Australia: Generic pharmaceuticals and competition law: the ACCC vs Pfizer proceedings

The ACCC has commenced proceedings in the Federal Court against Pfizer Australia Pty Ltd (Pfizer) alleging that commercial offers made by Pfizer to pharmacies before the expiry of the patents for its blockbuster Liptor drug were anticompetitive. In making the offers the ACCC alleges that Pfizer breached prohibitions in the Competition and Consumer Act 2010 on the misuse of market power and exclusive dealing.

Competition between originator (or 'branded') and generic pharmaceutical companies has been an area of particular focus for US and European competition regulators since at least the European Pharmaceutical Sector Inquiry in 2008/09. Particular attention has been paid to:

• patenting practices, regulatory or litigation strategies that may frustrate or delay generic entry;
• the terms on which pharmaceutical patent disputes are settled between originator and generic companies – particularly where those settlements result in an agreement by the generic to defer entry in return for a payment by the originator company (often referred to as a "reverse payment" or a "pay for delay" settlement);
• disparagement of generic pharmaceuticals by originator companies; and
• patent expiry strategies implemented by originator companies to seek to defend their market position upon expiry of their patents.

Regulators are keen to ensure that these practices do not tilt the delicate balance between the incentives for innovation provided by pharmaceutical patents and the aggressive competition and discounting that invariably follows patent expiry and generic entry.

The ACCC's action against Pfizer falls into the last of the categories described above but it is the first public foray by the ACCC into the complex issues surrounding pharmaceutical patents. For that reason alone, the case is likely to be watched closely by participants in all innovative industries.

BACKGROUND

Atorvastatin is a pharmaceutical used to lower blood cholesterol and was marketed in Australia by Pfizer as LIPITOR Atorvastatin (Lipitor). Pfizer's related entity was the owner of the patent for atorvastatin, which expired on 18 May 2012. According to documents filed in the proceedings by the ACCC, under the terms of a settlement of a previous patent dispute, Pfizer had agreed a licence to allow one competitor to launch a generic atorvastatin product on 18 February 2012.

In the 2010-2013 financial years Lipitor was the highest selling prescription pharmaceutical in Australia, with over one million prescriptions and 10 million units sold in each year.

THE ALLEGED CONTRAVENING CONDUCT

The ACCC alleges that Pfizer implemented a strategy (described in more detail below) to protect its market share in the face of impending generic competition comprising:

• changes to their distribution arrangements:
• commencing an "accrual fund scheme"; and
• offering discounts to pharmacies that purchased a proportion of their forward requirements for atorvastatin in one shipment.

Pharmacy supply arrangements

On or around 31 January 2011, Pfizer ceased supplying prescription pharmaceuticals to pharmacies through pharmaceutical wholesalers (the conventional distribution method for pharmaceutical companies) and commenced supplying directly to pharmacies.

Accrual fund scheme

On or around 31 January 2011, Pfizer established an accrual fund scheme under which:

• accrual accounts were established for each pharmacy; and
• Pfizer credited each account with a 'rebate' equal to a percentage of the pharmacy's purchases of non-generic prescription pharmaceuticals, including Lipitor which received a rebate sum equal to 5% (the Lipitor Rebate).

Each pharmacy received monthly statements outlining the amount of credit in their accrual fund. However, prior to 16 January 2012, pharmacies were not told how they could redeem that credit, only that they would have an opportunity the access the Lipitor Rebate around the time of the expiry of the atorvastatin patent.

Discount offers

The ACCC alleges that, on 16 January 2012, Pfizer made offers to virtually all pharmacies in Australia that it would:

• supply Atorvastatin Pfizer, a new generic atorvastatin;
• provide access to Lipitor Rebates; and
• give discounts in relation to the supply of Lipitor and Atorvastatin Pfizer (Atorvastatin Pfizer Offers).

The Atorvastatin Pfizer Offers were categorised into different classes (Platinum, Gold or Silver or Alternate) and made on the condition that pharmacies:

• purchased 75% of their anticipated generic atorvastatin supply requirements for the following 12, 9 or 6 months (the longer the term, the higher the discount on Atorvastatin Pfizer and Lipitor);
• nominated a conversion rate, being the percentage of sales of Lipitor they anticipated being converted to sales of generic atorvastatin (higher conversion rates meant higher discounts on Atorvastatin Pfizer and lower discounts on Lipitor);
• accepted the entire volume of Atorvastatin Pfizer in one shipment before 30 April 2012; and
• accepted the offer before 24 February 2012 in order to receive that pharmacy's Lipitor Rebate.

Pharmacies were later told that they would receive a sliding percentage of the Lipitor Rebate if they accepted the offer prior to a series of later dates. From 24 August 2012, Pfizer told pharmacies that they would not release any of the Lipitor Rebate to pharmacies who accepted the offer after that date.

The ACCC's concern seems to focus on the timing of a compelling commercial offer that, if accepted, would stock pharmacies' shelves with Pfizer's own generic atorvastatin arguably before competitor generic companies were able to supply their own atorvastatin product.

Both the complex factual background and the history of market power and exclusive dealing cases in Australia suggests that the ACCC is likely to face a difficult and protracted fight to prove its allegations. Regardless of the result, the proceedings should provide valuable guidance on how patent holders can legitimately seek to compete with new entrants on the expiry of their exclusive rights.

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