The Primary Judge's Reasons
382 The primary judge addressed the legal principles which govern the meaning of "purpose" in s 46(1)(c) and in s 47(10)(a) at 443-451 [43]-[60]. At 447-451 [53]-[60], his Honour explained the relationship between the concept of "purpose" and the concept of "taking advantage" of market power as those concepts are used in s 46(1) of the CCA. We have summarised his Honour's views in those passages at [98]-[109] above. We will not repeat that summary here.
383 At 453-455 [68]-[75], his Honour explained the concept of "… substantially lessening competition …" as it is used in s 47(10)(a) of the CCA. Our summary of his Honour's reasons in this regard is to be found at [115]-[119] above.
384 At 461-478 [93]-[176], the primary Judge explained the way in which the PBS works and the way in which pharmaceutical products are generally supplied in Australia. At [126]-[127] above, we have set out his Honour's explanation of the PBS and his Honour's introduction to most of the big players in the market for the supply of generic pharmaceuticals to community pharmacies in Australia.
385 At 461-463 [98], [99] and [101], his Honour said:
The evidence filed by the parties
In support of its case, the ACCC relied upon a large number of Pfizer's own internal documents and upon the following affidavits either sworn or affirmed by:
• Mr Roger Millichamp, the regional managing director (Australia and New Zealand) of Apotex;
• Mr Stephen Fraser, the managing director of Alphapharm;
• Mr Robert King, a pharmacist who was a partner in and manager of five pharmacies (four of which are located in the Central Coast region of New South Wales);
• Ms Nancy Carter, the purchasing manager employed by Chempro (Qld) Pty Ltd;
• Mr Michael Karsz, a pharmacist employed by Jon Ravech's Chemsave Pharmacy;
• Mr Reza Safaei-Hosseinpour, a pharmacy manager employed by VietPhuoc Pty Ltd, trading as Curry Chemist Hornsby; and
• Mr Alexander Evans, the managing director of Ranbaxy.
The expert relied upon by the ACCC was:
• Dr Christopher Pleatsikas.
With the exception of Ms Carter, each of these witnesses was cross-examined. Ms Carter was unavailable for cross-examination. It was nevertheless agreed between the parties that subject to the "weight" to be given to her evidence, her affidavit could nevertheless be read.
In support of its case, Pfizer relied upon affidavits either sworn or affirmed by:
• Ms Jennifer Alltoft, the general manager, Global Established Pharma, Australia and New Zealand employed by Pfizer Australia;
• Mr Mark Crotty, the general manager of the established products business unit for Australia and New Zealand at Pfizer Australia between January 2009 and April 2011;
• Ms Sharon Brady, the business operations manager, strategic planning and operations, established products employed by Pfizer Australia;
• Mr David Gledhill, a senior finance manager who joined Pfizer Australia in April 2010;
• Mr Michael Held, Pfizer Australia's national key accounts manager, a position he has held since July 2011;
• Mr Deran Bagdadi, the trade marketing manager, established products employed by Pfizer Australia;
• Mr David Penny, Pfizer Australia's regional sales manager for Victoria and Tasmania;
• Mr John Latham, now retired but a former managing director of Pfizer Australia; and
• Mr Gary Cooper, the commercial manager, pharmacy in Pfizer Australia's established products division between August 2009 and April 2013.
The expert witness relied upon by Pfizer was:
• Dr Sumanth Addanki.
…
Notwithstanding the number of witnesses called, the case for the ACCC turned - at least initially - upon the contents of documents circulating internally within Pfizer and the inferences to be drawn from those documents. Not surprisingly, the Pfizer officers were cross-examined largely upon one or other of those documents. That cross-examination, however, was on occasions hampered by the fact that the officer giving evidence had never seen the document before, or was not the author of the document, or by the fact that the witness had not participated in a meeting or conference at which decisions were made or issues canvassed for consideration. Any finding of fact to be made in respect to some issues necessarily has to take into account both the difficulties experienced by the witness and the difficulties confronting the cross-examiner.
386 At 465 [115], his Honour found that the major manufacturers of generic pharmaceuticals who supplied those pharmaceuticals in Australia were Alphapharm, Aspen, Apotex and Sandoz. His Honour went on to find that those manufacturers together accounted for at least 85% of the sales of generic pharmaceuticals in Australia.
387 At 465 [116]-[117], his Honour said:
The manufacturers supply the wholesalers. The three major wholesalers are Australian Pharmaceutical Industries, Sigma Pharmaceuticals Ltd and Symbion Pharmacy Services. Prior to 2011, these three wholesalers controlled over 90% of the distribution of prescription medicines in Australia. Smaller wholesalers included Central Hospital Supplies and CH2.
It was the wholesalers who supplied pharmaceutical products to the community pharmacies.
388 At 465 [118]-[119], his Honour made the findings which we have extracted at [131] above.
389 At 465-466 [120], his Honour noted that the influence which could be exerted by the major wholesalers of pharmaceuticals in Australia was not inconsiderable. To a large extent, this influence was due to the vertical integration of the sale of those pharmaceuticals in Australia.
390 At 466-478 [121]-[176], the primary judge described in some detail the marketing methods of the major generic manufacturers of pharmaceutical products (Apotex, Alphapharm, Ranbaxy Australia, Ascent and Sandoz) and the plans which each of those corporations had in place in readiness for the expiration of the atorvastatin patent on 18 May 2012. Those findings made by the primary judge make perfectly plain that these corporations were and are very substantial enterprises which exercise considerable influence and power over the price at which pharmaceuticals are sold in Australia.
391 Some matters of importance should be highlighted from this section of his Honour's Reasons. These are:
(a) All of the major manufacturers of generic pharmaceuticals were well aware for a number of years prior to 2012 that the atorvastatin patent would expire on 18 May 2012;
(b) Apotex had started planning the development of its generic atorvastatin products in about 2007 and had started manufacturing its generic atorvastatin products in or around November 2011 in Canada for ultimate distribution in Australia;
(c) Apotex was in the habit of offering substantial discounts and rebates to its aligned wholesalers;
(d) Apotex sold its pharmaceutical products as a range of generic products and did not allow its wholesalers to "cherry pick" individual pharmaceuticals;
(e) The major manufacturers of generic pharmaceuticals encouraged a sell-in of their generic pharmaceutical products from the very moment the relevant patent expired. As the CEO of Apotex said: "We would absolutely want to be selling the minute the patent expired, absolutely.";
(f) By mid-2011, Apotex had carried out sophisticated modelling to support its launch of its own generic atorvastatin with a target launch date of 19 May 2012, which, of course, was the day after the expiration of the atorvastatin patent. In May 2011, it placed an order with its manufacturing arm to satisfy the anticipated demand;
(g) Apotex was also monitoring the steps being taken by other manufacturers of generic pharmaceuticals in the lead up to the expiry of the atorvastatin patent;
(h) At the time of the Apotex launch on 19 May 2012, two deals were being offered to pharmacies by Apotex, namely:
(i) Deal 1: This deal provided a percentage discount of 90% off invoice price, the offer being based on a nine month order at 60% substitution rate; and
(ii) Deal 2: This deal provided for a lesser discount but stated that Apotex would cover the Pfizer rebate. Upon presentation of the pharmacy's Pfizer statement, the deal provided that Apotex would organise a credit for the wholesale account;
(i) As at the date of the Apotex launch, deals had been struck with at least:
Blooms the Chemist;
Discount drugs stores;
Chemmart; and
Terry White;
(j) By May 2012, competition in the atorvastatin market was intense;
(k) The evidence disclosed that Alphapharm had taken similar steps to those taken by Apotex, starting as early as October 2006;
(l) Alphapharm made a competitive response to Pfizer's bundled offers by offering a higher discount on its generic atorvastatin and by not requiring any minimum purchase commitments;
(m) Ranbaxy Australia took similar steps but also actively sought to sell into the atorvastatin market even before it was entitled to do so on 19 February 2012; and
(n) Ascent and Sandoz also actively pursued opportunities for the sale of their generic atorvastatin as soon as the atorvastatin patent expired.
392 Neither the ACCC nor Pfizer challenged in this Court his Honour's exposition of the relevant legal principles in respect of the matters with which we are dealing in this section of our Reasons nor did either of the parties challenge his Honour's findings as to the workings of the PBS, the manner in which pharmaceuticals are supplied in Australia and the detailed preparations and plans carried out by the major manufacturers of generic pharmaceuticals in order to be in the best possible position to exploit the opportunities presented to them by the expiry of the atorvastatin patent on 18 May 2012.
393 At 478-496 [177]-[247] and also at 508-536 [291]-[414], his Honour made detailed findings in respect of the issue of "taking advantage" and "purpose" for the purposes of the ACCC's s 46(1)(c) case and the issue of "purpose" for the purposes of the ACCC's s 47(2)(d) and s 47(2)(e) case. Included within these paragraphs of the primary Judge's Reasons are his Honour's detailed reasons for rejecting critical elements of the ACCC's cases. In these paragraphs, the primary judge explained why he found that, at no time in the period from mid-2010 to the end of February 2012, when the impugned conduct was engaged in by Pfizer, did Pfizer engage in that conduct for either of the purposes proscribed by s 46(1)(c) or s 47(10)(a) of the CCA.
394 We will now endeavour to explain his Honour's reasons for reaching the conclusions which he did in respect of the elements of s 46 and s 47 with which this section of our Reasons is concerned.
395 At 478 [177]-[182], the primary judge said:
Pfizer traditionally focused on supplying its patented products and researching and developing new medicines.
As at 2009 it had little experience in marketing and supplying generic products.
The looming expiration of a number of its patented products, however, dictated the need for Pfizer to give consideration to what position it would occupy in the market once its key patents expired.
The atorvastatin patent was not the only Pfizer patent which was due to expire. Between 2010 and 2014 the patents for an unusually high number of other important pharmaceuticals also expired, namely, the patents over the molecules used in Exefor, Caduet, the Xalabrands (Xalatan and Xalacom), Aricept, Viagra and Celebrex.
In 2007, there were sales of approximately $9 billion of pharmaceuticals under the pharmaceutical benefits scheme. Of those, approximately $2.4 billion were sales of products whose patent expired in the period 2010-14.
There can be no doubt that Pfizer had to take some steps to combat the competition which it would confront when the atorvastatin patent expired in May 2012.
396 At 478 [183], his Honour recorded that Pfizer retained Sinapse Consulting (Sinapse) in September 2009 to assist it to develop its strategy for addressing the expiry of the patents to which his Honour had referred at 478 [177]-[182]. The retention of Sinapse was intended to assist Pfizer in combating the power of the significant manufacturers of generic pharmaceuticals operating in Australia.
397 At 479-480 [184]-[186] his Honour made findings concerning Sinapse's identification of the important drivers for change and its market research work carried out for Pfizer which led ultimately to Pfizer's conceiving and putting into effect Project Leap.
398 At 480-481 [187]-[190], his Honour said:
The plan to combat these changes came to be known as "Project LEAP".
As explained by Mr Crotty, he perceived the main features of Project LEAP to be:
• the supply by Pfizer of pharmaceutical products directly to retail pharmacies, bypassing wholesalers;
• the development of a dedicated sales field force and customer service support teams;
• the development of a range of Pfizer Australia generics - or what it termed "price fighters";
• the development of a range of non-Pfizer generics;
• the offering of an immediate trading term discount of 5% off the "Chemist List Price" on pharmaceuticals listed on the pharmaceutical benefits scheme and sold to community pharmacies;
• the offering of commercial proposals at the time Pfizer Australia launched a generic product in the future that was competitive with those being offered by other manufacturers; and
• the creation of an accrual scheme to fund rebates on seven major Pfizer Australia products - including Lipitor - as they approached and entered the post patent expiry phase of their life cycle.
The aspects of Project LEAP that the ACCC takes issue with in this proceeding involve three "platforms", namely:
• the direct-to-pharmacy model, involving the sale and distribution of its products directly to pharmacies;
• the accrual funds scheme, involving the accrual of 5% of a pharmacy's purchase of Pfizer's patented products (including Lipitor) from 31 January 2011 to be credited as a rebate on conditions; and
• a "bundled offer" to pharmacies which (inter alia) tied the prices upon which the branded product, Lipitor, was to be provided to the amount of Pfizer's generic atorvastatin that the pharmacy agreed to purchase.
The first reference in the documentary evidence to Project LEAP appears in a feasibility study forwarded by Sinapse to Pfizer in September 2009.
The content of the plan, including each of the three "platforms", evolved from its outset in 2009. Issues which were canvassed over time and changes which took place included:
• whether the direct-to-pharmacy model should in fact be pursued or whether there were other options open to Pfizer;
• the quantum of the Pfizer generic atorvastatin required to be purchased by a pharmacy in order to "unlock" the rebate which had been accruing in that pharmacy's "bank"; and
• the date upon which Pfizer would launch its own generic atorvastatin.
There was also a change in the manner in which one or other of the objectives sought to be achieved were expressed. There was also, perhaps not surprisingly, differing views being expressed within Pfizer.
399 At 481-482 [191] his Honour explained the way in which Project LEAP was intended to work by reproducing a table created by Pfizer in February 2010. That paragraph is in the following terms:
Although each of these "platforms" was separately considered, they each interrelated one with the other. Thus, for example, a table included with the Project LEAP Overview: Primary Care in February 2010 provided as follows:
This table was reproduced from time to time in slightly different forms. Earlier variants emerged (for example) in December 2009 and January 2010. Without being exhaustive, the relevant features in this table, and other variants of it, are:
• the 5% discount - both in respect to the invoice price and the separate contribution to the pharmacist's "bank";
• the reference to the expected date of Ranbaxy's generic atorvastatin "launch";
• the proposed timing of the Pfizer launch; and
• the proposed "12 month sell in".
400 At 482-483 [192]-[193], the primary judge made the following observations:
The detailed evolution of Project LEAP from 2009 through to 2012 was largely tracked by the documents being circulated within Pfizer. Caution must be exercised, however, in deciding what inferences should be drawn from them. There were various drafts of documents and some uncertainty as to whether a document labelled "draft" was in fact the final version. The language, terminology and views expressed in some documents - not surprisingly - simply communicated the views or thinking of the author of the document and did not necessarily expose the views or thinking which was ultimately embraced when Project LEAP was approved in its final form. Indeed, some proposals were raised for consideration but later abandoned. Within Pfizer itself there were also different corporate divisions each having different responsibilities and priorities. Some documents produced within one division may not have been considered or agreed upon by another division.
The documents circulating internally within Pfizer nevertheless remain an invaluable source of information disclosing the consideration being given by Pfizer as to how it would combat a very changed market when its patent on atorvastatin - and its patents over other products - expired.
401 At 483 [194], his Honour made a number of findings concerning the respective roles of Mr Crotty and Mr Latham in relation to Project LEAP. His Honour found that Mr Crotty had a more "hands-on" role in developing and executing Project LEAP even though that project was under the supervision of a Steering Committee the members of which included Mr Crotty and Mr Latham. In the same paragraph, his Honour appeared to make findings that the evidence of both Mr Crotty and Mr Latham was reliable.
402 At 483 [195], his Honour found that, as Project LEAP evolved, some elements of the project commended themselves more to Mr Crotty than to Mr Latham.
403 At 483 [196], the primary judge made the following findings as to the steps involved in developing Project LEAP. His Honour said:
At a very general level, an overview of the steps taken along the way in developing the strategy involved at least the following:
• the preparation in June 2009 of a long-range forecast review;
• a number of meetings in September 2009 at which there was a presentation of a feasability project;
• the preparation of a commercial offer assessment in November 2009;
• a meeting of the steering committee on 17 December 2009;
• a further meeting of the steering committee in January 2010;
• the preparation of a final report for Project Leap in March 2010;
• a videoconference in April 2010 in which there was a presentation of Project Leap to Mr John Young and the responses to a series of questions which were then raised;
• a presentation in Australia in late May 2010 of Project Leap to Mr Simmons the global president of established products;
• the preparation of a "Briefing document" on about 9 June 2010 for a presentation on 10 June 2010;
• the preparation on 8 July 2010 of an "Approval document for the ELT" (namely the "Executive Leadership Team") for the purposes of a presentation in New York on 14 July 2010.
The final approval of Project LEAP was communicated to Mr Crotty on 14 July 2010. The project as finally approved obviously went through a process of review both within Australia and ultimately in New York. As Mr Crotty observed, "this [was] probably the most approved project I've ever been involved in".
404 At 484 [197]-[201], his Honour made a number of important observations as to the way in which he approached his assessment of the evidence. At those paragraphs, his Honour said:
The ACCC's case focused (at least in part) on the language used to express Pfizer's objective within a number of internal Pfizer documents and the various changes to the manner in which elements of Project LEAP were to be structured and implemented throughout the development process.
It is unnecessary to trace each of these elements from the outset through to the final approval of Project LEAP in New York in July 2010. It is equally unnecessary to canvass each of the occasions and the context in which each of these elements was considered. It is sufficient to make reference to a limited number of discrete occasions upon which one or other of these elements arose for consideration.
Such references are sufficient to give context to both the inferences sought to be drawn from the documents on the part of the ACCC and to the explanations sought to be propounded by the Pfizer witnesses during their cross-examination by senior counsel for the ACCC.
And, although it is convenient to direct separate attention to each of the three elements of Project LEAP which were said by the ACCC to culminate in contraventions of ss 46 and 47 of the Competition and Consumer Act, within Pfizer it was manifestly apparent that a consideration of these elements progressed on many occasions in tandem. Focused attention upon one or other of these three elements on occasion exposes parallel consideration being given to one or more of the other elements.
Subject to those reservations, it is nevertheless convenient to consider the evolution of each of these three "platforms" relied upon by the ACCC separately.
These paragraphs should be read with 462-463 [101] where his Honour made a number of other pertinent observations about the evidence of the witnesses called by Pfizer.
405 At 484-488 [202]-[214], the primary judge explained the DTP model and its development within Pfizer. In those paragraphs, his Honour made the following findings:
(a) Historically Pfizer had distributed its products solely through wholesalers (484 [204]).
(b) In September 2007 it established a parallel distribution division called "Pfizer Direct". Pfizer Direct gave Pfizer the ability to distribute products directly to pharmacies. Pfizer's initial use of Pfizer Direct was "soft" and "non-aggressive" (484 [205]).
(c) In June 2009, Pfizer began looking at the possibility of using its DTP model in respect of its proposed generic pharmaceuticals and also in respect of its established products. At this time, Pfizer was investigating supplying all of its products direct to pharmacies (484-486 [206]-[209]).
(d) The advantages perceived by Pfizer in implementing the DTP model were referred to repeatedly at meetings of the Project LEAP Steering Committee. It was thought that the DTP model would optimise revenues and provide a platform to defend LOE revenue erosion (486 [210]).
(e) In 2009, the DTP model was not the only option being pursued. At that time, Pfizer had under active consideration licensing existing generic manufacturers to product a generic version of some of its established products (486 [211]).
(f) By May 2010, Pfizer had come to the view that the DTP model produced a better commercial outcome for Pfizer than any proposed licensing arrangement (486-488 [212]-[214]). It was described as the "enabler" not the "nucleus" of the Project LEAP strategy (488 [214]).
406 At 488-490 [215]-[225], his Honour discussed the rebates and the accrual funds scheme. In those paragraphs, his Honour referred to that scheme and those rebates as the second "platform" relied upon by the ACCC.
407 At 488 [216]-[219], his Honour said:
The prospect of Pfizer being able to offer discounts and rebates to pharmacies was contemplated from the outset.
The proposal that Pfizer would deliver its products directly to the pharmacies enabled it to offer a 5% "discount" off the invoice price of its products. This represented an approximate amount which had previously been incurred by the wholesalers responsible for the delivering of product to pharmacies.
The 5% "rebate" was a separate amount. It, too, was related to the direct-to-pharmacy model.
In an executive summary of Project LEAP circulated in June 2010 the operation of the "rebate" was explained as follows (without alteration):
Project Leap aims to create Pfizer and brand loyalty in the 18 months leading up to LOE. Building a relationship with Pharmacy is key to our strategy. Accordingly, a pharmacy field force will be recruited at the end of 2010.
Pfizer and brand loyalty will be achieved via a two pronged approach. Firstly, a 5% reduction from Chemist's List price will form our net invoice price.
Secondly, each pharmacy will start to accrue a rebate "bank" of 5% on all purchases of an LOE product 18 months out from LOE. That is, purchases of Lipitor will start to accrue a rebate before Caduet, Xalabrands, and there will be overlap. Due to the launch date of Feb 1 2011, Lipitor will only have 12 months before LOE.
That rebate accrual is analogous to a frequent flyer scheme, whereby the pharmacy will know each month how their rebate bank is accruing. The pharmacy representative will have that accrual on their CRM screens each month, and AR will have it noted on the monthly debtor statements.
Once LOE occurs, we will require the pharmacies to continue to meet preconditions related to purchase of Pfizer branded products.
If successfully meeting those purchasing conditions for 6 months post LOE, the rebate "bank" will be paid to the pharmacy via credit on their AR account in quarterly instalments over a 12 month period.
Access to dispensing data will enable measurement of the purchasing behaviours.
Should a pharmacy fail to meet their purchasing levels, they will lose their "bank" and the accrual will be reversed. For modeling purposes we have assumed 87.5% of pharmacies will actually be paid, the balance finding generic competitor's offerings more attractive.
408 His Honour then referred (at 488-489 [220]) to a briefing document prepared in June 2010 which was in the following terms:
In the "Briefing document for the WBB ELT" prepared in June 2010 the loss of exclusivity of the Pfizer patents over the forthcoming years was referred to. The "opportunities in Australia" were set forth, one of which included "[d]eveloping a platform to defend LOE revenue erosion". A "Solution" was set forth. It again referred to the role played by the "rebate" as follows:
The Solution
The Project Leap commercial offer aims to create Pfizer and brand loyalty in the 18 months leading up to LOE. The intended launch date of the commercial offer is Feb 1 2011 and building a relationship with Pharmacy is key to the strategy. Accordingly, a pharmacy field force will be recruited at the end of 2010.
…
Secondly, each pharmacy will start to accrue a rebate "bank" of 5% on all purchases of an LOE product 18 months out from LOE. That is, purchases of Lipitor will start to accrue a rebate before Caduet, Xalabrands, and there will be overlap. Due to the launch date of Feb 1 2011, Lipitor will only have 12 months before LOE.
That rebate accrual is analogous to a frequent flyer scheme, whereby the pharmacy will know each month how their rebate bank is accruing. The pharmacy representative will have that accrual on their CRM screens each month, and AR will have it noted on the monthly debtor statements.
But the offer of a mere "rebate" was not without its own consequences.
409 The primary judge then discussed the terms of the bundled offers which were ultimately made in January and February 2012. At 489-490 [221]-[225], his Honour said:
It was a term of Pfizer's offer that pharmacists accept a specified volume of Pfizer's generic atorvastatin. An incentive for the sell-in of a large volume of stock before 30 April 2012 lay in the 1-month grace period available under the statutory price disclosure regime then in operation. For the first month after the listing on the pharmaceutical benefit scheme schedule of a generic product, sales of that product were excluded from calculations of the weighted average disclosed price.
There were within Pfizer two schools of thought as to whether pharmacists should be encouraged to take delivery of generic stock in advance of patent expiry. One school of thought was that having generic stock on pharmacist's shelves would only accelerate erosion by encouraging pharmacists to sell through their generic stock quickly at the expense of Lipitor. That scenario would have an adverse effect on Lipitor sales and on Pfizer's revenue given that Atorvastatin Pfizer was less profitable than the brand, Lipitor. The other school of thought was that selling in stock would not be perceived favourably by pharmacies and could affect the take up of Pfizer's atorvastatin offer.
Four levels of offer were developed - the Platinum Offer, the Gold Offer, the Silver Offer and the Alternate Offer.
One internal Pfizer document dated 16 November 2011 entitled "Project LEAP Update" referred to the Platinum, Gold and Silver Offers. This document referred to the Platinum Offer as "requiring a commitment on the generic of 12 months at 70% support and carries the highest levels of discount on the brand and the generic version".
The terms upon which discounts would be offered and rebates offered were finally settled in January 2012. It provided for Platinum, Gold, Silver and Alternate Offers - each dependent upon the volume of Pfizer's generic atorvastatin purchased by the pharmacy and the time over which that quantity was to be used. The final rebate and discount structure is summarised by the following table:
This table distinguishes between (inter alia) the generic product (Atorvastatin Pfizer) and Lipitor. Pursuant to this offer, pharmacists were invited (for example) to purchase under the Platinum offer enough Atorvastatin Pfizer to fulfil 75% of their anticipated demand for generic atorvastatin for a period of 12 months. The Gold Offer was to purchase 75% of their anticipated demand for generic atorvastatin for 9 months; the Silver Offer was to purchase 75% of the anticipated demand for a period of 6 months.
410 At 490 [226]-[230], the primary judge referred to the bundled offers in a little more detail. He noted that an aspect of the strategy pursued by Pfizer from the outset was that it would sell both Lipitor and its own generic atorvastatin to pharmacies as a bundle. Of course, only Pfizer could sell both branded and generic atorvastatin. Pfizer recognised this unique position that it held and sought to exploit the premium image it held in respect of Lipitor by marketing its generic atorvastatin in almost identical packaging. It made much of its capacity to market its generic atorvastatin as having been made in the same factory as Lipitor.
411 At 490 [229]-[230], the primary judge said:
In "bundling" its branded and generic atorvastatin it was doing something which no other manufacturer could offer. And, in doing so, some documents circulating internally within Pfizer stated that the stocking of pharmacy shelves with its own product would effectively "block" the ability of pharmacies to obtain and sell the generic products of other manufacturers.
This was an important element of the strategy under consideration by Pfizer.
412 At the trial, the ACCC focussed much of its attention on the use of the words "block" and "blocking" in respect of Pfizer's strategy to pre-emptively stock pharmacy shelves with its own product before other generic manufacturers could supply. An internal Pfizer document dated November 2009 recorded that, in the opinion of the author, it was possible to sell in over six months of stock into a typical community pharmacy. In this way, Pfizer sought to delay its market share loss for year 1 and to piggy back the higher market share which it would thus be able to sustain for future years. This approach led to what it became referred to in the Pfizer internal documents as the "Complete Package" or the "preferred offer".
413 In March 2011, in a note recording the summary outcomes from a Lipitor Scenario Planning Day, the author of the note recorded that Pfizer needed "to have a compelling offer that is sold into pharmacy early. Pfizer has the advantage of being able to formulate deals and sign contracts before competitors".
414 The primary judge noted (at 492-493 [235]), that the word "blocking" was used relatively frequently in internal documentation of Pfizer in the latter half of 2011. At 492-493 [235]-[237], the primary judge said:
This "unique" position occupied by Pfizer was repeatedly acknowledged. Thus, for example, it was stated in the draft September 2011 "Project LEAP: Review" that "Pfizer is in a unique position - they are the only company selling both the brand and generic". The same review also stated:
There are many factors that determine the market share of generic entrants post LOE. Two of the most crucial factors are:
1. First or equal first to market, and
2. Authorised / licensed generic
Being first to market allows the generic to maximise the initial patient switch. It also provides the opportunity to employ "blocking" strategies against yet to be launched generics by taking up valuable shelf space, limiting the ability for subsequent companies to sell their product. It was assumed that Pfizer would launch its 2nd brand equal first to market.
Later in this draft review it was explained as follows how a promotional "sell in" would become "an effective blocking strategy":
Explanation: How a promotion sell in becomes an effective blocking strategy
• Pfizer will be able to ensure it is first, or equal first, to market on the launch of 2nd brands for its LOE range
• For Lipitor, there will only be one competitor - Ranbaxy - for the first 3 months post LOE
• This is due to the Government regulations regarding when a generic product can be listed (currently it is not monthly)
• Ranbaxy are seen as a weak competitor given their existing market share is estimated at around only 1%
...
• This 3 month window presents Pfizer with a unique opportunity to gain market share
• A promotional sell in would be aimed at putting in stock longer than the 3 month window - this serves two purposes:
• Blocking shelves with Atorvastatin to reduce motivation of the pharmacist to purchase another suppliers molecule when they come to market
• If sold within the first month, the sale is excluded from Price Disclosure calculations
This draft version of the Project LEAP: Review was superseded by at least two further versions. One version dated 14 September 2011 and labelled "DRAFT ONLY" deletes the reference to the term "blocking". A further version, labelled "FINAL Version 11, Dated 14/9/11" also deletes the term "blocking". There were also changes to the text of the document. Part of the final version was as follows:
5.5.6 Explanation: How a promotion sell in becomes an effective 2012 strategy
• Pfizer will be able to ensure it is first, or equal first, to market on the launch of 2nd brands for its LOE range
• For Lipitor, there will only be one competitor - Ranbaxy - for the first 3 months post LOE
• This is due to the Government regulations regarding when a generic product can be listed (currently it is not monthly)
• Pharmacies are aligned to each of the generic companies, selecting one of them as their "preferred" supplier
• This relationship ensures that the best discount is on offer to pharmacy, in return for support of the generic partner range
• If the generic partner cannot offer a generic molecule, the pharmacy is free to source it from another supplier
• This small time window presents Pfizer with an opportunity to gain market share
• A promotional sell in would be aimed at putting in stock longer than the 3 month window - this provides an important benefit in that if the stock is sold within the first month, the sale is excluded from Price Disclosure calculations
The language of "blocking" nevertheless persisted. In a document prepared in about November 2011 and intended to be used at the "Atorva Launch - January 2012" (Atorva being an earlier proposed name for Pfizer's generic atorvastatin) it was stated that the "deal" to buy 12 months stock "blocks competition".
The first approaches to community pharmacies occurred in about December 2010. The first few months evidenced pharmacy resistance to Pfizer Australia. The regional sales manager for Victoria and Tasmania, Mr David Penny, maintained that the period from December 2010 to March 2011 "were the four hardest months of [his] professional life". It was his view that the anger expressed towards Pfizer Australia by the pharmacies was "created largely because the pharmacists were concerned that Pfizer DTP would take business away from the wholesalers and would threaten the viability of the Australian wholesaler model if other originators followed Pfizer's lead".
415 At 493-495 [238]-[243], the primary judge noted that Pfizer's strategy did not meet with wholehearted support from all pharmacists. However, the bundled offers had significant take-up in February 2012. At 495 [243], his Honour summarised this part of his Reasons in the following terms:
Common to the accounts given by the pharmacists called by the ACCC to give evidence was that the following facts were key to their reasons for accepting the Pfizer offer:
• the fact that each had accumulated a rebate which they did not wish to lose;
• the fact that atorvastatin was a significant part of their business, both in terms of volume and value; and
• the fact that the generic atorvastatin supplied by Pfizer (Atorvastatin Pfizer) was available in advance of other alternative generics.
416 At 495-496 [244]-[247], the primary judge discussed briefly the impact of Pfizer's activities in the first half of 2012. In those paragraphs, his Honour recorded that, when Pfizer began supplying its generic atorvastatin, there was an immediate and significant switch from Lipitor to that generic atorvastatin in terms of market share. From June 2012, there was a further reduction in Lipitor's market share of atorvastatin dispensed in Australia.
417 At 508-517 [291]-[324], the primary judge considered the question of whether, making the assumptions which we have specified at [364] above, Pfizer took advantage of its market power in the atorvastatin market when it established the DTP model, implemented the accrual funds scheme and made the bundled offers.
418 At 508-509 [291]-[293], his Honour set out verbatim pars 62-65B of the ASC. He then moved to discuss the various integers of the ACCC's case in respect of "taking advantage" for the purposes of its s 46 case.
419 At 510 [295], his Honour found that the DTP model could not have been successfully implemented by Pfizer without it being the sole supplier of the atorvastatin in Australia prior to 19 February 2012. Atorvastatin was an essential pharmaceutical for community pharmacies to have in stock at that time. Ranbaxy Australia was a weak competitor. In the real world, there was no other source of supply until after the atorvastatin patent expired on 18 May 2012.
420 At 510-514 [298]-[311], his Honour discussed the question of whether there was any relevant "taking advantage" by Pfizer when it established the accrual funds scheme.
421 At 510-511 [300]-[301], his Honour explained the essence of his reasoning on this point in the following terms:
Notwithstanding the uncertainty as to the precise terms upon which a pharmacist could access its "rebate" until January 2012, it is nevertheless concluded that:
• Pfizer took advantage of its market power in establishing the accrual funds scheme in January 2011; and that
• that taking advantage of power falls within paras 63(a) of the amended statement of claim - subparas (a)-(d) being pleaded either conjunctively or disjunctively. Paragraph [48] pleads as a material fact, being a pleading later included with the pleading as to the taking advantage of power (para 65), the fact that prior to 16 January 2012 Pfizer had not advised pharmacies as to "how they could use or redeem their Lipitor Rebate".
The accruing rebate upon the sale of its patented products inevitably provided an incentive to pharmacies to accept Pfizer's offers to supply generic atorvastatin. Such a result necessarily followed from Pfizer's position in the market as the only supplier of a product over which it had a patent and the linking of the rebate to the quantity of its generic atorvastatin that the pharmacy purchased. Mr Crotty accepted such a connection in his cross-examination:
So you were able to plan to use some of the profit that you obtained on the sale of your patented products for the purpose of creating an incentive to encourage pharmacies to purchase a Pfizer generic following loss of exclusivity? --- Yes. It would provide some of the funding towards a generic, yes.
422 The primary judge held that the establishment of the accrual funds scheme in January 2011 was, of itself, a taking advantage of the substantial market power which Pfizer then held in the atorvastatin market. His Honour held that this was so because Pfizer thereby created an expectation in the minds of community pharmacists that rebates which a community pharmacy would accumulate would be made available upon terms and conditions to be announced in the future. In his Honour's opinion, it was only Pfizer's substantial market power in the atorvastatin market in January 2011 that enabled it to announce a rebate scheme without at the same time telling pharmacies how they could access and recover the monies that would be accumulating for their benefit (see, in particular, 511 [304]).
423 At 511-513 [306]-[310], the primary judge explained his reasons for concluding that the value of the rebates being offered to community pharmacies as part of the accrual funds scheme was only a part of the overall strategy being developed by Pfizer for doing its utmost to protect is market share of the sale and supply of atorvastatin in Australia.
424 The primary judge then moved to consider whether, having concluded that Pfizer did not have a substantial degree of market power in the first half of 2012, it nonetheless took advantage of such market power as it had retained in that period to make the Platinum, Gold and Silver Offers which it made in January 2012. His Honour concluded that it did not.
425 In this part of his Reasons, the primary judge rejected Dr Pleatsikas' application of the discount attribution test and thus rejected the proposition that atorvastatin Pfizer was effectively being offered at below cost. In addition, his Honour expressed the opinion that, during the launch phase of a new pharmaceutical product, the evidence before him established that a new product could, for a time, be sold at below cost without thereby necessarily exposing the seller to the charge of engaging in anti-competitive conduct. In this regard, the primary judge ultimately concluded that the bundled offers made by Pfizer in early 2012 were being made during the launch phase of its generic atorvastatin. In addition, his Honour concluded that the duration of time over which the bundled offers were made and the duration of the terms consequent upon acceptance of one or more of those offers was a relatively short period of time.
426 At 517 [324], his Honour said:
Had it been necessary to do so, it would thus have been concluded that the Pfizer offers when first made did not involve the taking advantage of any market power that Pfizer may have retained. Even if it be assumed that Pfizer was supplying the generic atorvastatin at below cost, the offers it made were but offers made during the launch phase of a new product and for a relatively short period of time. And the quantum of any losses being incurred relative to the profit that Pfizer may have been making were not addressed.
427 At 517 [325], the primary judge commenced his consideration of the question of whether, in all of the circumstances, Pfizer had a proscribed purpose for the purposes of s 46(1)(c) of the CCA or s 47(10)(a) of the CCA when it engaged in the impugned conduct from mid to late 2010 up to the end of February 2012.
428 Given the way in which the ACCC pleaded and ran its s 46 and s 47 cases, it undertook the burden of proving that Pfizer had the requisite proscribed purpose throughout the period from mid-2010 up to the end of February 2012.
429 At 520 [339], the primary judge said:
The ACCC has failed to establish that Pfizer took advantage of its market power for a purpose proscribed by s 46(1)(c) by reference to either events:
• extending back to December 2010;
or by reference to events confined to:
• the period from January to May 2012.
430 At 520 [340], his Honour noted that the search for the relevant purpose was a search for Pfizer's subjective purpose being what Pfizer had in view or being the end sought to be accomplished by Pfizer. Purpose is different from "motive". At 520 [341]-[342], the primary judge briefly described the task which he then undertook in deciding whether or not the ACCC had established that Pfizer had the requisite proscribed purpose at all relevant times. At those paragraphs, his Honour said:
With reference to the "purpose" pleaded in both paras 60 and 66 of the amended statement of claim, the ACCC further pleads in summary form that:
(i) the advice provided to pharmacies by Pfizer in late 2010 of its intention to commence manufacturing and supplying generic brands and its intention to offer pharmacies a discount on the supply of generic brands: para 43;
(ii) the announcement by Pfizer in December 2010 of its intention to change its distribution arrangements with pharmacies and that it would commence marketing and supplying prescription pharmaceuticals directly to pharmacies: paras 44-46;
(iii) the establishment of the "Accrual Funds Scheme" in January 2011: paras 47-49; and
(iv) the terms upon which it made offers, commencing in January 2012: paras 50-60;
were pursued by Pfizer:
(v) "for the purpose, or for purposes that included the substantial purpose, of deterring or preventing other suppliers of Generic Atorvastatin, including Ranbaxy Australia and Other Generic Suppliers, from engaging in competitive conduct in the Atorvastatin Market".
Pfizer's defence to the allegation of "purpose" was, in essence, to deny that it had the "purpose" alleged.
Realistically, it is concluded that any case should be rejected which sought to contend that Pfizer had a purpose of "preventing" other generic manufacturers from supplying atorvastatin to community pharmacies - even in the short to medium term. To so contend, with respect, would be commercial naivety. It would also be a finding contrary to the evidence. The value of the atorvastatin market made competition inevitable once Pfizer's patent expired. At a point of time, at the very latest, shortly after the expiration of the Pfizer patent, competition was inevitable. However, it was plainly open to contend that Pfizer's conduct was undertaken for the purpose of "deterring" the entry of other generic manufacturers - and for the purpose of "deterring" the entry of other generic manufacturers for as long a period of time as possible.
431 The primary judge rejected the idea that the evidence could conceivably support the proposition that Pfizer's purpose was to prevent future competition from generic manufacturers in the atorvastatin market. His Honour noted that competition in that market was inevitable post expiry of the atorvastatin patent and that the most that Pfizer could expect to achieve would be to slow down the rate at which that competition developed. His Honour also noted that the ACCC submitted that the selling-in of a large volume of stock was action taken by Pfizer which disclosed the requisite proscribed purpose for all to see.
432 At 521 [344]-[347], the primary judge expressed his ultimate conclusions in relation to the question of whether Pfizer had the requisite proscribed purposes. At those paragraphs, his Honour said:
It is respectfully concluded, however, that several factors provide a firm foundation for the conclusion that Pfizer was not engaging in conduct for a purpose proscribed by s 46(1)(c). Although Pfizer accepted that its conduct would provide an incentive for pharmacies to accept its offers, it is concluded that Pfizer pursued its conduct for the substantial purposes of:
• ensuring that it remained a supplier of pharmaceutical products, including both Lipitor and Atorvastatin Pfizer; and
• ensuring that it remained competitive in the atorvastatin market.
Rejected is the allegation that Pfizer:
• engaged in conduct for the purpose of "deterring or preventing" other generic manufacturers from engaging in competitive conduct.
Also rejected is the submission that Pfizer pursued its conduct for the purpose of:
• "blocking" competition.
Even if it could be said that Pfizer's desire to gain a commercial advantage or make it harder for a generic competitor to succeed were "purposes" which could fall within s 46(1)(c), it is further concluded that any such "purposes" were not a "substantial" purpose.
The factors which it is respectfully concluded ultimately demand the rejection of the case advanced on behalf of the ACCC that s 46 has been contravened emerged from a number of discrete themes pursued by senior counsel for the ACCC in his cross-examination of the more senior officers within Pfizer.
Given a tension between the competing inferences which could be drawn from the documents circulating internally within Pfizer between 2009 and 2012, it is necessary to express some brief observations as to the credibility of the Pfizer witnesses. Left unexplained, those documents unquestionably provided a platform from which the ACCC could argue that the impugned conduct was undertaken for a proscribed purpose. Expressed as a general conclusion, the Pfizer witnesses satisfactorily answered the inferences which were otherwise available from the documents. To a considerable extent, the explanations are to be found in the terms of the evidence provided and in the consistency of the explanations provided by the Pfizer witnesses. But to a considerable extent the explanation is also to be found in the integrity with which they gave that evidence. The manner in which they presented their evidence provided, with respect, considerable comfort in accepting their explanations in the face of the inferences otherwise available.
Although the reasons or purposes pursued by Pfizer were differently expressed by different officers within Pfizer, and although it is somewhat artificial to seek to divorce one reason or purpose from another where reasons or purposes appear interrelated, a number of discrete themes can conveniently be addressed separately.
433 At 521-525 [348]-[363], the primary judge considered whether or not, by implementing the DTP model, Pfizer took advantage of a substantial degree of market power in the atorvastatin market for the purpose of hindering or deterring competition in that market from generic manufacturers post expiry of the atorvastatin patent.
434 Once the DTP model was put in place, Pfizer became the sole supplier of atorvastatin to pharmacies until at least February 2012. Wholesalers no longer supplied atorvastatin to those pharmacies.
435 Internal Pfizer documents dated July 2009 and September 2009 suggested that the DTP model was developed and put into place as a means of protecting the volume of sales of Lipitor once the atorvastatin patent expired. As the primary judge said, according to those documents, a central concern of Pfizer was to protect its branded product (Lipitor).
436 At 522 [356], the primary judge said:
The reasons for ultimately approving the direct-to-pharmacy model are many. However, none of those reasons was the desire to deter or prevent other generic suppliers from entering the market for the purposes of s 46(1)(c).
437 At 522-524 [357]-[359], his Honour extracted a number of passages from the oral evidence given by Mr Crotty and Mr Latham as to Pfizer's purpose in putting the DTP model in place.
438 At 523-524 [358], his Honour noted two of the reasons given by Pfizer witnesses for implementing the DTP model in the following terms:
Although Mr Crotty left Pfizer Australia in April 2011 to become vice president of established product for Pfizer in South Europe, his evidence as to the thinking behind the strategy being developed prior to that date nevertheless remains of assistance. With respect to the direct-to-pharmacy model, Mr Crotty maintained his:
… reason for supporting the direct to pharmacy model stemmed from the vertical alignments between generic manufacturers, wholesalers and pharmacies which meant that Pfizer Australia could not rely on generic manufacturers and wholesalers to supply Pfizer Australia's off-patent products. I thought that the direct to pharmacy model would provide the platform to enable Pfizer Australia to establish relationships with pharmacies which would provide Pfizer Australia with a greater opportunity to be able to sell its generic products, including atorvastatin, to those pharmacies at the time of loss of exclusivity.
He also thought that the exclusive direct-to-pharmacy model provided an improved ability to defend volume and price erosion upon loss of exclusivity. The model established a direct platform with pharmacies that would facilitate a successful commercial offering.
439 Mr Crotty accepted that Pfizer was trying to minimise the erosion of Pfizer's market share of atorvastatin once the product came off patent.
440 At 524-525 [360]-[363], the primary judge stated his conclusions in relation to Pfizer's purpose in implementing the DTP model. His Honour said:
It is concluded that the reasons of Pfizer in establishing the direct-to-pharmacy model were as explained by Messrs Latham and Crotty. That evidence should be accepted. Uppermost in the minds of the Pfizer officers was the need to establish a close relationship with pharmacies and the Pfizer objective of creating a greater opportunity to sell its own generic products. The explanation provided by Mr Latham in respect to the "fallback plan" as depicted in the internal Pfizer documents also provides, only by way of further example, reason for caution in too readily drawing inferences from documents drafted in some cases by unknown persons and divorced from the input of those responsible within Pfizer for making decisions. On many occasions the author of the documents upon which cross-examination proceeded was unknown - the author may have been an officer of Pfizer or (indeed) Sinapse. But it was not the subjective purpose of any individual author which mattered; it was the purpose of those who were responsible for making the ultimate decision that mattered. The views being expressed by those various authors may be a source upon which the views of those responsible may be questioned. Ultimately, however, it was the purpose of the decision-maker that remains of primary importance for the purposes of s 46(1).
It was not a substantial purpose of Pfizer, in establishing that model, to hinder, deter, or prevent other generic manufacturers from supplying their own generic atorvastatin to community pharmacies.
The mere fact of implementing a direct-to-pharmacy model, it should be noted, could not of itself necessarily expose any proscribed anti-competitive purpose. Such a model may be implemented for purposes free of any anti-competitive purpose. Thus, for example, Ascent also implemented such a model. One of its reasons for doing so focused on "customer relationships and control over customer service". In implementing that model it was said that "Ascent interacts directly with its pharmacy customers across the entire chain from promotion and order taking through to product support and customer queries". Such was also part of the reasoning of Pfizer.
Although Pfizer's implementation of its direct-to-pharmacy model was potentially capable of supporting the ACCC submission as to purpose, neither the implementation of that model alone - nor in combination with other factors - made good that submission.
441 At 525-530 [364]-[388], his Honour discussed Pfizer's purpose in relation to the proposed sell-in of its generic atorvastatin in the first half of 2012.
442 His Honour noted that, as was the case with many of the relevant decisions made by Pfizer at this time, the considerations feeding into the decision to be made were multifaceted. His Honour found (at 525 [367]) that the date upon which Pfizer proposed to sell in its generic atorvastatin was a matter which was given some detailed consideration. One aspect of the decision requiring consideration was the circumstance that an early sell-in of product would prejudice the commercial position of Pfizer by reducing profits from the sale of its branded product (Lipitor).
443 At 526-528 [370]-[379], his Honour explained his reasons for concluding that it was not the purpose or objective of Pfizer in attempting to sell in large quantities of atorvastatin to shut out its competitors or to discourage pharmacies from sourcing product from its competitors in the post 18 May 2012 period. At those paragraphs, his Honour said:
The case sought to be advanced on behalf of the ACCC, for present purposes, had at least two strands to it, namely:
• the purpose of placing on the shelves of pharmacies as much stock of the Pfizer generic atorvastatin as possible such as to reduce the "motivation" of pharmacists to purchase generic atorvastatin from another supplier;
and - but perhaps differently expressed:
• to "block" the ability of a competitor to supply a pharmacy with generic atorvastatin.
Although both strands may be but a means of conveying a single message, each should be separately addressed.
Any consideration of the significance to be attached to the strategy of selling in large quantities of generic atorvastatin upon its launch - or the motivation or ability of pharmacies to order a generic atorvastatin from a manufacturer other than Pfizer - must necessarily recognise at the outset that there were many reasons why Pfizer was pursuing a strategy of encouraging pharmacies to purchase large quantities of its generic atorvastatin.
As explained by Mr Latham during the course of his cross-examination, those reasons were expressed as follows:
It was your view, Mr Latham, I suggest, that unless Pfizer included an upfront bulk purchase in its offers it would be unlikely to gain any significant ongoing custom for Atorvastatin Pfizer. That's correct, isn't it? - It was unlikely that we would get ongoing unless we had a -
Unless the offers included an upfront bulk purchase? - It's - it's a benefit to Pfizer to have an upfront offer. Absolutely. There was significant demand from the pharmacies. Pharmacies were expecting - were wanting - to have this ability to buy as much as they could during this grace period. So not only do you have Pfizer wanting to sell as much as we can, you also have the pharmacists wanting to purchase as much as they can in this grace period. You have the Pharmacy Guild doing road shows around Australia, every capital city, talking to pharmacies about this. About the opportunity, this window, where they can buy as much as they can in the grace period and substitute as much as they can to generics to offset the $600 million that they were losing on 1 April from price decreases. So as I said, there was demand there for this buy-in as well as from Ranbaxy and Pfizer, and also a subsequent buy-in from Alphapharm as well too. That's also excluded from the 13 month period that they go to. So, you know, this - Pfizer wasn't - Pfizer wasn't generating this demand. This demand for a big buy-in was there, and certainly surprised us the amount of that demand, for sure.
Those reasons were also explained by Mr Crotty as follows:
And you thought that that was a relevant strategy for Pfizer to consider in the context of any exclusive direct to pharmacy case scenario, didn't you, at this time? - This - yes, this was a - a part of the strategy that we were considering.
And an important part of the strategy that you were considering, wasn't it? - The sell-in - you know, for a company that had no, I suppose, experience with pharmacy, it did require a sell-in over the period prior to and post-patent expiry.
Mr Crotty continued on to say:
Now, you mentioned a moment ago that one of the reasons why you thought the sell-in was appropriate, was that Pfizer didn't have any pharmacy experience? - That was one of the reasons, yes.
Why was the lack of any experience with pharmacies a reason to have a sell-in? - Well, first and foremost, there's a number of reasons for the sell-in. The first is that you're allowed to under the PBS rules - the first month didn't count towards price disclosure. The second one is that we needed to - we needed to have a go at competing in that marketplace, and so we needed to have stock, basically, in the pharmacies upon both the entry of Ranbaxy and also when the other generic companies would come in. If we didn't have any stock, given the very tight vertical arrangements between the generic companies, the pharmacists and the wholesalers, we would have got absolutely slaughtered. So it was a way of having relevance.
So, your view, as early as June 2009, was that in order to have relevance, you had to get your stock in the shelves of the pharmacies before the generic companies were able to market any generic atorvastatin product? - Well, for a start, there's a distinction between Ranbaxy and the licence they could grant and when a - the other generic companies could come in. So we had a decision to make. Did we compete with Ranbaxy and one other generic company prior to patent expiry, the three month period - and if we did, I think we would have been out of the game - or did we compete with them first and so we had to have a sell-in then, or that was the plan, and then once the other companies came into the marketplace, we obviously had to have stock on shelf then. So there was more than one reason why we had to have a sell-in.
And, in respect to the sell-in, there was what was referred to as the "first mover advantage". Pfizer, according to Mr Crotty, was of the view that "a sell-in would provide Pfizer with an ability to get the stock in the shelves of the chemist before the other generic manufacturers other than Ranbaxy were able to market their generic product".
The prospect of one manufacturer selling in large quantities of product and thereby placing at risk the ability of another to supply its own product was not confined to Pfizer. As at May 2011 one risk to Pfizer envisaged by Ms Brady, for example, was that Ranbaxy could supply its generic atorvastatin for free. If Ranbaxy did so, it would place at "risk" the ability of Pfizer to supply its own generic atorvastatin to those pharmacies that accepted any such offer from Ranbaxy.
The ACCC proposition that Pfizer was pursuing a strategy of selling in large quantities of its own generic atorvastatin upon launch for the purpose of - or with the intention of - discouraging other competitors from supplying their own product was thus not borne out by the evidence of the other Pfizer witnesses. Pfizer did so for the purpose of protecting its own commercial position - and did so in a manner consistent with the practice pursued by other manufacturers upon the release of a new pharmaceutical product.
The ACCC proposition was also rejected by Ms Brady. Her response in cross-examination was as follows:
Another objective of the bulk sell-in, as you understood that Pfizer was seeking to pursue, was to discourage those pharmacies that accepted a platinum offer from taking generic atorvastatin from your competitors for a significant period of time, wasn't it? - I don't believe it was an objective, no.
What you were - what Pfizer, as you understood it, was seeking to achieve by the bulk sell-in was to discourage those pharmacies who had accepted the Pfizer generic offer from taking generic atorvastatin from your competitors during the period at least of the sell-in stock; would you agree? - I can't say I agree that it was the intention, no. I believe that that is a likely result, but I don't believe that it's the intention.
And when you say "intention", you're talking about the intention of senior management within Pfizer? - Well, I'm not referring to any specific people.
It was your view that the result of the sell-in would be that community pharmacies that accepted the platinum offer would be most unlikely to have any incentive to acquire generic atorvastatin from your competitors, that is Pfizer's competitors, until at least the stock and the sell-in had been sold? - Until they started to dispense the atorvastatin Pfizer stock, they were unlikely to take a volume stock from a competitor, yes.
Ms Alltoft was also taken to the reasons pursued by Pfizer in seeking a bulk "sell-in" of product. When questioned by her cross-examiner, Ms Alltoft responded as follows:
Because the idea of the bulk sell-in was that you hoped it would improve, first brand retention? - The idea of the bulk sell-in was the bulk sell-in was a volume incentive and as a result of that bulk sell-in we would take advantage of price disclosure for that volume not counting in the first month of price disclosure, and the second was we were hoping that it would mean that pharmacies would actually support us in the longer term because that was our intention in the marketplace was to be a competitor in the post-patent marketplace. So having volume sell-in that gave greater commitment to pharmacies to actually support us long-term, that was the purpose of the bulk sell-in.
And beyond the term of the bulk sell-in, wasn't it? - Beyond the term of the -
The long term support that you were looking for to achieve by the bulk sell-in wasn't limited to the term of the bulk sell-in, was it? - We wanted long - we wanted to be a player in the post-patent marketplace and so we wanted customers to support us not only for the short term on the deal but for the long term.
The explanations provided by these witnesses, it is respectfully concluded, should be accepted.
It is concluded that Pfizer recognised that a consequence of selling-in large quantities of its generic atorvastatin at launch - and in "incentivising" pharmacies to commit to take specified percentages of their future requirements - was that those pharmacies which did may well have little need to source generic atorvastatin from a Pfizer competitor. But it is further concluded that it was not the intention, purpose or objective of Pfizer in attempting to "sell-in" large quantities of atorvastatin to shut out its competitors or to discourage pharmacies from sourcing product from its competitors.
444 At 528-530 [380]-[388], the primary judge discussed the significance of documents in which the word "block" or "blocking" were used.
445 His Honour gave careful consideration to the significance of the use of the word "block" or "blocking" in Pfizer's own documents. He (correctly) reasoned that the use of colourful language such as this had to be understood in its context. He noted that various explanations were provided by the Pfizer witnesses for the use of that terminology.
446 Mr Crotty testified that Pfizer needed to have stock on the shelves of pharmacies from 1 June, given the vertical alliances between the generic manufacturers and the wholesalers of generic pharmaceuticals, or else Pfizer would have been slaughtered from that date onwards by the generic manufacturers.
447 In the second half of [387] (at 530), his Honour extracted the following exchange between Senior Counsel for the ACCC and Mr Crotty:
Mr Crotty also recognised that the inevitable effect of the "sell-in" was that a pharmacy would buy less of a competitor's generic atorvastatin. The cross-examiner was thus content to conclude with the following exchange:
If a pharmacy accepted a significant supply of generic Atorvastatin from Pfizer wouldn't you accept that the logical consequence of that was that it was less likely to need to acquire generic Atorvastatin from a competitor at least for the period during which that pharmacy sold through Pfizer Australia stock? - Well, we definitely had the intention of - of wanting to compete and that they would buy less of our competitor's range.
You realised that would be the consequence of the sell-in, didn't you? - We wanted to compete and we wanted to make sure that we had a foothold in pharmacy that there was a reason for our reps to go in and continue to sell through the stock, so if that meant that our competitors didn't get as much share as they hoped then that is the - it's the consequence.
You would accept that was the effect that you sought to achieve through the sell-in, wasn't it? - The effect we sought to achieve is to compete, to have a chance because if we didn't have stock in the pharmacy on either 19 February when Ranbaxy came in or 1 June we would have got slaughtered.
Now, your motivation, I suggest, was to enable Pfizer to compete with the generic manufacturers for the supply of Atorvastatin post-loss of exclusivity, wasn't it? - Yes -
And the way you were going to? - - and to sell Lipitor.
Sorry. Yes, and sell Lipitor, sorry. And the way you were going to achieve that object was to sell-in your stock so the pharmacy would be much less likely to want to take stock from your competitors. That's the case, isn't it? - Of course.
Your Honour, I have no further questions.
The explanations provided by Mr Crotty are accepted. His view that Pfizer took the steps that it did to avoid being "slaughtered" was a view oft-repeated in his evidence. It was a view, with respect, which he genuinely and passionately held.
448 At 530 [388], his Honour said:
The reasons for the bulk "sell-in", it is thus concluded, were driven by a recognition that it was in the commercial interests of both the pharmacy and Pfizer to take advantage of the first month's stock not being included in the subsequent calculation and adjustment of price under the pharmaceutical benefits scheme and a desire to secure the long-term support of pharmacies. It was not a purpose of the bulk "sell-in" to deter or prevent other generic manufacturers - or to "block" those manufacturers - from supplying their own products to pharmacies.
449 At 530-535 [389]-[406], his Honour then considered whether the requirement in the Platinum Offer made by Pfizer in January 2012 for community pharmacies who accepted that offer to take 100% of their needs for generic atorvastatin for 12 months was evidence of a proscribed purpose.
450 At 531-532 [392]-[396], his Honour examined the evolution of the Platinum Offer. It will be remembered that, in January 2012, Pfizer altered its requirement in respect of the Platinum Offer. From then on, it required pharmacies to take only 75% of their generic stock requirements in order to obtain the discounts being offered whereas previously it had required pharmacies to take 100% of their requirements of generic atorvastatin. That decision enabled community pharmacies to take 25% of their needs of generic atorvastatin over a 12 month period from other generic suppliers or limited the time during which the pharmacies would effectively be unable to accept supplies from other generic suppliers to nine months from the date of acceptance of the offer, rather than 12 months.
451 Another matter upon which the ACCC focussed was the delaying of the date for the acceptance of the Pfizer offers and thus the delaying of the date of any sell-in of the new generic product to be supplied by Pfizer. This matter is dealt with at 532-535 [397]-[406] of his Honour's Reasons.
452 After referring to the evidence of Mr Cooper and Ms Brady in relation to this aspect, his Honour moved to consider the evidence of Mr Latham relevant to the topic. At 533-535 [402]-[406], his Honour said:
Whatever may have been the thinking of these persons within Pfizer, the decision to change the date for acceptance of the offers to 24 February 2012 was also taken by Mr Latham. He accepted in his cross-examination that "a benefit of a cut-off date of 18 February to Pfizer would be that the community pharmacies were required to commit to [Pfizer's] before Ranbaxy was able to legally make offers to community pharmacies …". His reasons for extending the date to 24 February 2012 were, obviously enough, a matter which attracted the attention of his cross-examiner. An initial venturing into this area was the following exchange (without alteration):
Now, looking at this document, do you maintain your evidence that it was you who made the decision to move to 24 February? - Yes.
And do you say the reason why you moved it to 24 February was to allow established products more time for logistics and rebate calculations? - No. The - the move - the move from 18 February for 24 February was to allow pharmacists time to assess the offers and everything that were being made by - by Ranbaxy. The reason it's not later than 24 February, like 7 March or 15 March, is that you have to put everything in place to process the orders and to make - make the deliveries. Remember, the stock has to be there on the shelves in the pharmacies ready for sale on 1 April.
The notion that Pfizer wanted to extend time to pharmacies to "assess the offers" attracted further attention in the following exchange occurring a little later:
… In order to give community pharmacies five business days to consider any offers that Ranbaxy will make, we're going to move the offer cut off date to 24 February? - Yes, that is correct.
You're not making this up as you're going along, are you, Mr Latham? - No, I'm - I'm not making this up as I go along.
Why did you want to give community pharmacies five business days to consider the Ranbaxy offer, Mr Latham? - Well, I suppose, to a certain extent, it's optical. We already knew that Ranbaxy were out there. We already knew that Ranbaxy were talking to pharmacists. We already knew that Ranbaxy were talking to the groups. We already had evidence that - that other generic manufacturers were out there talking to the groups as well, too. However, it would appear to be improper, incorrect, to ask pharmacies to make a decision before the time that legally Ranbaxy were entitled to be out there.
Why were you concerned about that? - About the optics?
Yes. Why were you concerned about - weren't you out there to try and make money? - No. But it would appear to me that the pharmacists have to have time to legally assess the offers made by Ranbaxy.
Why? - Otherwise we would be in the situation of getting pharmacists to sign up when, in fact, legally they had not been able to have any offers made to them by Ranbaxy or everybody else, even though we knew - and we have evidence - and we have documented evidence, that there was significant activity in the marketplace, as far as terms and conditions were concerned.
But, Mr Latham, you had known for some time, I take it, that the original proposal had been to have a cut-off date of 18 February? - That's right. And then it was brought to my attention, okay, that that does not give - when Ranbaxy are not legally allowed to talk to anybody legally until 18 February, it looks a bit silly getting pharmacists to make a decision to accept your offer when they haven't legally had a chance to listen to Ranbaxy. That makes sense to me.
Taken by itself, there may well have been good reason to also question this evidence of Mr Latham. Against the background of the repeated references in the internal Pfizer documents to (for example) the "blocking strategy", considerable reservation may have been expressed as to whether Pfizer's reasons were as altruistic as suggested.
But such reservation is, it is concluded, removed when consideration is given to the further evidence of Ms Alltoft. By the time she had arrived at Pfizer, the decision to extend the date to 24 February 2012 had already been taken. Her evidence can, accordingly, not go to any finding of fact as to the reasons being pursued by Mr Latham on behalf of Pfizer. Her evidence can, however, assist in an understanding of what Pfizer was seeking to achieve in the longer term. Although her understanding as to the reasons for extending the date for acceptance of the offers may have been a matter left unexplored in cross-examination, senior counsel did pursue this issue with her. She explained her understanding as follows:
And why was, as you understood it, the fact that Ranbaxy was able to make offers legally to community pharmacies from 18 February relevant to the decision as to when Pfizer was going to impose a cut-off date for community pharmacies to accept the Pfizer offer? - It was one of the relevant pieces because it was the other competitor in the market at the time, and we wanted pharmacies to be able to consider our offer and competitor offers.
Why did you want to do that? - We have to have the pharmacy to be able to consider all offers that were in the market at the time and make an informed decision about whose offer they wanted to go with.
She returned to the same explanation a little while later in her evidence when the following exchanged occurred:
Because, prior to 24 February, you wanted pharmacists to believe that if they didn't accept the offers that you were making prior to that date, they would have to wait for some later time to get access to their accrual funds with respect to Lipitor. That's the case, isn't it? - We wanted to have a date where there was a - a target to actually gain acceptances by pharmacies.
And you wanted them to provide those acceptances before they had had any significant period of time to consider the terms of any Ranbaxy offer? - As I said before, I think we believed that Ranbaxy was out talking about their deal, and that by giving them till 24 February gave them time to consider the Ranbaxy offer.
Founded upon such evidence, it is concluded that the reason for extending the date for acceptance of the Pfizer offers was that propounded by Mr Latham. In fixing the various dates upon which offers could be accepted, it was no part of Pfizer's purpose to deter or prevent the other generic manufacturers from engaging in competitive conduct in the atorvastatin market.
Rejected is the submission of the ACCC that "[t]he effect that Pfizer sought to achieve by setting a deadline for acceptance of 24 February 2012 for the initial Atorvastatin Offers was to secure supply arrangements with as many Community Pharmacies as possible before they were able to receive or adequately assess definitive offers from other suppliers or potential suppliers of generic atorvastatin including Ranbaxy". Also rejected is the similar submission advanced by the ACCC in respect to setting the deadline for acceptance of the late acceptance terms and conditions of 10 March 2012 and 15 April 2012.
453 At 535-536 [407]-[414], his Honour gathered together his conclusions in relation to the question of whether Pfizer had a proscribed purpose for the purposes of the ACCC's s 46 case or its s 47 case.
454 At 535 [407]-[409], his Honour said:
Any finding as to the "purpose" being pursued by Pfizer in the present case - and whether any such "purpose" or "purposes" was the "substantial" purpose for its conduct - necessarily has to take into account the entirety of both the evidence given by the individual witness and that evidence in the context of the inferences to be drawn from documents and the evidence of other witnesses. Part of that evidence is to be found not only in the documents themselves and in the oral evidence of the Pfizer witnesses; it is also to be found in the factual content of the conduct pursued. Thus, for example, one fact was that Pfizer did "bundle" both its branded product with its generic atorvastatin; another fact is that the "sell in" of product necessarily had the effect that pharmacies would have less shelf-space for other competitive generic products.
Any finding must also necessarily take into account the suggestions made by senior counsel for the ACCC from time to time that one Pfizer witness was making it up as he went along or was "deliberately avoiding" answering a question or making a concession.
Left unexplained, the inferences which may otherwise have been drawn from the documents circulating internally within Pfizer and the objective facts flowing from the conduct of Pfizer may well have supported a finding that its purpose fell within s 46(1)(c). But such inferences were not left unexplained.
455 His Honour went on to accept that each and every one of the Pfizer witnesses was a person of commercial integrity who sought to do no more than give an honest account as to the purposes or reasons behind the decisions being taken. His Honour recognised, as was obvious, that, when a commercial enterprise previously had 100% of a particular market because its business was patent protected, once the patent expires, there is only one way to go - down. In the words of Mr Crotty: "Our strategy was to manage that market share erosion as best as we could". His Honour found that that particular objective was variously expressed but that, at all relevant times, Pfizer was seeking to position itself to remain a viable supplier of atorvastatin into the future rather than to hinder or deter others from competing in the atorvastatin market. At all relevant times, Pfizer well understood that any aspiration to hinder or deter the very substantial corporations which manufactured and supplied generic pharmaceuticals in Australia would have been pointless.
456 At 536 [414], his Honour specifically distinguished Baxter from the circumstances of the present case. At 536-537 [415]-[421], his Honour rejected the proposition that, in the circumstances of the present case, the ACCC could not rely upon the submissions which it was advancing in relation to "purpose" because it had not confronted Mr Latham bluntly with its contentions and thus had breached the rule in Browne v Dunn (1893) 6 R 67.