Preferential drug supply arrangements at patent’s end found not to amount to misuse of market power or exclusive dealing
On 25 May 2018 the Full Federal Court dismissed an appeal by the ACCC and confirmed that Pfizer had not engaged in misuse of market power or exclusive dealing (within sections 46 and 47 of the Competition and Consumer Act 2010)1 in offering to enter into preferential direct supply arrangements with community pharmacies in early 2012 in respect of the supply of Lipitor (the commercial embodiment of its patent) and its own generic drug (atorvastatin Pfizer). This was in circumstances where its Australian Patent No 601981 (the atorvastatin patent) was due to expire in May 2012. Lipitor was a particular type of statin which reduced the production of cholesterol in humans, thereby lowering the risk of cardiovascular disease including stroke.
The proposed supply arrangements provided for rebates or discounts to community pharmacies who signed up to yearlong supply agreements prior to the patent expiring. Under the supply agreements at least 75% of the atorvastatin requirements were to be purchased from Pfizer.
There was no real dispute of fact as to the conduct which Pfizer had engaged in. The case turned on issues including definition of market, whether at the relevant time Pfizer had a substantial degree of market power in the market, whether it had taken advantage of that market power for the purpose of substantially lessening competition and whether the arrangements constituted exclusive dealing.
The joint judgment of Greenwood, Middleton and Foster JJ contains a comprehensive review of authorities in the area.
Under its patent Pfizer had enjoyed a statutory monopoly and it was concerned to remain competitive in the generic market which would come into being once the patent expired. The supply arrangements were aimed at assisting it to do that. One of Pfizer’s management team gave evidence that it did not want to be “slaughtered” after May 2012 in the market.
Pfizer ultimately accepted that the market through the relevant period was the atorvastatin market being the market for the sale of Lipitor and its generic equivalents.
The Trial Judge had found that notwithstanding that Pfizer continued to have market power in the atorvastatin market in January 2012, and beyond that date, it no longer had a substantial degree of market power. The Full Court overturned this finding at paragraph 354 of the judgment:
“In January and February 2012, Pfizer was not yet constrained in its behaviour to any significant extent by the future inevitable competition that would be brought to the atorvastatin market by the participation in that market of Ranbaxy Australia and the major generics manufacturers. Its conduct in making the bundled offers on or about 16 January 2012 was behaviour which would not have been possible in the absence of its having a substantial degree of market power in the atorvastatin market. That behaviour was a reflection of its continuing to hold a substantial degree of market power in that market although the behaviour in question was, by early 2012, being heavily influenced by the fast approaching inevitable competition from the generics manufacturers”.
A further question concerned the Trial Judge’s conclusion that Pfizer had not taken advantage of its market power. The Full Court, in contrast to the Trial Judge, accepted that Pfizer had taken advantage of its market power in making the offers. The Full Court’s deliberation and discussion of the relevant factors at paragraphs 522 and 523 of the judgment are set out below:
“As at January 2012, Pfizer had put in place its DTP model and had also begun accruing rebates in respect of the sales of Lipitor commencing on 1 February 2011. In addition, it had announced to the market that it intended to supply its own generic atorvastatin from early 2012. In those circumstances, when postulating the relevant hypothetical (counter-factual) for the purposes of assessing whether Pfizer took advantage of its market power in the atorvastatin market in January 2012 when it made the bundled offers, all of the above circumstances must be included as elements of that hypothetical. Other matters were also required to be taken into account. These were:
- Pfizer was then the only supplier of Lipitor to community pharmacies;
- Even after the expiry of the atorvastatin patent, Pfizer would continue to be the only supplier of Lipitor to pharmacies;
- There would continue to be a sustained demand from pharmacies for Lipitor even after the introduction of atorvastatin Pfizer;
- Until 1 April 2012, Lipitor would be the only atorvastatin product that could be sold to members of the public under the PBS
- Pfizer was the only firm offering and capable of offering a discount on the price of Lipitor;
- Pfizer had a discretion as to what price it charged for Lipitor and, as at January 2012, had an ongoing ability to charge a substantial premium in its price for Lipitor relative to the price of generic atorvastatin;
- Pfizer was the only firm offering and capable of offering a pharmacy the benefit of rebates on the price of Lipitor;
- Pfizer was the only participant in the atorvastatin market which had the capacity to control the manner in which the Lipitor rebates might be made available to pharmacies;
- Pfizer was the only supplier (and from 19 February 2012 to 18 May 2012, one of only two suppliers) offering, or capable of offering, to supply a generic atorvastatin to pharmacies; and
- Ranbaxy Australia was not able lawfully to market a supply of atorvastatin in the atorvastatin market until 19 February 2012 and the other generics suppliers were not able lawfully to market or supply atorvastatin in that market until after 18 May 2012.
Pfizer argued that all of the factors which we have listed at  above were only matters of money and did not bespeak any taking advantage of market power. Further, Pfizer submitted that, ultimately, Pfizer’s competitors did make offers that matched or bettered Pfizer’s offers. However, those matching offers came later and the question for present purposes is whether, in January and February 2012, the making of the bundled offers constituted a relevant taking advantage of market power. For the reasons which we have explained, we consider that the making of those offers did constitute such a taking advantage of market power”.
The Full Court, however, upheld the Trial Judge’s finding that, Pfizer’s purpose in endeavouring to procure a state of affairs whereby a significant number of community pharmacies took up its bundled offer was to allow it to continue to compete in the market post expiry of the atorvastatin patent rather than that of substantially lessening competition in that market. This was explained in paragraph 589 of the judgment:
“There is no doubt that both Mr Latham and Mr Crotty hoped and expected that the making of the bundled offers would give Pfizer an edge in the highly competitive atorvastatin market which was to come post 18 May 2012. But, as the primary judge found, the end sought to be achieved by Pfizer by making the bundled offers in the circumstances in which they were made was not to make it difficult for its putative competitors to compete in the atorvastatin market post 18 May 2012 but rather to enable Pfizer to have a fair and reasonable opportunity to minimise the erosion of its market share for the supply of atorvastatin in the atorvastatin market post 18 May 2012 as a result of the loss of its monopoly position. Furthermore, the primary judge took the view that Pfizer’s conduct in offering rebates and discounts and, indeed, in bundling the sale of Lipitor with atorvastatin Pfizer, was commercial conduct in which Pfizer was entitled to engage in order to compete in the atorvastatin market post 18 May 2012 and was not atypical of the conduct which other pharmaceutical manufacturers had taken in the past and would take again in the launch phase of a new pharmaceutical. After all, the generics manufacturers were expected to, and did, in fact, vigorously compete with Pfizer by discounting their generic atorvastatin to 90% or 100% in order to gain traction in the post 18 May 2012 atorvastatin market. Nothing Pfizer did changed those circumstances. Pfizer did not expect that its manoeuvres would change those circumstances”.
As to the exclusive dealing case, the Full Court found that the terms upon which the price of the patented drug was given did not prevent the pharmacies which accepted the offers from buying generic atorvastatin from other suppliers. Merely having the effect or result in the practical consequence that a pharmacy might be less inclined to buy elsewhere did not mean that the terms amounted to conditions within section 47 (2) of the Act. It was not a condition of supply that community pharmacies would not, or would not, except to a limited extent acquire generic atorvastatin from a competitor.
1 A link to section 46 (1) and 47 (2) of Competition and Consumer Act 2010 is attached (1)