Federal Court Decides Protecting Your Brand Against Generic Pharmaceuticals Is Not A Misuse Of Market Power.

In a decision which will be welcomed by many pharmaceutical companies the Federal Court of Australia recently dismissed proceedings instituted by the Australian Competition and Consumer Commission (ACCC) against Pfizer Australia Pty Ltd (Pfizer) in which the ACCC alleged that Pfizer had misused its market power and engaged in anti-competitive exclusive dealing in relation to its sales and marketing strategies leading up to the expiry of its patent over atorvastatin.

The Court found that Pfizer’s strategies were legitimate forms of commercial conduct in response to an increased threat to its Lipitor brand, and were not for the substantial purpose of preventing competition in the Australian market for the supply of atorvastatin to, and the acquisition of atorvastatin by, community pharmacies.

The decision is important for pharmaceutical patent holders, as it is the first time that an Australian court has addressed the competitive parameters of pharmaceutical companies looking to employ aggressive strategies in preparation for imminent patent expiry. The decision also provides some guidance to generic drug manufacturers communicating with pharmacies prior to patent expiry and the types of conduct which may constitute a patent infringement in those circumstances.

Although the Pfizer case was a loss for the ACCC, it is likely that it will appeal the case, especially given its recently stated intention to increase focus on anti-competitive conduct within the pharmaceutical industry and the broader healthcare sector as a priority for 2015.

Background

From 2000, Pfizer exclusively manufactured and supplied a cholesterol-lowering drug called atorvastatin, marketed under the ‘Lipitor’ brand. In the 2010 – 2013 financial years, atorvastatin was the highest selling prescription pharmaceutical in Australia, with 10 million units sold each year.

The patent was due to expire on 18 May 2012, after which time a number of generic manufacturers would enter the market selling their own atorvastatin products. Pfizer had granted Ranbaxy Australia Pty Ltd (Ranbaxy) a licence to release a generic version of atorvastatin from 18 February 2012.

Pfizer’s Commercial Strategy

In preparation for its patent expiry, Pfizer implemented ‘Project LEAP’, a marketing strategy consisting of three main elements:

• The Direct-to-Pharmacy model, where Pfizer would sell and distribute its pharmaceuticals direct to pharmacies, rather than through wholesalers;
• The Accrual Funds Scheme, which involved the creation of an accrual fund for each pharmacy to be credited with a rebate calculated on the quantity of Lipitor and the Pfizer generic atorvastatin that the pharmacy purchased; and
• Bundled Offers, whereby Pfizer would sell Lipitor and the Pfizer generic atorvastatin to pharmacies as a bundled product. Pharmacies would also be able to obtain a discount on Lipitor and the generic product on the condition that they purchased a minimum of 75% of their projected Pfizer generic atorvastatin requirements for the following 6, 9 or 12 months. The longer the term, the higher the discount.

The ACCC alleged Pfizer had contravened the Competition and Consumer Act 2010 (Cth) (CCA) by:

• Misusing its substantial market power for the purpose of deterring a person from engaging in competitive conduct in the atorvastatin market; and
• Engaging in exclusive dealing for the purpose of substantially lessening competition by offering discounts, allowances and rebates for its products on the condition that the pharmacies would not acquire or re-supply atorvastatin from a competitor of Pfizer (except for a limited extent) for periods up to 12 months.

Market Power

The ACCC submitted, and the Court accepted that the relevant market was the Australian market for the supply and acquisition of atorvastatin by community pharmacies.

The Court examined the degree of Pfizer’s market power in two disparate time periods, namely:

• Prior to late 2011: for which period it was held that Pfizer possessed substantial market power as the sole supplier of atorvastatin; and
• After January 2012: for which period it was held that Pfizer’s market power had declined due to its imminent patent expiry and the registration and increasing promotion of generic rivals, including Ranbaxy, soon to enter the market.

The Court found that Pfizer’s market power gradually decreased the more imminent the expiration of its patent became. Due to these factors, it was held that Pfizer’s market power was not substantial after January 2012.

The Court also rejected the ACCC’s allegation that Pfizer’s actions were for the purpose of preventing other generic manufacturers from supplying atorvastatin. Importantly, the Court found that Pfizer’s Project LEAP strategy was for the substantial purpose of ensuring that it remained a supplier of pharmaceutical products including Lipitor and the Pfizer generic and also that it remained competitive in the atorvastatin market following the loss of its patent protection.

As such, the Court found that the ACCC had failed to establish that Pfizer’s conduct breached the market power provisions of the CCA.

Exclusive Dealing

The Court found that Pfizer’s conduct in offering the rebate and bundled offer did not amount to exclusive dealing as the pharmacies were not restricted from purchasing generic atorvastatin from Pfizer’s competitors, even though they may have been less likely to buy these products.

The Court also found that the ACCC had failed to establish Pfizer’s conduct in establishing the Accrual Funds Scheme and bundling offers was for the purpose of substantially lessening competition.

The Conduct Of Ranbaxy

Evidence was led in the case that, prior to its licenced market entry date as agreed between Pfizer and Ranbaxy, Ranbaxy had made and accepted offers for its generic atorvastatin. Although supply had not yet occurred, the Court considered that this conduct constituted an encroachment of Pfizer’s exclusive right to exploit its patent. The finding is a warning to generic manufacturers to ensure that any marketing strategies employed in preparation for patent expiry may still breach a patent holder’s rights if such conduct could be considered an offer to sell or supply.

Implications

The case will no doubt be welcomed by pharmaceutical patent holders, providing, as it does some judicial insight into what distribution arrangements will be competitively acceptable, in the context of impending patent expiry.  

It is worth bearing in mind, however, that in finding that the conduct of Pfizer in simplifying supply and providing rebates and bundling incentives to pharmacies did not breach the CCA, the Court relied heavily on its findings of fact that Pfizer did not have a substantial degree of market power and did not have the requisite anti-competitive purpose. Those matters of fact may not be present in every situation and it would be wise for any pharmaceutical company contemplating a strategy similar to that employed by Pfizer to review its market position and its purpose before embarking on the same.

Stop Press: The ACCC announced on 18 March 2015 that it was appealing the decision to the Full Federal Court stating that it is “important that the ACCC seeks clarity from the Full Court on issues of market power and anti-competitive purpose, such as those raised by this case”