In May 2015, Mylan Pharmaceuticals appealed to the Third Circuit after the lower court dismissed its case against Warner Chilcott, which was predicated on a practice called product-hopping. While we await the ruling which is due to come later this year, here is some background information on the developing area of product-hopping in the pharmaceutical sector.
Product hopping, also known as product switching, is a strategy undertaken by brand-name pharmaceutical companies in order to avoid the inevitable “patent cliff” – the date that a patent expires. Hopping involves introducing a new drug just before the patent cliff with very little modifications from the original drug, such as a change of form or dosage amount. In fact, these changes often provide no therapeutic advantages compared to the earlier product. The new drug receives a fresh patent that will last 20 years from its release. In comparison, because a patent of a previous drug is almost expired, the company shifts its patients from the old version of a drug to the new. This is done to preserve monopoly profits, since once the generic drug becomes available, the competition drives down the prices for both the brand and generic products.
Before the patent expiration of a brand name drug, the regime under the Hatch-Waxman Act provides the generic company with a possibility to file an ANDA (Abbreviated New Drug Application). An ANDA is an application for a U.S. generic drug approval for an existing licensed medication or approved drug. If the generic drug is therapeutically equivalent to a brand drug the Food and Drug Administration may grant the generic with a permission to enter the market. Once it is done, the generic can take the advantage of state substitution laws, which allow pharmacists to substitute the generic product when prescriptions given by doctors are for the brand products. However, the product switch creates a situation where the generic has no role to play in the market; the patients and the doctors together have moved on to the new drug thus making the generic drug obsolete. In this sense, the state substitution laws can only work when there is an ongoing stream of prescriptions for the older version of the drug.
Mylan Pharmaceuticals v. Warner Chilcott
On April 16, 2015, the district court in Mylan Pharmaceuticals v. Warner Chilcott ruled that Warner Chilcott’s product switching scheme did not violate antitrust laws. According to the court, the company did not have monopoly power in the relevant market, which the court defined to include the generic Doryx (medication used to treat a wide variety of bacterial infections, including those that cause acne), the branded Doryx, and, more broadly, all oral acne medication (the alternatives). The court further stated that even it had adopted a narrower market definition – excluding the alternatives and including only the generic and brand Doryx – there would still be no antitrust infringement because of a lack of foreclosure. The court reasoned that the “regulatory windfall” provided by state substitution laws is not the only vital mean for competition. The court explained that Mylan could have simply spent more money on advertising of its generic drug to attract consumers and compete with a Doryx.
FTC Amicus Brief
In response to the district court decision in Mylan Pharmaceuticals, on September 30, 2015 the FTC filed an amicus brief before the U.S. Court of Appeals for the Third Circuit arguing that the district court misinterpreted the special characteristics of the pharmaceutical marketplace. Specifically, the FTC argued that automatic substitution is a vital means to a successful competition since it is aimed to address the “disconnect between prescribing physicians and payors.” Accordingly, money invested in advertising would not solve the disconnection issue.
The FTC further argued that product hopping on its own could be an indication of monopoly power. It postulated that in the Mylan case the alternative drugs should not be considered to be in the same product market as the brand Doryx. If the alternatives were in fact in the same product market, the price of the brand Doryx should have been driven down already. This situation would have left no incentive for the Warner Chilcott to make minor changes to the drug solely to defeat the generic entry. According to the FTC the product hop is undertaken to preserve high monopoly profits that a generic drug’s entrance into the market would destabilize, but that no alternative drug has yet disciplined because they do not have power to bring the prices down.
Potential Circuit Split
On May 28, 2015, the Court of Appeals for the Second Circuit in New York v. Actavis reached a different conclusion that the lower court in Mylan Pharmaceuticals. In the Actavis case, Forest Laboratories (Actavis) manufactured Namenda IR, a twice-daily drug, which is designed to treat moderate to severe dementia related to Alzheimer’s. The patent for Namenda IR was due to expire on July 2015. As a result, many generic brands started filing for ANDAs. In order to avoid the patent cliff, Actavis undertook product switching tactics.
In 2010 Actavis was granted with an NDA for a new drug Namenda XR that only needed to be taken once-daily. In 2013 it presented Namenda XR to the market, leaving consumers with a choice between Namenda IR (twice-daily) and XR (once-daily). Since the new patent provided Namenda XR with a 20 year protection, it meant that the migration of its customers from using IR to using XR would amount to an extension of monopoly profits until 2029 (the expiration date of Namenda XR patent), rather than 2015 (the expiration date of Namenda IR patent). To that end, the company carried out a “soft switch” scheme under which it stopped offering various discounting and rebate schemes for IR and, instead, began offering discounts for XR. The soft switch strategy was not as successful as expected. As a result, Actavis next chose a more aggressive strategy referred to as “hard switch” under which the Namenda IR was completely pulled out of the market. Consumers had no choice but to switch to Namenda XR.
The Second Circuit held that this hard switch strategy was aimed at maintaining monopoly power and thus violated the U.S. antitrust laws. The Court upheld the preliminary injunction, which required Actavis to continue selling Namenda IR without raising the price or restricting access until a month after the generics are supposed to enter the market. The petition for certiorari was dismissed as part of a settlement between Actavis and the attorney general who brought the case. The message of Actavis is that the coercive switch combined with an intentional hindering effect on generic competition leads to a presumption of illegality.
McGuireWoods lawyer Larissa Bergin argued that it is certainly possible that Actavis launched Namenda XR to improve the drug; however, by highlighting the financial benefits of moving patients from Namenda IR, the court interpreted these actions as an intention to lessen competition.
In contrast, the District Court in Mylan Pharmaceuticals found that although the defendants withdrew the prior formulation of the drug, there was no coercion aspect involved since (a) there were other competitors, and (b) the generics could still win customers through advertising, promotion, cost competition or superior product developments. If the Court of Appeals affirms the lower court’s decision and disregards FTC warning in Mylan, we would be faced with a circuit split – one that may well provide a substantial basis for the parties to look to the Supreme Court for the final resolution.