Napp Pharmaceuticals loses appeal before Competition Commission Appeals Tribunal

On 15 January 2002, the Competition Commission Appeal Tribunal (Tribunal) confirmed the findings of the Office of Fair Trading (OFT) that Napp’s pricing policies for morphine pain killer MST had been in abuse of its dominant position and in breach of the Competition Act 1998. However, the Tribunal did reduce Napp’s fine from £3.21m to £2.2m.

Background

Napp was found to have supplied its morphine pain killer product MST through wholesalers and community pharmacy at excessively high prices whilst discounting sales of MST to hospitals in a predatory manner. The Tribunal found that Napp’s discounting practices to hospitals had the effect of blocking competitors.

Napp had followed a sustained policy of aggressively low pricing in hospital tenders, often proposing discounts of 90% or more when the hospital was seeking a single supplier. By securing hospital contracts in this way, Napp was able to ensure that MST could be introduced to patients. Napp would then have the advantage of follow on sales, once the patient was treated in the community. There was a wide discrepancy between hospital and community prices.

The Tribunal considered the product market to be that of sustained release morphine tablets and capsules. MST enjoyed 90% of both the hospital and the community segments in this product market. This constituted a dominant position and was referred to by the Tribunal as a “superdominant position.

The Tribunal viewed Napp’s discounts to hospitals as predatory and considered that it charged excessive prices in the community segment. Each factor constituted an abuse of Napp’s dominant position.

In the case of discounts to hospitals, the Tribunal found that:

• for presentations where there was a competitive product, Napp was selling at prices well below direct cost – its discounting was therefore both predatory and selective;
• for this type of product, there was an important connection between achieving hospital sales and follow on sales in the community segment;
• Napp’s pricing was made with a view to excluding competitors from the hospital segment and thereby to deny competitors this “gateway to the community segment;
• Napp’s core “net revenue defence could not succeed. Napp had argued that its hospital sales have always been profitable taking into account the “net revenue from both sales in the hospital and follow on sales in the community, a linkage available to its competitors. The evidence indicated that the reason for the aggressive hospital discounts was the exclusion of competitors rather than net revenue considerations.

In the case of excessive pricing in the community segment, the Tribunal:

• rejected Napp’s argument that the Department of Health’s powers under the Pharmaceutical Price Regulation Scheme (PPRS) and the Health Act 1999 were effective to prevent excessive pricing;
• found that Napp’s prices in the community segment were significantly higher than would be expected in a competitive market and that there was no significant competitive pressure to bring them down to a competitive level;
• viewed the PPRS as having little, if any, relevance to the issue of excessive pricing. The broad framework of the PPRS did not itself prevent a company taking individual product pricing decisions in breach of competition law.

OFT directions upheld

The Tribunal also supported the OFT’s directions setting out how Napp was to end the prohibited abusive conduct. The effect of the directions was to require Napp:

• to reduce the NHS list price for MST by at least 15% which was then a maximum price. Supply of MST could be made at that price less the normal wholesale discount of 12.5%; and
• not to supply MST to hospitals at less than 20% of the NHS list price.

The highest permissible price differential between sales to hospitals and sales to wholesalers for the community is therefore 67.5% of the NHS list price (taking account of the wholesaler discount). Competitors also know exactly Napp’s floor price in tenders. Napp has a four month period of grace to review existing hospital contracts.

The effect of the OFT’s directions was suspended pending the appeal to the Tribunal in return for an undertaking from Napp to meet DoH losses should Napp lose. Unless the case is taken further on appeal and ultimately succeeds Napp will have to make good this commitment. Napp can only appeal to the Court of Appeal on a point of law or as to the amount of the fine.

Significance for the pharmaceutical sector

Although much of the judgment turns on its facts, a number of issues are of broader significance in the pharmaceutical sector. In particular:

• the judgment looks at sales to the hospital and community segments as a single market;
• the judgment accepts that differential pricing between hospitals and the community is possible even if the supplier is dominant, but cannot give any universal guidance on what differential is acceptable. It appears from the Tribunal’s judgment that the OFT had initially wanted no differential at all;
• the PPRS which places profit controls on participating companies’ sales to the NHS was considered as relevant market background. However, the PPRS was found not to have any bearing on individual pricing practices, as it was a portfolio constraint and did not seek to ensure that prices of individual products were kept at appropriate levels;
• dominant companies should not bid in hospital tenders at a predatory level. Even profitable sales can be predatory if a dominant company make selective discounts to eliminate competition.