Pfizer's bundling and rebates get a clean bill of health – do yours?

01 Jun 2018

The Federal Court has confirmed that vigorous competition on the merits, even by a firm possessing substantial market power, will not be found to constitute an abuse of market power.

In ACCC v Pfizer Australia Pty Ltd [2018] FCAFC 78, the Full Federal Court found that Pfizer's offering of discounts and rebates to pharmacies as part of a bundled offer of a branded and generic pharmaceutical product, in anticipation of the entry of competing generic products did not constitute an abuse of market power, nor was it engaged in for the purpose of substantially lessening competition by deterring entry by competing generic producers.

Although it was argued under the older abuse of market power law (section 46) which was replaced and expanded in late 2017), the Pfizer decision is important because it gives businesses some clarity on how they can lawfully bundle rebates and discounts.

Pfizer gets ready for the expiry of its Lipitor patent

Pfizer manufactured the cholesterol drug Lipitor. Pfizer held the relevant patent over the molecule atorvastatin. The term of the patent was coming to an end. In order to manage the expected reduction in revenue arising from the expiration of its patent and subsequent increase in competition from generic versions of Lipitor, Pfizer decided to implement a number of measures.

First, Pfizer announced it would no longer supply prescription pharmaceuticals through wholesalers; henceforth it would sell directly to community pharmacies ("DTP Model").

It then established an Accrual Funds Scheme – a percentage of the price of purchases of Pfizer pharmaceutical products was credited to an account created for each pharmacy to be rebated on terms which would be announced at a later date.

The third element was Pfizer offering terms upon which it would supply Lipitor and its own generic atorvastatin to all, or virtually all, community pharmacies. These terms tied the rebates that were available from the accrual fund to the quantity of atorvastatin that the pharmacy purchased.

The ACCC took Pfizer to court alleging that by this conduct Pfizer had contravened the Competition and Consumer Act 2010 (Cth) (CCA) by:

  • abusing its substantial power in the market for atorvastatin for the purpose of deterring or preventing competitors from engaging in competitive conduct in that market; and
  • engaging in exclusive dealing conduct for the purpose of substantially lessening competition.

At first instance, the Federal Court disagreed and held that Pfizer had not contravened the CCA. The ACCC appealed to the Full Court of the Federal Court. That appeal was heard in November 2015.

Defining the pharmaceuticals market

As to what the appropriate market was, the Court held that pharmaceutical markets should be defined by molecule as per prescription. The Court rejected the suggestion by Pfizer that there was a "cluster market" for the supply of all pharmaceuticals to pharmacies including all generic drugs. Lipitor was supplied in a distinct market for atorvastatin which included the supply of both Lipitor and generic versions of that molecule.

The fact that Lipitor was sold at a higher price than competing generics did not mean that Lipitor was in a separate market to its generic versions.

Pfizer's substantial market power

The Court confirmed that Pfizer had substantial market power in the market for atorvastatin over the period when Pfizer's patent remained on foot. In addition, the Court held that Pfizer continued to hold substantial market power over the period up to the market entry of competing generics.

Pfizer's substantial market power in the market for atorvastatin gradually decreased as the expiry date of the patent became imminent. That market power rested on Pfizer's unique ability to supply Lipitor at a premium price and to package its generic version in an identical manner.

The Court held that Pfizer's substantial market power continued up to the date when competing generic drugs could be supplied to pharmacies.

Hence Pfizer's substantial market power was still "intact" at the time, prior to patent expiry, when producers of generics were telling pharmacies the sorts of discounts they could offer on entry and warning them not to sign long-term contracts with Pfizer.

Did Pfizer use, exploit or take advantage of its market power?

At first instance the Could held that Pfizer has "taken advantage of" or used its substantial market power, when it launched:

  • the "direct to pharmacy" distribution model which bypassed wholesalers, and 
  • the rebate scheme 

as these measures could not have been successfully implemented without Pfizer being the sole supplier of atorvastatin (ie. in the absence of it possessing market power). 

However, the Court held that Pfizer's supplying of generics below cost during the initial launch phase of a new product, for a relatively short period, did not involve Pfizer "taking advantage" of its market power.

The Full Court found that in all of its conduct Pfizer did take advantage of its substantial market power. The Court considered that in relation to:

  • the imposition of the DTP Model, Pfizer was able to impose it on pharmacies because of its monopoly through its patent over atorvastatin. Therefore, the establishment of the DTP Model was materially facilitate by Pfizer's market power in the supply of atorvastatin;
  • the establishment of the Accrual Funds Scheme could not have been imposed upon Pfizer's customers had it lacked its market power in the supply of atorvastatin; and
  • the making of bundled offers, Pfizer took advantage of its market power.

Under the new form of section 46 it is no longer necessary to show the corporation took advantage of its substantial degree of market power

Did Pfizer act for the purpose of deterring market entry or blocking competition from generic suppliers?

The case turned on the finding of Pfizer's purpose. The Court closely examined whether Pfizer's "purpose" was to block, deter or prevent the generic suppliers from engaging in competitive conduct in entering the market.  The focus was on whether Pfizer's conduct was for a purpose of deterring or making it difficult for those generics to enter successfully and compete in the market.( The Court held it would have been "utterly unreal" for Pfizer to have had the purpose of trying to persuade the generics to withdraw from the market or to prevent them entering and competing.)

So the question was: was Pfizer's purpose in offering these bundles to compete itself, or to block competition and deter entry by the generics?

The Court noted evidence that Pfizer's management denied they sought to block competition by offering to sell in large volumes Pfizer's products (which meant that pharmacies which purchased from Pfizer would be less likely to buy the competing generic drugs).

Ultimately, the Court accepted that "the end sought to be achieved by Pfizer by making the bundled offers in the circumstances … was not to make it difficult for its putative competitors to compete in the … market post 18 May 2012 but rather to enable Pfizer itself to have a fair and reasonable opportunity to minimise the erosion of its market share … as a result of the loss of its monopoly position" [emphasis added].

Pfizer's conduct, by offering rebates and discounts and in bundling the sale of Lipitor with its own generic atorvastatin product, was found to be ordinary commercial conduct in which Pfizer was entitled to engage in order to compete in the atorvastatin market.

The Full Court ruled Pfizer's conduct was not atypical of the conduct which other pharmaceutical manufacturers had taken in the past and would take again in a launch phase of a new pharmaceutical.

Therefore, the Court agreed with the decision at first instance that Pfizer's conduct had not been engaged in for a specific anticompetitive purpose.

Pfizer did not act for the purpose of making it difficult for the generics manufacturers to compete in the atorvastatin market, nor did it have as a substantial purpose a purpose of substantially lessening competition in that market.

As a result, the ACCC's case that Pfizer had abused its substantial market power in the supply of atorvastatin failed.

ACCC's exclusive dealing case

The ACCC had also alleged that Pfizer, in making its bundled offers to pharmacies, had engaged in exclusive dealing conduct for the purpose of substantially lessening competition in a relevant market. The ACCC did not allege that such conduct also had the effect of lessening competition.

It was not surprising that the ACCC did not pursue an "effects " test as the evidence indicated that Pfizer's bundling strategy did not prevent it losing substantial market share and the generics were able to gain a large share of the market fairly quickly.

At first instance the Court held that Pfizer's purpose had been to maximise Pfizer's sales for its products and that was not a purpose of substantial lessening of competition.

On appeal, the Court upheld the original decision. The Court noted that a condition requiring a customer to acquire at least 75% of its requirements from the supplier in order to receive a discount did not amount to an exclusivity "condition" within section 47 of the CCA. Therefore the exclusive dealing prohibition in s47 did not apply to that condition.

Despite Pfizer's 75% condition, the customers were able to buy competing products (competing atorvastatin generics in this case) from other suppliers. The condition might merely have the practical effect of making the customer less inclined to buy elsewhere.

Your bundling practices and the new effects test for market abuse

The ACCC is reportedly examining the decision and has not yet announced whether it will seek leave to appeal the decision to the High Court of Australia.

Between the hearing of the ACCC's appeal and the Full Court's decision, the Harper related competition law reforms were enacted, including the amendment of the abuse of market power provision in section 46 of the CCA.

Section 46 of the CCA now prohibits a firm that has a substantial degree of power in a market engaging in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a relevant market.

Since the ACCC did not argue that Pfizer's making of bundled offers had the effect of substantially lessening competition in a relevant market, it seems likely that the result would have been the same if the new section 46 had applied. 

The lesson going forward is to check that bundled rebates and discounts are framed with a view to competing and permit others to compete

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.