An academic outsider’s view on the Glaxo case

1. An academic outsider’s view on the Glaxo case Eric Avenel Grenoble Applied Economics Laboratory

2. Objectives of the speech • Output • Neutral, hopefully helpful view on the case • Input • No specific information on the case beside the decision published by Conseil de la Concurrence • Supplementary input • Some economic theory on predation • Some familiarity with competition policy cases

3. Outline of the speech • An overly simplified, textbook-like version of the case • Based on elements from the decision • Ignoring important aspects of the case • Pointing at needed extensions of the underlying economic analysis • The story told in the decision • Developments suggested to fully grasp the economics of the case

4. A simplified story

5. A simplified story • The product: a specific presentation of cefuroxime used in hospitals (‘Cefuroxime’ in what follows) • The market: Cefuroxime for hospitals in France • Let’s ignore cefamandole at this stage • Players: Glaxo and Flavelab • Let’s ignore other players at this stage

6. Portrait of a predator and a prey • Glaxo is a well-known, multinational, large pharmaceutical company with important financial ressources • Until 1997, it is in a monopoly position on the cefuroxime market due to patent • Flavelab is a recent, small company with limited financial ressources • It enters the cefuroxime market in 1998, with limited sales, but sales increase in 1999

7. The predation story • Starting in 1999, Glaxo attacks Flavelab with bids corresponding to prices below costs • In 2001, Flavelab leaves the market • Glaxo raises prices and recoups the cost of predation thanks to large profits on the market • All these elements are extracted from the published decision

8. Supporting evidence: Cefuroxime average price

9. Why we should refine this analysis • The previous story is about successful predation by a firm that is not in a dominant position! • Glaxo is not in a dominant position on the market for cefuroxime • Use of Article 82 (or French law equivalent) problematic • Interesting theoretical issues to look at

10. The Conseil’s analysis

11. The market for Aciclovir • Glaxo is in a dominant position on the market for aciclovir (due to patent protection until september 2002) • Until 2003, only one generic drug producer on the market (Merck) • Three entrants in 2003 • In 2005, Glaxo still has 52% market share

12. Link between the two markets • Entry on the market for Aciclovir is delayed and the number of entrants is limited • Many firms with licenses to produce Aciclovir renounced to enter the market • Effect of the reputation established by Glaxo on the market for cefuroxime thanks to the elimination of Flavelab • Based on sound economic theory

13. Limits and refinements

14. Back to the market for cefuroxime • The reputation argument solves the legal question of using art. 82 against non-dominating predator, but the mechanism of predation needs further examination • The definition may also need some further examination • Narrowing the market? • Broadening the market?

15. The relevant market • Cefuroxime and cefamandole are perfect substitutes • Firms on the market: • Glaxo (Cefuroxime) • Elli Lilly (Cefamandole) • Flavelab (Cefuroxime and Cefamandole) • Panpharma (Cefuroxime and Cefamandole) • 1997: Elli Lilly sales larger than Glaxo sales

16. What about Panpharma? • Why is Panpharma not driven out of the market? • Glaxo tried, but could not because of intervention by the Conseil de la Concurrence in 2001 • Glaxo did not try (Why? Reputation? How is it possible to attack only Flavelab?) • In 2002, Panpharma has 49% of the market (share of sales)

17. What about Lilly? • Lilly is the biggest player on the market in 1997 • It leaves the market in 2003 • It is not a small firm, but clearly a strategic player with possibility to influence the market • Nothing on Lilly’s strategy in the decision • Is it passive? Why?

18. First exploratory hypothesis • Lilly does not react to Glaxo’s strategy because it is good for it (eliminates a rival on the market) • But Lilly leaves the market • Maybe Lilly is not passive, but its strategies are not described in the decision

19. Narrowing the relevant market • Lilly is passive because Glaxo’s strategy has no effect on its profits, since they are not on the same market. • Decision clearly states that cefuroxime and cefamandole are substitutes, but… • Why do Flavelab and Panpharma offer both molecules if they are perfect substitutes? • Why is there no information on Lilly in the decision? • Glaxo in a dominant position on Cefuroxime market? • Ability to raise price

21. Broadening the relevant market • Lilly does not care about cefamandole, because there is another molecule that is replacing both cefamandole and cefuroxime • Need for a broader definition of the market • No information about that in the decision, but data may support this hypothesis • 2004: lower prices and volumes as compared to 1997!

24. Conclusion • In depth understanding of what happened in the market may require • Thinking again about the relevant market • Refining the strategic analysis of the relation between Glaxo, Flavelab and their rivals on the relevant market. • Definitely a very interesting case!