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Pfizer appeal unsuccessful and changes to Section 46

30 May 2018
jason kaye
Read Time 6 mins reading time

Earlier this year, the Full Court of the Federal Court of Australia dismissed the ACCC’s appeal of a 2015 judgment in relation to Pfizer Australia Pty Ltd (Pfizer). The case was one of the last cases brought under the old misuse of market power prohibitions specified in section 46 of the Competition and Consumer Act 2010 (Act).

The 2015 decision, which found the ACCC failed to show that Pfizer’s sales strategy was designed for the purpose of deterring or preventing other suppliers from engaging in competitive conduct, was upheld.

Background

In February 2014, the ACCC commenced proceedings against Pfizer for alleged misuse of market power and exclusive dealings. Pfizer had the exclusive right to market atorvastatin, a pharmaceutical product used to lower cholesterol, until the expiration of its patent on 18 May 2012. Its originator atorvastatin product, Lipitor, reported PBS sales of $700 million per annum, making it the highest selling prescription medicine prior to the expiry of the patent.

In anticipation of competition from generic atorvastatin manufacturers, Pfizer took the following steps to minimise its loss of market share and decline in revenue:

  1. Direct-to-Pharmacy Model: Pfizer restructured its marketing and distribution strategy in January 2011 so it would sell directly to pharmacies instead of selling through its wholesaler networks.
  2. Accrual Fund Scheme: Pfizer established “accrual funds” for each pharmacy, against each Pfizer drug which could be credited at a notional rebate rate (5 per cent for Lipitor). The rebates could not be accessed until the expiry of the Lipitor patent but the funds commenced accruing from January 2011.
  3. Discount and Rebate Package: Pfizer commenced selling its own generic version of atorvastatin (named Atorvastatin Pfizer) and offered discounts and rebate packages to pharmacies. Under the offer, pharmacies could access the accumulated rebates if they purchased 75 per cent of their anticipated generic atorvastatin from Pfizer over a 6, 9 or 12 month period. Discounts for both Lipitor and Atorvastatin Pfizer were offered based on:
  • the length of their supply contract; and
  • the proportion of Atorvastatin Pfizer sales as a percentage of all atorvastatin sales by the pharmacy.Failure to accept the offer before August 2012 disqualified pharmacies from receiving any rebates from the accrued fund. Acceptance of the offer after 24 February 2012 (i.e. 5 days after it became lawful for Pfizer’s competitor to advertise generic atorvastatin) led to delays in payment of the rebates.
  1. Bulk Sale: Pharmacies participating in the offers were shipped the entirety of their 6, 9 or 12 month supply of Lipitor in advance (pre-expiry). The ACCC alleged this was arranged to reduce the shelf space available for the competing products.

The ACCC took action against Pfizer under the old section 46 of the Act, alleging Pfizer took advantage of its substantial market power for the purpose of, amongst other things, deterring or preventing other suppliers from engaging in competitive conduct. The ACCC also alleged Pfizer engaged in exclusive dealing for the purpose of substantially lessening competition.

In relation to the misuse of market power allegations, Justice Flick found the relevant market was the Australia-wide wholesale market for atorvastatin, in which Pfizer had a substantial degree of market power from December 2010 until 2012. However, this market power was found to be no longer “substantial” from January 2012 to May 2012 due to the emergence of generic atorvastatin manufacturers taking advantage of the patent expiration.

During the period in which Pfizer did have substantial market power, it was found Pfizer did not to take advantage of its market power for the purpose of deterring or preventing a person from engaging in competitive conduct. Specifically, Justice Flick held that:

  1. The Direct-to-Pharmacy Model had a legitimate purpose of establishing close relationships with pharmacies to create opportunities to sell its own generic products;
  2. The decision to lower the minimum purchase requirement from 100 per cent to 70 per cent in implementing the Discount and Rebate Package was found to be for the purpose of allowing the participating pharmacies to purchase from other suppliers.
  3. The Bulk Sale strategy was implemented to secure its commercial advantage with respect to the PBS pricing of its atorvastatin products, which depended on the level of stock held by pharmacies, rather than to deter competing suppliers.

It was also found the discounts and rebates did not inhibit the each pharmacy’s freedom to acquire their generic atorvastatin from alternative suppliers to amount to exclusive dealings, and the purpose of Pfizer’s conduct was to maximise its sales rather than to substantially lessen competition.

On 25 February 2015, the Federal Court of Australia dismissed the ACCC’s application. A Notice of Appeal was lodged by the ACCC on 18 March 2015.

Changes to Section 46

Section 46 was amended effective 6 November 2017 (after the ACCC instituted proceedings against Pfizer) as a result of the commencement of the Competition and Consumer Amendment (Misuse of Market Power) Act 2017. Importantly, the new section 46 introduces significant changes to the misuse of market power prohibition, including:

  • the introduction of the “effects test” – conduct which has or is likely to have the effect of substantially lessening competition will now contravene the section; and
  • the omission of the “take advantage” element; and
  • removal of the 2007 amendments which prohibit firms with substantial market share from engaging in predatory cost pricing for a sustained period of time.

If brought under the new provisions, the Pfizer case could have had a different outcome if the ACCC could prove Pfizer’s conduct was likely to substantially lessen competition.

The new “effects test” makes it easier for the ACCC to prove breaches of the misuse of market power prohibitions. Going forward, we are likely to see a greater litigious appetite from the regulator for potential contravention of section 46.

Macpherson Kelley specialises in advising on all aspects of competition and consumer law obligations. We have extensive experience in dealing with all facets of the Act, including dealing with the relevant regulatory bodies (such as the ACCC and ASIC). If you have believe you may be affected by the above, or if wish to obtain further advice, please contact us.

This article was written by Jason Kaye, Lawyer – Commercial.

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Pfizer appeal unsuccessful and changes to Section 46

30 May 2018
jason kaye

Earlier this year, the Full Court of the Federal Court of Australia dismissed the ACCC’s appeal of a 2015 judgment in relation to Pfizer Australia Pty Ltd (Pfizer). The case was one of the last cases brought under the old misuse of market power prohibitions specified in section 46 of the Competition and Consumer Act 2010 (Act).

The 2015 decision, which found the ACCC failed to show that Pfizer’s sales strategy was designed for the purpose of deterring or preventing other suppliers from engaging in competitive conduct, was upheld.

Background

In February 2014, the ACCC commenced proceedings against Pfizer for alleged misuse of market power and exclusive dealings. Pfizer had the exclusive right to market atorvastatin, a pharmaceutical product used to lower cholesterol, until the expiration of its patent on 18 May 2012. Its originator atorvastatin product, Lipitor, reported PBS sales of $700 million per annum, making it the highest selling prescription medicine prior to the expiry of the patent.

In anticipation of competition from generic atorvastatin manufacturers, Pfizer took the following steps to minimise its loss of market share and decline in revenue:

  1. Direct-to-Pharmacy Model: Pfizer restructured its marketing and distribution strategy in January 2011 so it would sell directly to pharmacies instead of selling through its wholesaler networks.
  2. Accrual Fund Scheme: Pfizer established “accrual funds” for each pharmacy, against each Pfizer drug which could be credited at a notional rebate rate (5 per cent for Lipitor). The rebates could not be accessed until the expiry of the Lipitor patent but the funds commenced accruing from January 2011.
  3. Discount and Rebate Package: Pfizer commenced selling its own generic version of atorvastatin (named Atorvastatin Pfizer) and offered discounts and rebate packages to pharmacies. Under the offer, pharmacies could access the accumulated rebates if they purchased 75 per cent of their anticipated generic atorvastatin from Pfizer over a 6, 9 or 12 month period. Discounts for both Lipitor and Atorvastatin Pfizer were offered based on:
  • the length of their supply contract; and
  • the proportion of Atorvastatin Pfizer sales as a percentage of all atorvastatin sales by the pharmacy.Failure to accept the offer before August 2012 disqualified pharmacies from receiving any rebates from the accrued fund. Acceptance of the offer after 24 February 2012 (i.e. 5 days after it became lawful for Pfizer’s competitor to advertise generic atorvastatin) led to delays in payment of the rebates.
  1. Bulk Sale: Pharmacies participating in the offers were shipped the entirety of their 6, 9 or 12 month supply of Lipitor in advance (pre-expiry). The ACCC alleged this was arranged to reduce the shelf space available for the competing products.

The ACCC took action against Pfizer under the old section 46 of the Act, alleging Pfizer took advantage of its substantial market power for the purpose of, amongst other things, deterring or preventing other suppliers from engaging in competitive conduct. The ACCC also alleged Pfizer engaged in exclusive dealing for the purpose of substantially lessening competition.

In relation to the misuse of market power allegations, Justice Flick found the relevant market was the Australia-wide wholesale market for atorvastatin, in which Pfizer had a substantial degree of market power from December 2010 until 2012. However, this market power was found to be no longer “substantial” from January 2012 to May 2012 due to the emergence of generic atorvastatin manufacturers taking advantage of the patent expiration.

During the period in which Pfizer did have substantial market power, it was found Pfizer did not to take advantage of its market power for the purpose of deterring or preventing a person from engaging in competitive conduct. Specifically, Justice Flick held that:

  1. The Direct-to-Pharmacy Model had a legitimate purpose of establishing close relationships with pharmacies to create opportunities to sell its own generic products;
  2. The decision to lower the minimum purchase requirement from 100 per cent to 70 per cent in implementing the Discount and Rebate Package was found to be for the purpose of allowing the participating pharmacies to purchase from other suppliers.
  3. The Bulk Sale strategy was implemented to secure its commercial advantage with respect to the PBS pricing of its atorvastatin products, which depended on the level of stock held by pharmacies, rather than to deter competing suppliers.

It was also found the discounts and rebates did not inhibit the each pharmacy’s freedom to acquire their generic atorvastatin from alternative suppliers to amount to exclusive dealings, and the purpose of Pfizer’s conduct was to maximise its sales rather than to substantially lessen competition.

On 25 February 2015, the Federal Court of Australia dismissed the ACCC’s application. A Notice of Appeal was lodged by the ACCC on 18 March 2015.

Changes to Section 46

Section 46 was amended effective 6 November 2017 (after the ACCC instituted proceedings against Pfizer) as a result of the commencement of the Competition and Consumer Amendment (Misuse of Market Power) Act 2017. Importantly, the new section 46 introduces significant changes to the misuse of market power prohibition, including:

  • the introduction of the “effects test” – conduct which has or is likely to have the effect of substantially lessening competition will now contravene the section; and
  • the omission of the “take advantage” element; and
  • removal of the 2007 amendments which prohibit firms with substantial market share from engaging in predatory cost pricing for a sustained period of time.

If brought under the new provisions, the Pfizer case could have had a different outcome if the ACCC could prove Pfizer’s conduct was likely to substantially lessen competition.

The new “effects test” makes it easier for the ACCC to prove breaches of the misuse of market power prohibitions. Going forward, we are likely to see a greater litigious appetite from the regulator for potential contravention of section 46.

Macpherson Kelley specialises in advising on all aspects of competition and consumer law obligations. We have extensive experience in dealing with all facets of the Act, including dealing with the relevant regulatory bodies (such as the ACCC and ASIC). If you have believe you may be affected by the above, or if wish to obtain further advice, please contact us.

This article was written by Jason Kaye, Lawyer – Commercial.