Pfizer Inc. and Pfizer Limited v 
Competition and Markets Authority [2024] CAT 65 (20 November 2024)
CAT HELD:
-Attribution:
questions of attribution arise, particularly in the case of subjective states of mind like intention. In the case of competition law infringements, the concept of the UA (“undertaking”) renders such issues academic. Thus: …the “unit of account” for purposes of competition law infringement and penalty is the “undertaking”, an economic and not a legal characterisation of an organisation. Thus, provided that legally recognised entities (incorporated or not) form part of the same economic unit, their conduct, knowledge and state of mind can be pooled into the UA… In this case, we have no hesitation in concluding that both Pfizer and Flynn intentionally infringed the Chapter II prohibition. We have reached this conclusion for the following reasons:
(1) For a Seller in a market, price and price setting is a critical part of staying in business. Just as any Enterprise will have the control of costs well in mind, so too will that Enterprise have a very clear understanding of what drives its margins, both in terms of individual product and in terms of overall profitability. Cost and price are the central considerations that will inform most, if not all, aspects of a commercial Enterprise’s consideration.
(2) With this focus on cost and price, every Enterprise will have an awareness – profounder than that of any regulator or reviewing court – of the competitive environment in which they function, which drives both cost (the price the Enterprise must pay for the Factors of Production they need to obtain) and price (the cost to that Enterprise’s Buyers).
(3) In this case we are concerned with the price and the cost of the various Capsule dosages, and with the profit that constitutes the difference between these metrics. We have – in order to resolve these appeals, considered these metrics in a very specific way: we have focussed on Product Unit Cost and Product Unit Price and Profit Margin, as derived from the Focal Product Spreadsheets. We anticipate that Pfizer and Flynn did not parse their costs and prices in quite this way. However, we find that both Pfizer and Flynn will have been well-aware, in relation to the Capsules, of both their cost and their price and the profit margin that accrued to them because the latter dramatically exceeded the former……In short, the Appellants will have known that there was a significant difference to their very considerable benefit between cost and price, and that the Capsules represented “good business” for them. Not only were the per unit margins great, but the overall revenues derived from the volumes of Capsules sold rendered the revenuesto both Pfizer and Flynn enormous.
(4) Pfizer and Flynn must have been aware that the products they were selling had certain characteristics that enabled them to price at will. Not only were the Capsules medically necessary, because of the issue of Continuity of Supply, Pfizer and Flynn would have appreciated that substituting other phenytoin sodium products for the Capsules would be difficult.
(5) The ability effectively to price at will is clear from the original arrangements between Flynn and Pfizer in 2012 and their joint decision
to “de-brand” the Capsules. The reason for de-branding was to escape the PPRS price control: the only reason to seek to escape a price control is an appreciation that the price control is exactly that – a fetter on the ability to price higher. The PPRS scheme does not apply to unbranded products because it is assumed that competition will act as a control on price. In this case, both Pfizer and Flynn knew – for the reasons we have articulated – that there were no competitive controls over the prices they could charge for the Capsules. We conclude that throughout the Relevant Period, Pfizer and Flynn knew the margins they were making, and knew that they were pricing at well-above CMA Cost Plus.
(6) That, of course, is not enough to justify a conclusion that there was an intention to infringe the Chapter II prohibition by pricing unfairly. Unfair pricing is not a legal concept. To achieve an objective outcome, unfair pricing is best analysed through the economic lens of Consumer and Producer Surplus. But the requisite intention to infringe can be established without reference to these economic concepts. The key questions are these:
(i) Is the Enterprise able to charge a price that is not particularly informed by its costs?
(ii) If so, why is the Enterprise able to do so?
(7) It will readily be appreciated that these are, in lay terms, precisely the sort of questions that this Judgment has been concerned with. In particular, the second question – why can the Enterprise price in a manner that is above cost but at prices not otherwise informed by cost? – raises exactly the questions regarding the Producer Surplus that we have been considering. In this case:
(i) Both Pfizer and Flynn knew that they were pricing at well above cost and at prices that involved some form of Producer Surplus. We do not consider that it can plausibly be suggested that the Capsule Prices were at what we have referred to as CMA Cost Plus, no matter how generously this was calculated.
(ii) Nor do we consider the prices of “competitors” or other Sellers in the same market to be particularly relevant. Pfizer and Flynn
may have been pricing in line with an industry standard, but that says nothing about how the industry sees its prices. Equally, the
Drug Tariff is no justification for a fair price, for the reasons that we have given.
(iii) Pfizer and Flynn were aware that they were able to price independently of cost and independently of competitive constraints. As successful Enterprises, they will have been well-aware of why this was the case. They were in a dominant position because of the need for Continuity of Supply, which was not something they delivered to the market, but rathersomething that they took advantage of. In short, they priced not because demand exceeded supply (Case 1), nor because of any particular innovation (Case 2), but because there was a basic human need for the Capsules, which only they could satisfy. The human need was not as stark as it might have been – the State intervened to pay – but that does not disguise the fact that both Pfizer and Flynn were gouging the market in a manner that can only be characterised as unjustifiable or opportunistic or – in a word –unfair
(8) This is something that Pfizer and Flynn intended. They did not accidently or negligently overprice. They had market power given them; and they abused it>>> there is jurisdiction to impose a penalty; and the basis on which we assess that penalty is one of intentional infringement of the Chapter II prohibition. Questions of negligence do not arise.
PENALTIES
-are the amount of the fines imposed by cma correct? : ‘Pfizer’s pricing of the 25mg Capsules, which we have found did not infringe the Chapter II prohibition. It is appropriate that we adjust the fine downwards. We do so by reference to the total monthly Profit Margin accruing to Pfizer as disclosed in Figure/Table 19. Total Profit Margin across all Capsule sales was £1,187,600, of which the Profit Margin of 25mg Capsules was £12,647 or 1.06%. We reduce Pfizer’s penalty by 1% or £630,000 accordingly.
ANEX: CASE 1 PRODUCER SURPLUS EXAMPLE [sar= saudiarabia]
sar enjoys the worlds lowest oil production costs…while south&north.america suffers the worlds highest oil production costs….. (and viceversa with cumulative oil production[in millions of barrels per day (“mbpd”)]…this is becos is inverse.proportional to oil production costs)
1. the same product (oil) has multiple producers, each with dramatically different costs of production. We assume a competitive
market in the sense that each producer is seeking to sell as many barrels of oil as they can (i.e. all will sell to capacity) and that they are not colluding as to price. Depending on the level of aggregate demand, there will be no dominance. We will suppose, for the moment, a level of demand at 60 mbpd and that (at this level of demand) buyers are prepared to pay US$70/per barrel, although of course, they would like to pay less. On this basis, all producers up to US Gulf of Mexico Deep Water producers will have costs (excluding the Reasonable Rate of Return, as we do) that will enable them to sell in this market. US Gulf of Mexico Deep Water Producers – costs at US$70/barrel – can only sell in this market if they are prepared to take a loss. On our assumptions, they will not, because as well as covering costs, they will want to make a Reasonable Rate of Return…(2) Looking to the other end of the costs scale, Saudi Arabia (costs at just over US$20/barrel) is clearly not dominant. Their production level is just under 10 mbpd, and there are at least 10 other sellers able to sell in this market in competition to Saudi Arabia.
2. We are – unrealistically, but it is a useful simplifying assumption – going presume that the Reasonable Rate of Return is a percentage of cost, and that that percentage is 10%
3. Let us ask ourselves what price would be charged – in this market – by the cheapest producer (Saudi Arabia). The price of Saudi Arabian producers will not be CMA Cost Plus. That would be an economically irrational price to charge, being far too low. Depending upon aggregate demand, and elasticity of supply – two points we will come to – Saudi Arabia will price at the CMA Cost Plus level of the least efficient competitor who is able to sell product into the market. In short, Saudi Arabia’s price – in a competitive market – will have
nothing to do with its costs, save that price will sit (well) above those costs. We expand upon why this is the case in the following sub-paragraphs:
(1) We are assuming that Saudi Arabia – as with all of the producers – is selling as much as it can produce. In other words, the 10 mbpd figure for Saudi Arabian producers is an inelastic figure (on the supply side) that cannot be increased. We are assuming this to be the case for all suppliers (all are supplying the maximum).
(2) As we have stated, we are supposing a level of demand at 60 mbpd and that (at this level of demand) buyers are prepared to pay US$70/per barrel. On this basis, UK North Sea producers can sell at above US$60/barrel. Indeed, they can sell at: Cost (US$60/barrel) + Proper Return (US$6/barrel) = Price (US$66/barrel)
(3) But that is not the price at which these producers will sell. The price at which each producer will sell will actually be determined by the next most (in)efficient producer, here Other North America producers, whose Cost appears to be about US$62/barrel (the graph is not easy to read accurately, but that does not matter), and whose proper return would be US$6.20. The minimum price for these producers would be US$68.20/barrel. UK North Sea producers would not sell at US$66/barrel but at US$68/barrel (or just below the next most inefficient producer’s minimum price).
(4) In short, the constraints on the price of UK North Sea producers are a combination of cost and Reasonable Rate of Return (which determine the “floor” below which these producers will not sell) and other producers’ “floor” (which determines the “ceiling”, above which these producers cannot sell). In short, the ceiling is a constraint derived from the next most (inefficient) producer in this case. As we shall see, for those like Saudi Arabian producers, the constraint is the CMA Cost Plus level of the least efficient competitor who is able to sell product into the market (i.e. in this case, UK North Sea producers)
In other words, Saudi Arabia will also sell at just above US$68/barrel, the price of its least efficient competitor, UK North Sea producers. If Saudi Arabian producers priced at above this level, they (like their least efficient competitor) would lose market share to the producer presently not in the market – Other North America producers. In other words, exactly the same constraint as operates on the UK North Sea producers.
4. Let us now assume an additional capacity in oil production capability of Saudi Arabia: say an additional capacity of 3 mbpd – which is the total capacity of the UK North Sea producers. Depending on the level of aggregate demand, it might pay Saudi Arabia to price at US$65/barrel, thus cutting out UK North Sea producers. Whether that is the case depends not on cost, but on aggregate demand. We are supposing a level of demand at 60 mbpd such that at this level of demand buyers are prepared to pay US$70/per barrel. At this level of demand, it will pay the Saudi Arabian producers to undercut the UK North Sea producers and drive them from the market. The model below assumes:
(1) Aggregate demand at 60 mbpd, which (with the levels of production shown in the graph) enables UK North Sea producers to stay in the market because of the supply constraints of other more efficient producers. In other words, if, as we will be assuming, the ability of one of the more efficient producers to supply the market increases, then the possibility of undercutting the less efficient producer arises.
(2) Cost per barrel of US$20/barrel for Saudi Arabian Producers, and US$60/barrel for UK North Sea Coast producers. The Proper Return, in each case, is 10% of Cost
5. UK North Sea Coast producers produce and sell 3 mbpd. These producers are selling at the margin: they are the least competitive producer in the market, and were aggregate demand to fall by 3 mbpd or the supply of more efficient producers to increase, there is a risk that UK North Sea Cost producers could be undercut. It is the latter case that we will consider. Example 1 assumes capacity
in Saudi Arabian producers of 10 mbpd; Example 2 assumes that that capacity increases to 13 mbpd.
CONCLUSION: competition has benefit. the price falls by $3/barrel, and producer profits go up….but the consumer does not win as much as they would on a pure cost plust basis. [the same outcome would happen if SAR were dominant. in example1, everyone is incentivised to be efficient, as it is no assumption that either sar or the uknorthsea are deliberately inefficient. sar have less incentive to be [efficient =cut costs] becos their oil production costs are the world’s lowest >> sar’s margins are huge, so , like a monopolist, they may become lazy to be efficient.