Pharmaceutical Antitrust Update: Courts Address How And When Product Hopping May Violate The Antirust Laws

For many companies that compete in competitive markets, innovation and product improvement fuels competitive success: create a better product than your competitors, and over time, make it better. This holds true in the pharmaceutical industry, where new and/or improved treatments are common and frequent for almost any indication. In recent years however, certain product modifications, marketed as improvements, have given rise to antitrust challenges.

"Product hopping" refers to the pharmaceutical practice of a branded pharmaceutical company switching patients from an older version of a drug, typically for which patent expiration and generic competition are imminent, to a new version of the same drug with some modification and no immediate threat of generic competition. The product switch may hamper competition, especially if the older product is removed from the market, because generic drug manufacturers depend on automatic substitution to divert prescriptions from the branded product to the generic version of that product. The Federal Trade Commission ("FTC"), in 2012, first stated that product hopping "can be an effective way to game the regulatory structure that governs the approval and sale of generic drugs, thereby frustrating the efforts of federal and state policymakers to facilitate price competition in pharmaceutical markets."1

Antitrust challenges to product hopping are rare, but recently two different appellate courts issued significant opinions in such cases.2 Both of these cases have implications for the antitrust treatment of product hopping allegations. The most recent case, decided in part on the issue of product market definition, may have broader antitrust implications as well.

Pharmaceutical Industry Background

The pharmaceutical industry has unique complexities. Generally, Food and Drug Administration ("FDA") approval and patent protection limits the number of products available for any particular indication. To be approved for sale, companies must a submit a New Drug Application ("NDA"), and they are required to, among other items, submit scientific studies and conduct clinical trials, which are costly and time-consuming processes. The Drug Price Competition and Patent Term Restoration Act (the "Hatch-Waxman Act") counters these limitations by creating a truncated approval process for generics known as the Abbreviated New Drug Application ("ANDA").3 This process allows generic drug companies to rely on a name brand drug company's approved NDA for a particular drug.4 "By enabling generic manufacturers to 'piggyback on a brand drug's scientific studies' and the significant costs associated with their NDA, Hatch-Waxman 'speeds the introduction of low-cost generic drugs to market, thereby furthering drug competition.'"5 To rely on a name-brand's NDA, however, the generic drug manufacturer must demonstrate that the proposed generic product is both equivalent to the name-brand drug in active ingredients, dosage form, strength, and route of administration (pharmaceutical equivalence) and yields similar test results for human absorption (bioequivalence).6 Approved generics are deemed therapeutically equivalent or "AB-rated" to the corresponding branded drug (also known as a Reference Listed Drug, or "RLD").

AB-rated generic drugs have a major market advantage through state automatic substitution laws. These laws permit or require pharmacists to substitute an AB-rated, lower-cost generic drug for a brand drug absent express direction from the prescribing physician.7 Due to lower upfront costs, generic drugs are generally less expensive than branded drugs and usually capture a substantial share of the prescriptions that would otherwise go to the brand. Generics drugs typically prompt a revenue and profit loss to the brand company that faces an onset of generic competition.

A product hop prevents generic drugs from benefiting from the state substitution laws. ANDAs to a branded drug generally are not substitutable to an AB-rated equivalent to a different formulation of the branded drug, even if the difference is insignificant.8 A brand's decision to change an RLD's dosage/strength (e.g., 10 mg tablets versus 20 mg), the form of the drug (e.g., tablet versus capsule), or the absorption qualities of the drug (immediate versus extended release), can all make a drug a different product such that a generic version of the old drug would not be AB-rated for the new one. These changes may give the branded drug fresh patent protection against generic competition. So long as the old version of the drug remains on the market, a doctor may still prescribe that version, allowing its approved AB-rated generics to benefit from automatic substitution. If, however, the brand company successfully removes the old version of the drug from the market before generic entry occurs, then doctors must switch the patients to other products or the newer RLD and will likely no longer prescribe the old version of the drug once a generic of that version reaches the market. In such circumstances, the product switch may completely remove the imminent threat of generic competition.

State of New York v. Actavis plc

In State of New York v. Actavis plc ("Namenda"), the Second Circuit became the first appellate court to address product hopping.9 The State of New York alleged that Forest Laboratories ("Forest"), a subsidiary of Actavis plc, planned to remove its twice-daily Alzheimer's drug, Namenda IR, from the market, and thereby force all patients to its new once-daily drug, Namenda XR with patent exclusivity through 2029. Both drugs contain the same active ingredient memantine. New York alleged that this was a coercive switch designed to avoid generic competition and monopolize the memantine market.10 Forest had patent exclusivity preventing the marketing of generic Namenda IR until July 2015, after which Forest would likely lose most of its sales to generics within six months. This period is referred to as the "patent cliff."11 In 2013, XR was introduced as a "soft switch," which means Forest aggressively marketed Namenda XR to doctors, patients, and pharmacists, and sold XR at a discount that made it less expensive than IR. In addition, Forest, effectively lowered the price of XR through rebates to health plans, aimed at limiting co-payments for the drug. Subsequently, in early 2014, when Forest faced imminent generic competition, Forest commenced a "hard switch" from IR to XR. The company announced in February 2014...

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