Free Competition and Excessive Prices

Published: 25 Sep 2020

In 2016 the Competition and Markets Authority (CMA) of the United Kingdom, led an emblematic procedure against the pharmaceutical companies Pfizer and Flynn Pharma, which was resolved on March 10, 2020 in court. The CMA maintained that both companies had abused their dominant position, through the execution of an agreement for the manufacture and distribution of phenytoin sodium (treatment for epilepsy), which allowed these operators to increase the price by 2600%; An increase that represented for the National Health Service a growth of 2 million in 2012 to approximately 50 million lire for 2013, and for a patient the increase from 2.83 to 67.50 lire per presentation of 100mg.

The fact is that Pfizer and Flynn Pharma, in the opinion of the CMA had a dominant position, additionally they took advantage of the uncontrolled price system for generic drugs, they withdrew from the market a brand-name substitute product whose ceiling was delimited by the regulator, being Pfizer, the manufacturer of both products, with the peculiarity that it only sells to Flynn Pharma and 17 times more expensive than the price marketed to other wholesalers prior to the agreement, without forgetting that there was no competitor capable of disciplining the commercial agreement.

Throughout the procedure, Pfizer maintained that the agreement was efficient, since it allowed to cover costs and thus guaranteed the continuity of the product in the market, and both pharmaceutical companies recognizing that the new price still did not fully cover their costs and there were even brand-name products on the market, with prices between 25% and 40% higher.

Cases of excessive prices are not abundant, but they are relevant, since the primacy of social interest over individual interest(1) is discussed. Can a competition authority determine if the price is excessive in a dominant operator? What should be the fair price and how to determine it?

It is clear that the CMA has shown that in the United Kingdom they can, however, in the Ecuadorian case, the question can be cleared by analyzing what Article 92 of the Organic Law of Regulation and Control of Market Power [LORCPM] raises as abuse in its subsection(2), as follows:

“"The behaviors of one or more economic operators with market power, which allow them to increase their profit margins through the unjustified extraction of consumer surplus" wording that leads us to conclude a positive response, i.e., the Superintendency of Regulation and Control of Market Power SCPM) has the same powers that the CMA exercised to investigate and resolve a case of abuse due to excessive prices.

Now, how to determine when an operator with market power, by increasing its profit margins, incurs in a prohibited practice? In this regard, there are jurisprudential precedents(3) with internationally accepted methodology in terms of free competition, capable of guiding the SCPM. However, the United Brands Test, ruled by the Court of Justice(4), is the most widely accepted model to determine “the injustice of a price” for being illegally excessive and therefore anti-competitive. Such evidence raises that the price was unfair either (a) in itself or (b) compared to the price of competing products (the "extremity of injustice").

In the CMA vs. Pfizer-Flynn Pharma case, the United Brands Test was implemented, however, one of the most discussed and seriously criticized(5) aspects of the administrative decision by the courts on appeal was how the aforementioned test was applied; and it is that the Competition Authorities in their administrative procedures do not have it easy being judge and party, since in evidentiary matters they can assess facts and methodologies that make their budgets viable, which however, when subject to judicial review, weaken the certainty of their main performance.

In the judicial review procedures of the CMA vs. Pfizer-Flynn Pharma, the CMA stated: “(…) The CMA's decision was based on a cost/price comparison to determine whether the prices were excessive through an abstract analysis, which compared the price to a theoretical benchmark of "cost plus 6%". The CMA concluded that the new price was first excessive and then unfair "in itself" because it exceeded the cost benchmark”.

It later argued “(…) it was sufficient to show that the price of Pfizer/Flynn's phenytoin capsules was unfair "in itself" and that, as a result, it was not necessary to consider the price of the comparison products. In CMA's view, the United Brands Test gave the authority the option to prove that a price was unfair in itself or compared to other products, so it was not necessary to consider the alternative evidence presented by Pfizer and Flynn to support the proposal."

However, the Competition Appeal Tribunal(6) dated June 7, 2018, recognizing the jurisprudential validity of United Brands, and its two options to assess a price as excessive and unfair, firmly corrected the CMA, reminding it that, while it is true, it is free to choose the model "price in itself" or "price in comparison", these are not disjunctive among themselves, nor exclusive of each other. Much less, the Free Competition Authority should not ignore a valid argument(7) presented by those investigated. Correction or whipping made by the Court based on the right of citizens to have a good public administration, a legal argument that coexists in both jurisdictions(8).

In times of Coronavirus, where the voracious and excessive demand for certain medicines and treatments with free and even regulated prices, affects their price exponentially, it becomes necessary for the Free Competition Authority in exercise of its powers to initiate ex-post control procedures about those dominants operators that may be setting excessively high prices. We know that it can be extremely difficult to implement, either due to the difficulty of estimating the “correct price” or due to the inadequate remedies available to solve the problem posed by the LORCPM, but this does not mean that the authority should stop exercising its role.

Being free competition authority is not easy in any latitude, less when it comes to excessive prices(9) and medicines(10), however the lesson that the CMA vs Pfizer-Flynn Pharma case leaves us, revoked and archived on March 10, 2020 by the Courts of Appeal of United Kingdom, is that the Authorities such as the SCPM can review excessive prices as a practice of abuse of power, and for this they enjoy a discretionary margin of evidentiary maneuver, which however, when motivated in arbitrary actions or outside the principle of good administration, its sustainability and defense in the judicial procedure will be weak, thereby affecting the only and truly important thing, free competition.

(1) Discussion that in our LORCPM is exposed in Article 4.- Guidelines for regulation and principles for application. - In accordance with the Constitution of the Republic and the current legal system, the following guidelines shall be applied for the regulation and formulation of public policy in the matter of this Law: 1. The recognition of the human being as the subject and purpose of the economic system. 2. The defense of the general interest of society, which prevails over the private interest (…).

(2) Organic Law of Regulation and Control of Market Power Art. 9.- “Abuse of Market Power. - It constitutes an infringement of this Law and the abuse of market power is prohibited. It will be understood that an abuse of market power occurs when one or more economic operators, based on their market power, by any means, prevent, restrict, falsify or distort competition, or negatively affect economic efficiency or general well-being.”

(3) Judgment of the CJEU, of November 13, 1975, case 26/75, General Motors Continental NV v. Commission of the European Communities (…) “the existence of an excessive price would be appreciated in those cases in which it is too high compared to the economic value of the good, restricting competition or exploiting customers)” Case 27/76 United Brands and Commission [1978] ECR 207; [1978] 1 CMLR 429. Case 226/84, British Leyland Public Limited Company and Commission of the European Communities, [1984] ECR 3263. 18 Case C177 / 16, Biedrība ‘Autortiesību un komunicēšanās konsultāciju aģentūra – Latvijas Autoru apvienība’ v Konkurences padome, Caso COMP/A.36.568/D3, Scandlines Sverige AB v Port of Helsingborg, Decision of July 23, 2004 and case COMP/A.36.568/D3, Sundbusserne v Port of Helsingborg, Decision of July 23, 2004.

(4) Judgment of the CJEU, of February 14, 1978, case 27/76 United Brands Company and United Brands Continental BV v. Commission of the European Communities.

(5) “(…) The CMA had not adequately assessed the possible impact of significant comparators (in particular, phenytoin sodium tablets) in order to assess whether the prices of Pfizer and Flynn were unfair. (…) It was wrong to discover that there were no non-cost factors that increased the economic value of the capsule product beyond Pfizer and Flynn's Cost Plus (…)”.

(6) Case Nos: 1275-1276/1/12/17

(7) Price model used by the dominant company itself in the past or by other groups of buyers, or those practiced by other companies active in geographically close markets.

(8) Official Record Supplement Jul 31, 07-2017 LAW OF PERSONS Art. 31.-A fundamental right to good administration People are holders of the right to good public administration, which is specified in the application of the Constitution, international instruments, the law and this Code.

(9) Increased profit margins through unjustified extraction of consumer surplus

(10) Autorità Garante della Concorrenza e del Mercato, “Price increases for cancer drugs up to 1500%: the ICA imposes a 5 million Euro fine on the multinational Aspen.

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