Insights

13/04/15

ACCC loses Pfizer case about conduct before the end of patent

The Federal Court has recently dismissed the Australian Competition and Consumer Commission’s (ACCC) case against Pfizer Australia (Pfizer) in which it alleged that Pfizer had misused its market power and engaged in exclusive dealing with an anti-competitive purpose in the run-up to the end of its patent exclusivity for its cholesterol lowering drug ‘Lipitor’.

Justice Flick found that while Pfizer had a substantial degree of market power and took advantage of that power, the ACCC had failed to establish that Pfizer’s actions had the purpose of preventing or deterring competition or of substantially lessening competition.  Instead, Flick J was satisfied that Pfizer's conduct was motivated by legitimate commercial purposes.

Background

In February 2014, the ACCC brought Federal Court proceedings against Pfizer Australia for alleged misuse of market power and exclusive dealing in relation to its previously patent protected cholesterol lowering drug, “atorvastatin” (both its originator brand “Lipitor” and its generic atorvastatin product).  Lipitor was for some years Australia’s highest selling prescription medicine under the Pharmaceutical Benefits Scheme.
 
The ACCC alleged that Pfizer engaged in anticompetitive conduct in its supply of these products by:

  • implementing new distribution arrangements by which it would market and supply prescription pharmaceuticals to pharmacies directly, bypassing wholesalers (Pharmacy Supply Arrangements);
  • establishing a scheme under which pharmacies would accrue rebates on purchases of certain pharmaceuticals, including Lipitor (Accrual Funds Scheme); and
  • offering and supplying atorvastatin at substantial discounts, and paying rebates on previously accrued sales of Lipitor, on conditions which included the acquisition of 75% of a pharmacy's generic atorvastatin supply requirements for a set period.  The terms of the offer also required a pharmacy to nominate a conversion rate, being the percentage of Lipitor sales it anticipated would be converted to the Pfizer generic product (Pfizer Offers).

for the purpose of deterring or preventing competitors from engaging in competitive conduct, as well as for the purpose of substantially lessening competition, in contravention of sections 46 and 47 of theCompetition and Consumer Act 2010 (Cth) (CCA).

Significantly, Pfizer first made the Pfizer Offers described above prior to the expiry of Pfizer’s patent protection for the atorvastatin molecule, when the other generic suppliers were prevented from supplying generic atorvastatin products in Australia.

Key Take Aways

  •  Pharmaceutical companies, and companies in other industries with patent protection over their products, can take some guidance from the Federal Court’s decision as to what they can legally do as their patent exclusivity draws to an end.  The decision is important because these companies have a legitimate right to engage in robust competitive conduct after their patent expires.  In Pfizer’s case, the Court gave weight to the integrity and credibility of the witnesses on this issue.
  •  A company with substantial market power by virtue of a patent may be able to show that in the run up to the end of exclusivity it no longer has this power because other players are taking active steps to enter the market.  On this point the Court placed emphasis on:

-  barriers to entry being a “primary consideration” to determining whether a corporation has market power.  The Court described the existence of a patent as one of the factors that may create a barrier.  The Court also referred to a number of internal Pfizer documents which evidenced three “drivers for change” given the competition it would face following the expiry of its patent and the entry of generic manufacturers; and

-  evidence that several generic manufacturers were actively approaching customers with atorvastatin supply proposals for when Pfizer’s patent expired.

  • Although not ultimately relevant to the decision, the ACCC wascriticised for having a “legally incoherent” case because it pleaded acumulative breach over a period from December 2010 until May 2012 (thatis, a breach covering all of the conduct), and not that each action was in itself a breach.  The legal effect of this pleading approach was that any substantial market power or purpose could only be assessed at the time at which all of the conduct was completed.  All elements of the conduct (market power, taking advantage and prescribed purpose) needed be connected to prove a contravention, and Pfizer no longer had substantial market power at the time the cumulative conduct was completed in early 2012.
  • The ACCC’s failure to establish purpose may cause some to point to the need for an ‘effects’ test for misuse of market power, as recommended by the Final Report of the Harper Review.  Whether this would have made any difference in the case brought against Pfizer is difficult to tell since the ACCC chose not to allege that Pfizer’s exclusive dealing conduct had the effect of substantially lessening competition, although that option was open.

What does this case mean for patent holders?

The Court in this case held that typically a patent holder does enjoy substantial market power during the term of the patent, but found that Pfizer’s market power began to dissipate in the months leading to the end of its patent.  Pfizer’s patent for atorvastatin was due to expire on 18 May 2012 and another manufacturer, Ranbaxy, was also able to supply atorvastatin from February 2012 as a result of unrelated proceedings.  The Court gave very detailed consideration to the facts at the relevant time and held that by at least the start of 2012, Pfizer had lost its substantial market power because generic manufacturers were “extensively canvassing pharmacies” prior to Pfizer’s patent ending.

However, the Court found that Pfizer did hold substantial market power until late 2011 by virtue of its patent giving it the exclusive supply of atorvastatin and there being no substitute drug.  The Court considered that the introduction and operation of Pfizer’s Pharmacy Supply Arrangements and Accrual Funds Scheme were only made possible because of Pfizer’s market power and so Pfizer had, therefore, taken advantage of that market power.

Despite this finding, the ACCC was unable to establish before the Court that Pfizer carried out the conduct with a substantial purpose of deterring or preventing other suppliers from supplying generic atorvastatin in contravention of section 46(1)(c) of the CCA.

In relation to the allegation of exclusive dealing, the ACCC was also unable to establish that conditions Pfizer had included in its pharmacy acceptance forms (requiring a certain percentage of generic atorvastatin be purchased from Pfizer) were included for the purpose of substantially lessening competition as required by s 47 CCA.

Instead, the Court found that Pfizer’s actual purpose for its conduct was to remain in the market as a supplier of pharmaceutical products and to remain a competitor for atorvastatin products.  In finding this, the Court took into consideration evidence showing that Pfizer expected to be “slaughtered” at the end of its exclusivity and gave weight to credible witnesses, whom Flick J described as having “commercial integrity”.  The Court used as an example of Pfizer’s purpose its decision to defer its offer period for discounts for bulk supply.  This decision was made so that customers (pharmacies) would have the opportunity to consider competing offers, including from Ranbaxy which was about to enter the market.  This was a legitimate purpose outside the reach of sections 46 and 47.

The Court found that competition for generic atorvastatin at the end of Pfizer’s exclusivity was held to be inevitable.  Therefore, although Pfizer’s conduct was likely to have the effect of creating incentives for pharmacies to contract with Pfizer, the substantial purpose of its conduct was to stay in the market in the face of intense competition, to allow pharmacies and Pfizer to take advantage of certain PBS benefits and to be a long term supplier of atorvastatin.

Although the Court’s decision was in Pfizer’s favour, it is not a ‘free pass’ for corporations to act without restraint simply because a patent is coming to an end.  It is still important to consider whether:

  • a corporation is likely to hold substantial market power in the market post-exclusivity, or leading up to the end of exclusivity.  To this end, it is important to take into account market dynamics, such as whether competitors are planning to enter the market upon the expiry of the patent and have been canvassing customers in preparation for that time;
  • the corporation’s conduct is legitimately for the purpose of remaining competitive in the post-patent market and there is credible evidence in support of this.

Is there a role for s 51(3) CCA?

The Court did not have to give findings on the use of section 51(3), which allows some otherwise illegal conduct by parties who enjoy patent protection. The Court did, however, offer some views on whether section 51 would have been applicable. First, section 51 is not available for alleged breaches of section 46 (misuse of market power) so its application was only limited to section 47 (exclusive dealing). The Court indicated that it would not have allowed a breach of section 47 to be cured by section 51 because the conditions Pfizer was imposing would have been used to create a “collateral advantage” to the patent protection and because this was not a question of.

Relevantly, the Harper Review’s Final Report recommended the repeal of s 51(3).  Given its limited application, it is difficult to see how the repeal of this exception would have any material impact.

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