Chillin'Competition

[Teaching great students is one of the best parts of being an academic at LSE. Suiyi Zhang exemplifies all the qualities of the students we are fortunate enough to attract. She graduated with top honours from our LLM programme last year and is now back in Australia, where she works on competition law matters for the ACCC. Suiyi has prepared a comment on a recent case that shows that pharmaceutical companies are under the spotlight all over the world. I leave you with it!]

In the northern hemisphere, pharmaceutical antitrust cases seem to have had their share of the limelight in the past few years. Europe is still litigating cases following the Commission’s pharmaceutical sector inquiry in 2008. The US Supreme Court handed down its decision in Actavis in 2013. Now, it is Australia’s turn.

Pfizer Australia owned a patent for the atorvastatin molecule which expired in May 2012. This molecule was used to make Lipitor which was a “blockbuster”. For many years it was the highest selling pharmaceutical in Australia.

Faced with the impending expiry of its patent, and like some of its global counterparts have done, Pfizer came up with a strategy. In January 2011 it changed the way it supplied community pharmacies, through an exclusive direct-to-pharmacy model, and established an accrual funds scheme, which involved pharmacies accruing rebates based on the quantity of Pfizer medication they acquired. From January 2012, Pfizer made offers to community pharmacies which included the release of rebates accrued on Lipitor purchases, discounts on Lipitor and discounts on Pfizer’s generic atorvastatin, each of which varied depending on the quantity of Pfizer’s generic atorvastatin product that a pharmacy purchased.

The ACCC commenced proceedings against Pfizer alleging (among other things) that through this conduct Pfizer misused its market power in contravention of section 46 of Australia’s competition legislation. Section 46 like Article 102 is not enlivened unless the firm in question is dominant, or in the words of section 46, has “a substantial degree of power in a market”.

In February 2015, Justice Flick of the Australian Federal Court ruled in favour of Pfizer on section 46. The interesting part is why.

Can the strength of market power be related to a patent’s remaining lifespan?

The definition of market power in Australia has European parallels, the Australian High Court  has said that market power is manifested in a “capacity to behave in a certain way (which might include setting prices, granting or refusing supply, arranging systems of distribution), persistently free from the constraints of competition” (Melway Publishing v Robert Hicks).

Justice Flick held that Pfizer did not contravene section 46 because as at January 2012, it did not have the requisite degree of market power in the Australian market for the supply of atorvastatin, despite holding the patent.

While acknowledging Pfizer still maintained some degree of market power, for example the “unique ability to exploit…the marketing of Lipitor to a premium price and to package its generic atorvastatin in a manner identical…to the packaging of the established brand”, he held that from January 2012 this degree of power was no longer “substantial”. The approaching expiration of the patent was key to Justice Flick’s reasoning. Justice Flick said that “Pfizer’s market power gradually decreased the more imminent the expiration of its patent became” (ACCC v Pfizer at [286]).

Justice Flick emphasised the need for market power to be capable of being maintained over a sustained period. He said that Pfizer did not have substantial market power because its power was not “enduring” and could not be “sustained” (ACCC v Pfizer at [286] and [288]).

Why was Pfizer’s market power not enduring? Because of the impending entry of generic manufacturers. Justice Flick noted that a number of generic manufacturers had listed their atorvastatin products on the Australian Register of Therapeutic goods in 2009 and 2010, one manufacturer (Ranbaxy) had been able to promote its own generic version since 2011 due to settlement arrangements between Ranbaxy and Pfizer in other proceedings, and in 2012 generic manufacturers were holding discussions with key customers about the terms on which they would supply generic atorvastatin, with some telling customers that they would beat Pfizer’s offer.

The approach is to be further tested

The soundness of Justice Flick’s approach to market power is shortly to be tested in the full Federal Court of Australia. The ACCC has already announced that it will be appealing the decision.

Disclaimer

The views expressed in this post are of the author only and may not necessarily be the views of the ACCC.