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.