Abstract
Davies and Padilla examine the UK Competition and Markets Authority’s 2016 decision to penalise Pfizer and Flynn Pharma for excessive pricing of phenytoin, an off-patent anti-epilepsy drug. The authors describe the CMA’s assessment of the gap between prices and cost and note that this same evidence is used in assessment of each of market definition, dominance and abuse. The CMA properly considered other evidence too, but this could serve as a precedent for a fragile and unreliable approach to assessing excessive pricing. The CMA found the price excessive ‘in itself’, rather than placing weight on comparator prices: a more appropriate measure of value. The authority imposed a fine uplifted by 400% for ‘deterrence’, and the authors question how realistic such deterrence objectives are, for excessive pricing provisions.
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Notes
- 1.
Decision of the Competition and Market Authority. Unfair pricing in respect of the supply of phenytoin sodium capsules in the UK, Case CE/9742-13 (hereafter “Phenytoin”). In this chapter, we use only this document to assess the CMA’s approach; we have no independent sources of evidence on the facts of the case.
- 2.
Both Pfizer and Flynn appealed the CMA decision. At the time of writing, their appeals had been heard in the UK Competition Appeal Tribunal, but no decision had been issued.
- 3.
All opinions expressed here are those of the authors, who are both economists at Compass Lexecon, and do not necessarily represent the views of Compass Lexecon’s other experts or clients. The authors have advised and still advise pharmaceutical firms under investigation by the European Commission, the CMA and the competition authorities of other EU member states. Neither author has advised any party in the Phenytoin case. The authors would like to thank Gianmarco Calanchi for his help in researching and writing this piece.
- 4.
ECJ Judgement of 14 February 1978—Case 27/76: United Brands v Commission (“United Brands”)
- 5.
T-399/04—Scandlines Sverige AB v Commission (“Scandlines”)
- 6.
Case COMP A 36.568.D3 Scandlines Sverige AB v Port of Helsingborg.
- 7.
UK CAT Case 1046/2/4/04.
- 8.
Ironically, their modern equivalents obsess over manufacturing: regarding the service sector as being somehow less valuable than bashing metal.
- 9.
Indeed, the Soviet Union, in implementing a version of Marxism, managed to demonstrate this point on a large scale. Some factories in Eastern Europe were value-destroying: taking perfectly good iron, rubber and aluminium and then adding a lot of labour to turn them into cars no one wanted.
- 10.
The CMA emphasised that there was scope for parallel imports of Pfizer-manufactured phenytoin capsules within its product market definition. It also considered an ‘alternative’ market definition before the MHRA advice in November 2013, in which it dropped the requirement for competing products to be supplied by Pfizer.
- 11.
‘ATC 5’ under the Anatomical Therapeutic Chemical Classification System.
- 12.
US vs. E.I. du Pont: 351 US 377, 76 S.Ct. 994, 100 L.Ed.1264.
- 13.
This principle could be seen as being behind the Commission’s logic in Scandlines. The port of Helsingborg offered a product equivalent to a port with a locational advantage in a competitive market. A consumer choosing between Helsingborg and another, less convenient, port would be prepared to pay extra for Helsingborg.
- 14.
We note that these issues were taken up extensively in the parties’ appeal to the CAT, which had not issued its judgement at the time of writing.
- 15.
As a matter of policy or principle—not as a matter of law.
- 16.
C-280/08P Deutsche Telekom AG v Commission.
- 17.
T-398/07 Kingdom of Spain v Commission.
- 18.
Napp Pharmaceutical Holdings Limited and Subsidiaries v Director General of Fair Trading [2002] CompAR 13, para. 413.
- 19.
We do not discuss the CMA’s approach to assessing Flynn’s profitability extensively here, but it applied the same 6% noting that it believed this to be generous given the limited role that Flynn played in the supply chain.
- 20.
We note that AG Wahl has also criticised the notion of a price being unfair ‘in itself’, writing ‘However, the difficulties now sketched out would seem minor as compared to an assessment of whether a price is unfair in itself. If one would—as the Commission in Scandlines—take into account also other non-cost related factors, it would seem less likely that monopoly pricing or any price less than that would be considered excessive. Assuming that the primary objective of the pricing strategy of any firm (on a free market) is to extract the maximum from its customers, it is respectfully submitted that I fail to see that any price would be excessive in itself’ (Wahl 2007).
- 21.
Microsoft v Commission (‘Microsoft’), Case T-167/08, EU:T:2012:323, paragraphs 84–91.
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Davies, J., Padilla, J. (2018). Another Look at the Economics of the UK CMA’s Phenytoin Case. In: Katsoulacos, Y., Jenny, F. (eds) Excessive Pricing and Competition Law Enforcement. International Law and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-92831-9_3
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