NAPP Pharmaceutical Holdings Ltd v Director-General of Fair Trading
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE BUXTON,Lord Justice Brooke,LORD JUSTICE BROOKE |
| Judgment Date | 08 May 2002 |
| Neutral Citation | [2002] EWCA Civ 796 |
| Docket Number | NO:C/2002/0705 |
| Court | Court of Appeal (Civil Division) |
| Date | 08 May 2002 |
[2002] EWCA Civ 796
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
Royal Courts of Justice
Strand
London WC2
Lord Justice Brooke and
Lord Justice Buxton
NO:C/2002/0705
Mr Christopher Carr QC appeared on behalf of the Claimant
The Defendant did not appear and was not represented.
Wednesday, 8th May 2002
Background
The facts of and relating to this case are set out in the submissions of the two parties to the Director, in the Director's decision, and again in the judgement of the Tribunal. I am not going to set them out again for a fourth or fifth time, and I will indicate only as much as is necessary for a broad understanding of the judgement on the part of somebody who has not been a direct party to the proceedings: although such a person can if he wishes have access both to the decision and to the Tribunal judgement in a new series of reports dedicated to that field. Although the applicant ("Napp") makes certain complaints about the Tribunal's handling of some factual issues, a matter to which I shall in due course return, there appears to have been a high level of agreement as to the underlying facts of the case, and I trust that what I now set out will not be seen as unduly controversial.
The market in question is that for the sale of sustained release morphine [SRM] tablets and capsules in the United Kingdom. SRM is a prescription drug, used for the relief of severe pain, including but not limited to that of cancer patients. The innovative element in the drug is the element of sustained release, enabling the drug to operate over a period of time, and thus to give relief in cases where the constant alleviation is required of otherwise unsustainable pain. Napp was the first company to introduce an SRM product into the United Kingdom, producing MST in 1980. Napp held a patent on the sustained release element in MST between 1980 and 1992. No competing SRM product entered the United Kingdom market until 1991.
There are two segments of the SRM market. The majority, some 86 to 90 per cent of supply, is to community pharmacies, for patients in community or primary care. The remainder is supplied to hospital pharmacies, for use in secondary care. There are different pricing and purchasing structures in these two segments. Sales to the community segment are not significantly price-sensitive. That is because although General Practitioners, whose prescription authorises the purchase, are subject to overall budget constraints, SRM drugs make up a small part of their total drug usage, and they are in any event likely not to be influenced by pricing considerations when dealing with the degree of acute suffering that SRM drugs seek to address.
NHS prices generally are, however, constrained by the voluntary Pharmaceutical Price Regulation Scheme [PPRS], agreed between the pharmaceutical industry and the Ministry of Health. PPRS, however, operates on a "portfolio" basis; that is, the scheme controls the overall profits of participating companies (which include Napp), rather than by placing price limits on particular drugs. By contrast, the hospital segment is highly price-sensitive, with hospital boards, as bulk purchasers, expecting substantial discounts off a supplier's NHS list price. Such discounts have increased substantially since the launch of a product competing with MST in 1991.
However, despite their different primary characteristics, as just set out, there is a substantial economic linkage between the two segments. A very great deal of effort has been expended in these proceedings in disputes about the detail of that link, but I would respectfully agree with the observation of Mr Carr Q.C. in this court that the exact nature of the linkage is not of primary importance. It suffices here to say that Napp agrees, and indeed strongly asserts, that hospital sales are an important, or even indispensable, "gateway" to community sales.
That link operates in two ways. First, in specific cases, the hospital doctor may require the patient to remain, or the community doctor think it advisable he should remain, under the same drug regime when he leaves hospital. This is not just on grounds of familiarity or because of inertia, but also because release patterns of different drugs do or may differ.
Second, the Tribunal found at paragraph 238 of its decision that in the conduct of its business Napp also laid weight on the effect of referral letters by specialists, even in cases where the patient had not been treated with an SRM drug in hospital, and on the enhancement of the reputation of the brand through its use in hospitals. The Tribunal found that it would be futile to seek to enter the community segment without a presence in the hospital segment.
Napp has a dominant position in both segments of the market. In the community segment, its market share has for many years exceeded 90 per cent and that dominance is buttressed, in the Director's contention, by significant barriers to entry into that segment of the market, including MST's reputation as what Napp described as "the gold standard for the treatment of severe chronic pain"; caution on the part of general practitioners in prescribing new strong opioid products; lack of price sensitivity amongst general practitioners; and the need for very considerable promotional expenditure in order to dislodge Napp's position.
In the hospital segment, Napp's market share is now also over 90 per cent, having grown in recent years with the reduction in share, and eventual withdrawal from the market, of the then only significant competitor, Oaramorph SR, manufactured by Boehringer Ingelheim Limited [BIL]. A recent entry is Zomorph, supplied by Link Pharmaceuticals Limited, which has some 7 per cent of the hospital market and some 3 per cent of the community market.
Napp makes a gross margin of in excess of 80 per cent of its sales in the community segment. By contrast, in the general climate of discounting to hospitals referred to above, Napp offers discounts of in excess of 90 per cent off its NHS list prices to the hospital segment. In the period from March to May 2000, Napp's prices to hospitals were below its total delivered costs on all tablets except those of 15 mg and 200 mg, and below direct costs of material and labour on all tablets except 5 mg, 15 mg and 200 mg. The latter cases, in which the discounts were below 85 per cent, were the only categories of the product in relation to which Napp did not face a directly competing product from BIL. The price to the community is very significantly greater than the price charged to hospitals, in the case of some higher strength tablets the community wholesale price being in excess of 1,000 per cent higher than the average hospital price.
The Director concluded that Napp had abused its dominant position in the terms of section 18 of the Competition Act 1998 in the following terms:
"(a) while charging high prices to customers in the community segment of the market, supplied sustained release morphine tablets and capsules to hospitals at discounts which have the object and effect of hindering competition in the market for the supply of sustained release morphine tablets and capsules in the UK. The pricing behaviour of Napp has to be considered as a whole, but the particular aspects in which, in the circumstances of the present case, its discounting behaviour is abusive under section 18 of the Act, are as follows:
"(i) selectively supplying sustained release morphine tablets and capsules to customers in the hospital segment at lower prices than to customers in the community segment;
(ii) more particularly, targeting competitors, both by supplying at higher discounts to hospitals where it faced (or anticipated) competition, and by supplying at higher discounts on those strengths of sustained release morphine tablets and capsules where it faced competition; and
"(iii) supplying sustained release morphine tablets and capsules to hospitals at excessively low prices.
"Moreover, Napp has engaged in the above conduct with the intention of eliminating competition.
"(b) charged excessive prices to customers in the community segment of the market for the supply of sustained release morphine tablets and capsules in the UK.
In doing so, Napp has abused its dominant position in the market for the supply of sustained release morphine tablets and capsules in the UK."
The Director ordered various regulatory measures and imposed a penalty of £3.21 million. The Tribunal upheld that decision, with the omission of sub-paragraph (i) of paragraph (a), but reduced the penalty to one of £2.2 million. Napp seeks permission to appeal to this court against both the findings of the Tribunal as to abuse and the fact and amount of the penalty.
The jurisdiction of this Court
Appeals to this court from the Tribunal, apart from appeals as to the amount of the penalty, are on points of law only. That has two particular implications.
First, by reason of section 60 of the Competition Act the Tribunal is required, as is this court, to secure that there is no inconsistency between its decisions and the principles laid down by the Treaty establishing the European Union and any principles laid down by or any relevant decision of the Court of Justice. That means that the "law" that will be applied is likely to be largely or entirely the law of the European Union, and that means in its turn that both the courts and those appearing before them have a particular responsibility to identify clearly what in the...
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