“3.–(1) The tribunal must determine the appeal on the merits by reference to the grounds of appeal set out in the notice of appeal. 2 (2) The tribunal may confirm or set aside the decision which is the subject of the appeal, or any part of it, and may– (a) remit the matter to the Director, (b) impose or revoke, or vary the amount of, a penalty, (c) grant or cancel an individual exemption or vary any conditions or obligations imposed in relation to the exemption by the Director, (d) give such directions, or take such other steps, as the Director could himself have given or taken, or (e) make any other decision which the Director could himself have made. (3) Any decision of the tribunal on an appeal has the same effect, and may be enforced in the same manner, as a decision of the Director. (4) If the tribunal confirms the decision which is the subject of the appeal it may nevertheless set aside any finding of fact on which the decision was based.”
“(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 8 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.”
“Right to a Fair Trial 1. In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Judgment shall be pronounced publicly ... 2. Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law. 3. Everyone charged with a criminal office has the following minimum rights: (a) to be informed promptly, in a language which he understands and in detail, of the nature and cause of the accusation against him; (b) to have adequate time and facilities for the preparation of his defence; (c) to defend himself in person or through legal assistance of his own choosing or, if he has not sufficient means to pay for legal assistance, to be given it free when the interests of justice so require; (d) to examine or have examined witnesses against him and to obtain the attendance and examination of witnesses on his behalf under the same conditions as witnesses against him; ...”
“It is our intention that the tribunal should be primarily concerned with the correctness or otherwise of the conclusions contained in the appealed decision and not with how the decision was reached or the reasoning expressed in it. That will apply unless defects in how the decision was reached or the reasoning make it impracticable for the tribunal fairly to determine the correctness or otherwise of the conclusions or of any directions contained in the decision. Wherever possible, we want the tribunal to decide a case on the facts before it, even where there has been a procedural error, and to avoid remitting the case to the director general. We intend to reflect that policy in the tribunal rules. This is an important aspect of our policy, and I shall explain the rationale behind our approach. The Bill provides for a full appeal on the merits of the case, which is an essential part of ensuring the fairness and transparency of the new regime. It enables undertakings to appeal the substance of the decision including in those cases where it is believed that a failure on the part of the director general to follow proper procedures has led him to reach an incorrect conclusion. The fact that the tribunal will be reconsidering the decision on the merits will enable it to remedy the consequences of any defects in the director general’s procedures.”
“relates to a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of consumers.”
“The existence of a dominant position may derive from several factors which, taken separately, are not necessarily determinative but among these factors a highly important one is the existence of very large market shares.”
“Napp considers that it makes sense to discount MST substantially to win hospital contracts, to take account of the fact that there is some linkage, albeit one that it is difficult to quantify, between sales in hospitals and sales in the community. Given that, under the PPRS, Napp can charge prices for its community sales which generate a profit margin of some [...] [in excess of 80]%, Napp does not need to stimulate many sales in the community to justify a substantial discount of its prices to the hospital sector. Thus Napp can afford to discount its prices to hospitals substantially, even on the basis of a fairly modest assumed linkage between hospitals and community sales, and the hospital sales will still be profitable. In short, we did not believe that, by discounting our prices to the extent that we did to win hospital contracts, we would be making losses; instead we believed that, if we were successful in winning contracts, we would thereby make extra sales, because we could expect to sell extra units of MST in the community segment, by virtue of the “linkage” referred to in paragraph (ii) above. We assumed that all bidders were 42 evaluating the opportunities in the same way, and were willing to offer discounts on the same basis.”
“Moreover, I have at all material times believed that Napp’s discounts to hospitals represented a fair and normal means of competition: Napp was keen to win hospital contracts, in recognition of the follow on benefits which they bring, in terms of community sales. I believed that other suppliers would also recognise those benefits and, indeed, I believed that that was why other firms (first Farmitalia, then Boehringer Ingelheim and now Link) were offering such low prices to hospitals.”
“Proof of this link [sc. between hospital and community] can be seen in the sales of Zomorph capsules over the last year where the ratio of hospital sales volumes to community sales volumes is 1:4. Link only has a hospital sales team. We do not call or advertise to GPs at all, and so the only way that there are any sales of Zomorph capsules into the community is through hospital influence via referral and the other methods outlined above. The MST ratio is currently 1:8 and so it can be seen following conversions that a hospital has an immediate and direct influence over around 50% of community usage. The ratio for Zomorph capsules sales will rise further over time as hospital influence filters through to the community… We do not dispute Napp’s second point that Napp makes money overall out of loss leading into hospital. For every 1 pack they sell into hospital we can see that immediately they would sell 4 into the community, and in the long term 8. …”
“The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.”
“A finding that an undertaking has a dominant position is not in itself a recrimination but simply means that, irrespective of the reasons for which it has such a dominant position, the undertaking concerned has a special responsibility not to allow its conduct to impair genuine undistorted competition on the common market.”
“41. In AKZO this Court did indeed sanction the existence of two different methods of analysis for determining whether an undertaking has practised predatory pricing. First, prices below average variable costs must always be considered abusive. In such a case, there is no conceivable economic purpose other than the elimination of a competitor, since each item produced and sold entails a loss for the undertaking. Secondly, prices below average total costs but above average variable costs are only to be considered abusive if an intention to eliminate can be shown. 42. At paragraph 150 of the judgment under appeal, the Court of First Instance carried out the same examination as did this Court in AKZO . For sales of non-aseptic cartons in Italy between 1976 and 1981, it found that prices were considerably lower than average variable costs. Proof of intention to eliminate competitors was therefore not necessary. In 1982, prices for those cartons lay between average variable costs and average total costs. For that reason, in paragraph 151 of its judgment, the Court of First Instance was at pains to establish – and the appellant has not criticised it in that regard – that Tetra Pak intended to eliminate a competitor. ... 44. Furthermore, it would not be appropriate, in the circumstances of the present case, to require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalise predatory pricing whenever there is a risk that competitors will be eliminated. The Court of First Instance found, at paragraphs 151 and 191 of its judgment, that there was such a risk in this case. The aim pursued, which is to maintain undistorted competition, rules out waiting until such a strategy leads to the actual elimination of competitors.”
“127. Apparently, therefore, sales below average variable (or short-run marginal: AKZO , paragraph 70) costs are in effect presumed to be abusive. While it is usually rational to sell above average variable costs, because that permits some return on capital, where the market will not bear a higher price, it is not usually rational to sell below average variable costs. Marginal costs need not be incurred and business has no interest in incurring them so as to make a loss. A dominant firm would be permitted, however, to rebut this presumption by showing that such pricing was not part of a plan to eliminate its competitor.”
“132. I would, on the other hand, accept that, normally, non-discriminatory price cuts by a dominant undertaking which do not entail below-cost sales should not be regarded as being anti-competitive. In the first place, even if they are only short lived, they benefit consumers and, secondly, if the dominant undertaking’s competitors are equally or more efficient, they should be able to compete on the same terms. Community competition law should thus not offer less efficient undertakings a safe haven against vigorous competition even from dominant undertakings. Different considerations may, however, apply where an undertaking which enjoys a position of dominance approaching a monopoly, particularly on a market where price cuts can be implemented with relative autonomy from costs, implements a policy of selective price cutting with the demonstrable aim of eliminating all competition. In those circumstance, to accept that all selling above cost was automatically acceptable could enable the undertaking in question to eliminate all competition by pursuing a selective 52 pricing policy which in the long run would permit it to increase prices and deter potential future entrants for fear of receiving the same targeted treatment.”
“137. In all these circumstances, the Court of First Instance committed no error of law in finding that the response of Cewal members to the entrance of G&C was not ‘reasonable and proportionate’. To my mind, Article 86 cannot be interpreted as permitting monopolists or quasi-monopolists to exploit the very significant market power which their superdominance confers so as to preclude the emergence either of a new or additional competitor. Where an undertaking, or group of undertakings whose conduct must be assessed collectively, enjoys a position of such overwhelming dominance verging on monopoly, comparable to that which existed in the present case at the moment when G&C entered the relevant market, it would not be consonant with the particularly onerous special obligation affecting such a dominant undertaking not to impair further the structure of the feeble existing competition for them to react, even to aggressive price competition from a new entrant, with a policy of targeted, selective price cuts designed to eliminate that competitor. Contrary to the assertion of the appellants, the mere fact that such prices are not pitched at a level that is actually (or can be shown to be) below total average (or long-run marginal) costs does not, to my mind, render legitimate the application of such a pricing policy.”
“112. It is settled case-law that the list of abusive practices contained in Article 86 of the Treaty is not an exhaustive enumeration of the abuses of a dominant position prohibited by the Treaty (Case 6/72 Europemballage and Continental Can v Commission [1973] ECR 215 , paragraph 26). 113. It is, moreover, established that, in certain circumstances, abuse may occur if an undertaking in a dominant position strengthens that position in such a way that the degree of dominance reached substantially fetters competition ( Europemballage and Continental Can , paragraph 26). 114. Furthermore, the actual scope of the special responsibility imposed on a dominant undertaking must be considered in the light of the specific circumstances of each case which show that competition has been weakened (Case C-333/94 P Tetra Pak v Commission[1996] ECR I-5951 , paragraph 24).”
“117 It follows that, where a liner conference in a dominant position selectively cuts its prices in order deliberately to match those of a competitor, it derives a dual benefit. First, it eliminates the principal, and possibly the only, means of competition open to the competing undertaking. Second, it can continue to require its users to pay higher prices for the services which are not threatened by that competition. 53 ... 119. It is sufficient to recall that the conduct at issue here is that of a conference having a share of over 90% of the market in question and only one competitor. The appellants have, moreover, never seriously disputed, and indeed admitted at the hearing, that the purpose of the conduct complained of was to eliminate G&C from the market. 120. The Court of First Instance did not, therefore, err in law, in holding that the Commission’s objections to the effect that the practice known as ‘fighting ships’, as applied against G&C constituted an abuse of a dominant position were justified. ...”
“it is necessary to consider all the circumstances, particularly the criteria and rules governing the grant of the discount, and to investigate whether, in providing an advantage not based on any economic service justifying it, the discount tends to remove or restrict the buyer’s freedom to choose his sources of supply, to bar competitors from access to the market, to apply dissimilar conditions to equivalent transactions with other trading parties or to strengthen the dominant position by distorting competition ( Hoffman-La Roche , paragraph 90; Michelin , paragraph 73). The distortion of competition arises from the fact that the financial advantage granted by the undertaking in a dominant position is not based on any economic consideration justifying it, but tends to prevent the customers of that dominant undertaking from obtaining their supplies from competitors ( Michelin , paragraph 71). One of the circumstances may therefore consist in the fact that the practice in question takes place in the context of a plan by the dominant undertaking aimed at eliminating a competitor ( AKZO , paragraph 72; Compagnie Maritime Belge Transports , paragraphs 147 and 148).”
“[71] Prices below average variable costs (that is to say, those which vary depending on the quantities produced) by means of which a dominant undertaking seeks to eliminate a competitor must be regarded as abusive. A dominant undertaking has no interest in applying such prices except that of eliminating competitors so as to enable it subsequently to raise its prices by taking advantage of its monopolistic position, since each sale generates a loss, namely the total amount of the fixed costs (that is to say, those which remain constant regardless of the quantities produced) and, at least, part of the variable costs relating to the unit produced.”
“Prices below average variable costs must always be considered abusive. In such a case, there is no conceivable economic purpose other than the elimination of a competitor, since each item produced and sold entails a loss for the undertaking. ... For sales of non-aseptic cartons in Italy between 1976 and 1981 ... prices were considerably lower than average variable costs. Proof of intention to eliminate competitors was therefore not necessary.”
“Link depends entirely on achieving a successful ‘conversion’ of a hospital to Zomorph as the basis for establishing a reputation and sales in the surrounding community segment of the market. This can only really be appreciated when one considers the way in which we inform GPs and retail pharmacists about our product.” (paragraph 28) Mr Hartley goes on to explain that Link’s strategy is first of all to secure a hospital contract. Once that contract has been won, Link does not market directly in the community segment but seeks to persuade the hospital authorities to inform GPs, retail pharmacists and others that the switch to Zomorph has taken place, explaining the advantages, and if possible recommending that it should be prescribed as “Zomorph capsules”
“The unique barrier that we face as a company trying to become known in this market place is Napp’s practice of offering extreme discounts to hospitals making their product almost free. At the levels of discount in question the average hospital spend on MST tablets comes to something under£500 a year.”
“the total value of the purchases by an individual hospital are now so small as to largely negate any desire or reason for a hospital to move away from MST CONTINUS”
“[The data] shows that even where and when Zomorph succeeds in gaining access to hospitals, this has a minimal impact on its market penetration among GPs.”
“there are only limited linkages between hospital and community sales of SRM. Most of the community market that is currently “captive” to MST cannot be won simply by winning some hospital contracts.”
“This is why Napp aggressively defend the hospital business, and as a monopoly supplier why their pricing is predatory.”
“The tribunal may admit or exclude evidence, whether or not the evidence was available to the respondent when the disputed decision was taken and notwithstanding any enactment or rule of law relating to the admissibility of evidence in proceedings before a court.”
“The launch of SRM-Rotard in tablet strengths of 10mg, 30mg, 60mg and 100mg, in identical colours to MST CONTINUS Tablets, is clearly the most important issue with which we now have to deal... We have agreed internally that we will match (beat, if necessary) their prices to hospitals and hospices.”
“The effect, however, would be to deflate the vital element of Boehringer’s promotional strategy and limit their opportunities to give Oramorph SR early success. It would also reaffirm that this is our market and any “would be” competitor may hurt us but will gain nothing for themselves.”
“The above action is both immediate and uncompromising as a response to Boehringer’s threat, and will hopefully signal to them that we are NOT leaving this market open to them...”
“Clearly the 90% discount option would send an unequivocal message to Boehringer that there was no place for them in this market. We do not of course know what their 82 intentions are and can only assume that they would not be prepared to lose money in order to penetrate the market.”
“I know there is a school of thought that argues that we should ‘stuff Boehringer’ by quoting substantial discounts, eg, 90%. However, I don’t want to simply win the battle and lose the war by getting stuck with such low prices that our hospital sales have no absolute value (other than referral). It’s the usual difficult balancing act. I’d be inclined to accept the proposal of 80% made by Chris providing that the contracts come up in such a sequence as to allow us to drop our price if we should fall at the first hurdle. If three significant contracts have to be completed at the same time then I would consider moving to 85%. Incidentally, Arthur, these judgments have to be made in relation to the cost of goods and you should encourage Chris to include these in future.”
“Chris I’d be inclined not to prevaricate. Simply match the prices.”
“In volume terms MST CONTINUS Tablets have done surprisingly well. Our aggressive stance towards Boehringer’s pricing is certainly working although, of course, reducing our overall sales and profit. I have already reported that our discounts are around 80% on tender business ... Perhaps more significantly though we are preventing them from getting a “toe-hold” in the GP market.”
“The cost of a drug is now the prime consideration with many if not most doctors. Unfortunately our major promoted products are highly exposed: MST continues to suffer severe price erosion from Boehringer’s efforts. Recently Oramorph SR was offered on contract at 97.5% discount compared with MST.”
“1. Perhaps understandably, they [BIL] felt hospital/hospice endorsement was very important to their market entry and aggressively undercut our own contract prices. As you appreciate, hospital endorsement (usage) can influence greatly the general practitioner and to prevent them gaining this foothold we also reduced our contract prices. They have now stabilised at the ludicrous figures you see in the table and whilst they are still half our price, the total value of the purchases by an individual hospital are so small as to largely negate any desire or reason for a hospital to move away from MST CONTINUS. 2. The above strategy [by BIL] was coupled with lower basic NHS price than MST. There are two reasons. Firstly, many hospitals appreciate the influence that their choice of drug has on the community general practitioner and believe therefore that they have a responsibility to make their choice of product with some regard to what the wider community will have to pay. Thus Boehringer use the lower Basic NHS price to persuade the hospital pharmacist – “not only will you pay less, but by following you the community, general practitioner will also pay less”
“Our morphine preparations have done considerably better than anticipated. This reflects the introduction of MXL once-a-day morphine ... We have been very successful in containing our competitors though not without a continued erosion of prices when trying to keep them out of the hospital market.”
“16. In essence, the Director General’s case is that Napp charges excessively low and/or discriminatory prices in the hospital segment and thereby sustains very high prices and market share in the community segment of the market. These two aspects are accordingly interlinked. Napp’s pricing practices have the effect of placing significant obstacles against the successful entry of competitors, and in consequence serve to preserve its quasi-monopoly position in the community segment of the market and enable it to continue to charge prices for MST higher than could be sustained in the absence of that quasi-monopoly position ie competitive prices … 17. Accordingly, the Director General does not seek to condemn the prices in the community segment in isolation; in other words, if his case should fail as regards the exclusionary character of Napp’s pricing practice in the hospital segment, he does not contend that the prices in the community segment violate the Chapter II prohibition simply because of their absolute level.”
“As stated above, it is the Director General’s case that Napp’s conduct has had the effect of excluding competitors from the hospital segment, thereby foreclosing the essential gateway for entry to the community segment. As a result Napp has retained its quasi-monopoly position in the community segment and has been able to charge quasi-monopoly prices. In those circumstances, the charging of prices, which are 95 higher than Napp would be able to charge in a competitive market, constitutes an abuse.”
“The essential significance of Napp’s exclusionary conduct (both before and after1 March 2000 ) to the finding of excessive prices is that it provides a solid basis on which to conclude that, in the absence of such conduct, there would have been effective price competition in this market as from1 March 2000 .”
“248 The imposition by an undertaking in a dominant position directly or indirectly of unfair purchase or selling prices is an abuse to which exception can be taken under Article 82 of the Treaty. 249 It is advisable therefore to ascertain whether the dominant undertaking has made use of the opportunities arising out of its dominant position in such a way as to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition. 250 In this case charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied would be such an abuse. 251 This excess could, inter alia , be determined objectively if it were possible for it to be calculated by making a comparison between the selling price of the product in question and its cost of production, which would disclose the amount of the profit margin; however the Commission has not done this since it has not analysed UBC’s costs structure. 252 The questions therefore to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products. 253 Other ways may be devised – and economic theorists have not failed to think up several – of selecting the rules for determining whether the price of a product is unfair”
“—Secure the provision of safe and effective medicines for the NHS at reasonable prices. - Promote a strong and profitable pharmaceutical industry capable of such sustained research and development as should lead to the future availability of new and improved medicines. - Encourage the efficient and competitive development and supply of medicines to pharmaceutical markets to this and other countries.”
“The PPRS does not guarantee a company a particular level of sales, or a particular level of profit associated with those sales, for a number of reasons…” “… a company facing competing products may not be in a strong position to increase prices as a way of generating additional revenue, unless it has other products in its portfolio facing little therapeutic competition.”
“243. Napp was similarly aware of the strategic importance of the hospital segment for new competitors and potential entrants. It must therefore have been aware that its discounts to hospitals would have the effect of reducing the ability of competitors to gain market share in the hospital and community segments of the market, and could lead them to exit the market altogether. That this was Napp’s intention is shown the more clearly by the fact that its prices to hospitals were below direct cost and by its having adjusted discounts on particular products and in respect of supplies to particular hospital regions according to the amount of competition it faced. 244. The Director is satisfied therefore that Napp’s conduct had as its object the restriction of competition. He is equally satisfied that Napp was aware that its actions would be, or, at the very least, would be reasonably be likely to be, restrictive of competition, but was still prepared to carry them out. Furthermore, contrary to Napp’s representations, Napp cannot have been unaware of the exceptional magnitude of the discounts it was offering to hospitals or of the asymmetry between its position in the market and that of its competitors. It must therefore have been aware that it would not be possible for competitors to engage in similar pricing behaviour over the long term.”
“246. Napp has maintained high prices in the community segment of the relevant market in the full knowledge of its own very high market share, its profit margins on such sales, its competitors’ prices, the preference for its brand on the part of the GPs, and their lack of price sensitivity. The Director therefore considers that Napp’s infringement in respect of its excessive prices to the community was, for the purposes of section 36 of the Act, intentional or, at the very least, negligent.”
“2.3 The starting point for determining the level of financial penalty which will be imposed on an undertaking is calculated by applying a percentage rate to the “relevant turnover” of the undertaking, up to a maximum of 10%. The “relevant turnover” is the turnover of the undertaking in the relevant product market and relevant geographic market affected by the infringement in the last financial year. This may include turnover generated outside the United Kingdom if the relevant geographic market for the relevant product is wider than the United Kingdom. 2.4 The actual percentage rate which will be applied to the “relevant turnover” will depend upon the nature of the infringement. The more serious the infringement, the higher the percentage rate is likely to be. Price-fixing or market-sharing agreements and other cartel activities are among the most serious infringements caught under the Chapter I prohibition. Conduct which infringes the Chapter II prohibition and which by virtue of the undertaking’s dominant position and the nature of the conduct has, or is likely to have a particularly serious effect on competition, for example, predatory pricing, is also one of the most serious infringements under the Act. The starting point for such activities and conduct will be calculated by applying a percentage likely to be at or near 10% of the “relevant turnover” of the infringing undertakings.”
“2.8 The penalty figure reached after the calculations in steps 1 and 2 may be adjusted as appropriate to achieve the policy objectives, outlined in paragraph 1.8 above, in particular, of imposing penalties on infringing undertakings in order to deter undertakings from engaging in anti-competitive practices. The deterrent is not aimed solely at the undertakings which are subject to the decision, but also at other undertakings which might be considering activities which are contrary to the Chapter I and Chapter II prohibitions. Considerations at this stage may include, for example, the Director’s estimate of the gain made or likely to be 124 made by the infringing undertaking from the infringement. Where relevant, the Director’s estimate would account for any gains which might accrue to the undertaking in other product or geographic markets as well as the “relevant” market under consideration. The assessment of the need to adjust the penalty will be made on a case by case basis for each individual infringing undertaking. 2.9 This step may result in a substantial adjustment of the financial penalty calculated at the earlier steps. The consequence may be that the penalty which is imposed is much larger than would otherwise have been imposed. The result of any one of steps 2 or 3 above or 4 below may well be to take the penalty over 10% of the “relevant turnover” identified at step 1, but the overall cap on penalties is 10% of the “section 36(8) turnover” referred to in step 5 below and must not be exceeded.”
“249. The relevant product market affected by the infringements is the supply of sustained release morphine tablets and capsules in the UK. Napp’s turnover in the relevant product market in the year ending31 December 2000 was £[...] million. The Director has taken this as the relevant turnover for the purposes of calculating the starting point. 250. The actual percentage rate applied to the relevant turnover depends upon the nature of the infringement. The more serious the infringement, the higher the percentage rate is likely to be. 251. Napp has supplied sustained release morphine tablets and capsules to hospitals at significant discounts with the object and effect of preventing competitors from increasing their share of the relevant market and deterring new entry. Napp has further targeted its discounts at those areas where it faced or expected competition. The Director considers that Napp’s discount policy directly restricted competition in at least a quarter of the relevant market and indirectly impaired competition in the whole of the relevant market. These discounts have therefore seriously disadvantaged Napp’s competitors in competing for hospital sales and thereby further restricted and diminished competition in the hospital segment of the market. Furthermore, the hospital segment of the market is of considerable strategic importance for competitors wishing to increase sales in the larger community segment of the market. Hence Napp’s discounts to hospitals have restricted and diminished competition in both the hospital and the community segments of the market. 252. Napp faces very little competition in the community segment of the market and the barriers to entry are high. Napp’s prices to the community are typically some 40% higher than those of its competitors and, in most cases, over 1000% higher than the prices it charges to hospitals. They are also between [...] [in excess of 100%] and [...] [less than 700%] higher than its prices for export. In addition, its gross profit margins on community sales are in excess of [...][80%] compared to average NHS margins of around 40%. The result of Napp’s conduct is a serious distortion of competition, and a considerable excess cost to the NHS and so to the taxpayer. 253. Sustained release morphine tablets and capsules are supplied for use in the final product market, rather than as an intermediate good, and the cost is borne by the taxpayer. The effects are therefore widespread. 254. The Director therefore concludes that, contrary to Napp’s submissions, Napp has committed a serious infringement of the Chapter II prohibition and has taken as the starting point for determining the penalty 8% of the relevant turnover.”
“257. The penalty figure reached after the calculations in steps 1 and 2 may be adjusted as appropriate to achieve the Director’s policy objectives of reflecting the seriousness of the infringement and deterrence. As regards the latter, the deterrent is not aimed solely at the infringing undertaking but also at other undertakings which might be considering activities contrary to the Act. 258. The Director considers that it is appropriate to make an adjustment to the penalty in order in particular to achieve his policy objective of deterrence. To achieve this objective, the Director has decided that in the present case the basis for the adjustment should be his estimate of Napp’s gain from the infringements. 259. It is impossible to estimate with certainty how much lower Napp’s profits would have been, or would now be, on sales of sustained release morphine tablets and capsules in the UK in the absence of the infringements. It is however clear that prices in the community segment of the market are, and have been throughout the period of the infringement, excessive and typically 40% higher than the prices charged by Napp’s competitors. Moreover, it could be expected that were it not for the infringements, not only would Napp’s community prices have been lower but the volume and value of its sales in the market as a whole would also have been, and would now be, lower. However, it is likely that Napp’s revenues from hospital sales, representing on average 15% of the market by volume and less than 1% by value, have been less than they would otherwise have been. 260. On the basis of these findings, the Director estimates that Napp’s likely gain from the infringements is, at the very least,£2m . The Director considers that this figure probably underestimates Napp’s gain from the infringements but is satisfied that it is appropriate in this case to adjust the penalty by this amount in order to meet the Director’s policy objectives on penalties. In reaching this conclusion, the Director has had regard both to Napp’s turnover on the relevant market and to the fact that Napp’s profits are subject to taxation. Following Step 3, the penalty is therefore adjusted to£2.92m .”
“At paragraph 236 of the Decision two elements of Napp’s conduct were found to infringe the Chapter II prohibition. First, Napp was found to have charged excessive prices to customers in the community segment of the market for the supply of sustained release morphine tablets and capsules in the United Kingdom (the relevant market). Second, Napp was found to have supplied sustained release morphine tablets to the hospital segment of the relevant market at discounts which have the object and effect of hindering competition in the relevant market. The Director considers that these two elements of Napp’s pricing conduct are inter-related and must be considered as a whole in formulating directions which are appropriate to bring the infringement to an end. First, Napp’s ability to sustain high prices in the community depends in large part on the effect of Napp’s discounting behaviour to hospitals in hindering competition in the relevant market. Second, the fact that Napp’s prices in the community segment of the relevant market are significantly above those of its rivals contributes to Napp’s asymetrical advantage in bidding for hospital contracts.”
“The Director considers that an immediate reduction in the NHS list price is appropriate in order to mitigate Napp’s excessive prices in the community segment of the relevant market in the short to medium term. This reduction, coupled with a corresponding reduction in the ex-factory price of MST tablets sold to the community, will also reduce Napp’s ability to cross-subsidise discounts in the hospital segment of the relevant market. 143 In the longer term, the Director considers that the best way to prevent Napp from pricing excessively is to maintain incentives, and to create opportunities, for competition to develop throughout the relevant market. The Director considers that the appropriate level of reduction in the NHS list price would be fifteen per cent. This will significantly reduce the price of MST tablets to the community segment of the relevant market, while nevertheless allowing for a gap between the price of MST tablets and that of Napp’s competitors, thus maintaining incentives for competition to develop. This is consistent with Napp’s representations that a reasonable price premium on MST tablets should be allowed to reflect their current higher brand value relative to that of rival products.”
“Paragraph 2(d) of the directions provides that the price of each strength of MST tablet sold to hospitals in the UK shall not be less than twenty per cent of the NHS list price for that product strength of MST. The Director considers that this direction is appropriate in order to prevent Napp from restricting competition by supplying hospitals at excessively low prices. The figure of twenty per cent represents the ratio between Napp’s average cost of supplying MST tablets to hospitals and the average NHS list price for those products arrived at following the fifteen per cent reduction required by the direction at paragraph 2(a). The calculation of Napp’s average cost of supplying MST tablets to hospitals for this purpose is based on the total delivered cost to Napp of supplying MST to hospitals in the UK over the period of March to May 2000. The calculation of Napp’s average NHS list price, to which the fifteen per cent reduction is then applied, is based on the volumes of MST tablets supplied to hospitals in the UK over the same period. The direction at paragraph 2(d) does not impose on Napp an absolute prohibition on supplying hospitals at prices below the average cost. In order to do so, however, Napp would need to reduce further its NHS list price for the product thus limiting its ability to cross-subsidise discounts in the hospital segment and so, by weakening the asymmetry between Napp’s position and that of its competitors, increasing the opportunities for competition to develop. In its representations, Napp has argued that in order to compete for hospital contracts it would have to reduce the list price of MST tablets to unnecessarily low levels. First, the Director does not consider that discounts to hospitals will remain at their current level following implementation of the direction. Second, MST tablets will maintain non-price advantages in competing for hospital contracts owing to Napp’s position of dominance on the relevant market.”
“3. The turnover of an undertaking for the purposes of section 36(8) is: (1) the applicable turnover for the business year preceding the date when the infringement ended; (2) where the length of the infringement is more than 12 months, in addition the amount of the applicable turnover for the business year preceding that identified under paragraph (1) which bears the same proportion to the applicable turnover for that business year as the period by which the length of infringement exceeds 12 months bears to 12 months; and (3) where the length of the infringement is more than 24 months, in addition the amount of the applicable turnover for the business year preceding that identified under paragraph (2) which bears the same proportion to the applicable turnover for that business year as the period by which the length of infringement exceeds 24 months bears to 12 months; save that the amount added under paragraph (2) or (3) shall not exceed the amount of the applicable turnover for the preceding business year in question.” 125 The Director’s approach in the Decision