PHARMA ANTITRUST IN THE U.S. AND THE WORLD:
ON SETTLEMENTS, EXCLUSIVE LICENSES,
PRODUCT DESIGN, AND MERGERS
Kevin D. McDonald
Aimee E. DeFilippo
Kristin Connarn
Marguerite Lavedan
Molly M. Wilkens
AIPLA Spring Meeting – Plenary Session Program
May 1-3, 2013
Panel: “Innovation Versus Regulation:
Enforcing Patent Rights Globally in View of Antitrust/Competition Law”
INTRODUCTION 1
The intersection, or collision if you prefer, between intellectual property and competition
law has been most closely examined in the pharmaceutical industry. Cases arising from the
information technology industry have made important contributions, to be sure—think of
Microsoft, Rambus, and others—but the pharmaceutical industry has dominated the published
decisions and (arguably) the IP/antitrust literature as well.
We offer two reasons for this focus on drugs. First, pharma is an industry with revenues
exceeding half a trillion dollars that (many have argued) depends more crucially on the existence
and enforcement of patent rights than any other. 2 Second, the 1984 Hatch-Waxman Act
revolutionized the pharmaceutical market with respect to the development and introduction of
generic drugs. By creating an “artificial” act of infringement—the mere filing of the generic
applicant’s request for FDA approval—and by allowing the patent litigation to be resolved prior
to any actual entry, Hatch-Waxman has ignited fierce debate over practices such as “reverse
payments” and “no authorized generic” clauses. These disputes have forced U.S. courts to
revisit first principles of patent and antitrust law repeatedly over the last dozen years.
At the same time, these disputed issues have not produced an equivalent level of judicial
precedent or even enforcement activity outside of the United States. As shown below, European
law has considered these issues to some extent, but the antitrust regimes in Asia and elsewhere
are thus far still awakening to the challenges of pharmaceutical antitrust. Nonetheless, despite
the limited extent to which the European courts have spoken, they appear more open than most
U.S. courts to claims that the conduct of innovator companies in enforcing patent rights may
violate competition laws.
Again, we suggest two reasons that may explain this dichotomy. First, Europe and Asia
do not have a system regulating the introduction of generic drugs similar to Hatch-Waxman.
Some would argue that the success of Hatch-Waxman is why the United States has relatively
more generic penetration and why the generic drug industry now features such giant and robust
competitors. But the absence of the Hatch-Waxman process also has an effect on how the
antitrust issues are framed. Hence, for example, in settlements of patent litigation outside the
U.S., the consideration flowing to the generic company, even if conveying value
indistinguishable in economic terms from payments, is less likely to take the form of actual cash.
The second factor relates to the history of U.S. patent and antitrust law, and the American
regard for individual freedom both in general and in the marketplace. In the last fifty years or
1
Four of the authors are attorneys at Jones Day, resident in Washington (McDonald and DeFilippo),
London (Lavedan), and Silicon Valley (Wilkens). Ms. Connarn is a partner in the Boston office of McDermott, Will
& Emery. Mr. McDonald alone is responsible for the views expressed in the introduction.
2
See, e.g., Kent S. Bernard and Willard K. Tom, Antitrust Treatment of Pharmaceutical Patent
Settlements: The Need for Context and Fidelity to First Principles, 15 FED. CIR. B.J. 617 (2005-06).
(“Pharmaceuticals, however, are no ordinary industry. Taken as a whole, society has put far more of its innovation
eggs in the patent basket in that industry than in any other area of the economy.”).
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more, U.S. courts have come to the view that “there is a difference between positive and negative
duties, and the antitrust laws have generally been understood to impose only the latter.” 3 That is
to say, even as to a monopolist, the antitrust laws impose only the negative duty to refrain from
harming competition, not the positive duty to improve it. The U.S. Supreme Court put it this
way:
The Sherman Act is indeed the ‘‘Magna Carta of free enterprise,’’
… but it does not give judges carte blanche to insist that a
monopolist alter its way of doing business whenever some other
approach might yield greater competition. 4
The U.S. courts have thus developed a series of principles that generally – there are
exceptions, of course – protect the rights of intellectual property owners to design, market and
price their products as they please; to license their IP rights with any restrictions that do not
extend the scope of those rights; and to enforce those IP rights in court. To invoke an exception,
the antitrust plaintiff in the U.S. must first persuade the court that the general rule – and the
values it reflects – can and should be set aside.
In contrast, the European courts and agencies apply an antitrust regime that is not
grounded in, and in some instances does not share, these first principles of U.S. law. We shall
see that the decision-makers arrive in some cases at a conclusion resembling one or more of
these principles as a matter of policy. But they also remain free to write and apply their
competition rules “as if the function of antitrust law were to compel firms to maximize
competition . . . rather than to prevent them from restricting it.” 5 As some of the decisions
discussed below reflect, European courts and agencies have done precisely that.
What follows is a survey of U.S. and European developments affecting four areas
important to the pharmaceutical industry: (1) “reverse payments” patent settlements, (2)
exclusive licensing provisions promising not to allow any other “authorized generic” product, (3)
“product switching,” such as introducing a new formulation or redesigned drug to compete with
the drug about to go off-patent, and (4) pharmaceutical mergers. In noting above that U.S. law is
more voluminous in all these areas, we do not mean to imply that U.S. law has fully settled these
questions, for it surely has not. Indeed, the U.S. Supreme Court is poised to speak loudly, and
perhaps definitively, on the question of reverse payments by June of this year. When it comes to
IP and antitrust, the focus remains on pharma.
I.
Reverse Payments
A.
U.S.
The Hatch-Waxman amendments to the federal Food, Drug, and Cosmetic Act were “an
effort to strike a balance between two conflicting policy objectives: to induce name-brand
pharmaceutical firms to make the investments necessary to research and develop new drug
3
USM Corp. v. SPS Technologies, Inc., 694 F.2d 505, 513 (7th Cir. 1982).
4
Verizon Commun. v. Law Off. Of Curtis Trinko, 540 U.S. 398, 415-16 (2004) (citation omitted).
5
USM Corp., 694 F.2d at 513.
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products, while simultaneously enabling competitors to bring cheaper, generic copies of those
drugs to market.” 6 Under Hatch-Waxman, a generic applicant may file an Abbreviated New
Drug Application (“ANDA”), which relies on the safety and efficacy studies of the name-brand
drug already approved. 7 If the ANDA seeks entry prior to the expiration of patents listed for the
branded drug, the innovator may sue the ANDA filer immediately for infringement, even though
the generic has not yet entered the market and faces no exposure to infringement damages.
The regulatory structure created by Hatch-Waxman alters the incentives of both patent
owner and alleged generic infringer in a manner that has given rise to settlements of patent
litigation involving a payment or other compensation from the patent owner to the alleged
generic infringer. Because the payment flows from the patent holder to the challenger, in
contrast to royalty payments, these are called “reverse payment” settlements. In the view of the
Federal Trade Commission’s (“FTC” or the “Commission”), these payments induce the generic
to accept a later entry date than it would demand in settlement negotiations absent the payment
or that it would obtain if it prevailed in the patent litigation.
Until recently, U.S. courts of appeal have repeatedly rejected the FTC’s theory of harm
and have upheld these settlement agreements. Courts have generally declined to examine the
patent merits, noting that predicting the outcome of the settled patent suit would necessarily
require speculation. 8 These courts evaluate reverse payment settlements under the “scope of the
patent” test, which holds that there is no harm to competition so long as the patent claim is not
“objectively baseless” and the agreement does not keep the generic off the market for longer than
would the patent itself. 9 The Second, Eleventh, and Federal Circuits have all endorsed this
view. 10
In July 2012, a minority view emerged from the Third Circuit in In re K-Dur Antitrust
Litigation. 11 In K-Dur, the court adopted the FTC’s position, which rejected the “scope of the
patent” test on several grounds. Specifically, the court found that the “scope of the patent” test
creates an “almost unrebuttable presumption of patent validity,” 12 that “reverse payments permit
the sharing of monopoly rents between would-be competitors without any assurance that the
underlying patent is valid,” 13 and that Congress’s desire to promote patent challenges should not
be overridden by the judicial preference for settlements. 14 The Third Circuit instructed the
6
aaiPharma Inc. v. Thompson, 296 F.3d 227, 230 (4th Cir. 2002) (quotation marks and citation omitted).
7
See ABA Section of Antitrust Law, Pharmaceutical Industry Antitrust Handbook (2009) for a detailed
account of the regulatory and enforcement framework underlying the Hatch-Waxman Act.
8
See, e.g., FTC v. Watson Pharm., Inc., (Androgel), 677 F.3d 1298, 1315 (11th Cir. 2012), cert. granted,
Dec. 7, 2012 (No. 12-416) (affirming dismissal of FTC’s antitrust claims because basing antitrust liability on the
likelihood of success in the would-be patent infringement action would be a “turducken task”).
9
See, e.g., In re Tamoxifen Citrate Antitrust Litig., 429 F.3d 370, 397 (2d Cir 2005).
10
See, e.g., id.; Schering-Plough v. FTC, 402 F.3d 1056 (11th Cir. 2005), cert. denied, 548 U.S. 919
(2006); and In re Ciproflaxin Hydrochloride Antitrust Litig., 544 F.3d 1323 (Fed. Cir. 2008).
11
686 F.3d 197 (3d Cir. 2012), petition for cert. filed Aug. 29, 2012 (No. 12-265).
12
Id. at 214.
13
Id. at 216.
14
Id. at 217. .
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district court to apply a quick look rule of reason analysis in which the factfinder must treat any
payment from a patent holder to a generic patent challenger who agrees to delay entry into the
market as prima facie evidence of an unreasonable restraint of trade. 15 This presumption “could
be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2)
offers some pro-competitive benefit.” 16 The Third Circuit also concluded that there was “no
need to consider the merits of the underlying patent suit because ‘[a]bsent proof of other
offsetting consideration, it is logical to conclude that the quid pro quo for the payment was an
agreement by the generic to defer entry beyond the date that represents an otherwise reasonable
litigation compromise.’” 17 Since K-Dur, one district court has refused to extend the Third
Circuit’s broad language to settlement consideration other than “cash payments.” 18
The K-Dur decision created a circuit split over the legality of reverse payment
agreements, and the U.S. Supreme Court will address this split in the coming months in the
Watson case. 19 Whether or not the Court’s decision provides genuine clarity, it will surely have
a dramatic effect on industry practices.
B.
Europe
Despite the lack of a regulatory framework in Europe similar to Hatch-Waxman, reverse
payments have been at the center of the European Commission’s activity in the pharmaceutical
sector since the Commission concluded its competition enquiry into the pharmaceutical sector in
2009. In its final report published in July 2009 (“the Report”), 20 the Commission identified
reverse payment patent settlements as restrictive of competition and indicated that it would
pursue stronger competition law enforcement with regard to such practices. Following the
Commission’s enquiry, it established a process for the continued monitoring of settlement
arrangements between originator and generic drug companies. Since 2010, the Commission has
published three Reports on the Monitoring of Patent Settlements. 21 The Commission’s aim in
monitoring these arrangements is to identify settlements it thinks may violate competition law.
According to the Commission’s latest Report (July 2012), the proportion of potentially
15
Id. at 218.
16
Id.
17
Id. at 207 (citing In re Schering-Plough Corp., Final Order, 136 F.T.C. 956, 988 (2003)).
18
In re Lamictal Direct Purchaser Antitrust Litig., 2012 WL 6725580, at *6 (D.N.J. Dec. 6, 2012) (“The
Court finds that the term ‘reverse payment’ is not sufficiently broad to encompass any benefit . . . to [the generic] in
a negotiated settlement.”).
19
See FTC v. Watson Pharm., Inc. 677 F.3d 1298 (11th Cir. 2012), cert. granted. In Watson, the Eleventh
Circuit dismissed a patent challenge in which branded manufacturer Solvay agreed to pay yearly sums and profit
earnings to generic companies in exchange for an agreement by the generics not to market a generic version of
Solvay’s Androgel product during the remaining life of the disputed patent.
20
Pharmaceutical Sector Inquiry Final Report, 8 July 2009, available at
http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/staff_working_paper_part1.pdf [hereinafter
Pharmaceutical Sector Inquiry Final Report].
21
The First Report on the Monitoring of Patent Settlement was published in July 2010, the Second Report
on the Monitoring of Patent Settlement was published in July 2011, and the Third Report was published in July
2012. All are available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/index.html.
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problematic settlements has stabilized at a low level of 11% compared with 21% in 2009 when
the Commission concluded its sector inquiry.
Following its sector inquiry, the Commission has launched several antitrust investigations
into reverse payment practices. These investigations have culminated in three major cases. 22 In
each of these cases, the Commission has taken the preliminary decision that the agreements
between the innovator drug company and the generic drug companies infringe European Union
(“EU”) antitrust rules that prohibit anti-competitive business practices (Article 101 of the Treaty
on the Functioning of the European Union – TFEU). In one of the cases, the Commission also
identified issues under Article 102 TFEU, which prohibits the abuse of a dominant position. 23
These cases are pending.
While it can be said with certainty that the Commission itself is innately suspicious of
reverse payments, EU case law currently offers limited guidance on the treatment of reverse
payments. Older case law suggests that the test for assessing compliance of a reverse payment
patent settlement agreement with EU antitrust rules should be whether the settlement restricts
competition beyond the exclusionary zone of the patent, unless the patent is a sham patent. In
Bayer v Süllhofer, the Court of Justice stressed that agreements to settle current or potential
litigation, which can be judicial or out-of-court settlements, are in principle capable of falling
within the prohibition of EU antitrust rules. However, it also indicated that a no-challenge clause
in a settlement agreement terminating an infringement claim does not generally violate EU
antitrust rules, as it is inherent in such settlement agreements that the parties agree not to
challenge the intellectual property rights covered by the agreement. 24 Moreover, it follows from
the General Court’s ruling in ITT Promedia that litigation settlements fall outside EU antitrust
rules unless it can be demonstrated that the settlement was reached in circumstances that
constitute “sham litigation.” 25 Under this judgment, two criteria must be fulfilled in order to
establish sham litigation: (i) the action must “on an objective view, be manifestly unfounded,”
and (ii) the aim of the action “must be to eliminate competition.” 26
22
On 30 July 2012, the European Commission informed Servier and several of its generic competitors of its
objections against practices potentially delaying the entry of generic Perindopril. See http://europa.eu/rapid/pressrelease_IP-12-835_en.htm?locale=en. On 25 July 2012, the European Commission sent Lundbeck its objections
regarding agreements concluded with four generic competitors concerning Citalopram. See
http://europa.eu/rapid/press-release_IP-12-834_en.htm?locale=en. On 31 January 2013, a statement of objections
was sent to Johnson & Johnson and Novartis regarding an agreement concluded between their respective Dutch
subsidiaries relating to Fentanyl. See http://europa.eu/rapid/press-release_IP-13-81_en.htm.
23
See Perindropil case, available at http://europa.eu/rapid/press-release_IP-12-835_en.htm?locale=en.
24
Case 65/86, Bayer AG and Maschinenfabrik Hennecke GmbH v. Heinz Süllhöfer, 1988 [ECR] 5249,
25
Case T-111/96, ITT Promedia NV v. Commission, 1998 [ECR] II-02937, paras. 55-61.
para. 21.
26
Case T-111/96, ITT Promedia NV v. Commission, 1998 [ECR] II-02937, para. 56. In the U.S., by
contrast, the subjective prong of the sham test appears to go farther. In Prof’l Real Estate Investors, Inc. v.
Columbia Pictures Indus., Inc., 508 U.S. 49, 60-61 (1993), the U.S. Supreme Court required more than
anticompetitive intent, because the right to petition government even with anticompetitive intent is precisely what
the Noerr doctrine protects. The Court thus held that the subjective prong of the sham test can be met only where the
intent was to harm the rival through the process of litigation (i.e., its cost and delay) rather than through the result of
the litigation (i.e., its outcome).
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Finally, the legislation that will replace the Technology Transfer Block Exemption
Regulation, which is set to expire in April 2014, may impact the assessment of reverse payments
under EU law. Draft guidelines on the anticipated changes to the application of Article 101
TFEU to technology transfer agreements (“the draft Guidelines”) expressly address patent
settlement agreements. The draft Guidelines recognize that settlement agreements in the context
of technology disputes are, as in many other areas of commercial disputes, a legitimate way to
find a mutually acceptable compromise to a bona fide legal disagreement. The draft Guidelines
also state that “[s]ettlement agreements between competitors which include a licence for the
technology and market concerned by the litigation but which lead to a delayed or otherwise
limited ability for the licensee to launch the product on this market may under certain
circumstance be caught by Article 101(1).” The draft Guidelines do not provide examples of
what those circumstances might be. The draft Guidelines do say, however, that scrutiny is
necessary in particular “if the licensor provides an inducement, financially or otherwise, for the
licensee to accept more restrictive settlement terms than would otherwise have been accepted
based on the merits of the licensor’s technology.” 27
II.
Authorized Generics
A.
U.S.
An authorized generic is a branded drug maker’s own generic version of its patented drug
that is marketed either directly by the branded firm or by a third party to whom the branded firm
has granted a license. Branded drug companies often release authorized generics when faced
with entry by a generic competitor, which typically (but not always) occurs near the end of the
life of a patent. The courts have held that the Hatch-Waxman Act does not preclude the branded
manufacturer from introducing an authorized generic version of the drug during the 180-day
period of marketing exclusivity granted to the first generic competitor to file an ANDA. 28 The
reason is that the exclusivity provision only bars the U.S. Food and Drug Administration
(“FDA”) from approving another generic ANDA for 180 days, whereas the authorized generic
enters under the authority of the original new drug application (“NDA”), by which the branded
drug is sold, rather than under an ANDA.
Opponents of authorized generics argue that the introduction of an authorized generic
raises significant competitive concerns. They contend that the introduction of authorized
generics can reduce the profits of a successful generic challenger so much as to dramatically
27
Draft Communication from the Commission, Guidelines on the application of Article 101 TFEU to
technology transfer agreements, para. 223, available at
http://ec.europa.eu/competition/consultations/2013_technology_transfer/guidelines_en.pdf.
28
See, e.g., Teva Pharm. Indus. Ltd. v. Crawford, 410 F.3d 51, 55 (D.C. Cir. 2005) (holding that the HatchWaxman Amendment “does not prohibit the holder of an approved NDA from marketing, during the 180-day
exclusivity period, its own ‘brand-generic’ version of its drug.”); Mylan Pharmaceuticals Inc. v. FDA, 454 F.3d 270
(4th Cir. 2006) (upholding the district court’s dismissal of Mylan’s case and concluding that “[a]lthough the
introduction of an authorized generic may reduce the economic benefit of the 180 days of exclusivity awarded to the
first paragraph IV ANDA application, [the Hatch-Waxman Act] gives no legal basis for the FDA to prohibit the
encroachment of authorized generics on that exclusivity.”).
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change the incentives of generic firms, perhaps eliminating the incentive to litigate the validity of
patents in some cases. Proponents, however, conclude that authorized generics are
procompetitive or, at the very least, raise no antitrust concerns. Authorized generics can
potentially improve consumer welfare by reducing the average price of drugs through increased
price competition during the exclusivity period, and can also reduce wasteful litigation which is
presently encouraged under the current Hatch-Waxman scenario. Proponents also maintain that
authorized generics do not deter generic entry because – even with the presence of authorized
generics – the profits to be gained from generic entry under the Hatch-Waxman process still far
outweigh the costs.
As a result of congressional interest in the impact of authorized generics on the
pharmaceutical industry, the FTC in March 2006 announced its intention to conduct a formal
study of the use and likely competitive effects of authorized generics in the prescription drug
marketplace. 29 The final FTC report, issued in August 2011, made several findings. 30 First, the
FTC report concluded that competition from authorized generics during the 180-day marketing
exclusivity period results in lower retail and wholesale drug prices. But introduction of an
authorized generic during the exclusivity period also was found to depress revenues for the firstfiling generic during the 180-day exclusivity period by 40 to 52 percent. However, despite the
threat of competition and reduced revenues from authorized generics, the FTC found that there
has been little effect on the generic’s incentives and no measurable reduction in the number of
patent challenges by generic firms under Paragraph IV certifications over the long term. 31 In
fact, “[f]or the drugs with higher sales that frequently do attract [authorized generic] competition,
[authorized generics] may conceivably deter only a narrow range of challenges that the generic
believes it will rarely win, meaning that the challenges are unlikely to result in early generic
entry even if pursued.” 32
Because of the extensive rulings on cash payments as a component of reverse payment
settlements, parties have been relying on other incentives in negotiating their patent settlements.
One such component may be that the brand-name manufacturer agrees to delay entry of an
authorized generic (or to not introduce it at all). The FTC report concluded that a branded
manufacturer’s commitment not to launch an authorized generic as part of a patent settlement
can be a form of compensation to a generic manufacturer for agreeing to delay entry beyond the
date on which the parties otherwise may have agreed.
The FTC has not brought an enforcement action alleging that a “no authorized generic”
clause is anticompetitive, even though its reports to Congress on the Hatch-Waxman settlements
filed each year with the FTC indicate that dozens, if not hundreds, of such agreements have been
executed. This may be because a “no authorized generic” clause is nothing more than an
exclusive license; the innovator simply promises that the generic will be the sole licensee. The
difficulty is that the right of a patentee to enter into an exclusive license is one of the oldest
29
FTC First Notice, Request for Comments on Information Requests for Authorized Generic Drug Study,
FTC Project No. P062195, at 3, Mar. 29, 2006.
30
See Federal Trade Commission, “Authorized Generic Drugs: Short-Term Effects and Long-Term
Impact” at iii (August 2011), available at http://www.ftc.gov/os/2011/08/2011genericdrugreport.pdf.
31
See id.
32
Id.
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known to patent and antitrust law. 33 In United States v. Studiengesellschaft Kohle, m.b.H., for
example, the court rejected the government’s claim that the terms of a patent agreement were
anticompetitive when the same alleged exclusion of competition “would have resulted from a
conventional grant of an exclusive license.” 34
Since the decision in K-Dur on reverse payments, the FTC has taken the position that the
rule against reverse payments should apply equally to exclusive licenses in Hatch-Waxman
settlements, because the exclusivity clause is a form of reverse payment. That is, despite its
early arguments that “it is the type of consideration that matters in the antitrust analysis,” the
FTC has argued after K-Dur that “reverse payments” means anything of “value.” 35 The only
court to rule on that question has declined to expand the definition of a “reverse payment”
beyond a cash payment to include a “no authorized generic” clause. 36
B.
Europe
According to the European Commission’s Pharmaceutical Sector Inquiry Final Report,
settlement agreements sponsoring authorized generics for a given period of time after the entry
of the generic company’s product were not found in any of the settlement agreements that had
been concluded in the EU at that time. 37 Besides settlements, “early entry” agreements, which
are extensively described in the Report, 38 are quite common in the EU. The Report does not,
however, provide further guidance as to whether those “early entry” agreements are compatible
with EU competition law. Such an assessment, the Commission states, would require an “indepth analysis of the individual agreement, taking the factual, economic and legal background
into account.” 39
The Commission briefly addressed authorized generics in its merger decision in
Sanofi/Aventis. 40 First, the Commission found that this strategy, if adopted, was unlikely to be
merger-specific. 41 Second, the Commission also added that its effect on the market would vary
due to national regulations and was only likely to be sizeable in cases where such regulation
specifically provided for a premium to the first generic entrant. Finally, the Commission
33
Dawson Chem. Co. v. Rohm & Haas Co., 448 U.S. 176, 215 (1980); Bement v. Nat’l Harrow Co., 186
U.S. 70, 92 (1902).
34
670 F.2d 1122, 1129 (D.C. Cir. 1981).
35
Compare Paying Off Generics to Prevent Competition with Brand Name Drugs: Hearing Before the S.
Judiciary Comm. 110th Cong. 132 (2007) (“All settlements include some form of consideration flowing between the
parties; it is the type of consideration that matters in the antitrust analysis.”) with FTC Br. as Amicus Curiae at 10 &
n.29, In re Lamictal Direct Purchaser Antitrust Litig., 2012 WL 6725580 (D.N.J. Dec. 6, 2012) (No. 2:12-cv- 0995)
(payment should mean “money or some other valuable thing”).
36
See In re Lamictal Direct Purchaser Antitrust Litig., supra. n.26, 2012 WL 6725580, at *6 (rejecting the
FTC’s argument in an amicus brief: “The Court finds that the term ‘reverse payment’ is not sufficiently broad to
encompass any benefit . . . to [the generic] in a negotiated settlement.”).
37
Pharmaceutical Sector Inquiry Final Report at para. 794.
38
Id. at pages 291-310.
39
Id. at para. 797.
40
Case No COMP/M.5253 - Sanofi-Aventis / Zentiva.
41
See also Case No COMP/M.5778 - Novartis / Alcon, para. 110.
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concluded that even in such cases, while there may be a negative effect on competitors resulting
from an authorized generic, “any effect on consumer welfare would be ambiguous.” 42
Finally, it is noteworthy that the OECD paper on Generic Pharmaceuticals, published in
October 2009, listed the use of authorized generics as part of new potentially anti-competitive
strategies by originator companies. The paper nevertheless acknowledges that “evidence
indicates that consumers may benefit from authorised generics, even when third party generics
are already in the market.” 43
III.
Product Switching
A.
U.S.
“Product switching,” sometimes called “product hopping,” describes actions taken by the
innovator company to shift the market to a new product – for example, by creating a new
formulation of the branded drug or replacing it with a different drug to treat the same condition –
prior to the expected launch of a generic substitute for the existing product. Under this approach,
the innovator introduces the new product before generic entry and potentially before the branded
drug product’s patent has expired. The pharmaceutical company then promotes the extension
product instead of the old product. In one case discussed below, the company also removed the
old product from the market and changed the product’s National Drug Data File (“NDDF”) code
to “obsolete.” 44 The brand manufacturer then took steps to shift the market over to the new
product.
Any shift in the market to the new product will not affect the approval of a generic
manufacturer’s ANDA for the old product, but it will affect generic substitution laws. State drug
product selection laws often permit or require substitution of an “AB-rated” generic for a
branded drug, resulting in a reduced market share for the branded product. A company can
reduce or delay the impact of generic entry by product switching, because any approved generic
will likely be AB-rated only as to the old product and therefore cannot be substituted for the new
one. 45 If the market shifts in favor of the new extension product by the time the generic version
of the old branded product enters, the impact on the company’s sales will thus be reduced.
42
Case No COMP/M.5253 - Sanofi-Aventis / Zentiva, para. 507.
43
OECD Policy Roundtable, Generic Pharmaceuticals, published 5 October 2010, page 11, available at
http://www.oecd.org/regreform/sectors/46138891.pdf.
44
The NDDF is a private database that provides information about FDA approved drugs. The NDDF
provides guidance to pharmacists in determining substitution of generic for brand-name drugs.
45
A generic drug must be therapeutically equivalent to the brand drug (i.e., the generic must have the same
active ingredient, form, dosage, strength, and safety and efficacy profile) and also bioequivalent to the brand drug
(i.e., the 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).
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Even outside of the pharmaceutical context, courts have grappled with the appropriate
antitrust standards by which to judge new product introductions. Current U.S. antitrust laws
embody a strong policy favoring innovative activity. As a result, most courts have found that
“product improvement without more is protected and beyond antitrust challenge.” 46 The reason
is that consumers generally benefit with the introduction of new and improved products, and
courts are reluctant to substitute their judgment regarding the merits of an innovation for that of
either the innovator or the marketplace. 47 But judicial deference to product innovation does not
mean that a monopolist’s product design decisions are per se lawful. Courts may conclude that a
particular innovation is predatory if there is evidence that introduction of the new product had no
business justification related to efficiency and was undertaken solely for the harm it would cause
to rivals.
Walgreen Co. v. AstraZeneca Pharmaceuticals, LP, 48 expresses the prevailing view that
innovative activity is generally protected from antitrust challenge. The case centered on
AstraZeneca’s drug, Prilosec, for which AstraZeneca received FDA approval in 1989. Prior to
the 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, though Prilosec remained on the market. 49 Plaintiffs filed suit alleging that
AstraZeneca’s switching of the market from Prilosec to Nexium before generic entry was
exclusionary conduct in violation of Section 2 of the Sherman Act. 50
The court granted AstraZeneca’s motion to dismiss, holding that its actions did not
reduce competition. Rather, by introducing Nexium into the market, AstraZeneca had increased
consumer choices. 51 In the court’s view, “[t]he 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.” 52 According to the court:
Plaintiffs have also not identified any antitrust law that requires a
product new on the market – with or without a patent – to be superior to
existing products. Antitrust law holds, and has long held, to the
contrary. Courts and juries are not tasked with determining which
46
IIIB Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 776a (3d ed. 2005); see also id. at ¶ 781e
(“We therefore conclude that all product innovation should be lawful in the absence of bundling ….”).
47
See Allied Orthopedic Appliances, Inc. v. Tyco Health Care Group LP, 592 F.3d 991, 1000 (9th Cir.
2010) (“There is no room in this [§ 2] analysis for balancing the benefits or worth of a product improvement against
its anticompetitive effects.”); Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979) (“The attempt
to develop superior products is, as we have explained, an essential element of lawful competition.”); accord, e.g.,
Medtronic Minimed Inc. v. Smiths Medical MD Inc., 371 F. Supp. 2d 578, 589 (D. Del. 2005) (rejecting the
argument that design changes to defendant’s products were unnecessary because “it is not the role of the courts to
determine how companies should innovate.”).
48
534 F. Supp. 2d 146 (D.D.C. 2008).
49
Walgreen Co., 534 F. Supp. 2d at 148-149.
50
Id. at 147-148.
51
Id. at 150-152.
52
Id. at 152.
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product among several is superior. Those determinations are left to the
marketplace. New products are not capable of affecting competitors’
market share unless consumers prefer the new product, regardless of
whether that product is superior, equivalent, or inferior to existing
products. 53
The court explained 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 the
antitrust laws. The court also noted that because Prilosec stayed on the market, generic
companies were free to compete with it. 54
The sole decision to allow a claim of pharmaceutical product redesign to survive early
dismissal is Abbott Labs. v. Teva Pharms. USA Inc. 55 In 1998, Abbott received FDA approval
for a capsule form of TriCor (fenofibrate), a cholesterol-lowering drug. In 1999, two generic
companies filed ANDAs for TriCor, and Abbott sued for patent infringement, triggering a 30month stay of the ANDAs’ approval. 56 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.” 57 Soon after generic companies filed a
second wave of ANDAs for the tablet formulation, Abbott filed another patent infringement suit
triggering another 30-month stay. 58 Abbott also submitted another ANDA for a new TriCor
tablet dosage formulation and label change. As it had done with the capsule formulation, Abbott
stopped selling the old tablets and changed the NDDF code for the old tablets to “obsolete.” 59
Plaintiffs sued alleging a violation of Section 2 of the Sherman Act, and Abbott moved to
dismiss.60
The court denied Abbott’s motion, holding that the company eliminated a choice between
products “by removing the old formulations from the market” and buying back existing
inventories. 61 The court also found that Abbott’s decision to change the NDDF code “blocked
53
Id. at 151.
54
Id. at 151-152. In AstraZeneca AB v. Mylan Laboratories Inc., No. 00-6749, 2010 WL 2079722
(S.D.N.Y. May 19, 2010), the court followed Walgreen and dismissed Mylan’s antitrust counterclaims pursuant to
Rule 12(b)(6) “because the alleged conduct — introducing new products — is generally considered procompetitive.” Id. at *6.
55
432 F. Supp. 2d 408 (D. Del. 2006).
56
Id. at 415-416.
57
Id. at 416-417.
58
Id. at 417-418.
59
Id.
60
Id. at 418-419.
61
Id. at 422.
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the introduction of generic fenofibrate” entirely. 62 The court held that total foreclosure of the
market is not required for an antitrust violation, and because the generic manufacturers could not
benefit from generic substitution, they were barred from the most cost-efficient means of
competing in the market. 63 The case settled shortly before trial.
Despite the Abbott decision, there is little support for the proposition that a seller of two
products must choose to sell the one that permits its rivals to compete in the manner they find
most “cost-efficient.” 64 As one article concluded, “it would still be unchartered territory for a
court to create an exception to the general rule that there is no duty to aid competitors in product
hopping cases.” 65
B.
Europe
Product switching was also addressed in the Commission’s Pharmaceutical Sector
Inquiry Final Report under “Life Cycle Strategies for Follow-on Products.” 66 The Report notes
that “the launch of a second generation product can be a scenario in which an originator
company might want to make use of instruments that delay the market entry of generic products
corresponding to the first generation product. The companies have an incentive to do so in order
to avoid generic exposure for the second generation product.” 67 However, the Commission
provides no guidance in its Report regarding when product switching may be found to infringe
EU competition law.
Outside the Report, the rarity of EU case law on product switching can be explained by
the fact that the primary focus of the Commission has been reverse payment settlements.
Product switching was, however, addressed in AstraZeneca. 68 In this case, the European
Commission considered that AstraZeneca’s selective withdrawal of marketing authorizations for
Losec capsules in several countries combined with the withdrawal of Losec capsules from the
market and their replacement with an improved Losec tablet was an abuse of a dominant
position. 69 The withdrawal of the marketing authorization and the product switch did not
62
Id. at 424.
63
Id. at 423.
64
See Meijer v. Biovail, 533 F.3d 856, 857 (D.C. Cir. 2008) (“There is no provision of law that would have
required Biovail and Forest to sell . . . a generic version of Diltiazem HCl in competition with Biovail’s branded
product . . . .”).
65
Seth Silber and Kara Kuritz, Product Switching in the Pharmaceutical Industry, 7 J. GEN. MEDS. 119,
126 (2010).
66
Pharmaceutical Sector Inquiry Final Report at pages 351-367.
67
Id. at para. 988.
68
Case COMP/A.37.507/F3 – AstraZeneca, OJ L 332, 30.11.2006, p. 24–25; appealed before the General
Court in Case T-321/05 AstraZeneca v. Commission, 2010 [ECR] II-02805; and appeal before the Court of Justice in
Case C-457/10 AstraZeneca v. Commission, not published yet.
69
Case COMP/A.37.507/F3 – AstraZeneca, at p. 24–25, para. 789.
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preclude or delay generic entry, but it did make generic entry marginally more difficult. The
Commission determined that was sufficient for a finding of abuse. 70
IV.
Mergers
A.
U.S.
The pharmaceutical industry has undergone significant consolidation over the last
decade. Several factors help to explain this, including global competition, generic competition,
R&D challenges, high drug attrition rates, and a record number of patent expirations. Many
companies depend upon sales from one or two blockbuster drugs to provide them with the
revenue they need to maintain profitability. Mergers and acquisitions allow pharmaceutical
companies to move away from dependence on a single blockbuster drug and instead diversify
their current portfolios and their pipelines of potential new drug products.
The pharmaceutical industry has several unique issues when it comes to mergers. For
example, exclusive licenses to another company’s intellectual property rights are very common
in the pharmaceutical industry and may be reportable under the Hart-Scott-Rodino (“HSR”) Act.
At the present time, entering into an intellectual property license – irrespective of industry – is
not reportable as an asset acquisition unless it includes the exclusive rights to “make, use and
sell” under the patent. However, when the licensor retains some rights in the patent, either
outright or over time, legal analysis and consultation with experienced counsel is often necessary
to determine reportability. If the exclusive license is reportable, another complicated question is
often how to value the license when the particular drug compound licensed is still in
development.
In the pharmaceutical industry it is not uncommon for licensors to retain the right to
manufacture, granting only the rights to “use and sell” under a patent, and over time the FTC
staff has viewed the grant of such a license to be a non-reportable event similar to entering into a
simple distribution agreement. Other types of licenses that have not been treated as asset
transfers under the HSR Act include the grant of co-exclusive licenses where the licensor retains
rights to use and/or grant additional licenses for the intellectual property, and the grant of
marketing and distribution rights, even if those grants are exclusive. 71
On August 13, 2012, the FTC, in consultation with the U.S. Department of Justice,
proposed amendments to the premerger notification rules regarding when a transfer of rights to a
pharmaceutical patent is reportable under the HSR Act. 72 The Amendments would extend HSR
Rules 801.1 and 801.2 to formalize and broaden unofficial guidance given by FTC staff
regarding the circumstances under which transactions involving the transfer of exclusive rights to
a pharmaceutical patent — generally by license — are potentially reportable under the HSR Act.
70
See Case T-321/05 AstraZeneca v. Commission, at paras. 807-808.
71
ABA Section of Antitrust Law, Premerger Notification Practice Manual, 4th Ed. ("PNPM") # 27.
72
Proposed Amendments to the Premerger Notification Rules 801.1 and 801.2: HSR IP Rulemaking,
Project No. P989316, available at http://www.ftc.gov/os/2012/08/120813hsr-ipnprm.pdf.
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Notably, the proposed Amendments would result in a significant change in the weight given by
FTC staff to retained manufacturing rights by deeming a license to be exclusive even when the
licensor retains the right to manufacture pharmaceuticals for the licensee.
Another characteristic of pharmaceutical mergers is that it is common for acquiring
companies to be interested in expanding and/or enhancing their patent portfolio or product line in
an area in which they already compete, thereby frequently resulting in significant consolidation
of existing players. In the pharmaceutical area, the relevant product market determination is
often the single most critical issue in the decision whether to challenge a merger.
Pharmaceutical merger enforcement actions fall into three broad categories: horizontal
mergers, potential competition mergers, and innovation market mergers. Direct, horizontal
mergers are those that occur between rivals that compete in the same market, or between a firm
that competes in the relevant market and a firm that has a relationship with a third party
involving an overlapping product. If the merged firm would control a large percentage of the
market postmerger, market power may be presumed based upon the lack of alternatives, and the
FTC will likely find the proposed merger to be anticompetitive. The FTC has brought numerous
enforcement actions against horizontal mergers of branded pharmaceutical products, 73 over-thecounter pharmaceutical products, 74 generic pharmaceutical products, 75 and combinations of
branded and generic pharmaceuticals. 76 The second category of mergers occurs when one firm
has a product in the market and another firm actively is engaged in a research effort to design
and manufacture a competing product, whether generic or not. The FTC may be concerned that
73
See, e.g., Amgen Inc./Immunex Corporation, 134 F.T.C. 333 (2002) (consent order), available at
http://www.ftc.gov/os/decisions/docs/Volume134.pdf#page=337. In this case, the FTC’s complaint alleged that
Amgen’s $16 billion acquisition of Immunex would lessen direct or potential competition in three highly
concentrated biopharmaceutical markets. The consent order required Amgen to divest all of Immunex’s assets
relating to Leukine (a neutrophil regeneration factor used to treat neutropenia) to Schering AG. The order also
required the merging parties to license certain Amgen and Immunex patents to various third parties.
74
See, e.g., Pfizer Inc./Pharmacia Corporation, 135 F.T.C. 608 (2003) (consent order), available at
http://www.ftc.gov/os/decisions/docs/Volume135.pdf#page=613. The complaint alleged that Pfizer’s $60 billion
acquisition of Pharmacia would lessen direct or potential competition between the two companies in nine markets,
including over-the-counter hydrocortisone creams and ointments. The FTC found that Pfizer’s Cortizone brand and
Pharmacia’s Cortaid brand were the only two branded hydrocortisone creams on the U.S. market and accounted for
55% of the over-the-counter sales of hydrocortisone creams and ointments. The consent order required Pharmacia
to divest its Cortaid business to Johnson and Johnson.
75
See, e.g., Activas Group/Abrika Pharmaceuticals, Inc., C-4190 (consent order issued May 18, 2007),
available at http://www.ftc.gov/os/caselist/0710063/index.shtm. The FTC’s complaint alleged that the merger of
Actavis and Abrika would create a monopoly in the market for generic isradipine capsules, thereby enabling Actavis
to increase prices. The parties entered into a consent order requiring Activas to divest certain rights and assets
related to generic isradipine capsules to Cobalt Laboratories, Inc. within ten days of the acquisition, and to transfer
its supply arrangement for generic isradipine to Cobalt.
76
See, e.g., Baxter International Inc./Wyeth Corporation, 135 F.T.C. 49 (2003) (consent order), available
at http://www.ftc.gov/os/decisions/docs/Volume135.pdf#page=54. The FTC’s complaint alleged that Baxter’s
acquisition of the generic injectable drug business from Wyeth’s subsidiary, ESI Lederle, would reduce either
current horizontal competition or potential competition in the market for five injectable drugs, including the
metoclopramide market in which Wyeth marketed a branded product and Baxter sold a generic version pursuant to
an exclusive supply agreement with GenesiaSicor. The consent order required Baxter to terminate its interests in
and divest its assets to GenesiaSicor.
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such a merger may eliminate potential competition between the merging parties and thereby
harm consumers. 77 Finally, innovation market mergers are those involving two firms that do not
have competing products but are engaged in research efforts to address the same medical need.
Under some circumstances, this type of merger can have an anticompetitive effect on a market
for innovation of new drugs. 78
The FTC has frequently expressed concern over a merger’s impact on R&D spending and
incentives to innovate. Many of the FTC’s pharmaceutical merger cases involve the acquisition
of intellectual property and relevant product markets defined as innovation markets. Currently,
U.S. antitrust enforcement agencies evaluate mergers in terms of their prospective effects on
innovation as well as on price levels. In industries where the focus of competition is the
development of new technologies rather than price competition, these concerns may dominate
the analysis. The FTC worries that reducing the number of innovating companies implies fewer
innovations, which is consistent with the idea of declining numbers of parallel research paths if
the number of rival firms decreases. Mergers that lead to fewer parallel efforts are likely to
reduce the rate of pharmaceutical innovation.
The FTC released a report in January 2013 detailing the agency’s merger enforcement
activity from 1996 until 2011 and breaking down the competition issues in 464 investigations. 79
The report focuses on horizontal mergers, where direct competitors seek to combine forces. The
report indicated that pharmaceutical mergers were the least likely to survive FTC scrutiny
unscathed. Of the 122 deals involving pharmaceutical markets between 1996 and 2011, the FTC
sought some kind of relief (e.g., a divestiture) in 119 of them. Thus, the FTC report shows that
the agency has been extremely active in the pharmaceutical merger area, and pharmaceutical
mergers frequently face challenges before the FTC.
B.
Europe
Market concentration through mergers and acquisitions is also addressed in the
Commission’s Pharmaceutical Sector Inquiry Final Report. The Commission notes that the
77
See, e.g., Baxter International Inc./Wyeth Corporation, 135 F.T.C. 49 (2003) (consent order), available
at http://www.ftc.gov/os/decisions/docs/Volume135.pdf#page=54. The FTC’s complaint alleged that Baxter was
one of only two companies marketing propofol, and Wyeth was seeking approval to enter the propofol market at the
time of the merger. In the Commission’s view, Wyeth was one of the best-positioned firms to enter the propofol
market. The consent order required the divestiture of Wyeth’s propofol business to Faulding Pharmaceutical
Company.
78
See, e.g., Ciba-Geigy, Ltd., 123 F.T.C. 842 (1997) (consent order), available at
http://www.ftc.gov/os/caselist/9610055.shtm. The FTC’s complaint alleged that the merger of Ciba-Geigy and
Sandoz would result in an anticompetitive impact on the innovation of gene therapies. The FTC found that firms
doing research in this area already needed to enter into joint ventures or contract with either Ciba-Geigy or Sandoz
in order to have any hope of commercializing their own research efforts. At the time of the merger, no gene therapy
product was on the market, but potential treatments were in clinical trials. The parties entered into a consent order
that required the merged company, named Novartis, to grant to all requesters a non-exclusive license to certain
patented technologies essential for development and commercialization of gene therapy products. Novartis also was
required to grant a non-exclusive license of certain technology and patent rights related to specific therapies for
cancer, GVHD, and hemophilia to a Commission-approved licensee.
79
Federal Trade Commission, “Horizontal Merger Investigation Data: Fiscal Years 1996-2011” (Jan.
2013), available at http://www.ftc.gov/os/2013/01/130104horizontalmergerreport.pdf.
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pharmaceutical industry is going through a significant phase of consolidation and states that the
trend toward increased market concentration will be “followed with attention by the
Commission.”80
Since January 2010, the Commission has imposed remedies in six pharmaceutical merger
cases 81 out of the 33 it has reviewed. The remedies imposed in these six cases were all
structural, requiring the divestiture of part of a business, 82 specific products, 83 or brands. 84 There
was only one Second Stage (Phase II) investigation in the pharmaceutical sector over this
period. 85
V.
ASIA: Draft Anti-Monopoly Enforcement Guidelines for Intellectual
Property Rights in China
In August, 2012, China’s State Administration for Industry and Commerce (“SAIC”)
released its fifth draft of Anti-Monopoly Guidelines for Intellectual Property Rights (“Draft IPR
Guidelines”). While the Draft IPR Guidelines provide welcome clarification as to how SAIC
may apply the Anti-Monopoly Law (“AML”) to certain patent licensing practices in the future,
they also leave a number of open questions with respect to certain practices.
The proposed provision that is likely to be of particular concern to the pharmaceutical
industry is Article 17(2) of the Draft IPR Guidelines, which would apply the essential facilities
doctrine to intellectual property rights. Article 17 recognizes, as a general principle, that
unconditional or nondiscriminatory unilateral refusals to license patents are “normally”
permissible. Article 17(2) provides an exception, however, for essential facilities. The AML
does not contain any reference to the essential facilities doctrine. Article 4(5) of the SAIC Rules
on Prohibition of Abuses of Dominant Market Positions prohibits a dominant company from
refusing to deal with respect to a product or service that may be deemed to be an essential
facility. Article 17(2) would apply this concept to a refusal to license intellectual property as
well. This may be of particular concern to the pharmaceutical industry because the importance
of treating certain diseases and the clear benefits of certain patented drugs in doing so could lead
SAIC to consider a patent necessary to manufacture a drug to be an essential facility. A refusal
to license such a patent could be construed to be an abuse of a dominant position.
80
Communication from the Commission - Executive Summary of the Pharmaceutical Sector Inquiry
Report, at page 18; Pharmaceutical Sector Inquiry Final Report at paras. 1564-1567.
81
Case No COMP/M.5661 - Abbott / Solvay Pharmaceuticals, February 2010; Case COMP/M.5778 —
Novartis/Alcon, August 2010; Case COMP/M.5865 — Teva/Ratiopharm, August 2010; Case COMP/M.5953 —
Reckitt Benckiser/SSL, October 2010; Case COMP/M.6258 — Teva/Cephalon, October 2011; and Case
COMP/M.6266 — J&J/Synthes, April 2012.
82
Case COMP/M.6266 — J&J/Synthes, April 2012; Case No COMP/M.5661 - Abbott / Solvay
Pharmaceuticals, February 2010.
83
Case COMP/M.5778 — Novartis/Alcon, August 2010; Case COMP/M.5865 — Teva/Ratiopharm,
August 2010, Case COMP/M.6258 — Teva/Cephalon, October 2011.
84
Case COMP/M.5953 — Reckitt Benckiser/SSL, October 2010.
85
Case COMP/M.6266 — J&J/Synthes, April 2012.
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