02 Mar 2015

Pfizer case shows protecting your own position isn't anti-competitive

Commercial strategies and practices used by Pfizer to counter the expected loss of revenue caused by the expiry of its patent over Lipitor, its bestselling cholesterol drug, were neither misuses of market power nor exclusive dealing and did not contravene Australian competition laws (Australian Competition and Consumer Commission v Pfizer Australia Pty Ltd [2015] FCA 113).

In yet another high-profile loss for the ACCC, the Court held that steps taken by Pfizer in offering stock and making bundled offers were carried out for a purpose of defending Pfizer's sales in response to strong competition from generics. In effect, the Court found Pfizer's strategies were legitimate forms of competition in the face of sustained attack by generics.

Pfizer's commercial strategy to deal with the patent expiry

Pfizer needed to manage the erosion of revenue that would come from the expiry of its patent over the molecule atorvastatin, which it sold as Lipitor, and the subsequent increase in competition from generics, so it took a number of steps:

  • it announced it would no longer supply prescription pharmaceuticals through wholesalers; henceforth it would sell directly to community pharmacies (the “Direct-to-Pharmacy Model”);
  • it 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; and
  • it offered terms upon which it would supply Lipitor and its own generic Atorvastatin Pfizer to all, or virtually all, community pharmacies. These terms tied the rebates that were available from the accrual fund to the quantity of Atorvastatin Pfizer that the pharmacy purchased.

The ACCC took Pfizer to the Federal Court, alleging it had contravened the Competition and Consumer Act 2010 (Cth) by:

  • using its substantial power in the market for atorvastatin for an anti-competitive purpose – to deter or prevent a person from engaging in competitive conduct in the market (section 46(1)(c)); and
  • engaging in exclusive dealing with the effect of a substantial lessening of competition (sectfion 47).

Pfizer's actions were not misuse of market power

Until late 2011, Pfizer did possess "substantial market power" in the market for atorvastatin as the sole supplier of that product. This is the requisite level of market strength for the application of section 46 and is a key threshold provision in any misuse case. The limited degree of price regulation under the PBS was not sufficient to prevent Pfizer being assessed as having substantial market power.

But section 46 requires that the conduct in question must represent a taking of advantage of substantial market power for a purpose of deterring other parties from competing.

Pfizer's declining market power

By the time Pfizer made its bundled offers to customers in January 2012, its power had already weakened. Well before Pfizer's patent expired in May 2012, other generic manufacturers planned their onslaught on the market. Pfizer's market power gradually decreased as the patent expiry date grew nearer. Pfizer maintained some degree of market power up to May 2012 because of its unique ability to exploit the marketing of Lipitor at a premium price and to package its generic in a very similar manner.

But from January 2012 Pfizer's power was not substantial, because:

  • from late 2011, a generic rival, Ranbaxy had been promoting the sale of its generic at discounts of 85% off the chemist list price and could enter the market from 19 February 2012 and pose a serious challenge;
  • a number of other generics had registered their competing products with the Australian regulatory authorities;
  • Apotex was holding discussions with key customers regarding its offers and arranging for its stock to be flown to Australia the very day the patent expired;
  • Alphapharm told customers in January 2012 it would beat Pfizer's offer and offered 12 months' worth of products;
  • Ascent was marketing to pharmacies not to succumb to a Pfizer offer;
  • Sandoz was writing to all customers advising them to seek advice on whether to accept Pfizer's offers.

Rebates not a marketing method unique to companies with substantial market power

The Court held that Pfizer was pursuing no different strategy than what was open to any other supplier. To offer a rebate doesn't involve taking advantage of market power.

Granted, it was only by reason of Pfizer's market power in January 2011 that it could announce a rebate scheme without telling pharmacies how they could recover the moneys that were accumulating for their benefit. But Pfizer was not taking advantage of market power in making the offers in January 2012.

Even if Pfizer did supply its generic below cost, the offers were made during launch phase for a relative short period of time and did not establish a "taking advantage" of market power.

Pfizer did not have anti-competitive purpose

The Court rejected a finding that Pfizer's action indicated that it had a purpose of preventing other generics from supplying the market.

Pfizer accepted that competition was inevitable from generics, and its documents referred to "blocking" generics.

The Court held that the desire to cause harm to competitors is not necessarily proof of anticompetitive purpose. Pfizer took the steps it did to avoid being "slaughtered".

Effect of Pfizer's marketing strategy

The Court noted that Pfizer rapidly lost market share in the market after the patent expiry to generics, so it was difficult to see that generics had been seriously damaged or deterred by Pfizer's actions. In other words, anti-competitive effects did not arise from Pfizer's conduct.

Exclusive dealing

The ACCC's case failed because the judge found the purpose was to maximise Pfizer's sales for its products and that was not a purpose of substantial lessening of competition. The ACCC did not allege that Pfizer's conduct had the effect of substantially lessening competition.

Impact of the Pfizer case

The judgment comes on the back of increased scrutiny worldwide, particularly in the US and EU, of commercial strategies used by pharmaceutical patent holders to delay or deter generic entry and competition.

More close to home in Australia, the ACCC has flagged competition and consumer issues in the medical and health sectors as a priority enforcement area, and the Harper Review Panel in its root and branch review of competition laws is considering calls for an effects-based test to be added to the misuse of market power provisions of the Competition and Consumer Act 2010 (Cth).

It's also the second of three high-profile cases on misuse of market power issued by the ACCC in the last three or so years. The ACCC has not succeeded in establishing contraventions of the misuse of market power provisions in the first two. The last of these cases (ACCC v Visa) is currently before the Federal Court of Australia.

The result in ACCC v Pfizer could add weight to calls by the ACCC and others for reform of the misuse of market power provisions of the Competition and Consumer Act. Critics have argued for some time that the law in this area is deficient and that the misuse of market power provisions are not an effective enforcement tool. However it is questionable whether the ACCC would have succeeded with an "effects test" law in this case of the kind it has been pushing for. The fact that the ACCC has failed again in such a case, though not for the same reasons as earlier cases, where the "taking advantage" limb of the test has been difficult to overcome, might encourage the Harper Review Panel to find that an effects-based test (in addition to the current "purpose" test) is necessary.  How this plays out when the Harper Review Panel issues its final report later this month will be interesting viewing.

It is not yet known whether the ACCC will seek to appeal the decision.

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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.