Federal Court Dismisses ACCC Proceedings Against Pfizer Australia

WHAT YOU NEED TO KNOW

• The Federal Court has dismissed the ACCC's proceedings against Pfizer for misuse of market power and exclusive dealing, regarding Pfizer's strategy in the lead up to expiry of its atorvastatin patent.
• Whilst the Court accepted that Pfizer had taken advantage of its market power in engaging in the impugned conduct, the ACCC failed to establish that, from January 2012, Pfizer had substantial market power and that any aspect of Pfizer's conduct had an anti-competitive purpose.
• The Court's decision suggests that action taken by a patent holder in the lead up to loss of patent exclusivity to "remain competitive" following expiry, by seeking to preserve its viability, will not necessarily be anti-competitive.

On 25 February 2015, the Federal Court dismissed allegations by the ACCC that Pfizer Australia Pty Ltd (Pfizer) had engaged in a misuse of market power and exclusive dealing in breach of the Competition and Consumer Act 2010 (CCA), regarding its strategy in the lead up to expiry of its atorvastatin patent.*

Background

Until 18 May 2012, Pfizer held a patent over the blockbuster drug atorvastatin (which it sold under the brand name Lipitor). Atorvastatin is a molecule that is used to lower cholesterol, and for a number of years Lipitor was the highest selling prescription medicine in Australia.

The ACCC's allegations centred on a strategy deployed by Pfizer in anticipation of the expiration of its atorvastatin patent on 18 May 2012. Pfizer expected intense competition from generic manufacturers from that date – although it had agreed to let one generic manufacturer, Ranbaxy, enter the market on 18 February 2012 (i.e. three months before patent expiry), as part of the settlement of a patent dispute.

The ACCC alleged that Pfizer held a substantial degree of power in the Australia-wide market for the supply of atorvastatin to, and acquisition of atorvastatin by, pharmacies, from at least December 2010 to 18 May 2012. This power resulted from a combination of three related factors: the patent that it held over atorvastatin, Pfizer was the sole supplier of atorvastatin and the absence of substitutes.

The ACCC impugned three aspects of Pfizer's conduct which it submitted, cumulatively, amounted to a misuse of market power:

• in January 2011, Pfizer established a direct-topharmacy model, whereby Pfizer commenced supplying pharmaceuticals directly to pharmacies and ceased supply through the traditional wholesale model (Direct to Pharmacy Model);
• in January 2011, Pfizer established an accrual fund scheme whereby pharmacies would accrue a rebate equal to a percentage of their purchases of pharmaceuticals including Lipitor (Accrual Fund Scheme). Pharmacies were not made aware of how the accrued rebate could be redeemed until January 2012; and
• in January 2012, Pfizer made offers to pharmacies for the supply of Lipitor and generic atorvastatin which offered significant discounts and the payment of rebates previously accrued through the Accrual Fund Scheme, in exchange for pharmacies accepting a bulk sell-in of Pfizer's generic atorvastatin (75% of the pharmacy's anticipated generic atorvastatin supply requirements over 6, 9 or 12 months) (Pfizer Atorvastatin Offer). Pfizer's offers were categorised as either Platinum, Gold or Silver with each offer containing different levels of rebates, discounts and bulk sell-in requirements.

The ACCC contended that Pfizer relied on its substantial market power to engage in this conduct, and that it did so for the purpose of preventing or deterring suppliers of generic atorvastatin from competing in the atorvastatin market.

In particular, the ACCC alleged that the Pfizer Atorvastatin Offer incentivised pharmacies to purchase large stockpiles of Pfizer Atorvastatin before Lipitor lost exclusivity, with the intention of foreclosing competitors from competing to supply generic atorvastatin.

The ACCC also alleged that Pfizer had engaged in exclusive dealing by imposing conditions on its Pfizer Atorvastatin Offer that:

• pharmacies acquire not more than 25% of their anticipated generic atorvastatin requirements from other suppliers for the nominated period of time (being 6, 9 or 12 months); and
• pharmacies were not permitted to dispense generic atorvastatin acquired from a competitor of Pfizer to the extent that it would exceed 25% of the total generic atorvastatin dispensed by the pharmacy,

for the purpose of substantially lessening competition in the atorvastatin market.

Pfizer's response

Pfizer disputed all aspects of the ACCC's misuse of market power case theory, as well as the exclusive dealing allegations.

Pfizer did not accept the ACCC's characterisation of the market as a market for the supply and acquisition of atorvastatin. Rather, Pfizer submitted that the relevant market was the market for the wholesale supply of a range of pharmaceutical products, only one of which was atorvastatin. This was said by Pfizer to be based on the fact that pharmaceutical providers compete to supply pharmacies on a range basis and resist attempts to deal on a molecule-by-molecule basis. In that market, Pfizer submitted, it did not possess a substantial degree of market power as the market was dominated by generic manufacturers.

Pfizer also submitted that any market power that it held as a result of the patent over atorvastatin was not, as required under Australian law, of an enduring nature as at the time Pfizer made the Pfizer Atorvastatin Offer the patent was soon to expire and it faced the imminent threat of entry by generic manufacturers.

On the issue of taking advantage of market power, Pfizer submitted that the ACCC had failed to show that a company without substantial market power could not have engaged in similar conduct to Pfizer. For example, Pfizer submitted that other pharmaceutical companies had moved to a direct to pharmacy model, and that bulk sell-ins are common in the pharmaceutical industry on the launch of a generic product.

The Judgment

Justice Flick dismissed the ACCC's allegations against Pfizer in respect of both misuse of market power and exclusive dealing.

His Honour did, however, accept the market as contended for by the ACCC. In particular, his Honour noted that while there was evidence that pharmaceutical products are commonly sold on a range basis, the absence of any supply-side or demand-side substitution for atorvastatin precluded a finding that the relevant market was any broader than atorvastatin.

Misuse of market power

The ACCC's case on misuse of market power failed on a number of bases. First, the Court found that while Pfizer enjoyed a substantial degree of market power until late 2011 (by reason of its patent), by January 2012 (i.e. the time at which the Pfizer Atorvastatin Offers were made) Pfizer's market power had ceased to be "substantial" due to the threat of imminent entry by generic manufacturers, including Ranbaxy in February 2012, followed by other large and powerful players on 18 May 2012. By January 2012, as the atorvastatin patent was soon to expire, Pfizer's remaining market power was no longer enduring.

Secondly, the Court held that the ACCC had failed to establish that Pfizer engaged in the relevant conduct for the proscribed purpose of deterring or preventing generic manufacturers from competing in the market. Rather, the Court found that Pfizer's conduct had the substantial purpose of remaining competitive in the market following the (impending) loss of exclusivity over atorvastatin.

In particular, the Court rejected the ACCC's contention that Pfizer had undertaken a bulk sell-in of large quantities of generic atorvastatin for the purpose of discouraging or blocking competitors from supplying pharmacies with their atorvastatin product. While the Court acknowledged that Pfizer was aware that a likely consequence of its sell-in strategy was to reduce the incentive for pharmacies to acquire generic atorvastatin from competitors, the Court accepted the evidence of Pfizer's witnesses that the purpose of the bulk sell-in was to:

• protect Pfizer's commercial position following the loss of exclusivity over atorvastatin by seeking to secure the long-term support of pharmacies; and
• to take advantage of the fact that the first month's volume of generic atorvastatin would be excluded from the calculation of the price that the Government pays for drugs under the Pharmaceutical Benefits price disclosure scheme. This aspect of the bulk sell-in requirement was desired by pharmacies.

The Court also noted that Pfizer's conduct was consistent with the conduct of other pharmaceutical manufacturers that also undertake bulk sell-ins following the release of a new pharmaceutical product.

The Court did, however, accept that Pfizer's conduct in establishing the Direct to Pharmacy Model and Accrual Fund Scheme (conduct engaged in in January 2011) involved a taking advantage of market power. The Court found that pharmacies, who were opposed to the implementation model, were forced to accept Pfizer's Direct to Pharmacy Model because they could not obtain atorvastatin from any other source due to Pfizer's position as the monopoly supplier of atorvastatin until February 2012.

The Court also found that Pfizer's Accrual Fund Scheme could not have been established in the absence of market power, as Pfizer would have been unable to establish the scheme without providing any certainty to pharmacies as to how the rebate could be accessed in the presence of competition from other suppliers.

While it was not strictly necessary to decide the question, the Court also concluded that Pfizer took advantage of its market power (albeit not market power that was substantial) in making the Platinum, Gold and Silver Pfizer Atorvastatin Offer in January 2012.**

The Court's findings on the ACCC's misuse of market power case are summarised below.

Conduct	Market power	Taking advantage	Proscribed     purpose
Direct To Pharmacy Model	✔	✔	✖
Accrual Fund Scheme	✔	✔	✖
Pfizer Atorvastatin Offer	✖	✔      **	✖

Misuse of market power – A case improperly pleaded

While the Court made a series of findings regarding the misuse of market power claim, the Court held that the ACCC's misuse of market power case could have been summarily dismissed on the basis that the case was pleaded in a "legally incoherent manner".

The Court accepted submissions made by Pfizer that the ACCC had pleaded its case in a manner that confined the relevant period of enquiry as commencing on 16 January 2012, being the date on which the Pfizer Atorvastatin Offer was made. The difficulty for the ACCC was that it had pleaded that Pfizer had engaged in a misuse use of market power by cumulatively setting up the Direct to Pharmacy Model and Accrual Fund Scheme in January 2011, and by making the Pfizer Atorvastatin Offer in January 2012. The ACCC did not allege that one or other of those elements alone constituted a separate contravention.

The Court held that as two aspects of Pfizer's conduct that were relied on to found the misuse of market power case occurred prior to the relevant period, the ACCC's case must necessarily fail as the ACCC had not pleaded that the making of the Pfizer Atorvastatin Offer in January 2012, itself, constituted a misuse of market power.

In any event, the Court noted that the ACCC's case as pleaded meant that any contravention could only have arisen, at the earliest, in January 2012 and, as a practical matter, the ACCC's case was bound to fail because at that time Pfizer did not possess a substantial degree of market power.

Exclusive dealing

Pfizer accepted the ACCC's contention that the requirement for pharmacies to dispense no more than 25% of their total generic atorvastatin from Pfizer's competitors was a condition that fell within the definition of exclusive dealing under the CCA. However, the Court found that the ACCC had failed to establish that Pfizer imposed the condition for the purpose of substantially lessening competition.

The Court also found that while the bulk sell-in aspect of the Pfizer Atorvastatin Offer may have had the effect of reducing the inclination of pharmacies to purchase a competitor's generic atorvastatin, Pfizer had not imposed a condition that inhibited the freedom of pharmacies to acquire generic atorvastatin from an alternative supplier.

The ACCC has been ordered to pay Pfizer's costs of the proceeding.

Significance of the decision

The ACCC is yet to announce whether it will pursue an appeal – it has 21 days to do so.

In our view, the task of persuading a Full Court to overturn this decision may be beyond the ACCC, given the nature of Flick J's findings – the ACCC would need, at least, to:

• overturn the findings that Pfizer did not possess a substantial degree of market power beyond January 2012 and that Pfizer did not have a proscribed purpose (across all three elements of the impugned conduct); and
• overturn the finding that the ACCC's misuse of market power case is "legally incoherent" and could have been summarily dismissed,

while also surviving the expected challenge that would come from Pfizer (in the form of a cross-appeal) on market definition, market power before January 2012 and taking advantage (again, across all three elements of the impugned conduct).

The findings on purpose, for example, appear difficult to overturn given the reliance by the trial judge on oral testimony given by Pfizer's witnesses at trial and the general reluctance of appeal courts to disturb findings made in such circumstances.

The ACCC's case against Pfizer marks the first attempt by the ACCC to prosecute a manufacturer of a patented pharmaceutical for conduct deployed in anticipation of the expiration of that patent. The Court's decision suggests that conduct undertaken by the holder of a patent to preserve its commercial viability following the loss of patent exclusivity will not, itself, amount to anti-competitive conduct.

The ACCC's case relied heavily on numerous references to "blocking" competition in various Pfizer internal documents to support a conclusion that Pfizer had acted with an anti-competitive purpose. While in this case the inference sought to be drawn by the ACCC of an anti-competitive purpose was defeated by the oral evidence given by senior Pfizer witnesses, the case serves as a useful reminder that internal documents that refer to competitors or the impact of conduct on the competitive process can be scrutinised by the ACCC and Court alike.

This decision marks yet another failure by the ACCC to successfully prosecute a misuse of market power case (the most recent victory for the ACCC in a contested misuse of market power case being in the ACCC v Baxter in 2008). Particularly as the ACCC has failed (at least in part) on the basis of its failure to establish a proscribed purpose, this decision may add fuel to the ACCC's claim that the misuse of market power prohibition (s 46 of the CCA) should be amended.

While the Harper Review has indeed proposed recommended amendments to the misuse of market power prohibition to incorporate an "effects test", there is significant doubt whether such a test would have assisted the ACCC in this case in any event. Rather, the evidence appeared to point to the conclusion that, in spite of Pfizer's conduct, following the expiration of Pfizer's patent the atorvastatin market was subject to vigorous competition.

_{* Australian Competition And Consumer Commission v Pfizer Australia Pty Ltd [2015] FCA 113, 25 February 2015, per Flick J (Judgment).}

_{** An alternative argument was raised by the ACCC that Pfizer's Atorvastatin Offer was below cost and thus constituted a taking advantage of market power on that basis. His Honour concluded that the evidence did not establish that Pfizer had in fact priced below cost. Moreover, his Honour found that even if the offers were below cost they were made during a launch phase and in respect of a relatively short period of time, and thus did not constitute a taking of advantage of market power. The reasons for judgment do not otherwise appear to provide any analysis in support of the conclusion that the making of the Pfizer Atorvastatin Offer itself constituted a taking advantage of, albeit limited, market power (see Judgment [251] and [291]-[324]).}