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Posted on 4th January 2017

Unfair! DoH temper tantrum is no help to generic drug pricing policy in the UK

The UK generics industry has been waiting for over a year to find out what the CMA’s final decision would be on the Pfizer/Flynn phenytoin case, following its preliminary ruling in August 2015 that the two companies were guilty of abuse of a dominant position. .That wait is now over but in our view, the final outcome is neither entirely clear nor particularly satisfactory

The background to the case is Flynn’s 2012 purchase of Pfizer’s branded 100mg phenytoin capsule, Epanutin. Having bought this product, Flynn withdrew the brand, launched a generic and proceeded to put the price up from £2.83/pack to £67.50/pack. This led to revenue from the product rising from about £2m pa to nearer £50m, with Pfizer (which was still doing the manufacturing) benefiting from a much improved supply price.

While de-branding and price hiking has become fairly common practice in UK generics in recent years, a price increase on this scale was very unusual and led to immediate complaints from doctors. In 2014, the price of the drug was cut to £54/pack but even so, the DoH asked the CMA (Competition and Markets Authority, the UK monopolies regulator) to investigate. It would appear that the CMA ruled out collusion between Pfizer and Flynn fairly early on, so focused instead on abuse of a dominant position, which led to its initial statement of objections in 2015.

On the face of it, an overnight price increase for an old drug of over 2,000% appears both outrageously high and morally wrong and this is clearly what the CMA felt, as it fined Flynn £5.2m (10% of its global turnover – the maximum fine that it can impose) and Pfizer £84.2m. It also gave the two companies between 30 days and four months in which to reduce the price of phenytoin 100mg capsules to a level that ‘is not excessive and unfair’. In the event, both Pfizer and Flynn announced that they would appeal the decision and we therefore assume that prices will stay where they are at least until the appeal has been heard, which should take about a year.

It is easy to think that both Pfizer and Flynn have got their just desserts, but looked at more dispassionately, the CMA’s insistence that the price of phenytoin capsules is too high does not stand up to any kind of scrutiny. This makes it perfectly possible that Flynn and Pfizer will prevail on appeal, particularly as the appeal will be heard by a judge, who will presumably not be subject to the same pressure from the DoH as the CMA has been.

Consider this: if the capsule form of phenytoin didn’t exist and a company launched it today, it is likely that it would pick a price by looking at the existing equivalent product, the 100mg tablet, and applying a 20-30% discount in order to encourage doctors to put new patients on to this novel presentation. In other words, the capsule would be priced precisely as it currently is and the cost of phenytoin to the NHS would actually be higher than it is today, as all patients would be taking the more expensive tablet. It is thus very difficult to argue that the capsule price is either excessive or unfair in absolute terms, unless you are going to argue that the tablet price is equally excessive. And since there is a competitive market in the tablet, with at least four companies selling it and a category M classification, this would be hard to justify. Of course, phenytoin is an unusual drug insofar as doctors are not supposed to move patients between different manufacturers’ products, but the reality would appear to be a bit different since the generic form of the 100mg capsule (which appears to have escaped the notice of the CMA when constructing its views on monopoly supply) was only launched in late 2011, yet now has a third of the market, which either means that patients taking phenytoin are very short-lived or else that at least some of them have moved from the Flynn product to the Actavis generic.

So if Flynn does now cut the retail price of phenytoin capsules, what price should it cut it to? The implication of the CMA ruling is that the final price should be based on a cost-plus approach, but this is hardly a mechanism that the pharmaceutical industry would want to see applied in a more general sense. And given that there are no regulations covering profit margins in pharmaceuticals (or price rises for generics, for that matter), the CMA mandating such a thing would surely set some kind of standard that has no basis in law. Any generic company is likely to have a portfolio of products with very different levels of profitability, relying on the more remunerative ones to offset the low – or even negative – margins on the rest. Flynn may have been disowned by the generic industry at large, but there are very few of its peers who can claim that they have never taken the opportunity to put the price of a product up when they could; it is just a question of degree. Nor would they presumably support a legal cap on margins or any change to their current ability to price generics freely.

We live in an era of trial by social media and while it was actually the old-fashioned printed press that has been whipping up moral outrage over generic prices, the DoH should surely not be allowing journalistic hysteria to drive policy. The UK benefits from an active generics industry that provides very cheap medicines, as well as from the investments in R&D made by big pharma. Neither of these is going to be sustainable in the longer term in an environment where companies have no idea what is or is not acceptable pricing behaviour. Flynn and Pfizer did not break any laws and the current price of phenytoin 100mg capsules is, as we have already noted, not unreasonable in absolute terms. Therefore, either the DoH should change the law to make large price increases illegal – while being mindful of the unintended consequences that this might have on the price of the cheaper drugs that actually make up the vast majority of NHS spending – or it should accept that prices will sometimes rise and then sit down with the industry and come to an agreement about what the acceptable limits of this are. The latter would clearly appear to be the more sensible option, but common sense has unfortunately been sadly lacking to date. Legislation set to pass through parliament in the first half of this year will give the DoH the power to directly regulate generic prices on a case-by-case basis, but this is likely to create far more problems than it solves and will hardly provide the needed clarity. In our view, if the government is incapable of drawing a line between fair and unfair price increases (to use its own terminology) then the generics industry should create its own code of conduct and implement it unilaterally. In this playground scrap, somebody needs to act the grown-up.

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