The case ACCC v Pfizer provides insights for the pharmaceutical industry on generic defensive strategies
This article provides insights and tips for the pharmaceutical industry arising from the case of Australian Competition and Consumer Commission v Pfizer Australia Pty Ltd.1 Until May 2012, Pfizer held the patent for a cholesterol drug known as atorvastatin. Pfizer marketed atorvasatin under the brand Lipitor. Lipitor was one of Pfizer's most profitable drugs.
In anticipation of the upcoming expiry of its patent for atorvastatin, Pfizer implemented a new distribution model and sales platform. The Australian Competition and Consumer Commission (the ACCC) alleged that in executing this new strategy, Pfizer misused its market power and engaged in exclusive dealing in contravention of the Competition and Consumer Act 2010 (the Act).
Despite finding that Pfizer took advantage of its market power, the ACCC's case did not succeed as the Federal Court was not convinced that Pfizer had the requisite anti-competitive purpose. Pfizer was able to defend what it did to secure market share for Lipitor and its own generic product as an astute commercial strategy, rather than one that had a substantial anti-competitive purpose. The ACCC has appealed the decision.
Nonetheless, the decision contains valuable insights and cautionary messages in relation to competitive conduct in the pharmaceutical industry. While generic defence strategies and aggressive commercial tactics are permissible, they are risky. This is especially the case where a patent confers market power and/or when strategic documentation contains prejudicial language or strategy, from which an anti-competitive purpose might be inferred.
Contentions and findings
The expiry date for the patent protecting Lipitor was mid-May 2012. In anticipation of the expiry, Pfizer implemented a new distribution and sales model called 'Project Leap', which aimed to retain its revenue in the face of expected market entry by generic products. This involved:
- in December 2010, a change to Pfizer's distribution arrangements from supplying through pharmaceutical distributors to supplying direct to pharmacies (Direct to Pharmacy Model);
- in January 2011, the establishment of an 'accrual funds scheme' by which an additional rebate was withheld by Pfizer to be paid out to pharmacies at a later (undisclosed) date (Accrual Program); and
- in January 2012, an offer to all pharmacies to supply both Lipitor and Pfizer's own generic atorvastatin (Pfizer Generic), which tied the rebates from the accrual fund to the initial quantity of the Pfizer Generic purchased by the pharmacy. No rebate was to be paid if the quantity acquired was less than 75% of the six months' total anticipated generic atorvastatin required by that pharmacy) (Bundling Offer).
In summary, the ACCC contended that:
- Pfizer held a substantial degree of market power and, by implementing Project Leap, took advantage of that power for the purpose of deterring or preventing a person (i.e. other generic manufacturers and suppliers) from engaging in competitive conduct in breach of section 46(1)(c) of the Act2; and
- the Bundling Offer constituted a course of exclusive dealing under subsections 47(2)(d) and (e)3 of the Act and was engaged in for the purpose of substantially lessening competition.
Market definition: The Court agreed with the ACCC that the market relevant to the competition analysis was the Australia-wide market for the supply of atorvastatin to, and the acquisition of atorvastatin by, community pharmacies.
Presence of market power: The Court found that up to December 2011 (six months before the patent expiry) Pfizer possessed substantial market power as a result of owning the Lipitor patent (Pfizer being the sole supplier of atorvastatin). However, Pfizer's market power gradually decreased the closer it came to the expiration of its patent and from January 2012 its market power could no longer be described as 'substantial'. The other generic manufacturers had registered their own atorvastatin products by mid-2011 and had started promoting and even (informally) offering their generics to pharmacies in anticipation of the expiry of the Lipitor patent from late 2011. This significantly undermined the market power held by Pfizer in the atorvastatin market.
Taking advantage of market power: The Court found that in implementing Project Leap, Pfizer had taken advantage of its market power. This was because Pfizer procured terms that it would not have been able to procure from pharmacies were it not for its market power. In particular:
- Pfizer was able to implement the Direct to Pharmacy Model despite the pharmacies not wishing to change their current supply arrangements. As the Court stated, 'the pharmacies did not like the Direct-to-Pharmacy Model – but they could not obtain atorvastatin... from any other source'; and
- Pfizer was able to establish the Accrual Program even in the absence of any certainty on the part of the pharmacists when it was implemented as to how or when their rebates could be accessed; and
- the ability to access the rebates that had accrued was linked to the commitment to purchase Pfizer's generic atorvastatin, via the Bundling Offer. This bundling was something which no other manufacturer could offer.
Purpose of deterring or preventing competitive conduct: The Court found that no prohibited purpose was present.
- Pfizer did not have the purpose of 'preventing' competitors from entering the market or engaging in competitive conduct, because it was a known fact that those competitors would do so. It would not be possible to infer such "commercial naivety" on the part of Pfizer that they could 'prevent' entry.
- Pfizer also did not have the purpose of 'deterring' competitive conduct because Pfizer pursued its conduct for the substantial purposes of:
- ensuring that it remained a supplier of pharmaceutical products, including both Lipitor and its generic atorvastatin; and
- ensuring that it remained competitive in the atorvastatin market.
- Even if Pfizer's other purposes may have been to gain a commercial advantage or make it harder for a generic competitor to succeed, they were not a "substantial" purpose.
Exclusive dealing: Only one aspect of the Bundling Offer was found to fall within the relevant section of the Act. The aspect was a condition that linked Lipitor discounts to 'first line support of [Pfizer Generic]'. However, the Court also found that Pfizer did not engage in this conduct for the purpose of "substantially lessening competition" for reasons similar to those set out above.
Unique patented molecule equals market power
A market may be a market for the supply or acquisition of a single molecule or active ingredient, where there are no close substitutes. Determining whether or not there are close substitutes will depend on a number of factors including:
- clinical use and treatment profile;
- the mechanisms of action;
- the mode of administration and design;
- regulatory and prescription regimes; and
- the side effect profile.
It is highly likely that the owner of a patent for a sufficiently unique active ingredient will have a substantial degree of market power in the market for the supply of that product during the term of the patent.
However, as the patent expiry date approaches, the degree of market power will lessen as the threat of new entry increases. This will be particularly so where the potential revenues are large and the market is characterised by highly sophisticated originating and generic manufacturers that pre-emptively develop and promote generic versions.
Defensive strategies OK but risky with market power
Bundling, exclusivity and other dealing restrictions are permissible under the Act unless they have:
- an anti-competitive purpose (that was a substantial purpose); or
- the effect of substantially lessening competition.
The risks associated with bundling, tying and other dealing restrictions are heightened where there is substantial market power but decreases as a patent expiry date approaches (i.e. within six months of patent expiry).
Taking advantage: If market power exists, take care when bundling, tying, requiring exclusivity, refusing supply, offering loyalty rebates or reducing pricing below cost, if those arrangements could not plausibly have been imposed, absent market power.
Aggressive competitive strategy generally OK
Purpose: Nonetheless, it is possible to pursue strategies which do take advantage of market power if it can be demonstrated that the intention is not to foreclose or substantially lessen competition. Decision-makers should ask themselves whether the conduct has, as a substantial (although not necessarily sole) purpose, the deterrence or injury of a competitor or competition. Decision-making documentation in borderline cases should record the actual purposes.
Effect: The likelihood of a bundling or exclusive arrangement having an anti-competitive effect is heightened with market power, as such conduct is more likely to have an actual impact on market dynamics. The conduct in the Pfizer case was not alleged to have had the likely effect of substantially lessening competition. However, this should also be checked before embarking on any strategy.
Beware competitively charged language like 'blocking' or 'corner the market'
Many documents in the case produced during the planning process for Project Leap contained references to 'blocking' both generic competitors from entering the market, and pharmacies from being able to source generic atorvastatin from such competitors.
The Court indicated that the 'rhetoric of competition' should not be confused with anti-competitive purpose. Nonetheless, it was, in part, this rhetoric that raised the ire of the ACCC in the first place. The Court also indicated that the documentary evidence could, absent contradictory evidence, permit the inference of a prohibited purpose.
Ensure language used in planning documentation, throughout the company, presents an accurate picture of the strategy and its purpose
Pfizer staff were able to counter the impression created by planning documentation and explain to the Court's satisfaction that the purposes of Project Leap were legitimate (to mitigate anticipated loss of market share, and to be competitive after patent expiry). Clarity in documentation on the purpose at the outset would have assisted greatly.
Care must therefore be taken during project planning processes to limit the authorship and content of documents relating to complex commercial strategies, which may later be misconstrued.
Whose purpose is relevant?
One issue in this case was the fact that the documents in evidence had often been prepared by various persons who were not actually decision-makers within the company. The Court found that it was not the subjective purpose of any individual author which mattered – it was the purpose of those responsible for making the ultimate decision that mattered.
While this offers real comfort, mixed motives expressed by more junior staff in an organisation can still significantly increase the risk of an anti-competitive purpose being inferred.
Reminder – cartels
Remember – generic defence strategies engaged in between actual or potential competitors (i.e. other pharmaceutical manufacturers or distributors) can, especially if not properly managed, present an even greater risk. Arrangements between competitors that may influence market entry or competitive behaviour can constitute cartel conduct in contravention of the Act, irrespective of whether or not they have any anti-competitive purpose or effect.
Earlier the European Commission's decision was published confirming its finding that Lundbeck and a collection of generic manufacturers agreed that the generic manufacturers would delay entering the market in competition with Lundbeck's originator antidepressant product. Together they were fined in excess of EUR 140 million.
ACCC focus on pharmaceuticals industry
The ACCC has variously indicated the importance of its case against Pfizer. With or without this outcome, it is apparent that the ACCC's gaze has turned towards the health and pharmaceuticals sectors. The ACCC's recently announced Enforcement Priorities for 2015 spell this out.
1 FCA 113. An appeal by the ACCC is
2Section 46 prohibits a corporation with a substantial degree of power in a market from taking advantage of that power in that or any other market for the purpose of eliminating or substantially damaging a competitor in that or any other market, preventing the entry of a person into that or any other market or deterring or preventing a person from engaging in competitive conduct in that or any other market.
3Section 47(2), relevantly prohibits a corporation from giving or offering a rebate, discount or credit on condition that the acquirer will not (or will not except to a limited extent) acquire or re-supply certain goods that have been acquired from a competitor of the corporation.