Pharmaceutical Product Switching: Antitrust Pitfalls - Law360
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`Pharmaceutical Product Switching: Antitrust
`Pitfalls
`
`Law360, New York (January 11, 2013, 12:24 PM EST) -- The terms
`“product switching,” “product hopping” and “line extension” are often used
`to 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 U.S. Food and Drug
`Administration. 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.”
`
`Paul Ragusa
`
`State drug product selection (DPS) laws often permit a physician to substitute a so-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.[1] 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.
`
`Product Switching Antitrust Cases
`
`Abbott Labs. v. Teva Pharm. USA Inc., 432 F. Supp. 2d 408 (D. Del. 2006).
`
`In 1998, Abbott received FDA approval for a capsule form of TriCor (fenofibrate), a
`cholesterol-lowering drug. In 1999, two generic companies (Teva Pharmaceuticals and
`Impax Laboratories) filed abbreviated new drug applications with Paragraph IV
`certifications challenging TriCor, and Abbott filed suit for patent infringement, triggering a
`30-month stay of the ANDAs’ approval.[2] 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.”[3],[4] When generic companies filed a second wave of ANDAs
`for the tablet formulation, Abbott filed another patent infringement suit triggering another
`30-month stay.[5] 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
`Exhibit 1074
`ARGENTUM
`IPR2017-01053
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`“obsolete.”[6]
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`Plaintiffs filed antitrust claims alleging a violation of Section 2 of the Sherman Act, and
`Abbott moved to dismiss.[7] The district court applied a “rule of reason” analysis to the
`case, whereby once a plaintiff has demonstrated an anti-competitive 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.”[8]
`
`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.”[9] 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.[10] The case settled shortly before trial.
`
`Walgreen Co. v. AstraZeneca Pharms., 534 F. Supp. 2d 146 (D.D.C. 2008)
`
`AstraZeneca received FDA approval for Prilosec in 1989. Prior to expiration of a patent
`covering Prilosec, and before generic entry, the FDA approved Nexium, a line extension of
`Prilosec. AstraZeneca promoted Nexium to doctors, and stopped promoting Prilosec.[11]
`
`Plaintiffs filed suit alleging that in switching the market from Prilosec to Nexium before
`generic entry, AstraZeneca engaged in exclusionary conduct in violation of Section 2 of the
`Sherman Act.[12] 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.[13] “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.”[14]
`
`Prilosec remained on the market, and the generic companies were free to compete with it.
`[15] 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.[16]
`
`Product Switching: Patent Settlements
`
`Patent settlement agreements between brand manufacturers and generic companies to
`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.
`
`FTC v. Warner Chilcott Holdings Company III Ltd., et al. (D.D.C. 2007)
`
`Ovcon, an oral contraceptive, was originally approved by the FDA in 1976, and was not
`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 $20 million. 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.[17]
`
`The FTC settled the case with both Warner and Barr. According to the terms of the
`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
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`steps prohibited Warner from deleting the NDDF codes for Ovcon, and destroying or buying
`back existing Ovcon supplies from pharmacies.[18] Barr was also enjoined from entering
`any reverse settlements for 10 years.[19]
`FTC v. Watson Pharm. Inc. et al., 677 F.3d 1298 (11th Cir. 2012).
`
`Watson involved a reverse payment settlement between NDA holder Solvay
`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 the 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.[20]
`
`The FTC filed suit against Solvay, Watson and Paddock alleging that the settlement
`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 anti-competitive.
`According to the FTC, Watson accepted a generic entry date of 2015, even though Solvay
`would have made 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.[21]
`
`The FTC’s complaint was dismissed by the district court, and the dismissal was affirmed by
`the Eleventh Circuit.[22] 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.”[23] 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 U.S. Patent and Trademark Office.[24]
`
`The FTC has petitioned for a writ of certiorari asking the question “[w]hether reverse-
`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 anti-competitive and unlawful (as the Third Circuit has held)?”[25]
`
`King Drug Co. of Florence Inc. v. Cephalon Inc., 702 F.Supp.2d 514 (E.D. Pa.
`2010)
`
`The FTC challenged patent settlement agreements between Cephalon and four generic
`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 anti-competitive because
`Cephalon planned to introduce its follow-on product Nuvigil (an isomer of Provigil) before
`2012, and switch the market from Provigil to Nuvigil.[26]
`
`The court denied Cephalon’s motion to dismiss, holding that the FTC’s complaint was 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.[27] The precedential weight of the
`court’s holding is questionable in view of the Third 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)
`
`In re K-Dur arose as a result of two agreements settling Paragraph IV challenges to the
`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 delay in generic entry into the market. K-Dur wholesalers and retailers
`challenged the settlements, alleging antitrust violations.[28]
`
`The case was dismissed at the district court level under the scope of the patent test. The
`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.[29]
`
`The Third Circuit reversed. According to the court, the intent of Congress in 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.[30] 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.[31]
`
`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 anti-competitive. The
`patentee may rebut the presumption that such a payment is anti-competitive 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.[32]
`
`Schering-Plough (now Merck & Co. Inc.) has petitioned for a writ of certiorari, asking 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?”[33],[34]
`
`Conclusion
`
`Product switching can be a strong tool for branded pharmaceutical companies to protect
`market share in the face of generic competition. However, antitrust issues can arise when
`the strategy is used in an unjustified, anti-competitive manner that goes beyond the scope
`of the patent. With petitions for certiorari pending, the time is ripe for the U.S. Supreme
`Court to clarify this evolving area law.
`
`--By Paul Ragusa and Dennis Bissonnette, Baker Botts LLP
`
`Paul Ragusa is a partner and Dennis Bissonnette is an associate in the New York office of
`Baker Botts, where they practice intellectual property law including life sciences related
`patent litigation, licensing and counseling.
`
`The opinions expressed are those of the authors and do not necessarily reflect the views of
`the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This
`article is for general information purposes and is not intended to be and should not be
`taken as legal advice.
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`[1] 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).
`
`[2] Abbott Labs. v. Teva Pharm. USA, Inc., 432 F. Supp. 2d 408, 415-416 (D. Del. 2006).
`
`[3] Id., at 416-417.
`
`[4] 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.
`
`[5] Abbott Labs., 432 F. Supp. 2d at 417-418.
`
`[6] Id.
`
`[7] Id., at 418-419.
`
`[8] Unites States v. Microsoft, 253 F.3d 34, 65 (D.C. Cir. 2001).
`
`[9] Abbott Labs., 432 F. Supp. 2d at 422.
`
`[10] Id., at 423.
`
`[11] Walgreen Co. v. AstraZeneca Pharms., 534 F. Supp. 2d 146, 148-149 (D.D.C. 2008).
`
`[12] Id., at 147-148.
`
`[13] Id., at 150-152.
`
`[14] Id., at 152.
`
`[15] Id.
`
`[16] Id., at 151-152.
`
`[17] FTC v. Warner Chilcott Holdings Company III, Ltd., 2007 WL 158746 (D.D.C.).
`
`[18] Id. (Final Order and Stipulated Permanent Injunction).
`
`[19] Id.
`
`[20] FTC v. Watson Pharm., Inc. et al., 677 F.3d 1298 (11th Cir. 2012).
`
`[21] Id.
`
`[22] Id.
`
`[23] Id., at 1312.
`
`[24] Id.
`
`[25] Petition for a Writ of Certiorari, FTC v. Watson Pharm., Inc. et al., 81 USLW 3216
`(Oct. 4, 2012) (12-416).
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`[26] King Drug Co. of Florence, Inc. v. Cephalon, Inc., 702 F.Supp.2d 514 (E.D. Pa. 2010).
`
`[27] Id., at 530-534.
`
`[28] In re K-Dur Antitrust Litig., 686 F.3d 197, 203-204 (3d Cir. 2012).
`
`[29] Id., at 214.
`
`[30] Id., at 217.
`
`[31] Id., at 218.
`
`[32] Id., at 218-219.
`
`[33] 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).
`
`[34] 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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