Loyalty rebate scheme 'saved' by pharma company's market misconceptions

According to the CMA, the discount scheme lacked exclusionary effects because the MSD had miscalculated the NHS's potential reactions to the discount scheme. While this case confirms the effects-based approach to assessing loyalty-inducing rebates by dominant companies this outcome is noteworthy.

Remicade, a biological immunosuppressant medicine used to treat autoimmune inflammatory disorders, is the branded infliximab product of MSD. Remicade's patent expired in February 2015, at which point biosimilar products were introduced in the UK. Following the introduction of biosimilars, MSD introduced a discount scheme in its dealings with the UK's NHS. In December 2015, the CMA opened an investigation into the scheme in order to establish whether it constituted an abuse of a dominant position by MSD.

In its recent decision, the CMA first established that the relevant market consisted of the supply of all infliximab products (Remicade and biosimilars) in England (as opposed to the entire UK). A wider product market for all other biological immunosuppressant products was considered, but rejected in view of the different mode of administration of these products and the infliximab products. England was considered the appropriate geographic market in view of the different tender processes in place in other parts of the UK.

Second, the CMA concluded that MSD held a dominant position in the market based on i) the barriers to entry and expansion in place for biosimilars (consisting mainly of the clinical caution vis-à-vis biosimilars), ii) the fact that MSD maintained a high market share even after biosimilar entry and iii) the absence of effective countervailing buyer power to constrain MSD.

As to the question of abuse, the CMA recalled that, for this to be the case, the rebate scheme must be found to produce an anti-competitive effect, and that effect must be likely (not purely hypothetical). This would be the case, for example, if the scheme would (likely) prevent purchasers from obtaining all or most of their requirements from competitors as a result of the financial inducements offered by Merck.

The CMA found that the scheme was in fact designed to generate an anti-competitive effect. Its analysis indicated that the scheme aimed to bring about the result that biosimilars would have to charge very low prices in order to match the effective price charged by MSD, while the NHS would have to pay more if it chose to switch away from MSD's product in favour of purchasing biosimilars.

These findings were driven by the fact that a certain portion of the demand was found to be 'incontestable' for biosimilar entrants. According to the CMA, MSD had speculated that this portion of the demand consisted of almost the entire patient population already using its drug (in other words, prescribers and the NHS would not be keen on switching existing patients). On the basis of that assumption, it had structured the rebate so as to force competitors to sell at unsustainable levels in order to compete within this range of demand.       

However, according to the CMA, MSD's assumption regarding the size of incontestable share of the demand did not hold up. In practice, the degree of clinical caution towards biosimilars was less prevalent than had been anticipated by MSD. In addition, due to the lack of retroactivity in the scheme, the financial incentives for the NHS bodies to purchase MSD's products were weaker than Merck had modelled.   

On this basis the CMA concluded that while MSD's scheme was designed to foreclose competitors, it was not likely to produce an exclusionary effect in practice. As a result, the CMA issued a No Grounds for Action Decision.

While this case confirms an increasingly effects-based approach to rebates schemes [see our October 2017 Newsletter], this outcome is noteworthy. In particular, the CMA assumed a burden in terms of analysing the likelihood of effects, which competition authorities have previously avoided. For this reason, we expect that this decision will be relied on extensively.

This article was published in the Competition Law Newsletter of April 2019. Other articles in this newsletter:

• European Court of Justice sets aside Portuguese rules time-barring a damages action
• Tick-tock: no reset of the appeal clock for amending Commission decision
• Fine liability in antitrust cases is closely scrutinised by Dutch courts
• Don't take the ACM's digital inspection guidelines too literally
• European Court of Justice issues landmark ruling on parental liability