Pfizer and Flynn: How are ‘excessive’ prices for generic drugs possible and should competition authorities do more about exploitative pricing?
As last year came to a close, the headlines were rocked by the news that pharma giant Pfizer had been fined a record sum for overcharging the NHS by exploiting regulation to hike the price of its drug Epanutin by 2,600%. Associate professor Dr Farasat Bokhari and professor Bruce Lyons of the University of East Anglia’s School of Economics and Centre for Competition Policy dissect the incident to understand exactly how it came to be.
In December the UK Competition and Markets Authority (CMA) imposed a fine of approximately £90 million on Pfizer and a generic manufacturer Flynn Pharma, on the grounds that each abused a dominant position by charging excessive and unfair prices for phenytoin sodium capsules, an anti-epilepsy drug (brand name Epanutin). The price of a pack of 84 capsules of 100MG increased from £2.83 to £67.50 in October 2012. This came about as part of a deal where Pfizer sold the distribution rights in the UK to Flynn Pharma, who in turn ‘de-branded’ the drug, and sold the generic at an inflated price. The drug in question is not protected by any patents, so other generics are available and further generic entry is possible, yet the branded original drug was replaced by a higher priced generic. The CMA’s case is a rare example of an abuse of dominance finding (under Art. 102 and/or Ch.2 of CA98) in relation to exploitative pricing. While we await the full published decision, it is worth looking at industry price and quantity data to contextualise the CMA’s case. We also try to understand how this price hike was possible and ask whether the CMA should pursue more exploitative pricing cases.
Pricing and product idiosyncrasies
The National Health Service (NHS) is the main buyer of pharmaceuticals in the UK. While firms are free to set their own prices, the profit they each make on all branded drugs is capped and any increase in price must be approved by the Department of Health. Significantly, generics are exempt from this scheme – reimbursement to pharmacists is based on the average price of a basket of generics (for the same basic drug) from different manufacturers and wholesalers. The presumption is that competition will keep generics prices low.
This presumption failed in this case. When Pfizer sold the UK distribution rights to Flynn Pharma, who in turn marketed the drug as a generic, they were able to set a much higher price for their particular generic. Pfizer continued to manufacture the drug as before, and even sold it by the original brand name ‘Epanutin’ in the rest of Europe, but supplied it at a roughly 25 times higher price to Flynn Pharma, who then sold it, further marked up, as Phenytoin Sodium Flynn Hard Capsules in the UK.
Beyond the general quirks of pharmaceutical pricing, there is another idiosyncrasy specific to this product. Drugs are characterised by their therapeutic ratio which provides a range of values over which a therapeutic agent goes from being effective to being toxic. Phenytoin has a low range and consequently, UK’s Medicines and Healthcare Products Regulatory Agency (MHRA), classifies it as a category 1 antiepileptic and states that "Doctors are advised to ensure that their patient is maintained on a specific manufacturer's product". Thus if doctors and patients are used to one specific brand – Pfizer’s Epanutin – it makes it difficult for a new manufacturer to enter this market as patients may not switch. In fact, when Pfizer sold the distribution rights to Flynn and it changed the drug’s name to “Phenytoin Sodium Flynn”, a letter from Flynn to prescribers (published on the MHRA website) explained that this was identical to Epanutin, and that doctors should prescribe by the new name. When wholesalers tried to import Epanutin from other EU countries (where Pfizer retained the manufacturing and distribution rights) and apply the “Phenytoin Sodium Flynn” name to the drug, Flynn sued for infringement of trade name which made parallel importing unprofitable – doctors had been told to prescribe Flynn.
Price and quantity demanded (the ‘economic evidence’)
Figure 1 plots the prices of 100MG Caps (sold in 84 capsule packs) by Pfizer and the completely identical unbranded (read Flynn Pharma) 84 capsule packs which entered in late 2012. There are other epilepsy drugs available in the UK, including those using the same molecule (phenytoin). For instance, the blue dashed line is a 100MG unbranded tablet. Here comes an interesting twist. The tablet is sold in 28 tab packs, so three £30 packs are equivalent to an 84 pack. Thus, a price comparison on per tablet vs per capsule basis shows that a 100MG capsule is cheaper than a 100MG tablet. This appears to be the basis of Flynn Pharma’s assertion that their capsules are less expensive than alternative equivalent drugs. It remains that the tablets do not meet the MHRA recommendation that a patient should be “maintained on a specific manufacturer's product”, which excludes them as a safe substitute for existing patients.
We can learn more by looking at how demand responded to the price hike. When Pfizer withdrew its Epanutin capsules, it took a few months for the very much higher priced Flynn caps to pick up sales, but when they did, they more than compensated for lost demand before rocking back to the same gently declining trend found pre-2012. The interim may or may not have been wholesalers running down stocks then re-stocking, but it appears that there was almost exact substitution of Flynn for Pfizer in the longer term. There is no evidence of any substitution to the unbranded tablets. We cannot identify new patients, but the steady loss of a third of phenytoin sodium sales (similar for both capsules and tablets) over the last five years may be consistent with current patients being locked-in and few new patients being put on this drug either before or after the price hike.
Should the CMA do more to tackle ‘excessive’ pricing by dominant firms?
Competition authorities are very reluctant to intervene in pricing decisions, which is why cases of exploitative abuse on price by dominant firms are very rare across the world. They prefer to use their powers to tackle (less controversial) exclusionary abuses, such as preventing new rivals from entering the market. A chapter in a slim volume authored by one of us investigates the competition law around high prices. In brief, high prices signal opportunities for new entry, providing an incentive for investment and are the incentive for providing customers with what they value. There is also the crucial practicality that it is often hard to provide a benchmark for excessive prices (“excessive relative to what?”). Overall, there is a substantial danger of undermining the dynamic benefits of markets if firms are required to determine for themselves whether a price is “unfair” or “exploitative” and so could be challenged as illegal.
The US Supreme Court has gone as far as to say: “The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful, it is an important element of the free market system”. The European Commission also shies away from prosecuting exploitative abuse but does not completely rule it out. In the UK, the CMA’s predecessor (OFT) was slightly less reserved and some private cases have been attempted. The CMA has hitherto focussed on high prices in the context of market investigations, but that is another story.
Returning to the Pfizer/Flynn case, we cannot determine on the basis of the very limited published evidence whether the CMA was right to decide this was illegal pricing. It seems clear that de-branding allowed Pfizer/Flynn the opportunity to implement a very large price increase to the cash strapped NHS. The drug was long off-patent so the legal entitlement to reward for innovation had already been received. On the face of it, this appears to be a blatant attempt to manipulate the complex system of pharmaceutical price regulation, and the extreme sensitivity of patients to a precise capsule formulation, in order to milk the last bit of profit out of a declining drug. All this is unpalatable. However, the even higher unit price of the generic tablet raises a serious question about what the CMA finds to be an exploitative price – why is the capsule price (but not the tablet price) illegal?
The answer is important for understanding the precedent being set and so the expectations of the CMA going forward. We note that the CMA has published a press release saying it has provisionally found that Activas has been charging excessive prices to the NHS for hydrocortisone tablets. This looks like a very similar case of firmly de-branding (genericising) a drug to evade price regulation. This is consistent with poorly designed pharmaceutical price regulation being the root cause of the problem, and the implication is that the legislation needs urgent fixing. On the other hand, if the CMA sees this as a wider precedent for prosecuting unregulated firms for setting high prices, it would herald a major change in competition law enforcement.
Associate professor Dr Farasat Bokhari and Professor Bruce Lyons of the University of East Anglia’s School of Economics and Centre for Competition Policy