court held that the majority of the CMA’s requests for public immunity interest redactions were properly made and could not (consistent with the Court of Appeal’s view) be disclosed to Concordia, whether into a confidentiality ring or otherwise.

The Judgment 

Finding that Concordia’s application must fail, Marcus Smith J stated that this was primarily as a result of reviewing the material that was properly protected by public interest immunity (and which therefore had not been made available to Concordia).  This material made clear that the focus of the CMA’s ongoing investigation had shifted and that the scope of the document retrieval methodology was no longer appropriate in view of the type of documents and the range of custodians at issue.  In particular, the CMA had taken the view that whilst it was co-operating, Concordia’s response was incomplete and that there remained relevant material within Concordia that would not be caught by the proposed methodology.

Turning to the question of whether the CMA was indeed investigating a different abuse to that it had been following in the course of the ongoing investigation, Marcus Smith J stated his belief that Mann J was not using the term “in a technical way”.  Rather, the term was used to describe the reasonable suspicion raised by the CMA that Concordia may have deliberately framed its search methodology with a view to ensuring that relevant materials were omitted.  If that were the case, then it was reasonable for the CMA to also conclude that a further, targeted section 26 notice might well lead to concealment or destruction of relevant material.

Comment

It remains to be seen whether the CMA will seek to make more use of its section 28 powers to investigate under a warrant without notice. Historically, the CMA has preferred either to proceed under section 26 (on notice information requests) or by using its section 27 powers which enables the CMA to conduct unannounced visits without a warrant. The main practical difference for a company facing a section 28 investigation rather than a section 27 is that in the former the CMA has the power to conduct its search itself, whereas under section 27 the CMA must ask for relevant information to be brought to it.  It is certainly the case that the facts were unusual, particularly given that the decision to seek a warrant was taken despite the ongoing investigation and the fact that Concordia had been co-operating.  It also remains to be seen how the CMA will deal with its reasonable suspicion that Concordia might continue to conceal or destroy relevant materials in the context of any eventual infringement decision. 

Partial annulment of Servier decision by the General Court – some good news for pharma innovators at last

The General Court has today handed down its judgment in the long-running Servier patent settlement case.  

It remains a rare event that the European Courts annul Commission decisions under Article 101 and, in particular, Article 102.  In this case, the General Court has partially annulled the 900 page decision.  In doing so, it has – subject to the outcome of further appeals – considerably reduced the range of competition law risks facing pharmaceutical companies.

Of particular note for innovators is the complete annulment of the fine for abuse of dominance.  The General Court has found that the Commission has failed to substantiate the alleged relevant market, and thus wrongly found that Servier held a dominant position in the EU.  

In the Decision, the Commission had held that perindopril, a treatment for hypertension, was a relevant market in itself.  This was despite it being one of a large class of drugs (‘ACE inhibitors’) with an essentially identical mode of action, and in relation to which clinical guidance existed which treated the products as substitutable.  The General Court has held that the Commission was wrong to rely on Servier’s promotional materials to claim that differences existed between the different members of the class of drugs, under-estimated the amount of switching which took place between different ACE inhibitors (in some cases driven by cost considerations on the part of organisations such as Clinical Commissioning Groups in the UK) and attributed too much importance to price in its analysis.  In its decision, the Commission had carried out a so-called ‘natural events’ analysis, which found that the only significant impact on sales volumes was sustained when perindopril generics entered the market.  The General Court has held that this paid insufficient attention to clinical decision-making, something the Commission had explicitly ruled out when considering what was relevant for market definition.

Although the particular market definition in this case is of limited relevance to third parties, the Commission’s failure to demonstrate that perindopril competed only with generics of the same drug has significantly wider implications for competition authorities’ ability to bring future abuse of dominance cases which rely on artificial differentiations between drugs with an equivalent mode of action.  Subject to the outcome of any appeal by the Commission to the Court of Justice, the position should now revert back to that established in AstraZeneca, which focuses on prescribers’ considerations as to the different therapeutic uses of the different drugs.  While a first in class product may still give rise to a dominant position in a period before further similar products come to market, a later drug is likely sit within the same relevant market, and will therefore be less likely to gain a dominant position (subject to market share growth, and specific factors which may indicate that a separate market in fact exists in a given case).  

As well as annulling the Article 102 portion of the case in its entirety, the General Court has also annulled the fine in relation to one of the anti-competitive agreements identified by the Commission, which was alleged to consist of a withdrawal from litigation in the UK in return for the grant of a licence in another Member State.  This annulment will also be welcome news to the pharmaceutical industry, as it may permit greater flexibility for companies wishing to enter into licensing agreements in tandem with settlements.  Provided any licensing agreement remains an arm’s length arrangement, at commercial rates, the risk that this will be categorised as an ‘inducement’ to settle the litigation now appears lower.

We conclude with a welcome recognition from the General Court of the value of patent protection and of patent settlements: “…intellectual property rights are protected by the Charter of Fundamental Rights, to which the Treaty of Lisbon has conferred the same legal value as the Treaties. …As regards patents, … when granted by a public authority, a patent is presumed to be valid and an undertaking’s ownership of that right is presumed to be lawful. The General Court emphasises, lastly, the importance of settlement agreements, since the parties to a dispute should be authorised, indeed encouraged, to conclude settlement agreements rather than pursuing litigation. The General Court concludes that the adoption of settlement agreements in the field of patents is not necessarily contrary to competition law.

Case T 691/14, judgment of 12 December 2018, press release here, full judgment (currently available only in French) here.

CLIP of the month: What is the best response to higher prices in the pharma sector?

Pricing issues in the pharmaceutical industry continue to keep European competition authorities busy. From the UK excessive pricing case involving Pfizer and Flynn (which has been remitted to the CMA following appeal – see here and here), and the Italian Aspen case (see here and here), to the European Commission’s continuing Aspen investigation (see here). Indeed, excessive pricing in the pharma sector was one of the topics discussed last week at the 130th Meeting of the Competition Committee of the OECD. The briefing paper for that session is our CLIP of the month.

The OECD paper provides a useful overview of recent competition law enforcement relating to excessive pricing in the pharma market, noting that such cases generally meet the stringent requirements developed in academic literature for the bringing of such cases: the presence of significant market power and high and durable barriers to entry, in scenarios where intervention will not adversely affect innovation, and where alternative regulatory intervention is not possible/inappropriate. In particular, the paper notes that each of the recent cases in Europe relates to:

  • medicines that have long been off-patent meaning that there were not R&D and investment recoupment justifications for high prices, nor concerns with interfering with innovation;
  • medicines which are essential to patients, and for which there was no prospect of timely market entry of alternative products (either because of supply constraints, the regulatory framework, or the limited size of the market); and
  • price increases which were sudden and significant, in respect of products that had long been in the market.

The OECD paper also notes that regulatory intervention in those cases was perceived to be unable to provide an appropriate, or at least timely, response to the price increase. Indeed, in light of the specific market and regulatory conditions, the stringent requirements for excessive pricing cases are more likely to be satisfied in the pharma sector. However, the OECD paper recognises that such cases are unavoidably fact-specific, operate ex post, are subject to high error risks and costs, and rarely set out bright-line guidance on how to set accurate prices. It therefore suggests that competition authorities should consider deploying other tools at their disposal including market studies, regulation, and joint initiatives with sectoral regulators. 

This is not the first we have seen of calls for broader methods for dealing with higher prices in the pharma market. Last year we reported on a recommendation by the Dutch Council for Public Health and Society for the government to use compulsory licences when a medicine is priced too high, or above a “socially acceptable price” (see here). However, there have not yet been any reports on the Dutch government’s response to that recommendation. 

In the UK at least, it seems that the CMA will not be abandoning its traditional competition tools for dealing with excessive pricing. In its contribution to the OECD meeting it states that new specific regulatory regimes are not always preferable to antitrust enforcement, as legislation takes time to implement and is generally fails to address the historic harm caused by higher prices. The CMA also emphasises that excessive pricing cases are important as a matter of policy, given that “[e]nsuring consumers are not exploited by unfairly high prices is at the heart of antitrust enforcement”. 

CLIP of the month: Does orphan drug pricing pose an antitrust problem?

In the USA, a rare or orphan disease is defined as affecting fewer than 200,000 people and more than 7,000 rare diseases have been identified to date. The EU adopts a similar definition and identifies the existence of a similar number of rare diseases (see here). 

Pharmaceutical companies are often reluctant to fund R&D for orphan diseases. As they affect so few people, there is no guarantee that successfully developed orphan drugs will be profitable. The Pharmaceutical Research and Manufacturers of America estimates that 95% of rare diseases do not have approved treatments (see here).

Both the US and EU have therefore sought to incentivise companies to develop orphan drugs. For example, in the US, the Orphan Drugs Act 1983 provides tax credits for clinical research into rare diseases, and the EU’s Horizon 2020 scheme provides funding of around €900 million for collaborative projects related to rare diseases.

Although more than 600 orphan drugs and biological products have now been approved in the US, they are still scarce, and often come with a high price attached. Given the relative lack of competition in this area, it’s no surprise that antitrust concerns have been raised about the potential for excessive prices to be charged.

This month’s CLIP examines antitrust enforcement actions involving orphan drugs in the US. It concludes that there has not been a special focus on orphan drug pricing compared to any other drugs. 

From the European perspective, we’ve noted the attempt by the Dutch foundation for ‘pharmaceutical accountability’ to secure an investigation into orphan drug pricing in the Netherlands (here).  As long ago as 2003, the OFT (as it then was) issued an abuse of dominance decision against Genzyme, in relation to a margin squeeze involving a treatment for an orphan indication. More recently, the question of excessive pricing in the pharmaceutical sector has been a focus across Europe.  The UK’s CMA and CAT looked at it in Pfizer/Flynn (see here), and the European Commission is investigating Aspen Pharma for its pricing practices for cancer medicines (here). 

In this current climate, whether it’s an orphan drug or any other potentially dominant product, pharmaceutical companies need to be prepared to justify their prices in case one of the competition regulators does come calling. 

Request to re-open Glaxo ‘dual pricing’ case rejected by General Court: The end of the road for challenges to dual pricing?

Entering into agreements that erect barriers to parallel exports between EU markets is generally a high-risk endeavour, which is likely to attract the attention of the competition authorities.  Nevertheless, in the pharmaceutical industry the financial stakes can be high – medicines are often sold at very different prices in different Member States, due to the different applicable health policies.  

Relatively low mandated prices in Spain have led a number of companies to devise sales structures which reduced the flow of parallel exports out of the country – in particular, through the use of so-called dual pricing schemes.  Under such schemes, prices charged to wholesalers differ depending on whether the medicines were resold in Spain or exported to other Member States; in some cases this is achieved by selling all products at the export price, and granting rebates to wholesalers where the products do not in fact leave the country.  While not explicitly prohibiting parallel trade, such practices are likely to reduce the financial incentive for wholesalers to export.

GSK introduced such a scheme in 1998, and applied to the European Commission for an individual exemption (under a procedure which has since been repealed).  This application, and a subsequent complaint by the industry body for parallel traders (the EAEPC), has led to what must be one of the longest-running competition cases.  Initially found by the Commission to be restrictive of competition by object, GSK succeeded before the European Courts in showing that the Commission had given insufficient consideration to whether the practice warranted an exemption.  The case was therefore remitted to the Commission for further consideration.  In January 2010, GSK formally withdrew its original application for an individual exemption.  However, that was not the end of the matter, as the EAEPC’s complaint remained live. By this time, however, GSK had changed its practices, so the Commission rejected the complaint and closed its file.  EAEPC persisted, and lodged an appeal.

The General Court Judgment

It is this appeal that has given rise to the most recent development. On 26 September 2018, the General Court (GC) approved the Commission’s stance, effectively putting an end to this case (appeals to the Court of Justice are rare in rejection cases). 
 
The GC judgment demonstrates that while there was still some sympathy for EAEPC’s appeal, the Court was unable to identify any continued Union interest. The Court agreed with the applicant that the previous judgments have generated legal interest in relation to the “analysis of … dual-pricing systems in the light of Article 101 TFEU”.  However, that was not sufficient reason to require the Commission to continue examining the applicant’s complaint. 

The Court held that a “specific and genuine interest” is required to justify use of the Commission resources. Likewise, EAEPC’s contention that GSK’s practices and the Commission’s “inaction” in the late 1990s led to the adoption of dual pricing by other manufacturers such as Pfizer, Janssen-Cilag and Lilly was not accepted as good reason for requiring the Commission to act now. 

The future of dual pricing schemes? 

The relevance of the GC decision for other dual pricing schemes should not be overstated: the rejection of EAEPC’s complaint turns on its particular facts.  Indeed, the fate of another Commission investigation into Spanish dual pricing practices more generally (referred to in the Commission rejection decision and the GC judgment) is unclear (the Commission website shows no record for the case number cited by the GC).  

However, developments have also continued in Spain.  Within the past six months, the Spanish Supreme Court has rejected an appeal by the EAEPC against a lower court rejection of a complaint against Janssen-Cilag’s drug supply scheme, finding that the scheme did not breach competition law.  More recently, the Spanish competition authority closed an investigation into alleged collusion between pharmaceutical manufacturers in relation to the introduction of such schemes in the mid-2000s.  The authority found that the companies’ schemes were the result of changes in pharmaceutical legislation, not of anti-competitive agreements.

Despite the successes for the originator companies, it remains the case that agreements which seek to limit parallel trade within the EU are high risk of being found to restrict competition by object and, as the Glaxo Greece case has shown (see our recent report, here), unilateral conduct may also be caught.  

Of course, from a UK perspective, a no-deal Brexit may make prohibiting parallel exports possible again, but it is unlikely to be possible under any likely successor to the Chequers proposal.  In any event, agreements affecting exports within the European Union will continue to be caught.

Competition law challenge to orphan drug prices in the Netherlands

Some months back, we reported on an initiative by the Dutch Council for Public Health and Society which considered measures for containing high drug prices.  Of particular note were the proposals for compulsory licensing, and the application of the new measures to orphan drugs as well as to more mainstream products (orphan drugs are those which are applicable to rare diseases affecting less than 0.05% of the population).  

Now a newly formed Dutch foundation for “pharmaceutical accountability” (the Stichting Farma ter Verantwoording, or SFV) has announced that it has presented a dossier to the Dutch competition authority requesting that it take action against Leadiant Pharmaceuticals in relation to the price of chenodeoxycholic acid (CDCA) which is used for a metabolic disease affecting around 60 people in the Netherlands (report in English here).  The focus of the complaint is on the difference between the current price of CDCA (€140 per capsule), and the price of the same drug which was formerly used in the treatment of gallstones (c. €0.28 per capsule).  According to the SFV’s report, the orphan designation was secured in Leadiant only  last year, following a two-year period when the drug was not on the market.  The orphan designation means that Leadiant will have market exclusivity for a 10-year period.  However, unlike some orphan drugs, CDCA was not a new product, but was used off-label for the disease in question for a number of years before withdrawal.  

This complaint highlights the competing policies of effective protection and incentivisation of drug development, including for small patient populations, and that of cost containment for health budgets.  Assuming the Dutch Competition Authority agrees to investigate, it will have to grapple with questions as to the appropriate return on an orphan product (bearing in mind the limited patient population which presumably means that fixed costs of producing the drug will have to be allocated at a much higher rate than for non-orphan drugs), and the question of whether the drug’s previous use for treatment of gallstones is comparable to its current use under the orphan designation.  There is no doubt that the prior off label use was more cost effective for treating Dutch patients, but on the other hand the orphan designation should assure the continued availability of the drug in circumstances where it was otherwise withdrawn from the market, and will have involved additional testing to ensure that appropriateness of the treatment.  

Whether these policy tensions are questions that are appropriately answered through the application of competition law is a wider question that will no doubt continue to stimulate discussion and dissent.

Concordia and the CMA – a drama in (at least) three parts

Last week, Concordia International released a management report in which it announced the names of six drugs currently under investigation by the Competition and Markets Authority (“CMA”).  This relates to an investigation into Concordia’s UK activities, which is the third launched by the CMA into Concordia’s business since April 2016, and forms part of a wider inquiry into the UK pharmaceutical sector. 

The investigation was launched in October 2017, and we now know that it involves the following products: 

  • Carbimazole, used to treat hyperthyroidism; 
  • Nitrofurantoin, an antibiotic;
  • Prochlorperazine, used to treat nausea and psychosis;
  • Dicycloverine, a gastrointestinal muscle spasm relaxant;
  • Trazodone, an antidepressant; and 
  • Nefopam, an analgesic. 
According to Concordia, the CMA has confirmed that it will be continuing its investigation into Nitrofurantoin and Prochlorperazine. It is currently assessing whether to continue its investigation into Trazodone, Nefopam and Dicycloverine. This investigation is still at an early stage, unlike a couple of others. 

The other current investigations involving Concordia are an abuse of dominance case about alleged excessive pricing of Concordia’s ‘essential’ thyroid drug, Liothyronine, and a case involving a possible ‘pay-for-delay’ agreement between Concordia and Actavis for hydrocortisone tablets (we previously discussed this here). Both cases have progressed to an advanced stage, with statements of objections having been issued by the CMA, but progress appears to have been delayed, perhaps because of the CAT’s June judgment in the Pfizer/Flynn case, which overturned the CMA’s controversial excessive pricing decision (covered here).

This latest announcement re-emphasises the CMA’s continued interest in the pharmaceutical sector and its eagerness to weed out anticompetitive practices in this industry, including the more novel, sector-specific forms of abuse and collusion such as ‘pay-for-delay’ strategies. It will be interesting to see whether the CMA follows a similar approach in these cases to that taken in other recent pharmaceutical cases, such as Pfizer/Flynn and the Paroxetine (GSK) case (discussed here). We will be keeping a close eye on any developments over the coming months…

Pharma stock management - nothing extraordinary in limiting parallel trade?

Pharmaceutical stock management – the brand-owner practice of limiting quantities sold to levels required for the local market in a bid to limit parallel exports – has been a feature of European markets for at least much of the past two decades. 

It was the 2004 Bayer (Adalat) decision of the Court of Justice, coupled with the continued supply obligations in Article 81 of Directive 2001/83 (as amended) which opened up a route for brand owners to effectively limit exports from lower price Member States without risking engaging the prohibition on anti-competitive agreements for limiting parallel trade.  That route essentially rested on unilateral conduct by the brand owner – but as such left open the risk of abuse of dominance rules applying.  As pharma markets are often narrowly drawn by competition regulators, this remained a significant concern.

It was another year before the first case raising the question of how Article 102 applied to stock management came before the Courts (Syfait, 2005).  That case was a referral to the CJEU from the Greek Competition Commission – but the request was stymied by a procedural point, and the Court declined to respond to the request for a preliminary ruling.  It was another few years before the same case came back before the CJEU.  This time the CJEU endorsed the benefits to consumers from parallel trade, and clarified that it may be an abuse of a dominant position for a pharmaceutical manufacturer to refuse to meet ‘ordinary orders’ from existing customers (Lelos, 2008).

Surprisingly, it took 10 years before the next development in the saga, when the Hellenic Competition Commission (“HCC”) found that GlaxoSmithKline (“GSK”) had abused a position of dominance in the market for migraine medicines in Greece by refusing to fulfil any orders in their entirety of Imigran and by refusing to meet ‘ordinary orders’ from wholesalers.  As a result, the HCC fined GSK a total of just over €4 million.  In reaching that decision, the HCC clarified that orders from wholesalers which were out of all proportion to a previous order history, could legitimately be refused as being of an ‘extraordinary’ character.  Assessing whether an order was ‘ordinary’ within the meaning set out in Lelos required a review against the annual size of previous orders and supplies per wholesaler, total national consumption per year and the pattern of previous business relations between the pharmaceutical manufacturer and the wholesaler in question.  Despite its findings on abuse, the HCC indicated that orders of significant quantities of products intended primarily for the parallel export market are likely to qualify as ‘extraordinary’, and rejected other parts of the complaints against GSK on that basis.

It seems that stock management issues in general may once again be an area of particular focus for regulators – it is interesting to note that in its case opening report initiating formal antitrust proceedings against Aspen Pharmacare, the Commission cites stock management alongside unfair and excessive prices.  Whatever the outcome of that case, it is clear that even a dominant firm can legitimately refuse orders that are ‘extraordinary’, but in doing so, the manufacturer must be able to justify this decision by reference to national market requirements and previous business relations with the wholesaler in question.

CAT judgment in Pfizer/Flynn: Was the CMA ‘unfair’ in its assessment of Pfizer and Flynn’s prices?

The principal issue is excessive pricing; … the reason for our conclusion is that the judge erred in holding that the economic value of the pre-race data was its competitive price based on cost +. This method of ascertaining the economic value of this product is too narrow in that it does not take account, or sufficient account, of the value of the pre-race data … and in that it ties the costs allowable in cost+ too closely to the costs of producing the pre-race data.

Thus concluded the Court of Appeal some 10 years ago in overturning a High Court judgment identifying an abuse of dominance through excessive pricing, in that case of pre-race data about British horse races.

The chequered history of excessive pricing cases has repeated itself in 2018, with the Competition Appeal Tribunal’s 7 June judgment in the appeals by Pfizer and Flynn of the CMA’s excessive pricing Decision in relation to phenytoin sodium capsules (we’ve previously covered this here, here, and here).   In a blow to the CMA’s ground-breaking case, the CAT has taken issue with the CMA’s analysis of abuse. As a result, it is considering whether to remit this part of the Decision (and consequential findings, such as the penalties imposed) back to the CMA, and essentially let the CMA try again.  

The CAT has succinctly summarised its main conclusions here.  The findings on market definition and dominance have been upheld, but the controversial findings on abuse have been set aside.  This post guides readers through the key points.

What was the CMA actually arguing?

In its Decision, the CMA sought to apply the Court of Justice’s United Brands ‘two-limb’ test for excessive and unfair pricing, and it was on this that the grounds of appeal focussed.  

During the appeal hearing, however, the CMA seemed to place greater emphasis on the comparison of prices before and after the Pfizer-Flynn agreement, perhaps in reliance on AG Wahl’s opinion in the AKKA/LAA case that competition authorities should have flexibility to determine their own framework for assessing prices.  While the CAT acknowledged that significant price increases over time may be a useful indicator of a potential competition problem, and a reason for starting an investigation, this “should not be confused with the test for unfair pricing itself” (439).  This therefore does not seem to be an easy route for the CMA to take on remittal.

The CAT’s analysis of the United Brands test

Taking the CAT’s approach to the two limbs of the United Brands test separately:  

(i) Whether the difference between the costs actually incurred and the price actually charged is excessive 

The CAT did not conclude that facts established by the CMA could not give rise to a finding of excessive prices.  Rather, it was the CMA’s narrow approach to the assessment of excessive pricing which could not support such a conclusion.  The CMA’s use of only a Cost Plus methodology resulted in a price that would have existed under conditions of “idealised competition”, rather than in the ‘real world’.  If the Cost Plus figure was not the normal competitive price, then it was not the right price for the purposes of the United Brands test.  Instead, the CAT should have looked at wider evidence to establish a benchmark price (or range) based on circumstances of “normal and sufficiently effective” competition.  If the Decision is remitted back to the CMA, it may use Cost Plus as part of the methodology, but it will also need to put those theoretical figures in their full market and commercial context.   

As to the benchmark figures themselves, which used the PPRS derived 6% return on sales, the CAT seemed to accept the PPRS was a potentially relevant indicator, but found the CMA placed too much reliance on it – particularly as Department of Health evidence expressed doubts as to its relevance.  The CAT cautioned that the PPRS was intended to apply in different circumstances to those in this case.  

(ii) Whether a price has been imposed which is either unfair in itself or when compared to competing products

The second limb of the United Brands test appears to give regulators two options: the issue here was whether these were genuine alternatives (as the CMA had only considered the first, ‘unfair in itself’), or whether the CMA should have considered both.  The CAT found that, although the CMA did not need to succeed under both to show a price was unfair, it did need to consider whether the alternative would show a price is one that undermines the basis of a finding of unfairness, in particular where a party under investigation has raised the issue.  While the CAT does not refer to the recent Intel judgment of the CJEU, there is a flavour of its ruling here.  

The CMA had determined that there were no products which could provide a ‘meaningful comparison’, but the CAT found that the CMA’s argument to support this was at fault, and it should have considered the suitability of comparators in more depth.  In particular, tablets produced by Teva were around twice the price of the Pfizer-Flynn Capsules; but this price came from an agreement with the Department of Health which reflected the economic value of the Teva tablets.  Even though those tablets were accepted by the CAT to be outside the relevant market as defined, they appeared to be sufficiently comparable to be worthy of more in-depth consideration.  The contrast drawn between the narrow function of market definition and the wider consideration of competitive constraints relevant in considering abuse is an important and sensible contribution to Article 102 case law generally.

The CAT found that the question of the ‘economic value’ of the Pfizer-Flynn Capsules (which the CMA had considered separately) was best addressed in the context of the ‘Unfairness Limb’.   The CMA had found that the economic value did not exceed the Cost Plus price it had calculated, and considered that there were no non-cost factors which served to increase it.  However, the CAT expressed concern that the evident economic value derived from the benefit patients received had been rejected.  Although the CAT acknowledged that patients did only have limited choices, the CAT found that the CMA should still have attempted a qualitative assessment of this benefit.  Assigning a monetary value to this benefit and assessing by how much it should be reduced due to patients’ limited choices is likely to be difficult.    

Findings of abuse set aside

The CAT decided that further assessment of competitive conditions using information beyond the scope of the Decision would be required.  For that reason, the CAT could not make its own findings as to whether there was an abuse by either company.  Instead, it has provisionally proposed to remit the abuse section Decision back to the CMA, but will now fix a further hearing for the parties to address it on this point.  

Given the policy issues surrounding price increases in the pharmaceutical sector, remitting the Decision for more a comprehensive analysis with the benefit of further clarity in a novel area (from the CAT and the CJEU in AKKA/LAA) is probably the best outcome for all concerned – although the recent closure of the regulatory ‘loophole’ that allowed unregulated price-rises perhaps reduces the long-term benefit.  This ‘have another go’ approach was also the outcome in the CAT’s first hearing for a collective proceedings order – another novel area where policy objectives would have been frustrated by an outright refusal.    

There have been immediate knock-on effects: the CMA has indicated that other active investigations it has in the area may now be severely delayed.  The end of the CMA’s investigation into hydrocortisone seemed to be in sight, and it will be interesting to see how the CMA proceeds with that, as well as the Pfizer / Flynn case.  

The CAT’s difficulties in applying the United Brands test are also likely to be of interest to the Commission, given that it has opened an excessive pricing investigation (into Aspen Pharma) – its first of that type in the pharmaceutical industry.

But while the CMA will clearly have its work cut out (assuming the CAT goes ahead with the remittal), it should not be assumed that this judgment is the end of the story for excessive pricing cases in the UK.  

Depression delayed: CMA’s paroxetine pay-for-delay case heads to Luxembourg

On 8 March 2018, the Competition Appeal Tribunal (CAT) gave an initial judgment (see here) in the appeals brought by GlaxoSmithKline (GSK) and a number of generic manufacturers against the Competition and Markets Authority’s (CMA) 2016 Paroxetine decision (see here and here).   As explained further below, the CAT has (in a move which perhaps goes against the prevailing zeitgeist) not reached final conclusions on the appeals, but has rather referred a number of questions to the Court of Justice in Luxembourg.

Background

The infringements identified by the CMA in its Paroxetine decision arose out of three patent settlement agreements made in 2001 and 2002 between GSK and various generic manufacturers of paroxetine.  

Paroxetine is an anti-depressant (selective serotonin reuptake inhibitor “SSRI”), marketed by GSK under the brand name “Seroxat”, which during the infringement period was one of its highest selling products, accounting for £71.6 million (10% of revenue) in 2001.

The CMA’s investigation into paroxetine was the first UK case to grapple with the contentious area of patent settlement agreements which limit generic companies’ ability to bring their own product to market.  The investigation was formally launched by the OFT in 2011 on the basis of information obtained by the European Commission through its pharmaceutical sector inquiry (2009). 

Following a significant further period of investigation, the CMA in 2016 issued a decision fining GSK, Alpharma and Generics (UK) a total of £44.99 million for agreeing to delay the entry of generic paroxetine in breach of Chapter I and/or Article 101 TFEU.  GSK received the largest penalty, being fined £37,606,275 for its parallel infringement of the Chapter II prohibition:

  • The CMA found that between 2001 and 2004 GSK agreed to make payments and other value transfers of over £50 million to generic suppliers of paroxetine; this amounted to a restriction of competition by object and/or effect. 

  • The CMA also found that GSK’s conduct induced generic providers to delay their efforts to independently enter the UK paroxetine market, abusing its dominant position in breach of Chapter II of the Competition Act.

The CAT Judgment 

The essential element of the CAT’s March 2018 judgment is the reference of five issues to the CJEU for a preliminary ruling.  As things stand, the exact text of the questions has not been formulated (and will no doubt be the subject of fierce debate among the parties).  However, the issues referred will relate to the following areas: 

  1. Potential competition: whether the existence of an interim injunction against generic manufacturers was an insurmountable barrier for entering the market.

    The provisional view of the Tribunal was to find that it was not (since, for example, it could have been discharged). However, it decided to refer a question to the CJEU as the question was similar to one raised in Lundbeck’s appeal (see here). This reference raises issues not dissimilar to those at play in the recent Roche judgment of the CJEU, which considered whether potentially unlawful products could be viewed as potential competitors (see here).

  2. Restriction of competition by object: when the strength of a patent is uncertain, does a transfer of value from the originator to a generic of an amount substantially greater than avoided litigation costs, under a settlement agreement in which the generic company agrees not to enter the market with its generic product and not to challenge the originator’s patent, constitute a restriction by object?

    The CAT emphasised a number of points in connection with this question, including a notable recognition that (a) the uncertainty over patent strength means that a possible outcome of the litigation was that the generic challengers would be held to infringe a valid patent; and (b) an outcome of litigation which upheld the patent should not be viewed as a less competitive outcome than the situation where the patent was overturned.

    A second related question was also identified, which seeks to establish whether a settlement comprising a value transfer which also provides some benefits to consumers (in the form of limited supplies of authorised generic products) should also be viewed as restrictive by object. Again, the preliminary view of the Tribunal was that such limited competitive benefits are not sufficient to draw into question the overall categorisation of the agreement as a by object infringement. If that is correct, it is necessarily a conclusion which will have to be considered in detail for any specific patent settlement agreement, and suggests that a blanket ‘by object’ approach will not be warranted.

  3. Restrictions by effect: in order to show a restriction by effect is it necessary to establish that the counterfactual would have been more competitive? The Appellants argued that the CMA’s Decision did not sufficiently consider the potentially pro-competitive effects of GSK’s agreements with generic manufacturers, for example the savings to the NHS compared to the situation where no authorised generics were on the market.

    The CAT also started to grapple with an issue which has been underplayed in the European decisions to date, namely the relevance of the outcome of the underlying patent litigation. If one realistic outcome of that litigation was success for GSK, the approach proposed by the CMA would be to reduce the test for identifying effects to “the probability of a possibility”. On the other hand, the CAT did not seem to acknowledge the risk of creating a situation where an agreement is considered restrictive of competition by object yet does not possess the requisite degree of probability for an effects finding that is not made out. This is surely an issue that will have to be fully played out before this, and similar cases, are finally resolved. (Damages litigation in relation to patent settlement agreements is likely to bring this issue to the fore, even if the CJEU elects to side-step the question.)

  4. The correct approach to defining the relevant product market: is the relevant product market paroxetine or all SSRIs? While the Tribunal supported the CMA’s finding of dominance on the basis of a market limited to paroxetine, it criticised its reasoning. It considered the CMA to have taken an overly narrow approach to market definition, based on the impact of generic entry on the price of paroxetine - following the Commission’s ‘natural events’ approach used in its AstraZeneca Decision (2005) (see here). However, the CAT supported the view that from the time when there were potential generic entrants, the market was limited to paroxetine and its generics. It recognised that this preliminary view, which suggests a significant change in the relevant market over time (despite no suggestion that the view of prescribing professionals was subject to a similar change) was a departure from existing case law. In the authors’ view, this approach will lead to legal uncertainty and, more importantly, inappropriately substitutes an analysis based on perceived competitive constraints for an assessment based principally on objective demand factors. As the CAT itself notes, this approach would suggest successful drugs will almost always be found to constitute a distinct market at least from the time when generic entry becomes likely. As the Tribunal notes, this approach would amount to a material change to the “IP bargain” which “might adversely affect the economic purpose of patent legislation”.

    Nevertheless, in making the reference on this point, the CAT has flagged some significant issues which should weigh in the CJEU’s eventual analysis.

  5. Abuse: are potential benefits to the NHS relevant to the assessment of whether GSK had abused a dominant position by entering into the agreements?

    The final question on abuse is limited to an allusion back to the questions referred in relation to the object and effect of anti-competitive agreements. The central issue is again the question of whether the limited pro-competitive benefits derived from the presence of the generic companies as distributors of an authorised generic product are sufficient to undermine the main finding as anti-competitive effects.

Although the judgment is provisional in nature, there is much to absorb. We will report further when the agreed text of the questions to be referred has been published.