Opinion ID: 788070
Heading Depth: 2
Heading Rank: 1

Heading: Defining the Relevant Market for Warfarin Sodium

Text: 44 Before proceeding further we think it helpful to define the relevant market for warfarin sodium. Evaluating market power begins with defining the relevant market. This inquiry will also prove useful for analyzing the § 1 allegations because a market definition provides the context against which to measure the competitive effects of an agreement. See, e.g., Copperweld v. Independence Tube Corp., 467 U.S. 752, 768, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984) (rule of reason requires an inquiry into market power and market structure designed to assess the combination's actual effect). 45 The goal in defining the relevant market is to identify the market participants and competitive pressures that restrain an individual firm's ability to raise prices or restrict output. The relevant market is defined as all products reasonably interchangeable by consumers for the same purposes, because the ability of consumers to switch to a substitute restrains a firm's ability to raise prices above the competitive level. United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 395, 76 S.Ct. 994, 100 L.Ed. 1264 (1956). Reasonable interchangeability sketches the boundaries of a market, but there may also be cognizable submarkets which themselves constitute the appropriate market for antitrust analysis. Brown Shoe Co. v. United States, 370 U.S. 294, 325, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962). Defining a submarket requires a fact-intensive inquiry that includes consideration of such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors. Id. The term submarket is somewhat of a misnomer, since the submarket analysis simply clarifies whether two products are in fact reasonable substitutes and are therefore part of the same market. The emphasis always is on the actual dynamics of the market rather than rote application of any formula. 46 The district court ruled that the entire warfarin sodium market, including Coumadin, was the appropriate market. It had noted the chemical equivalence between Coumadin and generics, found that customers and vendors viewed the products as competing, and concluded that generics took market share from Coumadin. We have performed our own analysis of the Brown Shoe factors and we conclude to the contrary that in this case generics alone constitute the relevant market.
47 It may seem paradoxical to believe that Coumadin and generic warfarin — which have been certified by the FDA as therapeutically equivalent — are nevertheless in separate markets for antitrust analysis. Functional interchangeability is certainly a prima facie indication that consumers of one product might be willing to switch to the other in the face of a non-trivial price increase. Yet, in examining the competitive pressures that affect the ability of a lone generic manufacturer to raise prices or reduce output, we are persuaded that competition among generics creates those restraints. We note that there is not just one relevant customer group, and are mindful to consider the impact that patients, doctors, third-party payers, wholesalers, and chain pharmacies can have on the price and output of warfarin. 48 (a) Price Differential. First, the price differential between Coumadin and generics is plain, as are the variant pricing trends. Barr's generic was introduced at about 70 percent of Coumadin's price, and has since declined to 50 percent while Coumadin's price has stayed steady, creating a marked gap in price between the products. Coumadin's substantially higher prices is evidence of a distinct customer group with brand allegiance and/or high risk sensitivity that was unwilling to switch from the known brand name even in the face of a discounted alternative. That this group has remained loyal despite Coumadin's conspicuously higher prices strongly suggests inelastic demand. More significantly, this division of customers indicates there is little likelihood that price-sensitive generic customers would switch to the higher-priced Coumadin when faced with an increase in generic prices. 49 When other generic competitors entered the market, Barr's prices dropped substantially, but Coumadin's remained virtually unchanged and even rose slightly. Not only did Barr's invoice prices drop a small, but statistically significant amount, but more importantly Barr admitted that Geneva's presence forced it to offer substantial off-invoice discounts and rebates. Barr's senior vice president of sales and marketing confirmed that Geneva's entry had a substantial effect on Barr's pricing, especially with large chain pharmacies and wholesalers. Regarding wholesalers, he testified Barr offered 15-20 percent rebates after Geneva entered, and with chain pharmacies, he confirmed that Geneva's entry cost Barr many millions of dollars. As one example, he noted that Geneva's entry forced Barr to give rebates to the CVS and Walgreens chain pharmacies each in excess of a million dollars a year. 50 (b) Brown Shoe Distinguished. Defendants urge us not to evaluate the market based on pricing differentials since they believe the Supreme Court rejected such analysis in Brown Shoe, 370 U.S. at 326, 82 S.Ct. 1502. In Brown Shoe, the Court did indeed reject Brown's claim that its medium priced shoes did not compete with its lower priced shoes. Applying Brown Shoe to the instant case, the district court agreed with defendants' position and held that a division of the product lines based on `price/quality' was `unrealistic.' 201 F.Supp.2d at 269 (quoting Brown Shoe, 370 U.S. at 326, 82 S.Ct. 1502). We cannot adopt this reasoning. 51 In Brown Shoe, customers and vendors viewed the differently priced shoes as competing, and the Court simply clarified that a price differential alone should not override observed market conditions. Further, in Brown Shoe there was a continuous spectrum of pricing, leading the court to conclude [i]t would be unrealistic to accept Brown's contention that, for example, men's shoes selling below $8.99 are in a different product market from those selling above $9.00. Brown Shoe, 370 U.S. at 326, 82 S.Ct. 1502. Here we find a substantial gap in pricing indicative of separate markets. Nor do we treat pricing as dispositive, but rather use pricing trends as one indicator of the impact each market participant has on overall price and output. 52 (c) Inelastic Demand. We also conclude that Coumadin's customers are displaying strongly inelastic demand. Overall generic penetration has not been as significant in the warfarin market as in other drug markets of comparable size: Barr's CEO testified that generic penetration after one year can be as high as 60 percent, but Barr projected only 35 percent penetration after a year and in fact captured just 8 percent of the warfarin market. Three-and-a-half years after generic warfarin was introduced, the generic substitution rate was just over 30 percent despite prices that were 40 percent lower than Coumadin. Such results indicate a substantial customer base that has not responded to lower prices. 53 Customers that have remained with Coumadin clearly do not perceive generics to be a reasonable substitute for it. Conversely, price-sensitive customers have flocked to the cheaper generic and are likely to view another inexpensive generic as a reasonable substitute. Plaintiffs' evidence suggests that upon generic entry, the consumer base split such that Coumadin and generics each faced smaller, distinct consumer groups. 54 Plaintiffs have offered evidence supporting plausible justifications for this trend. The narrow therapeutic index status of the drug may be having some effect on the risk-sensitivity of patients. Since proper dosing is tricky, patients must go through a lengthy introductory period of closely monitored dosage by their attending physician. Patients concerned about the potential for dosage problems may be especially unlikely to switch from a known entity even though they have to pay a higher price. Also, since Coumadin was the sole manufacturer of warfarin sodium for 35 years, there has been a lengthy opportunity to develop strong brand association and loyalty among patients and doctors. 55 (d) Different Distribution Chains. In addition, the distribution chain for generics is different in important ways from that of Coumadin. Wholesalers and chain pharmacies frequently stock Coumadin plus one generic version. Thus, for a substantial customer base, generic warfarin manufacturers compete among themselves for one slot rather than with Coumadin. Plaintiffs also offered evidence that Coumadin has been marketed primarily to physicians, while generics target wholesalers and chain pharmacies. Not surprisingly, Geneva's entry affected Barr's pricing primarily with respect to wholesalers and chain pharmacies. 56 (e) Industry Recognition. Industry recognition is also notable. Although the industry undoubtedly acknowledges that Coumadin competes to some extent with generics, generic manufacturers treat each other as the entities which most directly affect their pricing and output decisions. With respect to generic drugs generally, Dr. Sherman, defendant ACIC/Brantford's principal owner, stated: 57 Given that generic drug products are universally cheaper than original brand products, the first generic drug company, upon entry of a particular drug market, will automatically capture a sizeable portion of the sales of the drug, thereby creating the generic drug market. 58 When subsequent generic drug companies enter the market in respect of the particular drug, these generic companies compete with the first and prior generic drug companies as to the share of the generic drug market. . . . As a result, from the standpoint of the patentee drug company it matters not whether there is one, two, ten or twenty generic drug companies since each successive generic entrant only gains market share from the previous generic competitors and not from the patentee. 59 Several Apothecon employees also testified that they make pricing decisions as to generic warfarin sodium based on generic competition, not competition from Coumadin. Apothecon's former product manager stated We compete against other generics, we do not compete against Coumadin.... [W]e do not set our prices based on what the brand is doing. Plaintiff's expert pointed out that Barr's website stated, Barr focuses its generic research and development activities on generic products that have significant barriers to entry, and such barriers would apply only to generic competitors. 3 60 Barr's own price predictions for generic warfarin sodium led it to conclude that it could charge 70 percent of Coumadin's price in the first year, 50 percent in the second year and 40 percent in the third year. These predictions assumed one generic competitor entering in the second year and another entering in the third year. This effect is consistent with the literature on generic drug competition describing how generic pricing is a function of the number of generic competitors. See generally Congressional Budget Office, How Increased Competition from Generic Drugs Has Affected Prices and Returns in the Pharmaceutical Industry, at 32 (1998); Roy Levy, The Pharmaceutical Industry: A Discussion of Competitive and Antitrust Issues in an Environment of Change (Federal Trade Commission Bureau of Economics Staff Report, Mar. 1999); David Reiffen & Michael R. Ward, Generic Drug Industry Dynamics (Federal Trade Commission, Working Paper No. 248, Feb. 2002), at http://www.ftc.gov/be/workpapers/industrydynamicsreiffenwp.pdf (last visited June 4, 2004). 61 (f) No Supply Substitution. Moreover, the evidence shows there was very limited potential for supply substitution in the generic market. A manufacturer's ability to raise prices or reduce output is not only constrained by current substitutes but also by actual or potential competitors capable of providing new competition quickly with little sunk costs. 62 We can readily dismiss potential substitution from all entities other than DuPont. We find evidence of particularly high barriers to entry resulting both from limited supply of clathrate and from the regulatory requirements to sell generics. We find no evidence that other generic pharmaceutical manufacturers could quickly and easily have entered the warfarin market if generic warfarin prices were raised substantially above marginal cost. Barr's own process of reaching the warfarin market, which began in 1991 and ended in 1997, belies its claim of easy entry, as does its mission statement which acknowledges seeking drugs with high barriers to entry.
63 Competition from DuPont is not so straightforward. DuPont already sold warfarin sodium, had access to a clathrate supply, and had contacts in the distribution chain. However, DuPont would have had strong incentives not to introduce its own generic, even if it felt that Barr was charging supra-competitive prices. No doubt it observed that within a few years, there would be increased competition among generics, and its own entry would simply accelerate the decline of generic prices and thereby accelerate the segmentation of the market. Since at best it would be substituting sales of a generic at a lower price for sales of Coumadin at a higher price, all with the same cost of production, DuPont's entry into the generic market could only hurt its bottom line. DuPont likely could only have had success selling generic warfarin if it had been able to seize the substantial advantage that a first mover has in the generic market, and even then, it obviously found any advantage would be outweighed by the erosion of sales of Coumadin. DuPont had substantial success maintaining its customer allegiance at the higher price, and we believe it posed no threat of generic entry and therefore no check on generic prices. 64 In sum, the totality of the evidence convinces us that once Barr entered the market, the market became segmented so that Coumadin and Barr each had smaller, distinct customer groups. After the initial segmentation, Barr's price was impacted much more by Geneva's entry than by Coumadin. For example, plaintiffs have pointed to data indicating that Geneva's entry affected Barr's pricing of its dosage strengths also sold by Geneva, but not of its other dosage strengths. This evidence strongly suggests to us that competition among generics is the competitive force that restrains a single generic competitor from raising prices or restricting output. 65 We therefore hold that the relevant market for our purposes is the market for generic warfarin sodium tablets.