Flight and fright in pharmaceutical prices: CMA issues fresh statements of objections to drugCos implicated in hydrocortisone scandal
In the latest instalment in the CMA’s crackdown on staggering increases in fees charged to NHS procurers of hydrocortisone tablets (used to treat hormone-deficient conditions, such as Addison’s Disease), on 9 August 2017 it issued statements of objections (“SOs”) (i.e. formal charge sheets alleging competition law infringements) to Intas Pharmaceuticals and Accord Healthcare. These SOs followed on from the CMA’s SO addressed on 16 December 2016 to Actavis UK, for whose past and on-going levying of increasingly excessive prices in respect of hydrocortisone treatments Intas and Accord are suspected of also being liable as immediate and ultimate parent following Accord’s acquisition of Actavis in January this year. In a similar vein, the CMA is also seeking to establish liability against Allergan plc for its ownership of Actavis in the period 2015 to 2017.
The charges, relating to an estimated one million annual NHS prescriptions for hydrocortisone treatments, have been found to have risen from £0.70 per pack of 10mg tablets before April 2008 to £88 per pack within just under eight years (following the de-branding of the drug).
The case, which remains subject to further investigation and the outcome (which the CMA will announce in the early part of 2018) of exchanges of representations with the respondents during November and December 2017, could result in fines of up to 10% of global group turnover for the Intas and Allergan businesses, as well as potentially orders for the existing over-charges to be halted and prices returned to a level found to be economically justifiable.
Excessive pricing is not a straightforward concept, nor an abuse that the regulators or private claimants can easily prove. It often turns on complex economic evidence. However, the hydrocortisone cases demonstrate the CMA’s willingness to pursue companies charging high prices where these appear to have undergone inexplicable increases over a relatively short period of time, especially in a sector concerning the daily treatment of medical conditions experienced by large numbers of people. At the very least, this begs the question of these companies: what justifies these increases (e.g. the cost of a particular input)?
No freezing out competition: Competition and Markets Authority (“CMA”) investigates potential abuse of dominance for discount package offers by Unilever for branded wrapped ice creams
In August the Competition and Markets Authority (“CMA”) announced that its investigation into suspected abuse of a dominant position (in breach of Chapter II of the UK Competition Act 1998) by Unilever has revealed no grounds for taking action; however, the investigation and the CMA’s observations offer a pertinent reminder about the interest of the regulator in rebating and discounting practices, about which businesses in ANY market need to be very mindful if there is any possibility of their being in a dominant position.
What is abuse of dominance?
Abuse of a dominant position firstly requires dominance – as a rule of thumb, this will be presumed at a market share of 40% or more (although it could be found to exist at lower shares if there are barriers to entry / expansion in the relevant market). Firms in a dominant position have a special responsibility not to abuse it by refraining from conduct that could exploit customers and/or exclude competitors. There is not necessarily any exhaustive list of types of behaviour which could constitute an abuse.
Rebates and abuse of dominance – why ice creams?
Offering reduced prices (i.e. discounts or rebates) in exchange for commitments from customers are one of those recognised categories of behaviour which could amount to an abuse depending on the circumstances – in particular, whether the rebate would have the effect of pushing rivals out of the market or if there is evidence that the firm offering the rebate has or had that intention when offering it.
To offer discounts to customers purchasing certain volumes will not necessarily amount to an abuse of dominance, although EU case law has considered whether, in fact, in certain circumstances they may amount to having an exclusionary effect – that is to say, they would tend to make it far more difficult for rival providers (especially smaller businesses) to compete in the marketplace.
These are the types of rebates that were the subject of the CMA’s enquiries into the practices of Unilever in the market for wrapped ice creams. In particular, they were concerned that some of the bulk-buy discounts for certain of its products being offered by manufacturers to wholesalers and retailers may be incentivising them, significantly, to purchase mostly or, even, only Unilever ice creams. Such “package offers” involve free or reduced price supplies when ordering at or above a minimum purchasing volume, notably including offers such as “buy eight get four free” or “buy 12 get six free”. These offers, which sometimes linked ‘must have’ brands to “more contestable” brands, the CMA believed, could be akin to a “tying” or “bundling” obligation on stockists, which may be having a particularly exclusionary effect in the wrapped ice cream market in the UK since the freezer capacity available to retailers to store such ice creams is constrained.
Outcome – no conclusion BUT watch this space more generally with volume rebates…
Having closed its decision on 9 August 2017, the CMA published the findings from its investigation the following day. Having taken the view for these purposes that from the point of view of retailers, wrapped ice creams were probably in a different supply-side market to other “impulse” ice creams (i.e. because of the increased staff and equipment necessary to dispense, scoop and serve), it concluded that Unilever had a market share likely to be in excess of 50% (a position of dominance only enhanced by its brand strength and the conditions it imposes on retailers to stock exclusively its products in their freezers).
However, in the circumstances, even the combination of constrained freezer capacity and the structure and availability of Unilever’s package offers were not ultimately likely to have an exclusionary effect on competition. Notably, despite Unilever owning some of the ‘must have’ wrapped ice cream brands, and the fact that retailers were unlikely to have more than one wrapped ice cream freezer in their stores (which for periods of normally three years at a time would have to be stocked exclusively with Unilever brands), the CMA’s investigations revealed that the relevant package offers were generally only standalone promotions available for a single month at a time, usually outside of the peak summer season (whereas purchasing is usually made on a weekly or even daily basis during the summer – in these periods, discount packages were made on a smaller scale basis, such as “2 plus 1 or 2” or “5 plus 1”, which whilst capable of filling a freezer for a day were not in fact significant discounts compared with offers made available from other manufacturers).
Irrespective of the findings in this case, the CMA’s investigation into Unilever’s ice cream pricing practices demonstrates that the regulator is highly conscious of the effect rebate schemes may be having and is willing to regard the spectrum of potentially abusive discounting practices as open ended (along the lines laid down in the EU Court of Justice’s ruling in the October 2015 case of Post Danmark II). As such, it is imperative that any business in a potentially dominant position takes due care and seeks expert advice before instituting any substantial form of volume or other rebate system to encourage customer loyalty or increased sales.
For more information, please contact Paul Henty or Rory Ashmore.
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Focus Antitrust - 6 February 2019
The latest edition of our regular Focus Antitrust update.