The Evolving Standard of Antitrust Analysis in Pharmaceutical Product Hopping

By: John S. Sears* | Summer Guest Writer

Photo provided by taxrebate.org.uk

Is it “pharmaceutical innovation” or “product hopping”?  The distinction is not always clear.  While pharmaceutical innovation brings new and improved pharmaceuticals to patients, the term “product hopping” refers to a tactic by which brand name pharmaceutical companies try to obstruct generic competition by making modest reformulations that offer little or no therapeutic advantages.  Such approaches are contrary to section 2 of the Sherman Act that makes it an offense to “monopolize, or attempt to monopolize … any part of the trade or commerce among the several States.”

 Antitrust cases based on pharmaceutical product hopping are relatively few and the courts still struggle with how to handle these cases without stymying pharmaceutical innovation.  The struggle is complicated by the unique market structure and regulatory regime of the pharmaceutical industry.  A pair of recent cases highlight these struggles.  The cases involve instances of a “hard switch”, where manufactures market a new formulation of a branded drug while simultaneously removing the previous formulation from market.  Such switches can thwart generic competition due to the limited abilities to substitute under state drug product substitution laws.

The Second Circuit Court of Appeals recently upheld a lower court’s preliminary injunction requiring Actavis, PLC., manufacturer of a twice-daily Alzheimer’s drug, to continue manufacturing the patented formulation until thirty days after generic formulations enter the market.  Meanwhile, in the Third Circuit, generic drug manufacturers have appealed a decision in the Easter District of Pennsylvania granting summary judgment to defendant Warner Chilcott, the U.S. manufacturer of the acne medication Doryx.

            Abbott’s Rule of Reason Approach

The District Court of Delaware was the first court to address a hard switch with pharmaceutical product hopping in Abbott Laboratories v. Teva Pharmaceuticals.  Abbott marketed fenofibrate capsules, a cholesterol lowering drug, under the brand name TriCor and with $750 million in sales in 1998. In 2000, Teva filed an abbreviated new drug application (ANDA) to sell generic TriCor.  A year later Abbott hopped from TriCor capsules to a new tablet formulation and removed the old capsule formulation from the market.  However, Teva followed the hop by developing generic TriCor tablets and filed ANDA.  Abbott hopped again, developing a second tablet formulation for TriCor that need not be taken with food, and again removed the old formulation from the market.  In 2005, several plaintiffs brought an antitrust action against Abbott.  To analyze Abbott’s hard switch of TriCor, the court applied a rule of reason approach adopted from U.S. v. Microsoft that focuses on whether a modification’s anticompetitive effects outweigh its benefits.

New York v. Actavis

Actavis, through its wholly-owned subsidiary Forest Laboratories, LLC, manufactures and markets Namenda IR, a twice-daily formulation of memantine hydrochloride to treat moderate-to-severe Alzheimer’s disease.  The patent protection for Namenda IR extended until July 11, 2015.  Five generic versions of IR had tentative FDA approval to enter the market on July 11, 2015, and other generic versions were expected to follow.  After Namenda IR was brought to market, Actavis developed and patented a new once-daily formulation marketed as Namenda XR.  Assuming maintenance fees are paid, the patent for Namenda XR does not expire until 2029.  The Namenda formulations constitute about $1.5 billion in annual sales.

Actavis brought Namenda XR to market in July 2013 and adopted strategies to switch patients from Namenda IR to Namenda XR.  The strategies included robust marketing and discounting of the Namenda XR formulation.  In February 2014, Actavis announced they would discontinue Namenda IR in the fall of 2014.  They informed the FDA of their plans and published letters urging that caregivers discuss switching patients to Namenda XR.  In September of 2014, the State of New York filed a complaint alleging these acts violated the Sherman Antitrust Act and the analogous state law.  The State requested a preliminary injunction, a permanent injunction, and damages.  After a five-day hearing, the district court granted a preliminary injunction requiring Actavis continue to manufacture Namenda IR until 30-days after generic Namenda IR manufacturers enter the market.  On appeal, the Second Circuit affirmed.

            Mylan Pharmaceuticals v. Warner Chilcott

Warner Chilcott produces and sells Doryx in the U.S. for Australian Mayne Pharmaceuticals.  Doryx is the branded version of delayed-release doxycycline hyclate, a prescription antibiotic used to treat severe acne.  Mylan Pharmaceutics, the third largest generic drug manufacturer, brought suite accusing Warner and Mayne of illegally thwarting competition by product hopping.

In 1994, Mayne and Warner Chilcott entered an exclusive license agreement to manufacture Doryx capsules in the U.S.  In May 2005, the FDA approved Warner Chilcott’s new drug application (NDA) for Doryx 75 and 100 mg tablets.  The tablets were introduced in September 2005.  Warner Chilcott stopped selling the capsules, removed capsules from the website, worked with retailers to “auto-reference” the tablet whenever a doctor filed a Doryx prescription, informed wholesalers, retailers, and doctors that capsules were replaced by tablets, and destroyed or bought back existing capsule inventory.  In 2007, Mayne developed a 150 mg single-scored tablet.  The score allows the user to split the 150 mg tablet into two 75 mg doses.  This single-scored 150 mg tablet was FDA approved mid-2008.  Afterwards, the defendants began aggressively marketing the new 150 mg tablet and, realizing most of the market had switched, dropped production of the 75 mg and 100 mg tablets.  In 2010, the defendants again reformulated the tablet to include two scores, allowing for 50, 100, and 150 mg doses.  With each reformulation and supplemental NDA, the defendants asked the FDA to require generic applicants to match the scoring of the branded formulation.

Generic drug manufacturers and pharmaceutical wholesalers-filed complaint on July 6, 2012 in the Eastern District of Pennsylvania alleging the defendants took improper advantage of the regulatory system by making “tactical modifications” to Doryx to thwart generic competition.  All plaintiffs, except for Mylan, settled in an agreement certified on January 23, 2015.  On cross motions for summary judgment, the district court ruled for the defendants on May 20, 2015.  Mylan immediately appealed.  Initial briefs are due September 17, 2015.

The Evolving Standard

To establish monopolization under the Sherman Act, the plaintiff must prove (1) possession of monopoly power in the relevant market, and (2) the willful acquisition or maintenance of that power by means other than a superior product, business acumen, or historic accident.

The analysis begins by defining the “relevant market” and the defendant’s share of that market.  In Actavis, the Second Circuit defined the relevant market as “the memantine-drug market in the United States”, and it does not appear that either party disputed this definition.  This is essentially a single-product market definition.  Mylan also pushed for a single-product market definition.  Mylan urged the district court to adopt a “branded and generic Doryx” market definition.  However, given that patent protection for the branded product had expired and the acne medications were interchangeable, the court ultimately adopted a definition that included oral tetracycline acne medications as the market.

Under the single-product market, Actavis was found to have 100% control over the market.  This is not surprising given that Namenda is the only FDA approved memantine drug and Actavis had a legal monopoly on that market via patent protection.  In terms of the Alzheimer’s drug market, the total market is roughly $10 billion a year and Actavis is only one of several big players in that market.  The distinction is that the other approved drugs are all acetylcholinesterase inhibitors and are not a substitute for Namenda, the only approved N–Methyl D–Aspartate (“NMDA”) receptor antagonist.  Being a first-in-class drug with patent protection hurt Actavis’s case.  However, it is well-established law that a patent standing alone does not necessarily define a market.  Under the broader definition in Mylan, the court found that Warner Chilcott’s market share never exceeded 18% and nowhere near the 55% to demonstrate prima facie market power.

The rule of reason approach from Abbott requires a weighing of the benefits provided by the product changes against any anticompetitive harm caused by the switch.  The district court in Mylan declined to apply and strongly criticized the Abbott approach, citing to Allied Orthopedics v. Tyco for the premise that weighing the benefits of product redesign against the injury to competition is “not just unwise, it is unadministrable”.  In Actavis, the Second Circuit purported to apply the Abbott approach, but the analysis does not appear to address any of the benefits provided to consumers by the new Namenda XR formulation.  This part of the court’s analysis focused almost entirely on the anticompetitive factors, dismissing summarily any benefits the new formulation provided.  Patient compliance is a major concern in Alzheimer’s patients, and studies have shown patients adhere better to once-daily memantine treatment as compared to twice-daily treatment.

Interestingly, in summarily abandoning the benefits of the Namenda XR formulation, the court focused on the drug manufacturer’s intent “to avoid the patent cliff” as central to the analysis and secondary to any conferred benefit of the new formulation.  Such an approach appears contrary to Abbott’s rule of reason analysis.  The opinion language suggests the case may have been decided differently had Actavis demonstrated intent to manufacture an improved product for patients.

These decisions leave many questions remaining about the applicability of the Abbott approach in pharmaceutical product hopping.  While soft switches in product hopping appear generally safe, it’s clear that the legality of a hard switch will depend upon the breadth of the market inquiry.  More importantly, these decisions still provide little clarity to those “semi-soft” cases that lie just shy of a hard switch.

* John S. Sears, Ph.D. is a second-year law student at Wake Forest University School of Law and a patent agent at Thomas Horstemeyer, LLP in Atlanta, GA.  He holds Bachelor of Science degrees in Chemistry and Mathematics from Sewanee: The University of the South and a Doctorate of Philosophy in Chemistry from Georgia Institute of Technology.  His practice is focused on mentoring university and startup clients in many high-tech industries. John is licensed to practice before the United States Patent and Trademark Office.