AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE)

ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN

UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

Misuse of market power in the

Pharmaceutical sector

30 May 2014

Ross Zaurrini

1 The misuse of market power prohibition in the CCA

2 The ACCC v Pfizer case

3 Identifying and managing risk

Today

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The misuse of market power prohibition in the CCA

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Section 46 of the Competition and Consumer Act 2010:

• 46(1): A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of:

a) eliminating or substantially damaging a competitor;

b) preventing the entry of a person into that or any other market; or

c) deterring or preventing a person from engaging in competitive conduct in that or any other market.

(a) – (c) are "proscribed purposes"

• 46(1AA): A corporation that has a substantial share of a market must not supply, or offer to supply, goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying the goods or services, for a proscribed purpose.

Misuse of market power

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Misuse of market power (cont.)

Element Test applied by the Court (s46)

Market Power

• The ability to act in a manner not constrained by competitors, potential competitors or customers

• Factors: • ability to raise prices above supply cost without rivals taking away customers over time • market share • barriers to entry • vertical integration • ability to engage persistently in exclusionary practices

Taking advantage

• Would a corporation without market power have engaged in the conduct as matter of commercial judgment?

• Other possible indicators: • whether conduct was materially facilitated by corporation's market power • whether corporation engaged in the conduct in reliance on its market power • whether conduct is otherwise related to corporation's market power

Purpose • An intention to achieve a particular result • Established by direct evidence or inferred from the nature of the conduct, the circumstances of

the conduct and/or its likely effect

Predatory pricing

• No question of prospect of recoupment arises • Market share / cost / sustained period

The ACCC v. Pfizer case

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• ACCC claims that in the period leading up to the expiry of its

atorvastatin patent, Pfizer engaged in conduct intended to

prevent or deter generic atorvastatin products entering the

market in Australia

• ACCC considers that this conduct:

– was a misuse of market power in breach of section 46 of the CCA; and

– amounted to exclusive dealing with a purpose of substantially lessening competition in breach of section 47 of the CCA.

ACCC has sued Pfizer

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• Pfizer's Australian patent for the atorvastatin molecule used in Lipitor was due to expire on 18 May 2012

• Pfizer expected generic atorvastatin products to rapidly enter the market and compete aggressively with Lipitor

• Pfizer had also entered a patent settlement agreement in 2008 with Ranbaxy under which Ranbaxy could launch its generic atorvastatin product from 18 February 2012

Pfizer took a range of steps in response to the upcoming loss of exclusivity

Factual background

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What did Pfizer do?

Pfizer stopped selling through wholesalers in

2010 and supplied Lipitor

direct to pharmacies

Pfizer set up an Accrual Fund

Scheme in 2011 (more than 5000

pharmacies; $35m in rebates as at April 2012)

Pfizer released branded generic

version of atorvastatin in January 2012

Pfizer made the "Pfizer

Atorvastatin Offer" in

January 2012

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Offer type

Proportion of the Accrual Fund

released to the pharmacy

Required upfront purchase volume of Atorvastatin

Pfizer

Nominated Conversion Rate

Atorvastatin Pfizer Discount

Lipitor Discount

Platinum 100% 75% of 12 months'

total generic atorvastatin volume

<60% 60% 20%

60-75% 70% 10%

>75% 75% 5%

Gold 75% 75% of 9 months'

total generic atorvastatin volume

<60% 60% 15%

60-75% 65% 10%

>75% 70% 5%

Silver 50% 75% of 6 months'

total generic atorvastatin volume

<60% 55% 10%

60-75% 60% 8%

>75% 65% 5%

Alternate 0% No minimum volume

requirement

n/a 40% 5% until 1 June 2012, then 1.5%

Pfizer Atorvastatin Offer

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Timeline

24 February Pharmacies required to accept

Platinum, Gold or Silver Offer in order to have Lipitor Rebates released as a credit on their

April 2012 statement

Jan Feb Mar Apr May Jun

2012

Pharmacy must have accepted delivery of entire nominated

volume of Pfizer Atorvastatin in order to have Lipitor Rebates released as a credit on their

April 2012 statement 30 April

Ranbaxy permitted to enter market

18 February

18 May Pfizer's atorvastatin patent

expires and other suppliers of generic atorvastatin permitted

to enter market

January Pfizer begins offering

"Pfizer Atorvastatin" and makes Pfizer Atorvastatin

Offer

What is the relevant market?

A market is the area of close competition between firms, where there is strong substitution between one product

and another if given a sufficient price incentive

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• ACCC alleges a market in Australia for the supply of atorvastatin to community pharmacies. Community pharmacies in Australia demanded and acquired

atorvastatin. That demand derived from prescriptions issued by medical practitioners

No other pharmaceutical was substitutable for atorvastatin

Did Pfizer have market power?

Market power is the absence of constraints from competitors, potential competitors, suppliers or

customers

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• ACCC alleges that Pfizer had substantial market power in a market in Australia for the supply of atorvastatin. Until 18 February 2012, Pfizer was the only company that could

legally supply atorvastatin products in Australia

Until 1 June 2012, only Pfizer's atorvastatin and Ranbaxy's atorvastatin could be supplied to the public through the Pharmaceutical Benefits Scheme

Did Pfizer take advantage of its market power?

The test is whether Pfizer could or would have engaged in the alleged anti-competitive conduct if it did not have

substantial market power

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• Pfizer did not face any competition at the time it established the Accrual Fund and made the Pfizer Atorvastatin Offer

• The ACCC says Pfizer used its market power to establish the Accrual

Fund and make the Pfizer Atorvastatin Offer because it could not and would not have engaged in that conduct without its privileged market position

Did Pfizer have an anti-competitive purpose?

There is no prohibition simply on having market power

Purpose is a subjective test, but can be inferred from circumstances and effect of conduct

ACCC and courts will carefully review internal documents, including board papers, strategy documents and planning

materials

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• ACCC says Pfizer made the Pfizer Atorvastatin Offer to prevent or deter suppliers of generic atorvastatin from competing in the atorvastatin market

Incentivised pharmacies to stockpile Pfizer Atorvastatin before Lipitor lost

exclusivity, thereby limiting subsequent demand (and shelf space) for generics

Sought to secure Pfizer's market share by entrenching Pfizer Atorvastatin before Lipitor lost exclusivity

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The ACCC' s key arguments

The Pfizer Atorvastatin Offer was designed to be "too good to refuse" – it allowed pharmacies to access the Lipitor Rebate, and to receive attractive discounts on both Lipitor and Pfizer's generic atorvastatin

The Pfizer Atorvastatin Offer was made at a time when no other company could legally supply atorvastatin to pharmacies

The Pfizer Atorvastatin Offer was intended to limit generic competition at the critical point where customers were changing from Lipitor to generic products, with a view to transitioning a large proportion of customers from Lipitor to Pfizer's own generic atorvastatin

The fact that Pfizer's generic product had the same "look and feel" as Lipitor, combined with "the inherent difficulty in, and limited incentive for" a pharmacy to switch customers between generic brands, was expected by Pfizer to secure its market share

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Pfizer filed its defence on 1 April 2014 denying any misuse of market power:

What is Pfizer's defence?

Relevant market is a market for the wholesale supply of pharmaceutical products and over the counter products to community pharmacies in Australia

Pfizer does not have substantial market power in the supply of atorvastatin. It is subject to

vigorous competition across a range of products supplied to community pharmacies

Manufacturers and wholesalers were promoting supply of atorvastatin ahead of loss of exclusivity

In many cases Pfizer waived or varied requirements to comply with the dates by which things had to be done by community pharmacies

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Pfizer filed its defence on 1 April 2014 denying any misuse of market power:

What is Pfizer's defence? (cont.)

Pfizer's aim was not anti-competitive, it was to maximise its sales of atorvastatin following expiry of its patent

Pfizer perceived a first mover advantage for its generic atorvastatin product as some community pharmacists may be reluctant to then switch from Pfizer's generic to another generic

Pfizer was equal first to market with Ranbaxy

The Pfizer Atorvastatin Offer did not prevent any competitor from making an equally compelling

offer

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The ACCC' s lay evidence was due

to be filed last week

Pfizer's lay evidence is due in early July and the

parties' expert evidence in late July and August

Tentatively set down for hearing

for 4 weeks in October 2014

Next steps in the proceeding

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What happens if the ACCC wins?

• The ACCC seeks substantial financial penalties

• Each of the alleged contraventions carries a maximum fine of the greater of: $10 million; or 3 times the benefit gained

from the conduct (if quantifiable); or

10% of annual group turnover

Identifying and managing risk

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Forms of potentially abusive conduct

Conduct Examples

Refusal to deal Australia: • Queensland Wire Industries v Broken Hill Pty Ltd • NT Power Generation Pty Ltd v Power & Water Authority • ACCC v Cabcharge

European Union: • Microsoft

United States: • Verizon v Trinko

Price or margin squeeze

No Australian case European Union: • Deutsche Telecom • Telefonica

United States: • Pacific Bell Telephone Co v Link Line Communications

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Forms of potentially abusive conduct (cont.) Conduct Examples

Predatory pricing Australia: • Boral Besser Masonry Ltd v ACCC • ACCC v Cabcharge • ACCC v Eurong Beach Resort

European Union: • France Telecom

United States: • Brooke Group v Brown & Williamson Tobacco

Predatory bidding or buying

Australia: • ACCC v Cement Australia United States: • Weyerhaeuser

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Forms of potentially abusive conduct (cont.)

Conduct Examples

Exclusive dealing Australia: • Melway Publishing v Robert Hicks

European Union: • Intel

United States: • Microsoft

Loyalty discounts, conditional rebates, bundling and tying

Australia: • ACCC v Baxter Healthcare Pty Ltd (bundling) • ACCC v Pfizer Australia (loyalty discounts/rebates)

European Union: • Tomra (loyalty discounts/rebates) • Intel (loyalty discounts/rebates) • Bristish Airways (loyalty discounts/rebates) • Microsoft (tying)

United States: • Le Page's v 3M (bundling) • Cascade Health Solutions v PeaceHealth (bundling)

Managing risk

• Take ACCC enforcement risk seriously

• Think about your position in the market

• Consider the timing and other terms of your offer

• Ensure your offer is above cost

• Clearly articulate your purpose • Educate your people on conduct that may raise concerns

• Seek advice

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AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE)

ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN

UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

This presentation material is intended to provide a summary of the subject matter covered for training purposes only. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this presentation without first obtaining specific professional advice.

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Questions?