Source: http://www.ftc.gov/speeches/leary/learypharma.shtm
Timestamp: 2013-05-20 08:29:52
Document Index: 471392765

Matched Legal Cases: ['§ 301', '§355', '§355', '§355', '§355', '§355', '§355', '§355', '§355', '§9', '§355', '§3', '§2']

Sixth Annual Health Care Antitrust Forum
I want to thank the Healthcare Antitrust Forum for the invitation to talk about some recent developments in healthcare antitrust at the FTC.(1) An agency representative's usual response to such an invitation is a survey of cases across a spectrum, but I will not do that today. Instead, I would like to focus in some depth on the antitrust issues involved in the settlement of pharmaceutical patent disputes. Five months ago, the Commission announced a settlement agreement with two drug makers, Abbott Laboratories and Geneva Pharmaceuticals, Inc. resolving charges that the companies had entered into an anticompetitive agreement, which had the potential effect of delaying the entry of generic alternatives to Abbott's brand-name hypertension and prostate drug, Hytrin.(2) At the same time the Abbott/Geneva matter was settled, the Commission filed an administrative complaint challenging an agreement that raised similar issues between Hoechst Marion Roussel (now Aventis), the maker of Cardizem CD, a widely prescribed drug for treatment of hypertension and angina, and Andrx Corporation, the maker of a generic version of the product.(3) This case is still pending. Moreover, just last month the Commission announced a proposal to conduct a focused study of generic drug competition, and has requested public comment on the process it would use to collect relevant information from manufacturers nationwide.(4) The proposed study will examine whether brand-name and generic drug manufacturers have entered into agreements, or have used other strategies that could have an impact on competition from generic versions of patent-protected drugs.
In order to understand the context of the conduct at issue in the Abbott/Geneva matter, it is necessary to delve into the unique regulatory framework that governs the approval process of pharmaceuticals. Under the Federal Food, Drug, and Cosmetic Act ("FDCA"),(6) any applicant seeking to market a new drug must first obtain FDA approval by filing a new drug application ("NDA").(7) NDA applicants must provide, among other things, "full reports of the investigations" that demonstrate a drug product to be safe and effective for its intended use. In 1984, Congress adopted the Drug Price Competition and Patent Term Restoration Act, commonly known as the Hatch-Waxman Act. The Hatch-Waxman Act contains several important features intended to streamline the development and approval of generic drugs in order to "make available more low cost generic drugs," while at the same time protecting the interests of the patent-holding pioneer branded drug manufacturer.(8) The Hatch-Waxman Act created the abbreviated new drug application, or "ANDA." Before passage of the Hatch-Waxman Act, manufacturers of generic drugs were required to duplicate the time-consuming and expensive safety and effectiveness studies already performed on the pioneer drugs. Under the ANDA process, an applicant can sidestep this lengthy process and rely on the safety and efficacy tests conducted by the pioneer drug manufacturer, so long as it can demonstrate that its generic drug is the same as and is bioequivalent to the approved drug product (also known as the reference listed drug).(9) In addition to demonstrating bioequivalence, the ANDA applicant must provide a certification with respect to each patent listed in the so-called Orange Book,(10) which claims the reference drug or a method of using it. The certification must make one of four statements: (I) no patent information on the drug product that is the subject of the ANDA has been submitted to the FDA; (II) there was a patent which has expired; (III) such patent will expire on a particular date; or (IV) such patent is invalid or will not be infringed by the manufacture, use or sale of the drug product for which the ANDA is submitted. The last certification is known as a "Paragraph IV" certification.(11)
At the same time, the automatic stay provisions in Hatch-Waxman seem to have stimulated, or at least preserved, the incentives for pharmaceutical innovation. In recent years there has been a dramatic increase in innovation and the U.S. industry unquestionably leads the world.(18) Balancing Conflicting Goals
The following "facts" are extracted from the complaint or the Analysis to Aid Public Comment.(21) Some of them might well have been challenged in court had the case been litigated but, since it was settled, they are the predicate for the Commission's order. Abbott Laboratories markets and sells the prescription drug Hytrin, the brand name for terazosin HCL. Hytrin is used to treat hypertension and benign prostatic hyperplasia ("BPH" or enlarged prostate). Both hypertension and BPH are chronic ailments affecting millions of Americans each year, many of them senior citizens. In January 1993, Geneva Pharmaceuticals, Inc., an indirect wholly-owned subsidiary of Novartis Corp. and one of the leading generic drug manufacturers in the United States, filed an ANDA with the FDA for a generic version of terazosin HCL in tablet form. In December 1995, Geneva filed a similar ANDA for a generic version of terazosin in capsules. Geneva filed a Paragraph IV certification with the FDA for both ANDAs, which meant that Abbott had 45 days to initiate a patent infringement suit against Geneva and thereby invoke the Hatch-Waxman Act's 30-month stay of final FDA approval for the ANDAs.
Abbott agreed to pay Geneva $4.5 million per month until there was a district court judgment in the parties' patent infringement suit, and thereafter (assuming Geneva won before the district court), Abbott agreed to pay the $4.5 million monthly payments into an escrow fund until the final resolution of the litigation. Abbott would get the escrow funds back if the district court judgment was reversed, but the payments prior to judgment were irrevocable. The $4.5 million in monthly payments were well over the estimated $1 to $1.5 million profits that Abbott believed that Geneva would forego by staying off the market. Abbott was willing to pay Geneva a "premium" to refrain from competing because of the substantial impact that launch of a generic version of Hytrin would have on Abbott's overall financial outlook. Abbott had forecasted that entry of a generic terazosin HCL on April 1, 1998 would eliminate over $185 million in Hytrin sales in just six months. At Abbott's insistence, Geneva also agreed not to transfer, assign, or relinquish its 180-day exclusivity right. Since Geneva's agreement not to launch its product meant that the 180-day exclusivity period would not expire, the effect of this provision in the agreement was to ensure that no other company's generic terazosin HCL product could obtain FDA approval and enter the market during the term of the agreement.
The Commission's complaint charges that the agreement prevented competition that Abbott's Hytrin product would otherwise have faced from generic products of Geneva and other potential generic competitors. As explained in the Analysis To Aid Public Comment, generic drugs can have a swift marketplace impact because pharmacists are permitted, and in some instances required, to substitute lower-priced generic drugs for their branded counterparts, unless the prescribing physician directs otherwise. Certain third-party payors of prescription drugs (e.g., state Medicaid programs and many private health plans) encourage or insist on the use of generic drugs wherever possible. Abbott had forecast that generic terazosin HCL would capture roughly 70 percent of Hytrin sales within the first six months following its launch. The Commission viewed the challenged conduct as an agreement not to compete between potential horizontal competitors. Geneva was viewed as a potential competitor because it had certified to the FDA that its entry with generic HCL would not infringe a valid patent, and was confident that it ultimately would prevail in its patent infringement dispute with Abbott. In fact, in early 1998, Geneva was making preparations to launch its generic terazosin HCL capsules as soon as possible. (Remember that Abbott had mistakenly not filed suit against the capsule product, so there was no automatic stay.)
An initial question is whether the legality of the contract should be judged by the facts as they appeared at the time the contract was made or in the light of hindsight, considering subsequent events. In this case, for example, generic entry was not delayed as long as it might have been because the agreement in question was terminated(24) when the Commission began its investigation. The law is clear - at least for injunctive actions, as opposed to actions for damages - that legality should be tested by the facts as they appeared when the contract was made.(25) But this issue can obviously affect an equity court's choice of remedies and, if a troublesome contract were terminated before a Commission investigation, it could have an impact on prosecutorial discretion. The most difficult issue, for me, arises from the fact that a potentially anticompetitive incentive will be present in the vast majority of these patent settlement cases, and it is not at all easy to distinguish between the situations that are pernicious and those that are not- particularly, when the uncertain outcome of patent litigation is factored in. As stated in the factual background of the Abbott/Geneva case, Geneva's generic entry would have a negative impact on Abbott's expected profits considerably in excess of any positive impact that entry would have on Geneva's expected profits. This imbalance is likely to exist for many other drugs, as well. Generic entry will cause prices to drop sharply, and the resulting reduction in the monopoly profits of the pioneer manufacturer will far exceed the anticipated profits of the generic manufacturer in a more competitive market (with at least two suppliers). The profit imbalance also creates a significant incentive for a generic manufacturer to delay entry until a patent infringement suit is resolved because potential damages for infringement (measured by the pioneer's lost profits) will exceed profits for the entrant.(26) The fact that the entrant may not be able to pay these damages is a further complicating factor which can induce a pioneer manufacturer to settle, even if it is confident about its litigation prospects. This combination of factors creates an incentive for both parties to cooperate and share monopoly profits, but hostility to this incentive, carried to its logical extreme, would cast a cloud over all patent settlements.
Although it is not articulated in the Analysis, I believe that the Abbott/Geneva settlement ultimately is based on a standard that resembles the "less restrictive alternative" test, but with a very significant difference. The Commission focused on settlement terms -- like the so-called "reverse payments" from Abbott to Geneva and the ban on Geneva's waiver of 180-day exclusivity -- that went well beyond the provisions that would normally be contained in a stipulated temporary injunction.(28) In traditional antitrust analysis, however, the argument that an agreement went too far only comes into play if a particular transaction has already been demonstrated to have the potential both for anti-competitive harm and for pro-competitive efficiencies. The issue then is whether the parties could have achieved all, or most of the efficiencies by less restrictive means.(29) In the drug settlement context, however, an assessment of potential competitive harms and benefits would really require a judgment on patent validity and, as indicated, that is an issue that the Commission cannot really decide. So, the Commission considered the less restrictive alternative issue up front, rather than at the end.
Assume hypothetically that there is a genuine issue of patent validity in a case like Abbott/Geneva and that the parties want to avoid the expense and risks of litigation. A less restrictive way to resolve the controversy might be to grant a license that would permit the generic manufacturer to market its product sometime before the expiration of the Hatch-Waxman stay.(30) This is not really an entirely adequate test by itself, however, because the pro-competitive benefits may be illusory. If the royalty rate is high, generic entry will not cause prices to fall dramatically and the holder of a perhaps invalid patent will continue to earn both supra-competitive profits and a royalty. As mentioned above, a risk averse generic manufacturer may decide that a bird in hand is better than two on the wing, even if the case for invalidity is sound. A settlement that accelerates generic entry will surely be viewed with less suspicion than a settlement that defers it, but I doubt that the Commission should declare a safe harbor. There are comparable objections to declarations of per se illegality. Consider the reverse payments that flow from the patent holder to the potential generic challenger rather than the other way around. A settlement that includes these reverse payments may on its face look a lot more like a cynical bargain to share the spoils from a patent that both sides agree is invalid. However, there may be extenuating circumstances. Suppose both parties agree on a licensing solution, but the generic manufacturer is not yet ready to come to market and needs interim funds to get ready. Later entry coupled with some interim reverse payments and a lower royalty rate, may actually lead ultimately to stronger generic competition for the benefit of consumers. Presumptive strong suspicion of reverse payments may be justified, but at this stage I would hesitate to make the presumption conclusive.
(2) Interim settlement of patent litigation that involves payments to a generic company to delay entry are not banned outright, but must be approved by the court with an opportunity for the Commission to express its views.(36) The parties also must give the Commission notice of similar agreements in a non-litigation context.(37) For counseling purposes, a provision with reverse payments should raise a flag but does not signal that barriers are down. I personally think this is the right message at this time. The line between reverse payments and other benefits flowing to the generic manufacturer, like an earlier license or a reduced license fee, is too fuzzy for ironclad distinctions. The requirement for court approval in this order raises the question of how much comfort other parties can derive from possible judicial approval of pharmaceutical patent settlements. Obviously, these parties would derive maximum comfort from a court-approved settlement that made specific findings in matters of potential competitive concern.(38) On the other hand, some courts might be reluctant to give what would in effect be an advisory opinion on matters about which the parties appear to be in agreement, and the parties may understandably be reluctant to suggest procedures that would invite comments from the Commission(39) or other interested generic manufacturers. This is yet another issue on which I believe we are still feeling our way.
1. I wish to acknowledge the assistance of attorney advisor Holly Vedova in the preparation of this speech. I take sole responsibility, however, for the opinions expressed. 2. Abbott Labs. and Geneva Pharms., Inc., Docket No. C-3945 (2000). 3. Hoechst Marion Roussel, Inc., Docket No. 9293 (administrative complaint filed Mar. 16, 2000). 4. See 65 Fed. Reg. 61334 (Oct. 17, 2000). 5. The Commission also recently confirmed that it is investigating an agreement between Bristol-Myers-Squibb, Co. and American Bioscience, Inc., regarding the cancer drug Taxol. See FTC Press Release entitled, FTC to Study Generic Drug Competition, dated October 11, 2000, available at: </opa/2000/10/genericdrug.htm> As this matter is currently under investigation, I will also not discuss it any further. 6. 21 U.S.C. §§ 301 et seq. (1999). 7. 21 U.S.C. §355(a) (1999). 8. H.R. Rep. No. 98-857 (I), 98th Cong., 2d Sess. at 14-15 (1984), reprinted in 1984 U.S.C.C.A.N. 2647-48. 9. 21 U.S.C. §355(j) (1999). 10. The FDA's Orange Book (officially entitled "Approved Drug Products with Therapeutic Equivalence Evaluations") lists all approved drugs and related patents for each drug. 21 U.S.C. §355(j)(7)(A)(iii) (1999). The FDA obtains this information from NDA applicants, which must include information on any patent covering the drug, any method of using the drug for treatment of disease, or any method of delivery of the drug, for which a claim of patent infringement could reasonably be asserted against an unauthorized party. 21 U.S.C. §355(b)(1) (1999). 11. 21 U.S.C. §355(j)(2)(A)(vii)(IV) (1999). 12. 21 U.S.C. §355(j)(5)(B)(iii) (1999). 13. 21 U.S.C. §355(j)(5)(B)(iv) (1999). 14. Congressional Budget Office, How Increased Competition From Generic Drugs Has Affected Prices and Returns in the Pharmaceutical Industry, ch. III, at 1, 20 (July 1998). See also David A. Balto, Pharmaceutical Patent Settlements: The Antitrust Risks, 55 Food and Drug L.J. 325 (Fall 2000). 15. Congressional Budget Office, supra note 14 at Ch. III,1. 16. Id. at 5. 17. Id. at 27. 18. Almost half of all new medicines in the world are discovered by U.S. companies. See Pharmaceutical Research and Manufacturers of America, Fact Sheet, December 1999, available at: <http://www.phrma.org/publications/backgrounders/world/12_global.phtml>. 19. For a more detailed discussion of this topic, see Thomas B. Leary, Commissioner, Federal Trade Commission, Antitrust Law as a Balancing Act, Prepared Remarks Before Tenth Annual Seattle Computer Law Conference (Dec. 17, 1999), available at: </speeches/leary/leary991217.htm>. 20. The FDA has expressed concern about private agreements arising in the context of the Hatch-Waxman Act, and has observed that the incentives for companies to enter into such arrangements are becoming greater, as the returns to the brand name company from extending its monopoly increasingly exceed the potential economic gains to the generic applicant from its 180-day market exclusivity. See FDA Proposed Rule Regarding 180-Day Generic Drug Exclusivity for Abbreviated New Drug Applications, 64 Fed. Reg. 42873, 42882-83 (to be codified at 21 C.F.R. pt 314.107)(proposed Aug. 6, 1999). 21. The Analysis to Aid Public Comment, issued simultaneously with the complaint and the agreed-on settlement terms, is designed to elaborate on the Commission's underlying theories. 22. Abbott could, of course, still pursue a patent infringement claim against the generic capsules, but it would not get an automatic stay. 23. 21 U.S.C. §355(j)(5)(B)(iv)(II) (1999). The FDA has proposed a new rule that would allow subsequent ANDA filers to trigger the 180-day exclusivity period in certain circumstances. See FDA Proposed Rule Regarding 180-Day Generic Drug Exclusivity for Abbreviated New Drug Applications, 64 Fed. Reg. 42873 (to be codified at 21 C.F.R. pt. 314.107)(proposed Aug. 6, 1999). 24. Note that termination occurred only one month after the court of appeals had affirmed a finding of patent invalidity. In litigation, the parties might have claimed that the parties would likely have terminated the agreement after this appellate decision anyhow, and thus the delay would have been minimal in the "but for" world. 25. See e.g., John D. Calamari and Joseph M. Perillo, Contracts, Third Edition, §9-31 (1987)(general rule of contract interpretation is that courts will consider the intentions of the parties at the time they made their agreement). 26. Note also that entry by the generic manufacturer will start the running of its 180-day period of exclusivity, 21 U.S.C.§355(j)(5)(B)(iv) (1999). This can supply an additional motive for the generic manufacturer to delay entry until the infringement suit is resolved. 27. Note that initiation of an infringement suit with knowledge that the patent is invalid, may be attacked as an antitrust violation by itself, regardless of the settlement terms. See, e.g., Handgards, Inc. v. Ethicon, Inc., 743 F.2d 1282 (9th Cir. 1984), cert. denied, 469 U.S. 1190 (1985). 28. See Sheila F. Anthony, Commissioner, Federal Trade Commission, Riddles and Lessons from the Prescription Drug Wars: Antitrust Implications of Certain Types of Agreements Involving Intellectual Property, Remarks Before the ABA "Antitrust and Intellectual Property: The Crossroads" Program, San Franscisco, CA (June 1, 2000), available at: </speeches/anthony/sfip000601.htm>. Payments in settlement would normally be expected to flow from the alleged infringer to the patent holder; in Abbott/Geneva, the patent holder paid the alleged infringer. Moreover, the ban on Geneva's waiver expands on the temporary restraints provided by the statute. 29. Cf. United States Department of Justice and Federal Trade Commission, Guidelines for Collaborations Among Competitors, §3.36 (April 7, 2000), reprinted in 4 Trade Reg. Rep. (CCH) ¶13,160. 30. In the actual Abbott/Geneva case, there was no stay applicable to the generic capsule product, which Abbott had inadvertently failed to challenge in a timely manner. However, this highly idiosyncratic fact should not be outcome-determinative by itself. Abbott might still get a preliminary injunction from a court and even if it did not Geneva might decide to avoid risk by settling for a license rather than entering before patent validity had been decided. 31. Abbott Labs. and Geneva Pharms., Docket No. C-3945, Consent Order at ¶ 2 (2000). 32. Cf. Brulotte v. Thys Co., 379 U.S. 29, 33 (1964) (it is patent misuse to "enlarge the monopoly of the patent" by collecting post expiration royalties). 33. I do not believe a provision of this kind can be justified as an ancillary restraint, merely because it is part of a larger agreement. Cf. NCAA v. Board of Regents, 468 U.S. 85 (1984). 34. Abbott Labs. and Geneva Pharms., Inc., Docket No. C-3945, Consent Order at ¶ 2 (2000). 35. There have been suggestions for modification of the Hatch-Waxman 180-day exclusivity rights in order to reduce the first generic's ability to forestall entry by others. The FDA has proposed to amend its rules by placing a time limit (180 days) on when the first-filed ANDA applicant must trigger its rights to obtain the 180-day marketing exclusivity period and by clarifying which applicants are eligible for the 180-day marketing exclusivity. See, e.g., FDA Proposed Rule Regarding 180-Day Generic Drug Exclusivity for Abbreviated New Drug Applications, 64 Fed. Reg. 42873 (to be codified at 21 C.F.R. pt. 314.107)(proposed Aug. 6, 1999). I express no opinion on these proposals but, if adopted, they obviously could have an impact on the antitrust analysis of a settlement agreement because they would change the "but for" world. They also could change the incentives of parties to enter into settlement agreements. 36. Abbott Labs. and Geneva Pharms., Inc., Docket No. C-3945, Consent Order at ¶ 3 (2000). 37. Id. at ¶ 4. 38. Cf. the doctrine of collateral estoppel, or issue preclusion, which bars the relitigation of issues actually adjudicated and essential to the judgment in a prior suit between the same parties. See Edward I. Niles, Federal Civil Procedure, §2.152 (1984). 39. See Comment of the Staff of the Bureau of Competition and of Policy Planning of the Federal Trade Commission, In the Matter of 180-Day Generic Drug Exclusivity for Abbreviated New Drug Applications, FDA Docket No. 85N-0214 (Nov. 4, 1999), available at: </be/v990016.htm>. An alternative risk in some circumstances would be government involvement as amicus curiae. See brief of Federal Trade Commission as amicus curiae in American Bioscience, Inc. v. Bristol-Myers Squibb Co., et al., Case No. CV-00-08577 U.S. Dist. Ct., Central Dist., Ca., W. Div., Sept. 1, 2000. 40. Abbott Labs. and Geneva Pharms., Docket No. C-3945 (2000)(Statement of Chairman Robert Pitofsky and Commissioners Sheila F. Anthony, Mozelle W. Thompson, Orson Swindle and Thomas B. Leary).