The CMA’s full text decision in the long-running Hydrocortisone case, originally initiated in 2016 and in which the CMA imposed record fines, is now published and it shows a slight rethink of the CMA’s approach to excessive pricing in the pharma sector.

The definition of excessive pricing as an abuse of dominance under competition law remains largely that outlined in the United Brands case from the 1970s, i.e. that the price bore “no reasonable relation to the economic value of the product”, which is assessed through a two-limb test of demonstrating that the difference between the cost incurred and the price charged was excessive (excessiveness limb) and the price was unfair either in itself or when compared to competing products (unfairness limb). 

In its Phenytoin case, the CMA applied the "Cost+" method to determine "excessiveness" and compared the price to a Cost+ maximum of 6% of “reasonable return”, which is the Pharmaceutical Price Regulation Scheme target rate return on sales (albeit recognising that a return on sales of 6% would not necessarily be a reasonable rate of return for a Cost+ assessment for other generic products and can be greater). This was challenged on appeal and the Competition Appeal Tribunal (CAT) found that restricting the excessive limb to Cost+ and excluding other methodologies, rather than seeking a benchmark price, was too strict an approach. The CMA appealed to the Court of Appeal (CoA) and won on the ground regarding a duty to use a hypothetical benchmark price (as indicated by the CAT), with the CoA stating that while there needs to be "a" benchmark against which to measure excess or fairness, that choice of benchmark is for the competition authority to choose. However, if the CMA chooses one method (e.g. Cost+) and the defendant relies upon other well-reasoned methods and evidence, then the CMA must fairly evaluate it and cannot easily dismiss it. 

Applying a narrow Cost+ as a method in future cases, including in the pharma sector, was therefore hardly "dead in the water", but these judgments suggested the CMA could be strongly challenged in doing so going forward. Following the Court of Appeal’s judgment, the CMA decided to re-investigate the matters on abuse remitted by the CAT and issued a new Statement of Objections in August 2021. The case is still ongoing.

The Phenytoin judgments clearly threw a spanner in the CMA’s wheels in other parallel cases concerning excessive pricing. However, following the CoA’s Phenytoin judgment, the CMA eventually issued its Hydrocortisone decision in July 2021 and the full text version has now been published, over eight months later.

The decision reveals that whilst the CMA has continued to apply the approach of a narrow Cost+ reasonable rate of return, it used the return on capital employed ("ROCE") as its primary measure of the rate of return (as opposed to a return on sales measure, as applied in Phenytoin), concluding that a return between 5%-15% was reasonable (the exact figure redacted due to confidentiality). The CMA put the Cost+ for 10mg tablets at between £2.70-£4.45/pack and for 20mg between £2.91-£5.20/pack. However, in assessing whether the prices were excessive, the CMA stated that it had decided to exercise its “discretion to determine its administrative priorities” and not prioritised investigating prices where they were below £20/pack. The CMA did not clarify on what basis it reached the figure of £20 but it appears to have been applied as a "safety margin", perhaps in an attempt to avoid a repeat of Phenytoin and have the case subject to a remittal by CAT.

The CMA argued that its calculation of Cost+ was a “generous measure” and maintained that prices above Cost+, but below £20/pack, could still be excessive and unfair. However, it limited itself to finding that prices were excessive and unfair when they exceeded £20/pack, stressing that this meant the lowest price at which prices were found to be excessive and unfair (£20) still exceeded the upper bound of Cost+ “by 285%” (c.£15).

Nevertheless, the Hydrocortisone decision has been appealed to the CAT with the hearing listed for the week commencing 21 November 2022. Meanwhile, the CMA has made clear in its recently published Annual Plan 2022/23 that it will continue to progress “investigations into anticompetitive conduct in the pharmaceutical sector, with a view to ensuring that the NHS, and ultimately the taxpayer, does not pay more than they should for essential medicines and treatments”. The CAT’s Hydrocortisone judgment will be eagerly awaited in determining what “more than they should” might mean.