CAT upholds CMA excessive pricing decision in liothyronine tablets case

The UK Competition Appeal Tribunal has dismissed appeals against the CMA's finding of abuse of dominance relating to excessive pricing of liothyronine tablets. The judgment provides further detail on the application of the excessive pricing test, and follows the Court of Appeal's approach in CMA v Flynn Pharma (Phenytoin). In this blog post, we summarise the case and consider key practical implications.

Summary

On 8 August 2023, the UK Competition Appeal Tribunal (CAT) dismissed appeals brought by Advanz Pharma, Hg Capital and Cinven against a July 2021 decision of the Competition and Markets Authority (CMA) finding abuse of a dominant position in relation to the supply of liothyronine tablets. The CMA had imposed fines of over £101 million, of which Advanz Pharma was liable for £40.9 million, Hg Capital for £8.6 million and Cinven for £51.9 million (reflecting different periods of the infringement).

The appeal was closely connected to and follows the Court of Appeal's important March 2020 judgment in CMA v Flynn Pharma (Phenytoin) (see our previous blog post here). In that judgment, the Court reviewed the legal framework for excessive pricing (as set out by the European Court of Justice (ECJ) in United Brands and applied by subsequent European and domestic case law). It was issued in the course of the CMA's liothyronine investigation.

The CAT dismissed in their entirety the appellants' appeals on the substance, while reducing the penalty payable by Cinven to £37.1 million and Hg Capital to £6.2 million. The CAT affirmed that there is no single method or way in which an excessive pricing abuse might be established, and that competition authorities have a margin of manoeuvre in deciding which methodology to use and which evidence to rely on.

Further, although authorities are required to conduct a fair evaluation of competing evidence adduced by an undertaking, the CAT should interfere only if it concludes that the CMA's decision is wrong in a material respect.

As regards the CMA's application of the two-limb United Brands test for establishing excessive pricing, the CAT essentially found (i) that there were no material errors in the CMA's "cost plus" methodology for assessing whether the difference between the costs actually incurred and the price actually charged was excessive, and (ii) that the CMA's conclusion, after taking account of the comparators advanced by the appellants, that the excessive prices were both excessive and unfair in themselves was the right one.

Key practical implications

The key practical implications of the CAT's judgment are as follows:

• In a press release, the CMA welcomed the judgment, considering that it endorsed all the main elements of the CMA's decision. It also noted that the judgment paved the way for the National Health Service (NHS) to seek compensation. The outcome is likely to embolden the CMA in defending other pending appeals (in particular regarding the CMA's hydrocortisone tablets decision, and Flynn and Pfizer's appeals of the CMA's remitted phenytoin sodium capsules decision, both of which involve alleged unfair pricing).
• It remains the case that companies facing allegations of excessive or unfair pricing should seek to adduce as much evidence as possible as to why their pricing is not unfair, both "in itself" and by reference to relevant competing products.
• Companies enjoying a dominant position should be also mindful in their creation of internal documents (including those produced for them by consultants). The CAT's judgment refers to various damaging documents that evidenced Advanz's pricing strategy in a context of high barriers to entry, limited competition and its significant market power.
• As discussed in our previous blog posts, the CMA has made it clear that it will not hesitate to take action against collusive or abusive conduct at the expense of the NHS. The CMA's Annual Plan for 2023/24 also indicates that it will continue to defend appeals against its decisions in relation to anticompetitive practices (including excessive prices) in the supply of important medicines to the NHS. This focus on the pharma sector is likely to continue.

Background

In July 2021 the CMA issued an infringement decision to Advanz Pharma and Hg Capital and Cinven (the former parent companies of Advanz Pharma). It found that the companies constituted a single undertaking (Advanz) which had breached the Chapter II provision of the Competition Act 1998 by abusing a dominant position between 2009 and 2017 as a result of charging excessive and unfair prices for supplying 20mcg liothyronine tablets. Liothyronine is used to treat thyroid hormone deficiency.

Advanz at the time had been the only supplier of these tablets in the UK, and had increased the price from £4.05 per pack in 2007 to £247.87 by July 2017. The cost to the NHS had risen from around £600,000 a year before 2007 to over £30 million a year by 2016, despite volumes staying largely stable. The CMA found that Advanz had carried out a conscious strategy to exploit the absence of effective regulatory and competitive constraints on its market power, and that this had a significant impact on the NHS and patients.

The legal framework for determining excessive pricing was first addressed in the seminal ECJ case United Brands v Commission, and was recently reviewed by the Court of Appeal in CMA v Flynn Pharma (Phenytoin). Based on this framework, the questions to be determined are whether:

• The difference between the costs actually incurred and the price actually charged is excessive (the Excessive Limb);
• If so, whether a price has been imposed which is either unfair in itself or when compared to competing products (the Unfairness Limb).

In assessing the excessive limb of the United Brands test), the CMA used a cost plus assessment whereby it split the total costs involved in the supply of liothyronine tablets into direct costs, indirect costs and a reasonable rate of return, and compared Advanz's selling price with these costs (the "Cost Plus" assessment). The CMA found that, even applying a variety of adjustments, the differential ranged from above 300% in 2009 to almost 2,000% by 2017. The CMA concluded that Advanz's prices during the infringement period were excessive.

The CMA also concluded that the excessive prices were unfair in themselves (i.e. the second limb of the United Brands test). There were no demand-side factors which would materially add to the economic value of the liothyronine tablets, the price was unrelated to their economic value and the absence of constraints enabled Advanz to sustain prices that bore no reasonable relation to the economic value of the tablets.

Advanz Pharma, Hg and Cinven all brought appeals before the CAT challenging the CMA's infringement findings, relating variously to alleged errors by the CMA regarding its findings of dominance and abuse, the Cost Plus assessment methodology used by the CMA, attribution of liability, and fine calculation. The CAT ordered that the three appeals should be heard and managed together.

CAT judgment

In a unanimous judgment, the CAT:

• Dismissed the appellants' appeals against the CMA's decision that Advanz abused its dominant position by charging excessive and unfair prices for liothyronine tablets during the infringement period;
• Reduced the penalty payable by Cinven from £51.9 million to £37.1 million;
• Reduced the penalty payable by Hg Capital from £8.6 million to £6.2 million.

The grounds of appeal, though framed in different ways, gave rise to common issues. The CAT considered these as follows. (i) Did the CMA err in its assessment of Cost Plus? (ii) Did the CMA err in its assessment of the comparators put forward by the Appellants? (iii) Did the NHS acquiesce in the price increases and, if so, does that mean that there was no abuse? (iv) Was the CMA wrong to conclude that Advanz had a dominant position, having regard to the NHS’s countervailing market power? (v) Should the penalties imposed by the CMA be quashed in their entirety or reduced in amount? We summarise its conclusions on each of these below.

CMA's Cost Plus Assessment

The appellants contended that, in applying its Cost Plus approach to assessing whether Advanz's prices were excessive, the CMA understated relevant costs and failed to take sufficient account of relevant factors. In particular, it was argued that the CMA had:

• Incorrectly measured the value of "Product Rights" (manufacturing knowhow and marketing authorisations);
• Understated the allocation of common costs to liothyronine;
• Failed to make necessary adjustments to the cost of capital;
• Failed to take sufficient account of the patient value of liothyronine tablets;
• Failed to take sufficient account of the use of portfolio pricing in the pharmaceutical industry (i.e. setting prices of a product by reference to the pricing and costs of an overall portfolio); and
• Erred in concluding that a "multi-firm" adjustment was inappropriate when considering whether the prices charged by Advanz were unfair.

The CAT concluded that there were no material errors in the CMA's Cost Plus calculation, and upheld the CMA's conclusion that Advanz's prices during the infringement period were excessive. The CAT noted that an over-rigid or exclusive reliance on a Cost Plus analysis, at the expense of a proper consideration of competition, would be wrong. However it rejected the appellants' contentions as follows:

• The CMA had followed a reasonable approach overall in measuring the value of Product Rights;
• Rejected the argument that the CMA had underestimated certain costs and failed to take into account certain evidence;
• The CMA's approach to allocation using sales volumes (number of packs sold) as a percentage of Advanz's global pack volumes was transparent, objective and appropriate;
• The CMA had not erred in not adopting a value-based approach to cost allocation;
• As regards cost of capital, the CMA had been justified in not making the adjustments in its methodology argued by the appellants;
• As regards patient benefit, it was not necessary to increase the Cost Plus on this basis. The CMA had been in correct in finding there were not additional benefits present that were not reflected in the costs of supply, or particular enhanced value from the customer's perspective. There were no demand-side factors that would materially add to the economic value of the liothyronine tablets;
• There was an absence of evidence that Advanz was actually setting prices for liothyronine on a portfolio basis (rather than increasing the price without reference to other products);
• The CMA had not erred in concluding that a multi-firm adjustment was inappropriate (noting that the United Brands test does not compel the use of any particular benchmark).

CMA's assessment of comparators

The appellants contended that the CMA erred in ignoring "real-world" comparators of economic value for the purpose of determining whether Advanz's prices were fair:

• Post-entry prices: In 2017 Morningside and Teva entered the market, and thus from that point Advanz was not the only supplier of liothyronine tablets (the CMA considered that the infringement occurred between 2009 and 2017). In relation to post-entry prices as a comparator for pre-entry prices, the CMA had concluded that the prevailing post-entry prices in February 2021 did not provide a meaningful indication of prices for liothyronine tablets in an effectively competitive market, given that these were still "contaminated" by Advanz's abusive exercise of market power.

The appellants argued that the price as at February 2021, although not representing perfect competition, was sufficiently competitive in that it represented the outcome of a process of dynamic competition in a market free of dominance.

However, the CAT considered there was no cogent evidence that prices had stabilised by February 2021, and that the CMA's evidence of price movements since February 2021 showed that prices had continued to fall significantly since then. It concluded that the CMA was justified in rejecting post-entry prices as a valid comparator.

• Entry-incentivising prices (the prices at which competitors were incentivised to enter the market): Hg and Cinven argued that Advanz's prices were not unfair because they were implemented in the knowledge that they would lead to new entry, increased competition and a subsequent reduction in prices.

However, the CAT concluded that the CMA was justified in rejecting entry-incentivising prices as a valid competitive benchmark. In a market with exceptionally high barriers to entry, the price charged by an incumbent dominant supplier could be excessive and unfair even below the level required to incentivise other entrants, and self-correction would not necessarily occur within a reasonable time. Further, the United Brands test does not require that the price benchmark be set at a level to facilitate competition.

• Forecast prices (the prices forecast by new and potential market entrants): the CAT considered that the CMA had been entitled to reject the use of forecast prices as a comparator, given that the forecasts were part based on, and influenced by, Advanz's excessive prices.
• Levothyroxine oral solution: the CAT also rejected the contention that levothyroxine oral solution was a better comparator for the pricing of liothyronine tablets than liothyronine tablets, noting key differences identified by the CMA in the manufacturing process of the oral solution.

The CAT concluded that these comparators were not reliable indicators of the economic value of liothyronine tablets, and did not reflect the price of liothyronine tablets in conditions of sufficiently effective, workable competition. Cost Plus was an appropriate benchmark for determining a competitive price in generic markets (characterised as they are by low levels of innovation), and there were no policy considerations absolving Advanz from its special responsibility as a dominant supplier of liothyronine tablets not to abuse its market power.

Overall, the CAT agreed with the CMA that Advanz's prices for liothyronine tablets in the infringement period had been both excessive and unfair, having regard in particular to the substantial disparity between these prices and the economic value of liothyronine tablets, the lack of any independent or objective justification for the price increases, the purpose of Advanz's pricing strategy (i.e. to exploit the lack of regulatory or competitive constraints), and the significant adverse impact on the NHS. Further, an anti-competitive intent, while not sufficient in itself to establish abuse, constitutes a fact that may be taken into account in assessing abuse.

Countervailing market power

Advanz argued that the Department for Health and Social Care (DHSC) and NHS held sufficient countervailing buyer power to exclude the possibility that Advanz was dominant.

However, the CAT rejected this, instead supporting the CMA's findings that the fragmented composition of the NHS limited its ability to exercise buyer power. Further, it was not clear that the DHSC/NHS had power to control the price of liothyronine tablets through any provision of relevant legislation, there was no evidence that DHSC had at any point threatened to exercise any powers that it might have had against Advanz, and there did not appear to have been any clear view within DHSC that it had the ability effectively to constrain prices. Although there had been some apprehension within Advanz that DHSC might intervene in the price of liothyronine tablets, this did not prevent Advanz's pricing behaviour, and the potential for economic regulation is not a competitive restraint in itself.

Acquiescence of NHS in price increases

Advanz further claimed that in Genzyme Limited v OFT (Genzyme), the CAT had developed a general principle of acquiescence, and that this was applicable to the DHSC/NHS when purchasing medicines such that there was no abuse.

The CAT rejected that this established a general principle of acquiescence that would provide a defence to a finding of abusive pricing. In any event, the CAT concluded on the facts that Advanz did not intend to, and did not, provide the DHSC/NHS with sufficient information to make an informed assessment of the price increases, and Advanz could not reasonably have inferred that the DHSC/NHS approved of the price increases.

Fine calculation

The appellants put forward various arguments that the penalties imposed by the CMA should be quashed in their entirety or reduced in amount, which were largely rejected by the CAT as follows:

• Advanz knew or ought to have known about the essential facts giving rise to the infringement. In particular, Advanz was aware that it was not subject to any effective competitive restraint, that the NHS did not exercise effective countervailing buyer power, and that it was in a position to impose significant price increases without any material effect on sales volumes. Further, Advanz was, or should have been, aware of the essential facts constituting the unfairness of its pricing, i.e. in circumstances of no effective competition, it made a series of very substantial price increases that were not explicable e.g. by any material increase in production costs.
• As regards the CMA's penalty calculation:
  • The CMA was entitled to use Advanz's turnover in the UK market for the supply of liothyronine tablets in 2016 (i.e. the last business year before the date when the infringement ended) as the starting point;
  • It was appropriate for the CMA to impose a 30% maximum starting point percentage in light of the CMA's Penalty Guidance citing excessive pricing as conduct that is inherently likely to have a particularly serious effect;
  • The CMA was justified in treating the involvement of directors and senior management as an aggravating factor justifying a 10% uplift;
  • The CAT did not accept that Advanz had every reason to believe that its conduct was lawful, or that there was any uncertainty as to the law. There was no suggestion in Advanz's internal documents that it specifically addressed the lawfulness of its pricing of liothyronine tablets, or that it concluded that its pricing might be lawful. Although excessive pricing cases can be difficult to assess, it does not follow that every case of excessive pricing entails a mitigating circumstance.

The CAT however concluded overall that a deterrence uplift was not necessary in this case, noting that the CMA's penalty calculation was at a level above the financial benefits to the companies of the infringement. Further, it was reasonable to assume that the management of the appellants would be mindful of reputational damage resulting from the CMA's decision, and that this would act as a further deterrent against future infringements of competition law. The CMA had also not pointed to any specific reason for believing that, absent a deterrence uplift, there would be a risk of further competition law breaches by the appellants. Finally, the legislative powers available to DHSC to control prices were a further reason to conclude that a deterrence uplift was not necessary (even if DHSC had not stated how it would use the powers).

The CAT therefore removed the deterrence uplift from the fines. This reduced the penalty payable by Cinven from £51.9 million to £37.1 million, and by Hg from £8.6 million to £6.2 million. The statutory cap (which limits any penalty to 10% of the worldwide turnover of an undertaking in its last business year) meant that the penalty payable by Advanz Pharma was unchanged at £40.9 million.

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