The Federal Court of Australia has recently dismissed the ACCC’s case against pharmaceutical company Pfizer. The ACCC alleged that Pfizer had misused its market power and engaged in prohibited anti-competitive exclusive dealing.1
The Court found that the actions taken by Pfizer leading up to the expiry of its atorvastatin patent were not done for an anti-competitive purpose, but rather in recognition of the commercial challenges that Pfizer would face as it moved beyond the expiry of its patent. Pfizer sought to remain competitive in the market.
The decision is important for the pharmaceutical industry for several reasons.
- First, it is the first Australian decision to consider what strategies pharmaceutical patent holders can legitimately employ from a competition law perspective in the lead up to patent expiry.
- Secondly, the decision provides valuable commercial insight into what constitutes permissible competitive conduct in the pharmaceutical industry, by recognising that:
- the ‘substantial’ nature of a patent holder’s market power can shift in the period prior to, and shortly after, patent expiry (particularly, in instances where the patent holder has not had significant prior experience in the generic market), and
- pharmaceutical patent holders and generic manufacturers may engage in different positioning strategies in preparation for patent expiry.
The decision may also add fuel to the debate surrounding draft recommendations of the Harper Review to amend section 46 of the Competition and Consumer Act 2010 (CCA). The Harper panel has recommended the introduction of an effects test which considers whether conduct would substantially lessen competition. This proposed reform has been criticised in a number of submissions and in the broader public debate. The ACCC’s loss in Pfizer, which turned largely on the inability of the ACCC to establish a proscribed purpose, may provide further fuel to the fire for those advocating for the Harper panel’s recommendations.
That said, it would be overly simplistic to characterise the outcome in the Pfizer case as demonstrating a deficiency in the current structure of the law. The judgment emphasises that the application of competition law requires careful assessment of the competitive dynamics of the conduct and the market in which it is to be assessed. It is doubtful that a different result should have ensued on any properly framed law concerned with a misuse of market power.
The ACCC has 21 days to appeal the Pfizer decision and according to ACCC Chairman Rod Sims ‘the ACCC will carefully consider the judgment’.2
Pfizer and the drug atorvastatin
Pfizer Australia Pty Ltd (Pfizer) is a manufacturer and supplier of pharmaceutical products in Australia. From 2000 until 18 May 2012, Pfizer was the exclusive supplier of the ‘blockbuster’ cholesterol-lowering drug atorvastatin.
As at January 2012, atorvastatin was the highest-selling medicine, in terms of volume and value, under the Pharmaceutical Benefits Scheme (PBS) in Australia. The value of sales for the financial years ending June 2010, June 2011 and June 2012 exceeded $700 million.
The drug atorvastatin, sold under the Lipitor brand, was patent protected, with the patent expiring in 18 May 2012. The patent provided Pfizer with the exclusive rights to exploit Lipitor, which included the right to sell Lipitor in Australia until the expiry of the patent.
Pfizer’s commercial strategy to deal with patent expiry
In anticipation of the expiry of the patent, Pfizer took a number of steps. Of central importance to the proceeding was Pfizer’s ‘Project LEAP’ strategy. In short, Project LEAP consisted of 3 prongs:
- ‘Direct-to-Pharmacy Model’: this focused on the distribution of products directly to pharmacies. In December 2010, Pfizer announced it would start supplying prescription medications, such as Lipitor, direct to community pharmacies and cease supply through wholesalers,
- ‘Accrual Funds Scheme’: established in January 2011, this involved the creation of an ‘Accrual Fund’ for each community pharmacy to whom Pfizer supplied prescription medicines. The ‘Accrual Fund’ was essentially a credits and rebates scheme for community pharmacies with a specific rebate scheme for Lipitor and the Pfizer generic atorvastatin, and
- ‘Bundled Offers’: for Lipitor, this involved Pfizer selling Lipitor and the Pfizer generic atorvastatin to pharmacies as part of a bundled offer.
In February 2014, the ACCC commenced Federal Court proceedings, alleging that Pfizer’s ‘Project LEAP’ strategy for Lipitor contravened the misuse of market power and exclusive dealing prohibitions.
Misuse of market power
The following elements must be established:
- a corporation has power in a market,
- that power is substantial,
- the corporation has taken advantage (i.e. used) that substantial power in the market where power is held or in any other market (a distinction that took on some significance in Pfizer, where Pfizer was alleged to be using its market power derived from its patent rights in the generics market, where it did not have substantial power), and
- the taking advantage is for one of the three proscribed purposes (in Pfizer this was, deterring or preventing a person from engaging in competitive conduct).
Importantly, each of these elements must be present at the same time and there must be a connection between the substantial market power and the proscribed purpose (i.e. an assessment is made of whether the corporation would have engaged in the impugned conduct without market power).
Exclusive dealing as defined in the CCA is concerned with conditions placed on the supply or acquisition of goods or services.
In Pfizer, the ACCC alleged that Pfizer supplied its atorvastatin products to pharmacies with discounts, allowances and rebates on condition that the pharmacies would neither acquire nor re-supply atorvastatin from a competitor of Pfizer (except to a limited extent) for periods of up to 12 months. This type of exclusive dealing is only prohibited if the conduct has the purpose, effect or likely effect of substantially lessening of competition.
The ACCC’s exclusive dealing case was only concerned with ‘purpose’ – it did not allege an ‘effect’ of substantially lessening competition.
In short, the Court held that although the elements of Pfizer’s ‘Project LEAP’ strategy made it hard for other manufacturers to compete, Pfizer did not engage in conduct in breach of the misuse of market power and exclusive dealing prohibitions.
The Court held that:
- although up until late 2011, Pfizer had a substantial degree of market power as a result of its exclusive patent rights and had taken advantage of such power, the requisite purpose was not established,
- post January 2012, Pfizer did not have substantial market power, with the Court noting that Pfizer’s market power decreased the more imminent the expiration of its patent became, and
- Pfizer had not engaged in exclusive dealing for the purpose of substantially lessening competition.
What was the market?
The proper characterisation of the market was the subject of debate (including, between expert economists), although it is important to recognise that the Court’s conclusion did not ultimately hinge on this issue. Nevertheless, it provides insight into how the Court may assess pharmaceutical markets, particularly where patent expiry is imminent.
The Court accepted the ACCC’s submission that the relevant market was for the supply to and acquisition by pharmacies of atorvastatin. In so doing, the Court rejected the broader market put forward by Pfizer that there was a market for the wholesale supply of a range of pharmaceuticals to pharmacies.
The Court accepted the market proposed by the ACCC, relying upon:
- expert evidence which canvassed issues relating to the vertical integration between suppliers and community pharmacies,
- the absence of demand side substitutes for atorvastatin, and specifically the fact that a pharmacist presented with a prescription for the supply of atorvastatin was required to supply atorvastatin, and
- the absence of supply side substitutes for atorvastatin, largely due to the patent protection (subject to Pfizer granting a licence).
The Court also acknowledged that in the first half of 2012 (immediately prior to and post patent expiry) the market was in a ‘state of flux’, but concluded that the dimensions of the market had not changed by mid-2012.
The regulation of pharmaceuticals and the PBS
Pharmaceuticals are highly regulated in Australia. Of relevance to this case is the regulation of medicines that are supplied at a Government-subsidised price by virtue of the PBS.
As illustrated by the decision, PBS pricing plays a central role in the structuring of supply arrangements between manufacturers, wholesalers and pharmacies. Although the process for determining pricing changed on 1 October 2012, for the purpose of the case the Court considered the position prior to this date.
Of particular relevance to this case was the impact of the statutory PBS price disclosure mechanism and the implications for the first month after PBS listing of a generic product. The one-month grace period available under the statutory price disclosure regime created an incentive for the sell-in of a large volume of stock before 30 April 2012.3 The effect of the first month grace period is that the sales of generic products during the first month after PBS listing of a generic are excluded from price disclosure calculations and therefore not taken into account in determining future PBS price decreases. This was particularly relevant to informing the atorvastatin sell-in deals struck with pharmacies in early 2012.
Misuse of market power
Did Pfizer have substantial power in the market?
The question of whether Pfizer had substantial market power was considered by reference to two time periods:
- prior to late 2011: the period in which Pfizer was the sole supplier of atorvastatin, and
- after January 2012: the imminent period prior to expiration of Pfizer’s patent.
Although Pfizer was held to have market power in the period until late 2011,4 the Court considered that Pfizer’s market power gradually decreased the ‘more imminent the expiration of its patent became’.5 The combination of:
- the listing of other generic atorvastatin products on the Australian Register of Therapeutic Goods,
- Ranbaxy’s ability to enter the market under licence on 19 February 2012, and
- availability of generic atorvastatin products on the day of patent expiry,
resulted in the Court finding that from January 2012 until at least May 2012, Pfizer’s market power had decreased such that it lacked substantial market power.
Was there a proscribed purpose?
The purpose enquiry is concerned with the subjective purpose of the corporation in the sense of the ‘end sought to be accomplished’ and is not concerned directly with the effect of the conduct.6 In reaching its conclusions regarding Pfizer’s purpose, the Court considered that the oral testimony of key decision makers satisfactorily answered the inferences that could be drawn from the documentary evidence.
The Court concluded that Pfizer did not engage in the ‘Project LEAP’ strategy for the purpose of ‘deterring or preventing’ other generic manufacturers from engaging in competitive conduct. Rather, Pfizer’s thinking behind the strategy was to ensure it remained a viable supplier of atorvastatin into the future.
In considering whether Pfizer had the purpose of ‘deterring or preventing’, the Court considered a number of elements of the ‘Project LEAP’ strategy. These findings are set out in some detail as they provide insight into what may constitute permissible competitive conduct in the pharmaceutical industry and specifically, a patent holder’s exclusive rights are coming to an end.
- There were many reasons for approving the ‘Direct-to-Pharmacy Model’ but, the Court concluded, none of those reasons was the desire to deter or prevent other generic suppliers from entering the market. For instance, Pfizer’s purposes included to promote its generic products business and develop a close relationship with community pharmacies. This would give Pfizer the ability to defend volume and price erosion upon loss of exclusivity. In addition, such models had been implemented by competitors and this further supported Pfizer’s purpose.
- The purpose of Pfizer selling-in large quantities of generic atorvastatin in February 2012 was not to block the ability of competitors to supply a pharmacy with a generic equivalent. Again, such behaviour was not confined to Pfizer and the court accepted that Pfizer’s purpose in selling-in was to protect its own commercial position.
- The ‘Platinum Offer’ (which was one of the ‘Bundled Offers’) initially required pharmacies to acquire 100% of their projected requirements of the Pfizer generic atorvastatin to unlock 100% of their accrued rebate. The minimum requirement was reduced to 75%. Pfizer’s purpose in doing so was to enable pharmacies to choose a second supplier if they desired to do so.
A fundamental problem in the ACCC’s case as pleaded
Pfizer submitted that the ACCC’s case as alleged was ‘legally incoherent’.
While the Court did not ultimately deal with the proceedings on this pleading point, it did accept that Pfizer would have been successful on this point.
In short, the submission exposed the fact that the ACCC’s case alleged a misuse of market power from 2012 by relying ‘cumulatively’ on conduct pursued over an extended period in 2011 and 2012. The ACCC did not allege that any one element of Pfizer’s conduct constituted a separate contravention.
The ACCC’s approach failed to comply with the requirements of section 46 that there be a co-existence of each of the elements of section 46 at the time of the contravention. With reference to the facts alleged against Pfizer, the Court pointed out that a contravention of section 46 ‘from on or about 16 January 2012’ cannot be made out by reference to conduct pursued in January 2011.7
The ACCC alleged that Pfizer supplied its atorvastatin products to pharmacies with discounts, allowances and rebates on condition that the pharmacies would neither acquire nor re-supply atorvastatin from a competitor of Pfizer (except to a limited extent) for periods of up to 12 months.
The Court found that two of the discounts offered did not amount to exclusive dealing as defined in the CCA. The pharmacies remained free to purchase generic atorvastatin from other suppliers – i.e. there was no ‘condition’ imposed. It was not sufficient that any particular pharmacist may have been less likely to buy as much generic atorvastatin from another supplier as it would have had it not accepted Pfizer’s offer.
In relation to a further discount (which Pfizer accepted placed a condition on pharmacies), the Court found that the ACCC failed to establish that the impugned conduct had the purpose of substantially lessening competition.
The interaction of competition law and the pharmaceutical industry moving forward
The Pfizer decision is the first Australian case to consider the application of competition law in the context of pharmaceutical distribution arrangements, particularly at the point in time when a patent is close to expiry.
The ACCC’s recently released Compliance and Enforcement Policy for 2015 has prioritised competition and consumer issues in the medical and health sector. Therefore, we can expect that the pharmaceutical industry and the broader health sector will continue to be a priority for the ACCC going forward.
It should also be noted that internationally, the consideration of the interaction between competition law and the pharmaceutical industry has increased in prominence following the landmark US decision in FTC v Actavis in 2013.8 In Actavis,the US Supreme Court held that pay-for-delay arrangements (i.e. a strategy sometimes employed by originators to maintain market power during the term of their patent) could be subject to competition law scrutiny. While the Pfizer case did not involve a pay-for-delay arrangement, these type of arrangements are often prompted by a similar issue to that which was being grappled with by Pfizer (i.e. the impending expiry of relevant patents).
While key patents protecting most of the so-called ‘blockbuster’ drugs in Australia have expired in recent years, a significant number of high-volume drugs protected by patents remain on the PBS. As the terms of those patents approach expiry in Australia in the coming years, it may be that an Australian court will soon have the opportunity to consider whether pay-for-delay arrangements should be subject to scrutiny under the CCA.
Pfizer and the Harper Review
The decision in Pfizer is as an important (and rare) decision on section 46 that comes at a very interesting time with the final report of the Harper Review soon to be given to government.
A key area of public debate emerging from the draft recommendations of the Harper Review has been proposed amendments to section 46. These include removing the current ‘take advantage’ element and the requirement to prove a proscribed purpose. Instead the draft recommendation is to introduce the standard test in Australian competition law of the purpose, effect, or likely effect of substantially lessening competition with some specific defences.
The debate on these proposed reforms has tended to focus on a perceived shift from a ‘purpose’ test to an ‘effects’ test.
Given that the ACCC failed in Pfizer to establish the prohibited purpose of deterring or preventing competitive conduct, some may seek to characterise the result in Pfizeras an indicator of why the law needs to change to introduce an ‘effects’ test.
We think that would be an overly simplistic assessment of the Pfizer judgment. The critical issue emerging in this section 46 case (as it has in earlier cases), is that the impugned conduct of the entity with substantial market power must be assessed having regard to the competitive dynamics present in the relevant market. In this case this included the fact that the market was shifting from monopoly supply (built on patent rights) to what the Court found was inevitable competition once the patent expired.
Pfizer sought to position itself to compete in that new market dynamic, where it would no longer enjoy substantial market power. With reference to the facts in evidence, the Court held that Pfizer did so within the bounds of the law.
It should not be assumed that a different result would emerge on the application of the substantial lessening of competition test.
IP perspective: a cautionary tale of the dangers of overzealous prelaunch actions
Notwithstanding that Pfizer did not involve patent law issues, section 13 of thePatents Act 1990 (Cth) (Patents Act) became relevant during the hearing. Section 13 outlines the exclusive rights granted to a patent holder, namely the exclusive right to exploit the patented invention.
Section 13 considerations arose as a result of evidence given by Ranbaxy, one of the generic manufacturers. According to the Court, prior to its licensed early market entry date of 19 February 2012, Ranbaxy made and accepted offers for the sale of its generic atorvastatin. The Court considered that this conduct fell within the scope of section 13 and, as such, Ranbaxy’s actions amounted to ‘an encroachment upon the “exclusive right” of Pfizer to “exploit” its patent’.
The Court’s analysis demonstrates the need for care to be taken by generic manufacturers while preparing for product launch. While the act of applying to list a product on the PBS is not part of the relevant conduct of exploiting a patent, thePfizer decision is a reminder of the patent infringement risks that can arise from the nature of communications between generic manufacturers and pharmacies prior to patent expiry or the commencement of a licence. If those communications amount to an offer to sell or supply product that is capable of acceptance, that can be an exploitation of the exclusive rights of the patent holder.
The decision in ACCC v Pfizer is of particular note as it sheds light, for the first time, on what strategies patent holders may legitimately implement in anticipation of patent expiry for a PBS listed medicine. Of particular relevance, and one that provides guidance for pharmaceutical companies, is the Court’s finding that Pfizer’s strategy was undertaken for the purpose of remaining competitive within the market. The Court’s approach suggests that aggressive sales and marketing strategies may be legitimate provided the strategy is undertaken for a pro-competitive purpose.
The case also provides a unique glimpse into some of the commercial drivers for both originators and generic manufacturers. The Court’s detailed examination of the approach Pfizer and other generic manufacturers took in preparation for expiry of the atorvastatin patent functions as a ‘dos’ and ‘don’ts’ list for pharmaceutical companies. For example:
- for patent holders, Pfizer’s strategy of restructuring the pharmacy supply model, offering rebates and product bundling post-patent expiry demonstrates to patent holders one way of how patent expiration may be managed (subject to the specific factual circumstances), and
- for generic manufacturers, the case provides examples of different lead times that may be employed to prepare for the launch of a generic pharmaceutical. Further, the decision acts as a timely reminder of what types of activities generic manufacturers can engage in prior to expiry of a patent pursuant to section 13 of the Patents Act.
In light of the decision of ACCC v Pfizer, pharmaceutical companies who find themselves in the position of Pfizer or the generic companies might wish to consider the following.
- Clearly capture the thinking behind your commercial strategies in a precise and recorded way – The Pfizer decision confirmed the importance of the thinking of key decision makers when assessing purpose. Nevertheless, the adverse inferences that could be drawn from the documentary evidence (which included terms such as ‘blocking’ strategies) left Pfizer exposed to the proceedings that the ACCC brought against it. The inferences underlying the ACCC’s case were only disavowed when key individuals from Pfizer were on the stand. The case againhighlights that caution must be exercised when deciding what inferences can be drawn from documents, (including those labelled ‘draft’). Many documents may be produced on a major strategic proposal that express the views of individuals and do not necessarily capture the thinking that was ultimately adopted by the company in accepting the strategy. The case again highlights that companies can proactively deal with the prospect of ACCC making adverse inferences from documents by ensuring that the company articulates its purpose at the time it adopts major competitive strategies.
- Take care when using tying strategies in anticipation of patent expiry – The specific commercial circumstances facing Pfizer as well as the purpose of the ‘Project LEAP’ strategy (as revealed by key individuals during cross-examination) meant that the ACCC was ultimately unsuccessful. Companies should recognise, however, that the use of tying strategies in anticipation of patent expiry is tricky and will not always be viewed favourably by Courts when tested against the competition law provisions.