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

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

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

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

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

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

Supporting evidence: Cefuroxime average price

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

The Conseil’s analysis

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

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

Limits and refinements

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?

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

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)

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?

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

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

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!

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!