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
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
2,5
2
1,5
1
0,5
0
1997
1998
1999
2000
2001
2002
2003
2004
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 nondominating 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
Cefuroxim e Volum e and Sales evolution
2500000
2000000
1500000
Sales
Volume
Price (1M unit s)
Cef a price
1000000
500000
0
1997
1998
1999
2000
2001
Ye a r
2002
2003
2004
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!
Cefuroxim e Volum e and Sales evolution
2500000
2000000
1500000
Sales
Volume
Price (1M unit s)
Cef a price
1000000
500000
0
1997
1998
1999
2000
2001
Ye a r
2002
2003
2004
Cefam andole Volum e and Sales Evolution
3500000
3000000
2500000
2000000
Sales
Volume
Price (1M unit s)
1500000
Cef u price
1000000
500000
0
1997
1998
1999
2000
2001
Ye a r
2002
2003
2004
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!