Developments in Antitrust in Pharmaceutical Markets
This is an Insight article, written by a selected partner as part of GCR's co-published content. Read more on Insight
FTC challenges to mergers
During the past year, the FTC challenged and settled by consent order competitive issues in two separate transactions: the acquisition by E Merck oHG (Merck) of some of the assets of Mylan Laboratories (Mylan); and the acquisition of Taro Pharmaceutical Industries Ltd (Taro) by Sun Pharmaceutical Industries Ltd (Sun).1 These consent orders highlight the continued importance of generic pharmaceutical markets, as evidenced by the FTC's scrutiny of these markets. The consent orders also continue many of the trends we noted last year concerning the FTC's analysis of transactions involving generic drug manufacturers.2 First, in defining the relevant markets for these acquisitions, the FTC excluded a branded product from the market if there was more than one generic version of the drug on the market. In both the Mylan/Merck and Sun/Taro matters, the FTC explained that the existence of multiple generic versions of a drug in a market meant that the branded versions 'no longer significantly constrain' the price of the generic drugs.3 Second, the FTC ordered divestment of products when an acquisition or merger would otherwise reduce the number of AB-rated generic products in the market. For example, in the Mylan/Merck matter, the FTC ordered divestment in the market for generic flecainide acetate, an anti-arrhythmia drug, because the merger would reduce the number of suppliers of this generic drug from five to four.4 Similarly, in the Sun/Taro matter, the FTC ordered divestment in the market for immediate-release carbamazepine tablets because the acquisition would reduce the number of the generic tablet suppliers from four to three.5 Third, the FTC considered the AB-rated generics for a particular branded product as its own market, even where a broader market definition may have been available. Thus, in the Mylan/Merck matter, the FTC used a market for generic flecainide acetate rather than including all or some other subsection of generic anti-arrythmial products.6 It also used a market of generic acebutolol hydrochloride rather than a market of all or some subset of generic beta blockers used to treat hypertension.7 Fourth, in certain instances the FTC continued to delineate separate markets for different forms of the same pharmaceutical product. Thus, in the Sun/Taro matter, the FTC considered generic immediate-release carbamzepine tablets as a distinct market from generic chewable carbamazepine tablets as the chewable tablets 'come in a more convenient dosing form, which makes them better suited for pediatric, geriatric, and other patients who may have difficulty swallowing pills'.8 On the other hand, the FTC defined the market for generic guanfacine hydrocholoride as one including both the 1mg and 2mg formulations of the product. But the FTC did take the separate formulations into account in finding that the reduction from six suppliers to five in the market would be anti-competitive. The FTC noted that that 'many customers prefer to purchase the 1mg and 2mg formulations of the product from one supplier' so 'the competitive significance of the other four suppliers who do not sell these formulations is limited'.9
The FTC also remains concerned about settlement agreements between generic and brand manufacturers during Hatch-Waxman Act-related patent infringement litigation where consideration flowed to the generic manufacturer and where there was some restriction on the generic manufacturer's ability to market its product. Pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003, drug companies must file certain settlement agreements with the FTC and the US Department of Justice. The FTC reported that in fiscal year 2007, there were 33 final settlements of patent litigation brought by a brand company against a generic company, 14 of which included both compensation to the generic company and a restriction on the generic's ability to market its product; moreover, 11 of these settlements involved agreements with first-filer generic companies.10 The FTC considers settlement agreements like these to be anti-competitive. New FTC chairman William E Kovacic explained that '[t]his report confirms that settlements with potentially anti-competitive arrangements continue to be prevalent'.11 He further noted that: 'The Commission remains committed to ensuring that brand and generic companies do not use such settlements as a way to deny consumers the benefits of competition.'12 To further this goal, the FTC has in the past few years filed amicus briefs and enforcement actions that have so far unsuccessfully attempted to have such agreements viewed as presumptively illegal. In fact, the Second Circuit and the Eleventh Circuit have found that such agreements can only be found to be illegal under unusual circumstances such as where the agreement exceeds the scope of the patent's protection; the settlement was part of a fraud; or the underlying patent litigation was objectively baseless.13 The FTC has also unsuccessfully argued for Supreme Court review of this issue.14 In 2008, the FTC submitted an amicus brief urging the United States Court of Appeals for the Federal Circuit to reverse a ruling from the United States District Court for the Eastern District of New York. On defendants' motion for summary judgment, the District Court dismissed the antitrust claims of purported classes of direct and indirect purchasers because it held that its patent gave Bayer, the brand name manufacturer for the wide-spectrum antibiotic drug ciproflaxin hydrochloride, the right to exclude competition entirely.15 As a result, the District Court concluded that 'any conduct within the scope of the patent', including Bayer's agreement with generic manufacturers, was 'exempt from antitrust scrutiny'.16 In its amicus brief, the FTC argued inter alia that the District Court erred in holding that 'patent law effectively creates an antitrust immunity for such agreements regardless of the weakness of the patent', thereby incorrectly equating the exclusionary power of the patent with the 'nominal scope of the asserted patent', and the decision should be reversed.17 The issue has been fully briefed and argued, and the parties are awaiting a decision. The FTC also filed a complaint in the United States District Court for the District of Columbia against Cephalon Inc (Cephalon) alleging that it illegally extended its monopoly over Provigil, a sleep disorder pharmaceutical, by paying generic manufacturers to delay entry as part of settlements of four separate patent litigations with the four first-filer potential generic entrants for Provigil.18 Cephalon settled all four patent litigations and entered into agreements that inter alia allow the generic products to enter the market in April 2012, three years before the patent expires.19 The FTC alleged that Cephalon also entered into an aggregate 13 'purportedly independent business transactions' with the four generic first filers, which provided them 'in excess of $200 million'.20 These agreements included 'licenses to intellectual property, supply agreement, or co-development deals'.21 The FTC argued that in reality these were not independent transactions because: (i) they were signed concurrently with the settlements; (ii) Cephalon only discussed these issues with the generic companies at the same time as the negotiation of the settlement agreements; (iii) Cephalon purchased intellectual property that was unnecessary to manufacture or sell Provigil; and (iv) the supply contracts created a 'supply chain nightmare'.22 The FTC also alleged that but for these independent agreements, 'generic competition to Provigil would have occurred prior to April 2012 because (i) one or more of the First Filers would have entered with its version of generic Provigil before conclusion of the patent litigation; (ii) Cephalon would not have prevailed against each of the four First Filers in its patent litigation; or (iii) Cephalon would have agreed to settle its patent litigation on terms that did not compensate the First Filers, but instead provided for generic entry earlier than April 2012'.23 The FTC filed this enforcement action in the United States District Court of the District of Columbia rather than as an administrative action, which is the traditional method for the FTC to bring non-merger antitrust enforcement cases. Evidently, the FTC had hoped to prevent Cephalon from appealing any unfavourable ruling in an administrative action to one of the circuit courts that has favourable precedent on the issue of brand-generic settlements. Because the DC Circuit has not yet issued an opinion on these types of settlements, and because the DC Circuit has significant experience in antitrust and with enforcement agencies, the FTC hoped that it may have a greater chance of obtaining a favourable decision and a Circuit split, and perhaps eventual review by the Supreme Court.24 Cephalon though successfully moved to transfer this action to the United States District Court for the Eastern District of Pennsylvania where a number of private actions were already pending concerning the same core nucleus of facts. Cephalon has moved to dismiss these claims in that court. The FTC also chose to bring this action only against Cephalon, the brand name manufacturer, pursuant to a claim that the settlement agreements were an abuse of monopoly power and unlawful under section 5(a) of the FTC Act. In the past, the FTC has challenged brand-generic settlement agreements as anti-competitive agreements between horizontal competitors that were presumptively illegal either per se or under the rule of reason. While theoretically monopolisation claims pursuant to section 5(a) of the FTC Act may cover 'trade practices which conflict with the basic policies of the Sherman and Clayton Acts even though such practices may not actually violate these laws',25 the case law tends to follow that of other section 2 cases. In its opposition to Cephalon's motion to dismiss, the FTC cites the standard definition of monopolisation pursuant to section 2 of the Sherman Act. The FTC may be trying an alternate theory of liability to be able to distinguish this case to some degree from the Schering-Plough and Tamoxifen decisions that related to claims of an illegal agreement. The FTC also alleged that the settlement agreements excluded the first filers from selling even non-infringing generics and that the agreement precluded the first filers from developing, marketing, or selling generic equivalents of successor products.26 This appears to be an attempt to make these allegations similar to those in In re Cardizem CD Antitrust Litigation,27 where the Sixth Circuit found that a brand-generic settlement agreement was per se illegal when the agreement also excluded non-infringing generic products. The differences in these allegations may provide enough basis to distinguish this case from earlier cases like Schering-Plough and Tamoxifen, but the FTC risks undermining its goal of creating a split in the Circuits if the Court in Cephalon finds the agreement illegal under a different analysis. It is clear though that the FTC will continue to aggressively pursue brand-generic settlement agreements where it believes consideration was given for delay in generic entry.
The FTC has been conducting a study of the short- and long-term effects of authorised generics. During the past 12 months, the FTC issued special orders requesting information from both branded and generic pharmaceutical manufacturers. The FTC has not issued any public statement concerning when it will issue its report on authorised generics.28
The California Supreme Court held that a 'pass on' defence is viable under California antitrust law. In Clayworth v Pfizer Inc,29 the California Supreme Court held that under the Cartwright Act,30 California's antitrust law, a defendant may assert a defence that an antitrust plaintiff 'passed on' its alleged damages to customers and as a result was not injured. In Pfizer, the plaintiffs (retail pharmacies) alleged that Pfizer and other pharmaceutical companies fixed prices of the brand name pharmaceuticals purchased by the retail pharmacies. Defendants asserted as an affirmative defence that plaintiffs 'passed on' alleged overcharges to their customers, and therefore suffered no damages. The lower court permitted discovery on this issue, which revealed 'two undisputed facts: (1) plaintiffs passed on to their customers all claimed overcharges, and (2) plaintiffs waived any claims for damages not based on the alleged overcharge, claiming no lost or delayed sales, or any other diminution in business'.31 Under federal antitrust law, the courts have rejected a 'pass on' defence for overcharges in price-fixing cases. In 1968, in Hanover Shoe, Inc v United Shoe Machinery Corp, the Supreme Court held that a plaintiff could recover overcharge damages even though it passed on the alleged overcharges to its customers.32 The court explained that allowing a pass on defence would unduly complicate antitrust litigation. Moreover, such a defence would make it less likely that wrongdoers would be sued because the ultimate consumer would not have the proper incentives to bring a lawsuit.33 In 1977, in Illinois Brick Co v Illinois, the court further held that indirect purchasers did not have standing to bring a claim for overcharges for price fixing, even if all such overcharges were passed on to these indirect purchasers.34 The court explained that if it allowed indirect purchasers to have standing there would be serious concerns for multiple liability given that the court had already barred use of the 'pass on' defence; determining the amount of any overcharge would 'transform treble-damages actions into massive efforts to apportion the recovery among all potential plaintiffs'; and 'the antitrust laws will be more effectively enforced by concentrating the full recovery for the overcharge in the direct purchasers'.35 After Hanover Shoe and Illinois Brick, many states passed amendments to their state antitrust laws explicitly allowing indirect purchasers to bring lawsuits and recover damages for overcharges that resulted from antitrust violations. California also passed such an amendment allowing indirect purchasers to sue; however, it specifically noted that the amendment did not 'constitute a change in' the existing law but instead was 'declaratory of, the existing law'.36 This amendment did not explicitly discuss the issue of using a pass on defence. California courts had therefore recognised that the 'issue of the availability of a 'pass-on' defence in antitrust law still remains an open question in California'.37 In Pfizer, the California Supreme Court held that the plain meaning of the language in the Cartwright Act providing that '[a]ny person who is injured [...] by reason of anything forbidden or declared unlawful by this chapter, may [...] recover three times the damages sustained by him or her' does not include a plaintiff who has sustained no damages.38 As a result, the court held that the 'pass-on defense is available to defendants and, as applied here, defeats plaintiffs who have passed on all the claimed overcharges'.39 The court noted that to allow plaintiffs to recover here would 'violate a fundamental precept of California damage law - that plaintiffs not receive a windfall'.40 The court also stated that nothing in the legislative history of the Cartwright Act or the relevant amendment showed that the intent of the legislature was to preclude the use of a pass on defence.41 The court held that public policy also supported this conclusion because of the 'principle which calls for the equal treatment of claims and defenses, a principle fundamental to the holding in Illinois Brick'.42 Finally, the court noted that recent experience with consolidated class action cases by indirect purchasers shows that this holding would not significantly remove the incentives for plaintiffs to sue. The issue of whether or not a 'pass on' defence exists pursuant to state law not bound by the holdings of Hanover Shoe and Illinois Brick has been uncertain. The Pfizer decision clarifies the issue for the state of California and could provide useful precedent for other states. On 25 July 2008, the United States Court of Appeals for the District of Columbia Circuit affirmed a grant of summary judgment in favour of Biovail Corporation (Biovail) in four antitrust class actions brought on behalf of both direct and indirect purchasers.43 The four wholesale purchasers of Tiazac, a drug for hypertension and angina, alleged that Biovail had misused its patent to keep a generic equivalent of Tiazac off the market. Biovail initially asserted that its '791 patent protected its formula for Tiazac. In 1998, Andrx filed an Abbreviated New Drug Application (ANDA) claiming that this patent was invalid and not infringed by Andrx's generic version of Tiazac. Biovail sued Andrx for infringement, which eventually resulted in a decision by the United States Court of Appeals for the Federal Circuit determining that Andrx's generic version did not infringe the '791 patent.44 In the interim, Biovail had listed a different patent (the '463 patent) with the Food and Drug Administration that it claimed also covered Tiazac. As a result, Biovail again sued Andrx, this time concerning the '463 patent. This second lawsuit triggered a second 30-month stay of the FDA's ability to approve Andrx's generic product. The FDA tentatively approved Andrx's ANDA a second time on 14 May 2001, and Biovail withdrew its claim that the '463 patent covered Tiazac in April 2002. Andrx, however, did not receive final approval for its ANDA until April 2003 because of its own manufacturing issues. Four sets of wholesalers filed complaints alleging that Biovail's lawsuit against Andrx with respect to the '463 patent violated the antitrust laws by delaying the FDA's approval of Andrx's ANDA, thus preventing them from purchasing a generic alternative to Tiazac. The wholesalers claimed that Biovail filed documents with the FDA claiming falsely and in bad faith that the '463 patent covered Tiazac and that Biovail had conducted the ensuing patent litigation in bad faith or as a 'sham' litigation. Granting Biovail's motions for summary judgment in three of the antitrust cases, the district court found that plaintiffs could not show that Biovail's suit had caused any delay by the FDA in approving Andrx's generic version of Tiazac. The fourth set of wholesalers filed an amended complaint in June 2005, which added an allegation that Biovail and Forest Laboratories had 'conspired to distribute a generic version of Tiazac before Andrx [...] could get to market, but abandoned that plan in favour of using the '463 patent'.45 In 2006, the District Court granted summary judgment in this fourth case and held that the amendment to the complaint 'does not relate back and does not allege facts sufficient to establish a claim of injury within the limitation period'.46 The Circuit Court affirmed the District Court's granting of Biovail's summary judgment motions and also affirmed the district court's dismissal of the amended complaint. The court found that tentative approval from the FDA is not a sufficient basis for a reasonable juror to conclude that final approval would be forthcoming, particularly because the tentative approval letter instructed Andrx that final approval was contingent on the FDA being 'assured there is no new information that would affect whether the final approval should be granted'.47 The court also found that there was not a sufficient basis for a reasonable juror to find that Andrx would have been granted approval but for Biovail's lawsuit, despite the existence of both a fax from the FDA stating that it had completed review of a December 2000 amendment to the ANDA, and an affidavit from the general counsel of Andrx that the FDA told Andrx that it was prepared to grant final approval upon the expiration of the stay period.48 As a result, no reasonable juror could find that plaintiffs were ready and able to market generic Tiazac during the period in question. Plaintiffs, therefore, could not establish that Biovail's alleged conduct caused an antitrust injury. In Meijer Inc v Abbott Laboratories,49 the United States District Court for the Northern District of California denied a motion to dismiss a claim that a purported bundled discount was anti-competitive. In 1996, Abbott introduced Norvir, a stand-alone protease inhibitor used to combat the HIV virus. It was later discovered that 100mg to 400mg of Norvir could also be used to boost the antiviral properties of other protesase inhibitors. As a result, the price of Norvir dropped because Norvir could now be used in smaller doses in order to boost other protease inhibitors. In 2000, Abbott introduced Kaletra, a single pill containing Norvir and lopinavir, another protease inhibitor which was boosted by the Norvir in the pill. In 2003, two competitors were about to introduce new protease inhibitors which when boosted with Norvir were as effective as Kaletra. In 2003, one of these products, Reyataz, was introduced into the market causing the market share of Kaletra to drop. In December 2003, Abbott raised the wholesale price of stand-alone Norvir by 400 per cent but kept the price of Kaletra constant. Plaintiffs challenged Abbott's raising its price on stand-alone Norvir as illegally monopolising or attempting to monopolise the market for drugs intended for use with Norvir as a booster by exploiting its monopoly over the booster market comprising only Norvir. Abbott filed a motion to dismiss, claiming that the alleged conduct could not be anti-competitive because it did not meet the standard articulated by the United States Court of Appeals for the Ninth Circuit for illegal bundled discounts in Cascade Health Solutions v PeaceHealth.50 The court explained that bundling is 'the practice of offering, for a single price, two or more goods or services that could be sold separately. A bundled discount occurs when a firm sells a bundle of goods or services for a lower price than the seller charges for the goods or services purchased individually'.51 The Ninth Circuit explained that bundled pricing may be anti-competitive if 'the full amount of the discounts given by the defendant on the bundle are allocated to the competitive product or products' and 'the resulting price of the competitive product or products is below the defendant's incremental cost to produce them'.52 The district court initially noted that it was not clear that Abbott's sale of Kaletra was a bundled discount because Kaletra did not provide consumers 'with a way to save on two products they would otherwise have to purchase separately'.53 In fact, the court noted it is not even clear that Kaletra is two separate products as Abbott is only licensed to sell lopinavir as part of Kaletra. The District Court then found that even if Kaletra was considered a bundled discount, the Cascade test should not apply generally in pharmaceutical contexts like this one because in the pharmaceutical industry 'fixed costs in the form of investment in research and development dwarf variable costs'.54 Therefore, variable costs are likely to be less than the net sales price under the Cascade analysis. 'Thus, as applied here, the Cascade rule does not achieve its stated goal of prohibiting pricing that results in the exclusion of equally efficient competitors.'55 The court denied the motion to dismiss without articulating by what standard bundling claims should be evaluated in this context. The district court subsequently denied a request that this issue be certified for immediate appeal to the Ninth Circuit. The Cascade decision has generally been seen as articulating a clearer, more definitive standard for judging bundled discounts, at least in the Ninth Circuit. The Meijer case indicates that caution should be used in utilising this standard for bundling cases in pharmaceutical markets or any other markets where fixed costs dwarf variable costs.
1 Complaint, In the Matter of Mylan Laboratories Inc and E Merck oHG, 2007 WL 2985359, FTC File No. 071-0164 (19 September 2007), available at www.ftc.gov/os/caselist/0710164/070921cmp0710164.pdf; Complaint, In the Matter of Sun Pharmaceutical Industries Ltd, 2008 WL 3587474, FTC File No. 071-0193 (12 August 2008), available at www.ftc.gov/os/caselist/0710193/080813sunpharmcmpt.pdf.
2 Michael S Lazaroff, 'Developments in Antitrust Law in Health Care Markets', in Global Competition Review, The Antitrust Review of the Americas 2008 78 (Sept. 2007).
3 Analysis of Agreement at 2, In the Matter of Mylan Laboratories Inc and E Merck oHG, FTC File No. 071-0164 (27 September 2007), available at www.ftc.gov/os/caselist/0710164/070921analysis0710164.pdf (hereinafter Mylan/Merck Analysis); Analysis of Agreement at 2, In the Matter of Sun Pharmaceutical Industries Ltd, FTC File No. 071-0193, (13 August 2008), available at www.ftc.gov/os/caselist/0710193/080813sunpharmanal.pdf (hereinafter Sun/Taro Analysis).
4 Mylan/Merck Analysis, supra note 3, at 4.
5 Sun/Taro Analysis, supra note 3, at 4.
6 Mylan/Merck Analysis, supra note 3, at 2.
8 Sun/Taro Analysis, supra note 3, at 2.
9 Mylan/Merck Analysis, supra note 3, at 2.
10 Federal Trade Commission, Agreements Filed With the Federal Trade Commission Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003: Summary of Agreements Filed in Fiscal Year 2007 3 (May 2008).
11 Press release, Federal Trade Commission, FTC's Bureau of Competition Issues FY 2007 Summary of Pharmaceutical Company Settlement Agreements (21 May 2008), available at www.ftc.gov/opa/2008/05/drug.shtm.
13 Schering-Plough Corp v Fed Trade Comm'n, 402 F.3d 1056, 1072 (11th Cir. 2005), cert. denied, 548 US 919 (2006); In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006), cert. denied, 127 S. Ct. 3001 (2007).
14 Lazaroff, supra note 2, at 80-81.
15 Brief of Amicus Curiae Federal Trade Commission at 14, In re Ciprofloxacin Hydrochloride Antitrust Litigation, No. 2008-1097 (Fed. Cir. filed Jan. 25, 2008) (hereinafter FTC Amicus Brief).
16 In re Ciprofloxacin Hydrochloride Antitrust Litigation, 363 F. Supp. 2d 514, 524 (E.D.N.Y. 2005).
17 FTC Amicus Brief, supra note 15, at 14.
18 Complaint for Injunctive Relief, Federal Trade Comm'n v Cephalon Inc, 551 F.Supp.2d 21 (D.D.C. 2008) (No. 08-0244) (hereinafter Cephalon Complaint).
19 Id. at 15.
20 Id. at 14.
22 Id. at 15.
23 Id. at 22.
24 In 2006, Commissioner Jon Leibowitz explained that the FTC would 'look for appropriate enforcement cases which may create a clearer split in the circuits' and suggested that the FTC may bring such a case in the DC Circuit 'which has significant experience in antitrust and with enforcement agencies'. Jon Leibowitz, 'Exclusion Payments to Settle Pharmaceutical Patent Cases: They're B-a-a-a-ck! (the Role of the Commission, Congress, and the Courts)', Remarks at the Second Annual In-House Counsel's Forum on Pharmaceutical Antitrust (24 April 2006), at 8-9.
25 Federal Trade Comm'n v Brown Shoe Co, 384 US 316, 321 (1966).
26 Cephalon Complaint, supra note 18, at 20.
27 332 F.3d 896, 908 (6th Cir. 2003).
28 FTC Requests Information From Generic Manufacturers, World Generic Markets, 21 January 2008.
29 Clayworth v Pfizer Inc, 80 Cal. Rptr. 3d 847, 852 (Ct. App. 2008).
30 Cal. Bus. & Prof. Code sections 16700 et seq.
31 Pfizer, supra note 29, at 852.
32 Hanover Shoe Inc v United Shoe Machinery Corp, 392 U.S. 481, 489 (1968).
33 Id. at 493.
34 Illinois Brick Co v Illinois, 431 U.S. 720,730-33 (1977).
35 Id. at 735-738.
36 Pfizer, supra note 29, at 858.
37 See J P Morgan & Co Inc v Superior Court, 6 Cal. Rptr. 3d 214, 227 fn. 10 (App. Ct. 2003).
38 Pfizer, supra note 29, at 866.
39 Id. at 860.
40 Id. at 865.
41 Id. at 860-62.
42 Id. at 871.
43 Meijer Inc v Biovail Corp, 533 F.3d 857 (D.C. Cir. 2008).
44 Biovail Corp.Int'l v Andrx Pharm Inc, 239 F.3d 1297 (Fed. Cir. 2001).
45 Meijer, supra, note 43, at 861.
46 See id. at 865.
47 Id. at 860.
48 Id. at 863-64.
49 544 F.Supp.2d 995 (N.D. Cal. 2008).
50 515 F.3d 883 (9th Cir. 2008).
51 Meijer, supra, note 49 at, 1000.
52 Id. at 1001.
54 Id. at 1004.