Regulator’s Action Against Pfizer is a Fizzer

Australia’s competition watchdog has failed to convince a Federal Court judge that a strategy employed by pharmaceutical company Pfizer, to enter the market for generic products upon expiry of its patent covering blockbuster cholesterol-lowering drug LIPITOR, constituted an illegal misuse of market power, or ‘exclusive dealing’: Australian Competition and Consumer Commission v Pfizer Australia Pty Ltd [2015] FCA 113.

From the year 2000, when it acquired Warner Lambert LLC, Pfizer was the owner of an Australian patent protecting the drug atorvastatin, and the exclusive supplier of the drug to the Australian market under the brand name LIPITOR.  The patent expired on 18 May 2012.  However, Pfizer faced initial limited generic competition from 19 February 2012, from which date Ranbaxy Australia Pty Ltd was able to supply atorvastatin to the Australian market under the terms of a settlement agreement reached with Pfizer in earlier proceedings.

Pfizer’s internal modelling indicated that the expiry of the patent, and the consequent entry of generic competition to the market, would have a significant impact on revenues.  A 2009 estimate suggested that the value of sales of LIPITOR would fall from $771 million in 2011 (i.e. that last full year before patent expiry) to just $70 million in 2015.

Pfizer therefore devised a strategy according to which it would produce its own generic (i.e. ‘unbranded’) atorvastatin, and that would enable it to leverage the final year or so of the market exclusivity, which it enjoyed as a result of its patent rights, into a form of ‘loyalty scheme’ that would encourage pharmacies to stock the Pfizer generic product in preference to the products of other generic suppliers.

The Australian Competition & Consumer Commission (ACCC) alleged that Pfizer’s scheme involved a misuse of the market power it enjoyed during the term of its patent, contrary to section 46 of the Competition and Consumer Act 2010 (‘CCA’), as well as exclusive dealing contrary to section 47 of the CCA, and commenced proceedings against Pfizer in the Federal Court of Australia.

The case was heard over 14 days in October 2014.  The court (Justice Flick, who also decided the MPEG LA v Regency Media case at first instance, in which he was soundly rolled on appeal) has now handed down its decision, finding that the ACCC failed to establish that Pfizer had acted contrary to section 46 or 47 of the CCA, and thus that Pfizer’s strategy is not contrary to Australian competition law.

Pfizer’s Strategy – ‘Project LEAP’

In an effort to defend its market position upon expiry of the atorvastatin patent, Pfizer developed a strategy it called ‘Project LEAP’.  The strategy had three main components:

1. a shift from supplying prescription drugs to pharmacies via wholesalers to what it called a ‘Direct-to-Pharmacy Model’;
2. the establishment of ‘accrual funds’ to which amounts would be credited as a percentage of the price of Pfizer products purchased by each pharmacy, with rebates to be paid from the funds according to terms that were not initially defined; and
3. an offer made to pharmacies in January 2012 according to which Pfizer would supply the branded drug LIPITOR, in a ‘bundle’ with its own generic version of the product, Atorvastatin Pfizer, with rebates from the accrual fund being tied to the quantities of the generic drug purchased by the pharmacies.

In effect, Pfizer’s plan was to entice pharmacies to purchase six to 12 months’ supply of its own generic atorvastatin product upon expiry of the patent, in exchange for which they would be entitled to a rebate of funds accumulated through purchases of LIPITOR that had been made while the drug was still under patent, and Pfizer had been the sole supplier.  In addition, since only Pfizer was in a position to supply both a generic product and the established LIPITOR branded product, the bundled offers made by Pfizer could not be matched by other generic suppliers.

How Effective Was Project LEAP?

Project LEAP was somewhat successful in achieving Pfizer’s objectives.  Data revealed in the judgment (paragraphs [246-7]) show that, as expected, generic atorvastatin rapidly gained market share once the Pfizer patent expired.  Generic competition immediately reduced LIPITOR market share from 100% to 32%, and by the end of the first year off-patent generics accounted for 78% of the market.

At one particular pharmacy, Atorvastatin Pfizer constituted 100% of generic sales for the first six months (other than a tiny proportion of Ranbaxy sales in April 2012), after which sales fell away, with Aspen taking up 83% of the generic sales at the pharmacy over the subsequent six months.  However, this still left Pfizer with 17% of the generic sales, which might well be regarded as a relatively good outcome considering that it had not been a participant in the generics market at all, prior to April 2012.

In the absence of Project LEAP, it is reasonable to assume that the switch from the LIPITOR branded product to generic alternatives would have occurred at much the same rate, but that Pfizer would not have acquired any share of the generic market.  In the sense that it was thus able to secure a foot-hold in this market, the strategy can probably be regarded as relatively successful.

The Court’s Conclusions

Competition law is complicated, and I have no qualifications or particular experience in this area.  I am therefore little more than a layperson myself in this regard.

And from a lay-perspective, it certainly strikes me that there is something ‘unfair’ in Pfizer’s conduct.  In effect, it used the market power conferred by its patent monopoly to capture a share of the generics market – in at least the first few months after patent expiry, possibly a very large share – where it otherwise would have needed to adopt more conventional marketing and distribution strategies, which would doubtless have been less successful against the generic incumbents.

However, according to Justice Flick’s ruling, Pfizer’s behaviour is not determinative under the current Australian law.

Setting aside the market power held by Pfizer, at least prior to the expiry of its patent (or the earlier entry of Ranbaxy into the generic market), section 46 of the CCA requires that the purpose of the use of that power be for ‘deterring or preventing a person [i.e. the existing generic suppliers] from engaging in competitive conduct’. 

Furthermore, with regard to exclusive dealing section 47(10)(a) requires that the purpose of the accused conduct be that of ‘substantially lessening competition’.

The court found that the ACCC failed to establish these ‘purpose’ requirements, and that Pfizer’s actual purpose was ‘to remain competitive in the market’ (at [464]).  In reaching this conclusion, the court was sympathetic to the circumstances in which Pfizer found itself leading up to the expiry of the atorvastatin patent.  In deciding to enter the market for generic alternatives to LIPITOR, Pfizer:

…inevitably had to confront the reality that there were well-established arrangements between the generic manufacturers and many of the pharmacies. Those arrangements were such that the pharmacies were likely to sell the generic product supplied by the manufacturer with which it had an arrangement. In entering the generic market, Pfizer was entering a market in respect to which it had relatively no prior experience. (At [462].)

Therefore:

Although Pfizer recognised that in pursuing that course [i.e. the ‘Project LEAP’ strategy], the incentives it offered to pharmacies to take its atorvastatin products – including both Lipitor and its own generic atorvastatin – made it harder for the other manufacturers to compete, it did not engage in the conduct in question for any substantial purpose of deterring or preventing the other generic manufacturers from entering the market.

As such, Pfizer’s conduct did not contravene sections 46 or 47 of the CCA.

Comment

I have mixed feelings about this outcome.  As a patent attorney, I believe that patent monopolies serve an important function in providing incentives for innovators to take the risks necessary to develop and commercialise new technologies.  It is perhaps nowhere more clear than in the pharmaceutical sector, where development of a new drug might require an investment on the order of a billion dollars over many years, that a period of exclusivity is an appropriate reward for success.

But parliament (and the architects of international agreements) have made decisions about the duration of the exclusive rights granted by a patent, and leveraging that power to create a de facto extension of the monopoly makes me a little uncomfortable.  Of course, if a strategy is legal, then it would be irresponsible of a corporation not to take advantage of the commercial opportunity.

On the other hand, the ultimate effect of Pfizer’s ‘Project LEAP’ strategy may actually be an increase in competition in the market for generic atorvastatin.  While data from a single pharmacy may not be representative of the entire market, if Pfizer has managed to establish a stable market share of 15-20%, against four or five other generic competitors, then it can hardly be said that it has grabbed more of the market than it is ‘entitled’ to.  Pfizer may have ‘bootstrapped’ its way to that market share, but the overall effect of its conduct does not seem to have been a lessening of competition.  More competition is generally regarded as a good thing for consumers.

As for the ACCC, it still has the option of appealing to the Full Federal Court.  Whether it will do so remains to be seen.  In some ways, it may be content with a loss in this case (notwithstanding that it has been ordered to pay Pfizer’s costs of the proceeding).  The ACCC has been calling for changes to section 46 which would make it easier to establish a breach.  Additionally, the Harper Review of Australian competition policy published a draft report last September which proposed that section 46 be amended to remove the ‘take advantage’ and ‘purpose’ requirements, and replace them with a ‘purpose, effect or likely effect of substantially lessening competition’ test, along with a defence.

It is not clear that either the ACCC’s suggested amendments, or those proposed in the Harper review draft report, would have resulted in any different outcome in this case, considering that the actual effect of Pfizer’s conduct does not seem to have been any lessening of competition.  Even so, the court’s decision does appear to highlight potential flaws in the existing legislation, and could provide additional impetus for reform.

In the meantime, Pfizer may just have provided other pharmaceutical innovators with a template for defending market share in the lead-up to patent expiry.

Tags: Australia, Competition law, Pharmaceuticals