CMA drug-pricing appeal brings headache for policymakers

31 December 2019 00:00 by Simon Zekaria

For drugmakers Pfizer and Flynn Pharma as well as the UK's antitrust authority, the holiday season may offer a brief diversion from a landmark UK court dispute that will dog them well into next year.

The parties are waiting for a ruling from the Court of Appeal in London over epilepsy-drug sales. For the drugmakers, tens of millions of pounds are at stake, while the Competition and Markets Authority is fighting to preserve the reach of its powers to crack down on excessive pricing.

The CMA has much to lose. The hearing last month was to assess its challenge to an antitrust court ruling last year that quashed its 2016 fines of more than $100 million on the drugmakers for abuse of a dominant position through excessive and unfair drug prices.

The significance of the appeal's result isn't in doubt, given how it forensically addressed the CMA's legal and economic validity to qualify a drug as excessively priced.

That's no surprise: Competition enforcement, even in a fast-moving commercial market such as pharmaceuticals, is rooted in both law and economic theory. But the hearing also showcased wider issues, such as the impact of established drug licensing and pricing strategies on healthcare policy and patient care.

This dual nature of the case isn't lost on the CMA. The regulator has been upfront that its reputation is on the line, both as an antitrust enforcer in the drugs market and as a champion of consumer and social justice.

The presence of the CMA's key antitrust officials at the Court of Appeal's London courtroom, including General Counsel Sarah Cardell and Enforcement Executive Director Michael Grenfell, underlined the case's importance to the authority.

But others are being drawn in, too. The wider perspective of the case's implications for UK government health policy means lawmakers, too, are in the spotlight.

The re-election of the governing Conservative Party under Boris Johnson with a bumper parliamentary majority has amplified commercial and political risk over how the state-run National Health Service would, or would not, fit into a proposed free-trade agreement with the US after Brexit.

With NHS funding, and drugmakers' access to that, at the forefront of public debate, the appeal court's findings could spell trouble for government officials already buffeted by political opposition to the possibility of higher drug costs to health authorities and patients.

— Price enforcer? —

While the CMA, as a public authority, is aware of the political narrative, its priority task is to defend its enforcement remit. That task is all the more important for an agency that has accelerated its antitrust fight against drugmakers in recent years and has prioritized the sector for future investigatory resources. Indeed, it has other excessive pricing probes in train, including over hydrocortisone, a popular anti-inflammatory drug.

But the CMA is battling a tough record. Its charges against Pfizer and Flynn three years ago represented the first UK competition decision over excessive drug pricing since 2001.

The reasons for that are several, and interlinked. Competition authorities have a traditional reluctance to act as price regulators; wary of replacing normal market mechanisms — including pricing — that reflect consumer product demand. Data-collection burdens make for high barriers of evidence to prove pricing abuse. Drug patent investigations — a favored route to antitrust enforcement in the industry — are also complicated and resource-heavy.

But the CMA, in common with other watchdogs, insists the landscape has changed. It says that market failures or gaps in regulation, showcasing where competition doesn't work to bring drug prices down, makes antitrust intervention necessary.

It says that is particularly true for generic drugs, which, unlike on-patent, branded medicines, aren't subject to price regulation and therefore become a target for abusive pricing. In this case, the CMA said Pfizer's supply price of phenytoin sodium capsules to Flynn rose by 780 and 1,600 percent after the drug was debranded, with Flynn's price to wholesalers and pharmacies climbing by up to 2,600 percent.

In response, the drugmakers counter that the drug is loss-making and that their prices are competitive.

These overarching arguments, picking at the fairness or otherwise of pricing, were dissected at the Court of Appeal through the lens of key legal and economic principles. These included the role of pricing for rival drugs in antitrust enforcement probes and statistical assessment of drugs' economic value.

To win the overall argument, the CMA has a tricky task. The Competition Appeal Tribunal, which overturned its decision against the drugmakers, ruled that while the companies did hold a dominant position, the regulator's abuse-of-dominance finding through price was flawed. That put the CMA's investigatory practices, as much as its legal and economic approach to the probe, under the microscope.

— Consumer justice —

Alongside its technical and legal argumentation, the CMA has been eager to talk up its social mission and warn of the damage that excessive pricing causes for healthcare providers and patients.

In written arguments, the regulator said that while generic drugs generally provide "value for money" for the NHS, there are "niche generic drugs, such as phenytoin, marked by small market size and clinical guidance that dissuades switching to cheaper alternatives," which are shielded from effective competition. "The lack of effective competition for 'niche generics' facilitates conduct that is directly exploitative of consumers, such as unfairly high prices," the CMA said.

Despite having waned in popularity, phenytoin sodium remains a life-saving drug that thousands of patients rely on. It is therefore perhaps logical that the case has also become a "cause célèbre" for critics of Big Pharma, who claim that drugmakers exploit their market clout and pricing freedoms to engage in price-gouging.

The CMA, too, got into that act as part of its argument, highlighting how NHS payments for phenytoin sodium had skyrocketed and cost taxpayers tens of millions of pounds.

— Political debate —

These socially-focused points have added fuel to the political context that has increasingly overshadowed the specifics.

The UK government sees a US free-trade agreement as a major post-Brexit prize, even as it is tuned in to criticism that a new deal with Washington, alongside pressure from US drugmakers, risks undermining the UK government's ability to keep a lid on the cost of medicines. A report last September by the NHS Confederation, representing hospital trusts in England, warned of the dangers of the NHS paying higher bills for drugs.

The Office of the US Trade Representative last February said that bilateral trade negotiations would have to provide "full market access for US products." Prime Minister Johnson has consistently countered that the NHS will not be "for sale" in trade talks with the US.

But noise over the cost of drugs won't be going away, and lawmakers, as well as enforcers, will know that high-profile antitrust probes against drug giants over everyday medicines will put pricing at the center of public scrutiny.

As such, the CMA's case against Pfizer and Flynn could become a lightning rod for generalized negative perceptions over drug pricing, whether it is fair or not to extrapolate one case's specifics more widely to policy developments.

Next year may bring as much of a headache for policymakers as for the eventual loser of the court fight.

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