ACCC's Enforcement and Merger Reform Approach Could Foreshadow Increased Scrutiny

In Australia, there have been some important regulatory developments affecting the life sciences sector and the Australian Competition and Consumer Commission (ACCC) has taken some significant cases against companies in this sector in recent years. The ACCC has also called for significant reforms to Australia's merger laws. If enacted, these proposed reforms will be highly relevant to dealmaking in the life sciences sector.

Our Competition, Consumer + Market Regulation team have authored the Australian chapter of GCR’s Guide to Life Sciences. This guide was first published in GCR: The Guide to Life Sciences – Second Edition.

Contents:

• Relevant regulatory developments
• Main merger control developments
• Main infringement proceedings
• Outlook

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Relevant regulatory developments

Repeal of safe harbour exemption for IP licences

With effect from 13 September 2019, the Australian parliament repealed a safe harbour exemption for certain conditions in intellectual property (IP) licences in Section 51(3) of the Competition and Consumer Act 2010 (Cth) (CCA). As a result, all IP assignments or licensing arrangements are now subject to the entire CCA, including cartel prohibitions. The repealed provision provided a limited exemption for conditional licences or assignments of patents, registered designs, copyright and protected circuit layouts. However, it did not exempt conduct that contravened the prohibitions on misuse of market power or resale price maintenance.

Since the repeal of the IP exemption, there have been reports of the ACCC's Cartels Branch initiating investigations into restrictions in distribution agreements, IP licences and patent settlements for pharmaceuticals, but no proceedings have been commenced at this stage.

On 11 July 2023, ACCC Chair Gina Cass-Gottlieb, in a speech on the ACCC's approach to compliance and enforcement at a Law Institute of Victoria event, called for careful attention to potential anticompetitive arrangements with competitors, even in the settlement of litigation, and noted that:

There are sometimes situations where cartel conduct is harder to identify. We have recently seen an example where a market sharing arrangement formed part ofa deed of settlement of proceedings.

This has clear implications for the settlement of IP disputes in particular. If parties to an assignment or licence of IP rights could be competitors, it is important to assess whether there are any conditions that could be viewed as cartel provisions, such as setting prices, restricting output or sales, or allocating markets (including disease areas, customers and territories). In addition to exposing the parties to cartel prosecution, conditions that contravene the CCA would also be void and unenforceable.

Ongoing covid-19 authorisations for the wholesale pharmaceutical sector

During September and October 2020, in the context of the covid-19 pandemic, the ACCC granted a number of final authorisations to allow members of various pharmaceutical industry associations, pharmaceutical wholesalers, medical oxygen suppliers and suppliers of medical equipment, respectively, to cooperate to ensure security of supply of essential medicines and related devices, pharmacy products, medical oxygen, medical equipment and related supplies in the event of shortages resulting from the pandemic. These authorisations are subject to conditions that allow the ACCC to monitor the authorised conduct. Under the CCA, the ACCC may grant authorisations to provide businesses with legal protection for conduct that might otherwise contravene the CCA but is not harmful to competition or likely to result in overall public benefits, or both. The ACCC also granted a number of interim authorisations in early 2020, at the beginning of the pandemic, in some cases in extremely short time frames.

On 6 September 2021, pharmaceutical wholesalers applied for reauthorisation to continue to cooperate in providing access to essential medicines and pharmacy products during the continuing covid-19 pandemic. After granting an interim authorisation on 13 September 2021 to allow the cooperation to continue while the ACCC considered the application, on 17 February 2022 the ACCC reauthorised the cooperation until 28 February 2023.

On 15 February 2023, the pharmaceutical wholesalers lodged a further application for reauthorisation to continue the cooperation but the ACCC did not make a decision to grant reauthorisation due to the short time available before expiry of its prior authorisation. The ACCC left open the possibility for the parties to lodge a fresh application, which has not yet transpired.

Indications of ACCC approach to patent settlements

On 23 March 2022, the ACCC published for comment a draft determination in which it proposed to deny an application for authorisation of a patent settlement and licence agreement between Celgene and two generic companies (Juno and Natco). ACCC, Application for authorisation, AA1000592-1, lodged by Juno Pharmaceuticals Ply Ltd, Nalco Pharma Ltd, Celgene Corporation and Celgene Ply Ltd [27 May 2022]. The authorisation application related to a proposed patent settlement and licence agreement between Celgene,Juno and Natco for Revlimid and Pomalyst, which are used in the treatment of multiple myeloma and other forms of cancer. While there are numerous ACCC authorisations relating to agreements to supply or distribute pharmaceutical products that contain restrictions that could give rise to exclusive dealing, this is the first draft determination by the ACCC regarding an application for authorisation relating to a patent settlement. This authorisation application follows the repeal of the IP exemption in Section 51(3) (discussed above), which may have previously been relied upon by parties assessing such agreements.

When considering whether to grant an authorisation, the ACCC exercises its discretion as to whether the relevant public benefit test is satisfied (outweighing the detriment arising from a lessening of competition), and here the ACCC proposes to deny the application as it considers that the agreement is likely to result in anticompetitive effects but is not satisfied it will give rise to the claimed public benefits that would outweigh the detriment (The ACCC does not rule out the possibility that it might grant authorisation of a patent settlement in the future if the parties are able to provide convincing evidence of a net public benefit). The entry date provisions appear to be the focus of the ACCC's views that the agreement is likely to result in public detriment.

In describing the likely public detriment in the draft determination, the ACCC set out factors that might foreshadow how it could apply the CCA to patent settlements in the future, outside of the context of an authorisation determination. The ACCC indicates that an entry date might reduce the competitive constraint posed by the threat of generic entry by providing an originator with greater control and certainty of the timing of generic entry and might deter other generic entrants by conferring a first mover advantage on one generic entrant.

Patent settlements that provide for an entry date within the exclusionary scope of a valid and in-force patent and without any value transfer from the originator to the generic have typically not been the focus of enforcement action in Europe and the US. If enforcement risk arises solely from an agreed entry date in patent settlements, this makes settlements that involve any term with a potential for early entry problematic and could mean that parties might be forced to litigate their patent disputes to the end as settlements may be unable to be reached on commercially acceptable terms.

On 27 May 2022, the ACCC extended the statutory deadline for its final determination, with the agreement of the applicants, until 29 July 2022. On 29 July 2022, Celgene,Juno and Natco withdrew their application for authorisation without explanation.

Main merger control developments

In April 2023, the ACCC Chair Gina Cass-Gottlieb called for reforms to Australia's merger laws to protect competition in Australia. (See ACCC, The role of the ACCC and competition in a transitioning economy address to the National Press Club 2023 [12 April 20231]). Ms Cass-Gottlieb said that Australia's merger laws are no longer fit for purpose and risk allowing potentially anticompetitive mergers to proceed.

The proposed reforms include introducing a mandatory and suspensory notification system requiring parties to notify the ACCC upon reaching certain thresholds (that could be based on global or domestic turnover of parties or trans­ action consideration), as well as the ability to call in mergers of concern below those thresholds. Ms Cass-Gottlieb also proposed changes to the substantive merger test, including an update to the factors considered when assessing whether a merger is anticompetitive (such as the loss of potential competition).

The reform proposals are not finalised and will require legislative change. The ACCC has provided a paper to the Treasury on its proposals. The Treasurer and the Assistant Minister for Competition, Charities and Treasury jointly announced on 23 August 2023 that the government has established a Competition Taskforce, supported by an expert panel that includes former ACCC Chair, Rod Sims, to undertake a review of competition policy, which includes consideration of the ACCC's proposals for merger reform.

In the context of the proposed merger reforms, the ACCC has been more assertive in requiring that parties meet its expectations in relation to the time and information provided for the ACCC to make its independent assessment. This more assertive approach was demonstrated by the ACCC's application for an interim injunction restraining the acquisition of Adora Fertility by Virtus Health, which was granted by the Federal Court in October 2021. ACCC, Elanco Animal Health Incorporated, proposed acquisition of Bayer Aktiengesellschaft's animal health business (11 November 2020), ACCC, Mylan NV, proposed combination with Pfizer's Upjohn Inc. division (4 December 2020].

In the  ACCC's recent reviews of two significant mergers in life sciences - Elanco's acquisition of Bayer Animal Health and Mylan's merger with Upjohn to create Viatris - brands have played an important role. The ACCC considered generics and private labels as unlikely to exercise a sufficient constraint due to customer loyalty to the brands of the merged entities, arising from: trust in the safety and efficacy of products; supply on a portfolio basis; and internal documents supporting the strength of the brand and reinforcing concerns that the brand might hinder successful new entry. These factors also influenced the ACCC's review of divestiture purchasers with preference given to purchasers with customer relationships and experience in supplying branded products in Australia, in addition to an ability to transfer the manufacturing process.

Main infringement proceedings

Cartels are an enduring priority for the ACCC, and the most significant successful criminal cartel prosecution by the ACCC to date involved international cartel conduct in the pharmaceutical industry.

ACCC v. Alkaloids of Australia - criminal cartel prosecution

On 1 December 2020, the Commonwealth Director of Public Prosecutions filed criminal charges against Alkaloids of Australia Pty Ltd (AOA) and its former export manager, Christopher Kenneth Joyce, for cartel conduct relating to the supply of active pharmaceutical ingredient scopolamine N-butyl bromide (SNBB) in contravention of the CCA, following a criminal investigation by the ACCC (See R v. Alkaloids of Australia Ply Limited, Case No. 2020/00347778, and R v. Christopher Kenneth Joyce, Case No. 2020/00347777 [Downing Centre Local Court, Sydney, NSW]). Section 45AD of the Competition and Consumer Act 2010 (Cth) (CCA) sets out the requirements for a cartel provision; Section 45AF makes it a criminal offence to enter into a contract, arrangement or understanding that contains a cartel provision; and Section 45AG makes it a criminal offence to give effect to a cartel provision.

SNBB is manufactured from the alkaloid scopolamine that is extracted from Duboisia plants, which are native to Australia. AOA is a supplier of SNBB and the only manufacturer in Australia.

AOA and Mr Joyce were both originally charged with 33 criminal cartel offences spanning a period of almost 10 years from 2009, relating to allegations that AOA and other international suppliers of SNBB made and gave effect to arrangements to fix prices, restrict supply, allocate markets and customers and rig bids for the supply of SNBB to manufacturers of generic antispasmodic medications.

The original charges were restructured and, over October and November 2021, AOA and Mr Joyce both pleaded guilty to three charges and also admitted guilt in respect of a further seven offences. The three cartel offences to which AOA and Mr Joyce pleaded guilty related to conduct involving:

• fixing a minimum price for the supply of SNBB at between US$1,500 and US$5,000 per
• agreeing to acquire the entire supply of Duboisia leaves from a particular grower (who was also required to commit to not grow or produce Duboisia on certain property); and
• attempting to fix the price of SNBB so that it was inversely tiered based on the quantity to be supplied, with a minimum price of no lower than US$1,500 per kilogram.

On 29 November 2022, AOA was convicted in the Federal Court of Australia and fined A$1,987,500. Mr Joyce was also convicted and received an aggregate sentence of 32 months' imprisonment to be served by way of an intensive correction order as well as being ordered to perform 400 hours of community service, fined A$50,000 and has been disqualified from managing corporations for five years.

The Federal Court described the conduct as 'deliberate, systematic, coordinated and covert', see Commonwealth Director of Public Prosecutions v. Alkaloids of Australia Ply Ltd [2022] FCA 1424 [215]. Due to the early guilty pleas entered by the defendants, the court applied a 25 per cent discount. Nevertheless, the imprisonment sentence received by Mr Joyce is the longest imposed on an individual for criminal conduct in Australia to date.

ACCC v. Cryosite Limited - gun-jumping as cartel conduct

In 2019, the first penalty for gun-jumping conduct in Australia was imposed in a case involving two companies supplying services for the collection and storage of cord blood and tissue (CBT), Cryosite Limited and Cell Care Australia Pty Ltd. On 13 February 2019, the Federal Court of Australia ordered Cryosite to pay A$1.05 million in civil penalties for entering into an asset sale agreement that contained a cartel provision and giving effect to that cartel provision in violation of the CCA, see ACCC v. Cryosite Limited [2019] FCA 116.

Cryosite had agreed to sell assets used in its CBT banking services to Cell Care, and the ACCC raised concerns about cartel conduct during its public merger review of the deal. The sale agreement contained a clause that required Cryosite to refer all customer sales enquiries regarding its CBT banking business to Cell Care in the period between signing and completion. Cryosite admitted that this clause was designed to restrict or limit the supply of CBT banking services by Cryosite and to allocate potential customers to Cell Care. Cryosite also admitted that it gave effect to the cartel provision by ceasing to supply CBT banking services to new customers from the time of the signing of the deal and that it had set up and implemented a system to refer enquiries from potential customers to Cell Care following the signing of the deal. This resulted in Cryosite ceasing to compete with Cell Care even though the proposed sale had not been completed.

This case illustrates how important it is for parties involved in a proposed merger to ensure that the planning of the integration of their business ahead of completion and prior to obtaining clearance from the ACCC does not give rise to gun-jumping in violation of the prohibitions against cartel conduct in Part IV of the CCA.

ACCC v. Pfizer Australia Pty Ltd - life cycle management strategies

An older matter concerning the Australian pharmaceutical sector that retains importance is the ACCC's case against Pfizer Australia Pty Ltd, alleging exclusive dealing and misuse of market power in relation to the supply of atorvastatin to pharmacies in violation of the CCA. Section 46 of the CCA prohibits the misuse of market power; Section 47 of the CCA prohibits exclusive dealing. The case focused on life cycle management (LCM) strategies employed by Pfizer to address the patent expiry for its blockbuster cholesterol-lowering medicine, Lipitor (atorvastatin). The strategies involved the introduction of a direct-to-pharmacy distribution model, establishing an accrual funds scheme with pharmacies, making bundled product offers to pharmacies and offering discounts on the condition pharmacies would not supply generic atorvastatin. The ACCC's case focused on the language used to express the objective of the LCM strategies within Pfizer's internal documents.

On 25 February 2015, the Federal Court of Australia dismissed the ACCC's case (See ACCC v. Pfizer Australia Pty Ltd [2015] FCA 113). Although the Court determined that Pfizer had substantial market power prior to patent expiry and that it took advantage of that market power by implementing the LCM strategies, the Court did not find that Pfizer had a substantial purpose of deterring or preventing competitors from competing. Instead, the Court found that the substantial purpose of Pfizer's LCM strategies was to ensure that it remained competitive and that the language in Pfizer's documents needed to be understood in this context. It also found that Pfizer had not engaged in exclusive dealing conduct. The ACCC appealed.

On 25 May 2018, the Full Court of the Federal Court of Australia rejected the ACCC's appeal, finding that Pfizer had not misused its substantial market power for an anticompetitive purpose and had not engaged in exclusive dealing conduct when it devised and implemented a strategy with the purpose of protecting its business by reducing the financial impact of patent expiry for Lipitor, see ACCC v. Pfizer Australia Pty Ltd [2018] FCAFC 78. The High Court of Australia refused the ACCC's application for special leave to appeal this decision on 19 October 2018.

After the ACCC had initiated its case against Pfizer, changes to strengthen the misuse of market power prohibition were introduced, which: removed the requirement that a firm had taken advantage of its market power; added an effects test; and focused the prohibition on conduct that is likely to substantially lessen competition and on conduct that has that purpose (Competition and Consumer Amendment [Misuse of Market Power] Act 2017). Given that the Court had previously found that the substantial purpose of Pfizer's LCM strategy was to ensure it remained competitive, even if the ACCC could have taken its case under the new market power prohibition, it would have still faced difficulties in proving that the substantial purpose of Pfizer's conduct was to substantially lessen competition instead of ensuring it remained competitive. The ACCC might have also encountered difficulties in proving that the likely effect of Pfizer's conduct was to substantially lessen competition considering the evidence Pfizer had presented that generics did compete and respond to Pfizer's strategy by offering increased discounts (See ACCC v. Pfizer Australia Pty Ltd [2015] FCA 113 [342]).

Growing private litigation for misuse of market power

Since the changes to the misuse of market power prohibition, the ACCC has only brought one case to trial under the amended provision. However, a series of private actions have been brought before the competent courts, including one in the life sciences sector.

On 16 July 2021, Merck Sharpe & Dohme (Australia) Pty Ltd launched private litigation against Bristol-Myers Squibb Australia Pty Limited (BMS), claiming that BMS had misused its substantial market power in relation to the supply of immunotherapy to patients with Stage III and Stage IV melanoma (Mereck Sharp & Dohme (Australia) Pty Ltd v. Bristol-Myers Squibb Australia Pty Limited, Federal Court of Australia, New South Wales Registry, NSD708/2021). Merck alleged that BMS's Opdivo melanoma continuation programme (Opdivo MCP), which offered Opdivo free of charge when used in combination with Yervoy only to those patients who had received Opdivo at an earlier stage in their treatment, had the effect of eliminating or substantially lessening competition from Merck's competing immunotherapy, Keytruda. It was also alleged that doctors would be reluctant to prescribe Keytruda, rather than Opdivo, if it restricted their patients' access to the Opdivo MCP. While the proceedings have since been dismissed by consent (on 8 February 2022) on account of BMS agreeing to open up its subsidised treatment programme to patients who have been treated with drugs manufactured by its competitors, Merck's application provides an indication of the types of claims that parties might bring under the new test, such as alleging a competitor has leveraged power in one market for the purpose or effect of substantially lessening competition in another market.

Outlook

Since her appointment as chair of the ACCC in March 2022, Ms Cass-Gottlieb has indicated a strong focus on conduct that might result in widespread harm to Australian consumers. With the rising cost of living in Australia, we would expect that the ACCC will look closely at any conduct that could result in a reduction of Australian consumers' access to cost-effective treatments or contribute to price escalation pressures regarding these treatments.