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`Pharmaceutical Product Improvements and Life Cycle Management – Antitrust Pitfalls1
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`The terms “product switching,” “product hopping” and “line extension” are often used to
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`describe the strategy of protecting market share by reformulating or otherwise modifying an
`existing branded pharmaceutical product in a manner which requires approval from the Food and
`Drug Administration (FDA). Under this approach a pharmaceutical company introduces a
`product line extension to a branded drug product before generic entry, and promotes the
`extension product instead of the old product. In some instances, the company also removes the
`old product from the market, and/or changes the product’s National Drug Data File (NDDF)
`code to “obsolete.”
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`State Drug Product Selection (DPS) laws often permit a physician to substitute a so-
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`called “AB-rated” generic for a branded drug, resulting in a reduced market share for the branded
`product. However, a company can reduce or delay the impact of generic entry to a branded
`product by product switching, since any approved generic will likely be AB-rated only as to the
`old product, and therefore can not be substituted for the new line extension product.2 If the
`market shifts in favor of the new line extension product by the time generics enter the market
`with a generic of the old branded product, the impact on the company’s sales will thus be
`reduced. However, antitrust issues can arise for certain product switching scenarios, as further
`discussed below.
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`Product Switching Antitrust Cases
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`Abbott Labs. v. Teva Pharm. USA, Inc., 432 F. Supp. 2d 408 (D. Del. 2006).
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`In 1998, Abbott received FDA approval for a capsule form of TriCor (fenofibrate), a
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`cholesterol lowering drug. In 1999, two generic companies (Teva Pharmaceuticals and Impax
`Laboratories) filed ANDAs with Paragraph IV certifications challenging TriCor, and Abbott
`filed suit for patent infringement, triggering a 30-month stay of the ANDAs’ approval.3 While
`the patent lawsuit was pending, Abbott submitted a new NDA for a new tablet formulation of
`TriCor, and a new indication that the drug increases “good cholesterol” levels. The NDA was
`approved in 2001, while the 30-month stay in the capsule patent suit was still pending. After the
`NDA was approved, Abbott stopped selling the capsule form of TriCor, bought back supplies of
`the capsules from pharmacies, and changed the code of the TriCor capsule in the NDDF to
`“obsolete.”4,5 When generic companies filed a second wave of ANDAs for the tablet
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`1 By Paul Ragusa and Dennis Bissonnette. Mr. Ragusa is a partner and Mr. Bissonnette an associate in the New
`York office of Baker Botts, LLP, where they practice intellectual property law including life sciences related patent
`litigation, licensing, and counseling.
`2 A generic drug must be therapeutically equivalent to the brand drug (generic has the same active ingredient, form,
`dosage, strength, and safety and efficacy profile), and bioequivalent (rate and extent of absorption in the body is
`roughly equivalent to the brand drug) in order to be interchangeable with the brand drug. Such generic drugs are
`either A-rated (there are no known or suspected bioequivalence problems) or AB-rated (actual or potential
`bioequivalence problems have been resolved with adequate in vivo and/or in vitro evidence).
`3 Abbott Labs. v. Teva Pharm. USA, Inc., 432 F. Supp. 2d 408, 415-416 (D. Del. 2006).
`4 Id., at 416-417.
`5 The NDDF is a private database that provides information about FDA approved drugs. The NDDF guides
`pharmacists in determining substitution of generic for brand-name drugs.
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`formulation, Abbott filed another patent infringement suit triggering another 30-month stay.6
`Abbott also submitted another NDA for a new TriCor tablet dosage formulation and label change
`(that the drug did not need to be taken with food). Abbott stopped selling the old tablets, and
`changed the NDDF code for the old tablet to “obsolete.”7
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`Plaintiffs filed antitrust claims alleging a violation of Section 2 of the Sherman Act, and
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`Abbott moved to dismiss.8 The District Court applied a “rule of reason” analysis to the case,
`whereby once a plaintiff has demonstrated an anticompetitive effect, the burden shifts to the
`defendant to present a pro-competitive justification. According to the Court, “judicial deference
`to product innovation . . . does not mean that a monopolist’s product design decisions are per se
`lawful.”9 The Court denied Abbott’s Motion to Dismiss, opining that the company prevented a
`choice between products “by removing the old formulations from the market while introducing
`new formulations.”10 The Court also held that total foreclosure of the market is not required for
`an antitrust violation, and since the generic manufacturers could not provide generic substitutes,
`they were allegedly barred from the most cost-efficient means of competing in the market.11 The
`case settled shortly before trial.
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`Walgreen Co. v. AstraZeneca Pharms., 534 F. Supp. 2d 146 (D.D.C. 2008).
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`AstraZeneca received FDA approval for Prilosec in 1989. Prior to expiration of a patent
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`covering Prilosec, and before generic entry, the FDA approved Nexium, a line extension of
`Prilosec. AstraZeneca promoted Nexium to doctors, and stopped promoting Prilosec.12
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`Plaintiffs filed suit alleging that in switching the market from Prilosec to Nexium before
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`generic entry, AstraZeneca engaged in exclusionary conduct in violation of Section 2 of the
`Sherman Act.13 The Court granted AstraZeneca’s Motion to Dismiss holding that its actions did
`not reduce consumer choice. Rather, by introducing Nexium into the market, AstraZeneca added
`an additional choice for consumers.14 “The fact that a new product siphoned off some of the
`sales from the old product and, in turn, depressed sales of the generic substitutes for the old
`product, does not create an antitrust cause of action . . .”15 Prilosec remained on the market, and
`the generic companies were free to compete with it.16 The Court also noted that a company may
`enjoy the benefits of patent protection, and that short of false representations or fraud, product
`switching through sales persuasion did not violate antitrust laws.17
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`6 Abbott Labs., 432 F. Supp. 2d at 417-418.
`7 Id.
`8 Id., at 418-419.
`9 Unites States v. Microsoft, 253 F.3d 34, 65 (D.C. Cir. 2001).
`10 Abbott Labs., 432 F. Supp. 2d at 422.
`11 Id., at 423.
`12 Walgreen Co. v. AstraZeneca Pharms., 534 F. Supp. 2d 146, 148-149 (D.D.C. 2008).
`13 Id., at 147-148.
`14 Id., at 150-152.
`15 Id., at 152.
`16 Id.
`17 Id., at 151-152.
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`Product Switching: Patent Settlements
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`Patent settlement agreements between brand manufacturers and generic companies to
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`delay entry of generic products into the market often involve a payment from the brand
`manufacturer to the generic in exchange for delayed entry into the market.
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`FTC v. Warner Chilcott Holdings Company III, Ltd., et al., 2007 WL 158746 (D.D.C.).
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`Ovcon, an oral contraceptive, was originally approved by the FDA in 1976, and was not
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`subject to patent protection. Warner planned to introduce a follow-on chewable version of
`Ovcon before generic entry on the original product into the market. However, the follow-on
`product had not gained FDA approval as the entry of generic Ovcon into the market was
`imminent. Warner entered into an agreement with Barr Pharmaceuticals, Inc. to delay entry of
`Barr’s generic Ovcon for five years in exchange for $20M. The FTC claimed that since
`Warner’s switch strategy could not be implemented in time to delay generic entry, it entered into
`a horizontal agreement and paid Barr to stay out of the market, which constituted an antitrust
`violation.18
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`The FTC settled the case with both Warner and Barr. According to the terms of the
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`settlement, Warner was prohibited from entering into any reverse settlement agreements for 10
`years, and further, had to take affirmative steps to preserve the market for the first-generation
`form of its product for which generic competition was imminent. Such steps prohibited Warner
`from deleting the NDDF codes for Ovcon, and destroying or buying back existing Ovcon
`supplies from pharmacies.19 Barr was also enjoined from entering any reverse settlements for 10
`years.20
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`FTC v. Watson Pharm., Inc. et al., 677 F.3d 1298 (11th Cir. 2012).
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`Watson involved a reverse payment settlement between NDA holder Solvay
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`Pharmaceuticals and ANDA filers Watson Pharmaceuticals and Paddock Pharmaceuticals over
`AndroGel, a prescription testosterone formulation prescribed for treating hypogonadism.
`Watson and Paddock filed separate ANDAs having Paragraph IV certifications that the
`AndroGel patent was invalid or unenforceable, and Solvay filed suit pursuant to 35 U.S.C. §
`271(e)(2) in the U.S. District Court for the Northern District of Georgia. Before the Court could
`rule on Defendants’ summary judgment motions, the parties settled. The generic manufacturers
`agreed to abandon their patent challenges, and refrain from entering the market until 2015, in
`exchange for a share of Solvay’s AndroGel profits.21
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`The FTC filed suit against Solvay, Watson and Paddock alleging that the settlement
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`agreement was an antitrust violation. The FTC alleged that Solvay’s plan to introduce an
`AndroGel product line extension (a different dosage of AndroGel that would allow patients to
`achieve similar therapeutic benefits with less gel) prior to 2015 was anticompetitive. According
`to the FTC, Watson accepted a generic entry date of 2015, even though Solvay would have made
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`18 FTC v. Warner Chilcott Holdings Company III, Ltd., 2007 WL 158746 (D.D.C.).
`19 Id. (Final Order and Stipulated Permanent Injunction).
`20 Id.
`21 FTC v. Watson Pharm., Inc. et al., 677 F.3d 1298 (11th Cir. 2012).
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`the switch to the follow-on product by that date, and Watson’s product would not be
`interchangeable with the follow-on product. The FTC alleged that Watson would not have
`accepted a 2015 entry date in view of Solvay’s product switching strategy, without a substantial
`sharing of AndroGel profits.22
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`The FTC’s complaint was dismissed by the District Court, and the dismissal was affirmed
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`by the 11th Circuit.23 The settlement agreement was upheld as lawful under the so-called “scope
`of the patent” test: “[A]bsent sham litigation or fraud in obtaining the patent, a reverse payment
`settlement is immune from antitrust attack so long as its anticompetitive effects fall within the
`scope of the exclusionary potential of the patent.”24 Under the scope of the patent test, a reverse
`payment is permitted so long as (1) the exclusion does not exceed the patent’s scope, (2) the
`patent holder’s claim of infringement was not objectively baseless, and (3) the patent was not
`procured by fraud on the PTO.25
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`The FTC has petitioned for a writ of certiorari asking the question “[w]hether reverse-
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`payment agreements are per se lawful unless the underlying patent litigation was a sham or the
`patent was obtained by fraud (as the Court below held), or instead are presumptively
`anticompetitive and unlawful (as the Third Circuit has held)?”26
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`King Drug Co. of Florence, Inc. v. Cephalon, Inc., 702 F.Supp.2d 514 (E.D. Pa. 2010).
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`The FTC challenged patent settlement agreements between Cephalon and four generic
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`manufacturers regarding generic entry of Cephalon’s wakefulness promoting drug Provigil. The
`agreements delayed generic entry until 2012 in exchange for payments from Cephalon. The FTC
`alleged that the settlement agreements were anticompetitive because Cephalon planned to
`introduce its follow-on product Nuvigil (an isomer of Provigil) before 2012, and switch the
`market from Provigil to Nuvigil.27
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`The Court denied Cephalon’s Motion to Dismiss, holding that the FTC’s complaint was
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`valid because the scope of the patent test could be used to determine whether Cephalon’s
`Provigil patent was procured by fraud, as alleged by plaintiffs, and if more rights were afforded
`by the agreements than granted by patent.28 The precedential weight of the Court’s holding is
`questionable in view of the 3rd Circuit’s decision in In re K-Dur.
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`In re K-Dur Antitrust Litig., 686 F.3d 197 (3d Cir. 2012).
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`In re K-Dur arose as a result of two agreements settling Paragraph IV challenges to the
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`validity of Schering-Plough’s patent to a controlled-release formulation of a potassium chloride
`supplement used to treat side effects from blood pressure medication marketed as K-Dur. Under
`the agreements, Schering-Plough made payments to the generic companies in exchange for a
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`22 Id.
`23 Id.
`24 Id., at 1312.
`25 Id.
`26 Petition for a Writ of Certiorari, FTC v. Watson Pharm., Inc. et al., 81 USLW 3216 (Oct. 4, 2012) (12-416).
`27 King Drug Co. of Florence, Inc. v. Cephalon, Inc., 702 F.Supp.2d 514 (E.D. Pa. 2010).
`28 Id., at 530-534.
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`delay in generic entry into the market. K-Dur wholesalers and retailers challenged the
`settlements, alleging antitrust violations.29
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`The case was dismissed at the District Court level under the scope of the patent test. The
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`District Court applied a presumption that the K-Dur patent was valid until the end of its term,
`and only reverse payments that exceeded the scope of the patent or were made to settle
`objectively baseless suits would be subject to antitrust scrutiny.30
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`The Third Circuit reversed. According to the Court, the intent of Congress in
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`implementing and construing the Hatch-Waxman scheme has been to encourage litigated
`challenges to weak and narrow patents, and finding that such intent is undermined by permissive
`antitrust scrutiny of payments to delay generic market entry.31 The Court held that any payment
`from a patent holder to a generic patent challenger in exchange for delayed market entry in
`settlement of an ANDA suit is prima facie evidence of an unreasonable restraint of trade.32 In so
`ruling, the Court rejected the scope of the patent test and applied a “quick look” rule of reason
`analysis, shifting the burden to the patent holder to justify the payments, while stopping short of
`determining that such payments are per se anticompetitive. The patentee may rebut the
`presumption that such a payment is anticompetitive by showing that: (1) the payment was for a
`purpose other than delayed entry; or (2) offered some pro-competitive benefit, such as
`forestalling bankruptcy of a generic competitor. The Court emphasized, however, that
`settlements based on a negotiated entry date without payment are permissible.33
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`Schering-Plough (now Merck & Co., Inc.) has petitioned for a writ of certiorari, asking
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`the question “[w]hether the federal antitrust laws permit a brand-name manufacturer that holds
`the patent for a drug to enter into a settlement of patent litigation with a prospective generic
`manufacturer, where the settlement includes a payment from the brand manufacturer to the
`generic manufacturer but does not exclude competition beyond the scope of the patent?”34,35
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`Conclusion
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`Product switching can be a strong tool for branded pharmaceutical companies to protect
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`market share in the face of generic competition. However, antitrust issues can arise when the
`strategy is used in an unjustified, anticompetitive manner that goes beyond the scope of the
`patent. With petitions for certiorari pending, the time is ripe for the Supreme Court to clarify this
`evolving area law.
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`29 In re K-Dur Antitrust Litig., 686 F.3d 197, 203-204 (3d Cir. 2012).
`30 Id., at 214.
`31 Id., at 217.
`32 Id., at 218.
`33 Id., at 218-219.
`34 Petition for a Writ of Certiorari, Merck & Co., Inc. v. Louisiana Wholesale Drug Co., Inc., et al., 81 USLW 3090
`(Aug 24, 2012) (12-245).
`35 Upsher-Smith Laboratories, Inc. has also petitioned for a writ of certiorari asking the question: “Whether the
`Third Circuit erred by holding, contrary to the Second, Eleventh, and Federal Circuits, that an agreement settling
`patent litigation that does not restrict competition outside the scope of the exclusionary right granted by the patent
`itself may presumptively violate the antitrust laws?” Petition for a Writ of Certiorari, Upsher-Smith Laboratories,
`Inc. v. Louisiana Wholesale Drug Company, Inc., et al., 81 USLW 3090 (Aug 29, 2012) (12-265).
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