Pharmaceutical Product Hop Antitrust Case Reaches Third Circuit

Briefing recently has closed in the first pharmaceutical product hop case to reach the Third Circuit, with argument set for July.  The Second Circuit addressed product hops in the Namenda case last year.  In Mylan Pharmaceuticals v. Warner Chilcott, plaintiffs challenged a series of product changes by the manufacturer of Doryx, a brand acne drug.  Plaintiffs alleged that the defendant brand companies made minor changes to its Doryx product to avoid generic competition, moving first from a capsule to a tablet, then to a scored tablet, and then to a dual scored tablet.  The district court granted summary judgment, finding that the product hops were not anticompetitive, and that Mylan simply failed to compete effectively, and that its lack of generic sales was not due to anticompetitive efforts by defendants to avoid the normal operation of generic substitution.   On appeal, the Third Circuit will be able to address what, if anything, a plaintiff must do to establish that product hopping is anticompetitive under the antitrust law.

Why Product Hops Work in the Pharmaceutical Industry

Within the context of the regulatory scheme for pharmaceuticals, product hopping can be uniquely successful.  Generic substitution in the United States is governed by FDA regulations and state drug product selection laws.  Since 1984, in every state, a generic that is of the same dosage size and form and provides an equivalent amount of active ingredient at the same rate and extent as a brand drug can be automatically substituted by a pharmacist when presented a prescription for the brand.  Such drugs are deemed by the FDA to be AB-rated, as reflected in FDA’s Orange Book.  If the brand company changes the dosage form, for example by changing from a capsule to a tablet as with Doryx, the generic capsule is not AB-rated to the brand tablet, and automatic substitution is not permitted.  The purpose of the automatic substitution system was, and is, to ensure that prescription drugs are eventually subjected to price competition after patent or regulatory exclusivities expire.   Prior to this system, generics had to compete with brands through expensive marketing efforts that focused on features other than price because prescriptions are written by doctors, creating a “price disconnect” because the person choosing the product does not pay for the product. Studies have shown that due to the price disconnect, cost is a relatively unimportant consideration, and non-price attributes, even among therapeutically equivalent products, were the differentiating factors.  Today, after thirty years of operating under this system, patients, pharmacists, physicians, and pharmacy benefit plans have come to rely upon its automatic operation to efficiently implement generic competition and its price benefits.

A common feature of product hop cases involves changing the original product in a way that does not alter its effect, but renders it sufficiently different from the original form that it will not be considered AB-rated to, or substitutable by pharmacists for, the original drug, and discontinuing the original form so that patients must move to the new form.  Thus, the new version offers no therapeutic benefit to the patient, but it benefits the brand company by avoiding generic substitution from equivalent versions of the old product.

The District Court Grants Summary Judgment to the Brand Defendants

The district court granted summary judgment despite finding that Defendants engaged in the product hop “primarily to defeat competition.”   Instead, the court found Mylan offered no evidence of anticompetitive conduct because it was able to gain approval for its generic version of Doryx, doctors were free to write prescriptions for a generic, and patients were free to ask for prescriptions for a generic.  The court stated that Mylan simply refused to compete for sales, and instead, wanted to rely on automatic generic substitution system to garner sales.  The court observed that “Defendants certainly did not exclude competition by denying Mylan the opportunity to take advantage of a regulatory ‘bonus.’”  The court concluded that absent proof of other exclusionary conduct, a contrary result could discourage innovation by brand companies fearing antitrust liability for trying to improve existing products.

The Appeal

Mylan has argued on appeal that the automatic substitution system is not a regulatory bonus, but instead is the efficient means of competition for generic drugs.  Otherwise, generic companies would have to market their products like brand companies, at the expense of the cost savings from generic substitution.  Mylan also argued that the district court ignored the evidence of exclusionary conduct of the withdrawal of the original form before generic entry, which put the case squarely within the contours of other product hopping cases, including TriCor, Suboxone, and Namenda.  Mylan argued that innovation would not be chilled, given that Mylan did not simply challenge the introduction of the new product, but also challenged the overall scheme, which included multiple product hops to avoid generic substitution.

Defendants argued that Mylan failed to show it was foreclosed from making its generic of the original product, and that when it finally gained approval for the later products, it was sold them for considerable profit.  Where Mylan failed was in its effort to compete head to head with the new Doryx forms, and to effectively market its product in the face of innovation.  Defendants disputed whether the removal of the capsule could be exclusionary because Mylan could have sought approval for the capsule long before it had, and then abandoned its effort on the capsules after the tablets were launched, and instead focused on formulating a generic of the new tablet.

The Third Circuit should squarely address the district court’s ruling that the serial hops can be anticompetitive. The district court also granted summary judgment on an alternative holding, that defendants did not have monopoly power over the market, which Mylan had defined as Doryx and its AB-rated substitutes.  The court rejected that market as too narrow and unsupported by the evidence, and instead held that the relevant market included all oral tetracyclines.  While the Third Circuit could decide the appeal on this narrower issue, it is unlikely.  First, SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056 (3d Cir. 1978), supports the narrower market theory advanced by Mylan.  Second, the district court’s ruling on the hop claim is potentially at odds with other rulings within district courts in the Third Circuit and with the Second Circuit’s ruling in Namenda.

At bottom, the appeal is an important battle over the future direction of the pharmaceutical industry.  On one side, brand companies claim that innovation is incremental, and that no matter how trivial a modification to a product may be, it must be permitted unfettered.  In their view, any interference by the antitrust laws can squelch the next big discovery.  On the other side, generic companies and consumers argue that, absent antitrust scrutiny, meaningful innovation will be sacrificed at the altar of easy money.  If brand companies can serially tweak existing products and take other steps to avoid generic competition, the incentive to engage economic and scientific resources in riskier research to truly innovate or to address untreated conditions will be rejected in favor of life cycle management strategies designed to ride existing cash cows for as long as possible.

One argument the Third Circuit should waste no time rejecting is that the generic companies should have to promote their products, and should not rely upon the “regulatory bonus” of the automatic substitution laws.  That “regulatory bonus” is nothing of the kind, but, instead, is the product of decisions made by the state and federal legislatures over thirty years ago to create a speedy and efficient mechanism to introduce price competition to brand drugs once patent or regulatory exclusivities expire.  The brand companies enjoy a period of earned exclusivity, competing with other brand companies based upon product features such as efficacy or convenience differences, and reap monopoly profits throughout.  But, once that exclusivity period comes to an end, the American public is supposed to enjoy the benefits of lower priced generics without resorting to inefficient means to obtain them (and the attendant increases in costs).  As defendants argued to the Third Circuit, the antitrust laws protect competition, not competitors.  Where defendants go astray is in focusing on Mylan as an individual competitor, arguing that it should have competed by undertaking aggressive (and unquestionably costly) promotional efforts to gain sales against the new version of Doryx.  The case is not so much about Mylan as a generic competitor, but it is about the nature of generic competition as a whole.  In the case of Doryx, Mylan perhaps could have benefitted as a competitor by trying to brand its generic and garner sales by promoting its product to doctors as if it were a brand, but price competition would have suffered because the automatic substitution mechanism was being thwarted.  If Mylan had branded its generic to gain as a competitor, consumers would have suffered, because no one needed another expensive branded version of Doryx, consumers needed the inexpensive generic version of Doryx.   

Product hop cases are about the harm to generic competition and the lack of price competition from automatic substitution, not about inadequacies of one or more generic competitors in trying to engage in features based competition (even if one promoted feature is a price differential).  Promotion based competition is not as economically efficient as the automatic substitution mechanism, in which price is the primary competitive feature.

About Faruqi & Faruqi, LLP

Faruqi & Faruqi, LLP focuses on complex civil litigation, including securities, antitrust, wage and hour, and consumer class actions as well as shareholder derivative and merger and transactional litigation.  The firm is headquartered in New York, and maintains offices in California, Delaware and Pennsylvania.

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About Joe Lukens

Joe Lukens is a partner in the firm’s antitrust practice group, resident in the firm’s Pennsylvania office.  He has represented plaintiffs in antitrust litigation for over 20 years.

Posted by Joseph T. Lukens

Partner at Faruqi & Faruqi, LLP
Pennsylvania Office
Tel: (215) 277-5770
Fax: (215) 277-5771

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