Power and purpose: Protecting a competitive position after ACCC v Pfizer (II)

Summary

On 25 May 2018, in ACCC v Pfizer,[1] the Full Court confirmed that a patent owner with substantial market power may not necessarily be acting with an anti-competitive purpose if it seeks to protect its market position when faced with significant competitive threats in the lead up to patent expiry. On 25 June 2018, the ACCC announced that it had sought special leave to the High Court.

Australia’s competition law has changed since the matter was brought and decided by two Courts, and the case may yet be heard by the High Court. However, the judgment provides some clarity on the issue of anti-competitive purpose. This is a central issue in pharmaceutical markets, where originator pharmaceutical companies continue to search for new ways to protect assets in which they have made substantial investments as patent expiry approaches.

When will an originator with a product approaching a ‘patent cliff’ retain sufficient market power to contravene Australia’s competition law, and how should its actions to protect its competitive advantage be assessed?

Background to Court action

For over a decade, Pfizer’s cholesterol lowering drug, Lipitor (molecule: atorvastatin), was the biggest-selling drug in the world. By the end of 2011, Lipitor was the highest selling drug in Australia in terms of both volume and value under the Pharmaceutical Benefits Scheme (PBS). Pfizer’s patent over Lipitor gave it the exclusive right to supply atorvastatin in Australia until 18 May 2012. The patent expiry date was well known to, and a major event for, Pfizer and generic pharmaceutical suppliers.

The matter concerns Pfizer’s attempts between 2011 and 2012 to combat the likely “erosion” of Lipitor’s market share after patent expiry. In late 2010, Pfizer recognised that from early 2012 its marketing strategies would have to accommodate the inevitable switching of patients from Lipitor to generic atorvastatin.

To avoid being “slaughtered” in the market, Pfizer took a number of steps including:

• the establishment in January 2011 of a supply model which involved Pfizer supplying pharmacies directly (rather than through wholesalers);
• the establishment in January 2011 of an accrual funds scheme whereby Pfizer set aside a percentage of the price of purchases of Pfizer products (including Lipitor) to be rebated to pharmacies on terms to be announced at a later date (and not known by the pharmacies at the date of accrual);
• in January 2012, making a bundled offer to pharmacies of Lipitor and generic atorvastatin, which Pfizer called atorvastatin Pfizer. This bundled offer tied the accrual funds scheme rebates to the quantity of Lipitor and atorvastatin Pfizer purchased by pharmacies. The more atorvastatin Pfizer purchased, the greater the proportion of the release of the pharmacy’s accrual funds. Discounts on the price of atorvastatin Pfizer and Lipitor were also offered, dependent on the conversion rate from Lipitor to atorvastatin Pfizer.

Contraventions

The ACCC pleaded broadly the same case before the Full Court as it did before the primary judge.

The ACCC claimed that the above conduct contravened s 46(1)(c) of the Competition and Consumer Act 2010 (Cth) (CCA) by taking advantage of the substantial degree of market power which the ACCC alleged that Pfizer held in the market for the supply of atorvastatin to pharmacies (atorvastatin market) for an anti-competitive purpose, namely deterring or preventing generic manufacturers from engaging in competitive conduct.

In addition, the ACCC claimed that Pfizer had engaged in the practice of exclusive dealing within the meaning of section 47 CCA by requiring pharmacies who wished to acquire atorvastatin Pfizer also to purchase specified quantities of Lipitor, contravening a number of sub-sections of section 47 CCA. Section 47 CCA provides that exclusive dealing of this type is prohibited only if it is has the purpose or likely effect of substantially lessening competition. The ACCC ran its section 47 case as a “purpose” case and not as a “likely effect” case.

Full Court’s judgment

The Full Court accepted the ACCC’s arguments in part. Foster, Greenwood and Middleton JJ concluded that:

• unlike the primary judge, who found that by January 2012 Pfizer no longer had a substantial degree of market power, in both January and February 2012, when the bundled offers were made, Pfizer did retain a substantial degree of market power;
• the primary judge was correct when he found that in 2010 and 2011, when Pfizer had market power, it took advantage of that market power by implementing the direct supply model and establishing the accrual funds scheme. However, the primary judge erred in concluding that in making the bundled offers in January and February 2012, Pfizer would not have taken advantage of its market power had any survived at that stage; and
• importantly, the primary judge was correct that, at no time, did Pfizer act with an anti-competitive purpose.

Market power on the edge of a ‘patent cliff’

In finding that Pfizer continued to maintain substantial market power in January and February 2012, the Full Court clarified that even the prospect of “significant potential competition” from generic manufacturers, ahead of the expiry of the patent over the biggest drug on the market, was not enough to diminish the originator’s substantial market power at that stage.

Pfizer’s ability to introduce its own generic, as part of a bundled offer in January 2012, without seriously affecting the price of its Lipitor branded product, was critical to the Court’s finding. The Full Court considered that Pfizer’s behaviour demonstrated that it was not yet constrained by the future “inevitable” generic competition.

The finding that Pfizer, despite being faced with one of the most anticipated generic launches, possessed substantial market power until at least around three months before patent expiry suggests that originators’ market power is likely to subsist until very close to patent expiry.

However, as the Court did not expressly state that Pfizer retained market power up to the date of patent expiry, it remains unclear exactly when Pfizer’s market power diminished and what level of competitive conduct pre-patent expiry would have been enough to tip the balance of power away from Pfizer.

Several questions therefore remain.

• Is it possible that there are other pharmaceutical markets (for other products) in which market power would subsist up until the date of patent expiry? These might include products which are not likely to be subject to such intense launches, products from which it is medically difficult to switch, very low-value products, or very high-value products. This finding highlights that originators will need to pay attention to the “effect” of sharp commercial practices in the months leading up to patent expiry.
  
  
• On one view, as competitive generic entry could not occur until June 2012 (the PBS listing date for generic atorvastatin), it may be arguable that Pfizer did not lose substantial market power until this point in time, shortly after it lost exclusivity in the market.
  
  
• As to what type of launch would count as a competitive threat, the decision suggests that only PBS launches would suffice. Alternatively, it is arguable that such an approach ignores the commercial realities of the pharmaceutical market and the bargaining that occurs between pharmaceutical companies and pharmacies in the months ahead of PBS listing. In this context, it is possible that market power does not continue to exist immediately prior to and at the date of patent expiry. However, such a view is at odds with the monopoly and exclusivity provided by a patent and a decision of the Full Court handed down last year, which held that an offer to supply post-patent expiry can amount to patent infringement where the offer is made during the term of the patent.[2]

Purpose, “taking advantage” and a new effects test

The Full Court confirmed that by their nature direct-to-pharmacy models, the accrual fund schemes, and the bundled offers could expose no anti-competitive purpose. Most importantly in this regard, the bundling of Lipitor with atorvastatin Pfizer in January and February 2012 was not evidence (of itself) of Pfizer having a proscribed purpose when it did so.

The Full Court judgment also confirms that protecting a market position in the face of competition does not expose an anti-competitive purpose. Even where internal documents used “offensive” language, such as “blocking” competition, in the circumstances, the Full Court considered that Pfizer’s actions were “defensive” and it entered into the conduct to prevent inevitable share “erosion”.

However, “colourful’ language used in internal documents was persuasive for the ACCC in this regard. Those “blocking” documents were the focus of the ACCC's case and helped to create the controversy. While that characterisation found no favour with the primary judge or Full Court, this does not mean that language is any less important in internal documents after this case – and hyperbolic language of this type remains risky.

As well as determining the purpose of a corporation’s actions, there is now an “effects test” to contend with. Australian competition law changed substantially in late 2017. The biggest change was to the unilateral conduct prohibitions. The old market power prohibition stopped corporations with market power from taking advantage of that power for a prohibited purpose (deterring entry or competitive conduct, or harming competitors). Now, the law prohibits corporations with market power from engaging in conduct with the purpose or effect of substantially lessening competition.

The Full Court considered only the purpose case(s) put before it. However, there are important takeouts for the new effects test universe. Atorvastatin was a major event for generic pharmaceutical suppliers. By June 2012, 77% of the atorvastatin market was being supplied by suppliers of generics.

The Full Court considered that, in context, the strategies Pfizer had developed and put in place were not expected to have effect in the market for very long and were not expected to achieve much more than gaining a “first-mover advantage” for Pfizer. Nothing Pfizer did changed those circumstances. Nor did it (realistically) expect any change. Similarly to the assessment of market power above, we question whether there are a range of pharmaceutical products where generics would not be likely to launch so effectively and intensely. In those circumstances, a Court could easily apply different reasoning to that which the Full Court employed. If “erosion” is expected to be substantially slower, or a position is more easily able to be defended – would the Full Court’s conclusions have been the same under an effects test?

In the same way, an important element under an effects test could be that even though generics are able to engage in some competitive conduct pre-patent expiry, they cannot engage in the same conduct, in the same way, as the originator, or launch offers or products at the same time as the originator. This was a key point for the primary judge and Full Court with regard to the “taking advantage” test under the old law. In effect, the Courts asked whether a firm without market power in a workably competitive market could have taken the same action as Pfizer. For the Full Court, the answer was “no”.

In these circumstances, could activity directed to obtain a “first mover advantage” (i.e. to get stock on the shelves of a chemist before other generic manufacturers) have the effect of substantially lessening competition? Even though the “taking advantage” limb has now been removed from the law, this context could be important in assessing the effects of similar conduct.

Where to next? 

The ACCC has sought special leave from the High Court to appeal the Full Court‘s judgment. “The ACCC is seeking clarity … on how to assess anti-competitive purpose”, said an ACCC Commissioner.[3] The ACCC is also seeking special leave on the issue of when a “requirements contract” will amount to exclusive dealing. The assessment of purpose is complex but well-trodden ground in Australian competition law and four seasoned competition law judges appear to be in violent agreement as to the nature and application of the purpose test in this matter. In those circumstances, it will be interesting to see the points of law on which the ACCC seeks to persuade the High Court to grant special leave.