United States: Second Circuit Holds A Hard Switch Between Drugs Is An Unlawful Product Hop Under Section 2

On May 22, 2015, in a much-watched case, the Second Circuit upheld a preliminary injunction against Actavis PLC and its wholly owned subsidiary, Forest Laboratories, LLC (collectively "Actavis" or "Forest"), finding that Actavis's "hard switch" strategy to launch an extended-release version of its blockbuster Alzheimer's therapy and delist the immediate-release version would likely violate Section 2 of the Sherman Act.1 The Court held that because generic competition depends heavily on state drug substitution laws that allow pharmacists to substitute generics for branded products, the combination of launch and product removal constituted an anticompetitive "product hop" that would likely impede generic competition on the merits for the original immediate-release version of the drug.

Factual and Procedural Background

In January 2004, Forest launched its twice-daily immediate-release therapy for moderate-to-severe Alzheimer's, Namenda IR (memantine)2, generating over $1.5 billion in annual sales for the last several years. Five generic manufacturers have tentative FDA approval to launch on July 11, 2015 when regulatory exclusivity expires, and seven more may be approved for entry as early as October 2015. This generic entry was expected to reduce Forest's share of the immediate-release memantine market by over 80% within six months.

Forest developed a once-daily, extended-release version, Namenda XR, to improve patient compliance with treatment and extend its Alzheimer's franchise. Newly issued patents covering Namenda XR prevent generic entry until 2029. FDA approved Namenda XR in June 2010 and Forest launched in July 2013. As part of its initial "soft switch" launch strategy, Forest stopped actively marketing IR; promoted XR to physicians, caregivers, patients, and pharmacists; and discounted XR so patients would pay a lower co-pay for XR than IR. Internal Forest forecasts estimated that this "soft switch" strategy would only net a 30% market conversion.

The Court found in the record that, in order to boost the switch rate to an estimated 80 to 90%, Forest instituted several new strategies, which the Court called a "hard switch": (1) on February 14, 2014, Forest publically announced it would discontinue Namenda IR in August 2014, (2) Forest notified FDA of its intent to delist Namenda IR, and (3) Forest requested that the Centers for Medicare & Medicaid Services remove IR from its formulary so Medicare plans would not cover its prescription or use.

The State of New York filed its complaint in September 2014, alleging that the planned withdrawal of Namenda IR violated § 2 of the Sherman Act, and seeking a preliminary injunction requiring Forest to keep Namenda IR on the market at least through licensed generic entry in July 2015. The district court granted the preliminary injunction, finding that the State was likely to succeed on the merits and that competition and consumers would suffer irreparable harm if Forest's proposed actions were not halted.

The district court made several critical findings: (1) withdrawing IR from the market forced Alzheimer's patients to switch to XR as the only available alternative; (2) generic IR is not equivalent to XR and, thus, is not substitutable3 for branded XR; (3) high transactions costs would make patients forced to switch from IR to XR unlikely to switch back to generic IR; and (4) Forest's explicit purpose for withdrawing IR from the market was "to impede generic competition."4 Forest appealed to the Second Circuit.

Second Circuit's Decision and Analysis

The Second Circuit focused its antitrust analysis on the question of whether Forest's actions in removing Namenda IR from the market coerced patients and physicians into switching to Namenda XR. Critically, the Court found that the combination of launching a new product and delisting the original product resulted in the anticompetitive effects of sustaining and maintaining Forest's control over the memantine market. On its own, launching a new product was procompetitive, but in conjunction with removing the old product from the market, that combination could run afoul of Section 2's prohibition against monopolization.

The Court recognized that "[a]s a general rule, courts are properly skeptical about claims that competition has been harmed by a dominant firm's product design changes." United States v. Microsoft, 253 F.3d 34, 58-60 (D.C. Cir. 2001) (en banc). Nonetheless, the Court noted that "[w]ell-established case law makes clear that product redesign is anticompetitive when it coerces consumers and impedes competition."5 The Second Circuit turned to the analysis in its 35 year-old Berkey Photo, Inc. v. East Kodak Co. case, 603 F.2d 263 (2d Cir. 1979). There, Kodak, with a lawful monopoly in film, but not in cameras, introduced the new Kodacolor II film usable only in a new Kodak camera. The Court rejected a claim that Kodak was unlawfully using its film monopoly to monopolize the camera market, but at the same time (in a footnote) cautioned that "the situation would be completely different if, upon the introduction of the [new system], Kodak had ceased producing film in [old size], thereby compelling camera purchases to buy a [new Kodak camera]." Id. at 287. n. 39.

Applying this analysis here, the Court concluded that the hard switch was coercive because (1) it forced current Namenda IR patients to switch to the new Namenda XR in order to maintain their treatment regimen without interruption, and (2) transactions costs would likely prevent patients from switching back to Namenda IR upon generic entry. The Second Circuit reasoned: "Certainly, neither product withdrawal nor product improvement alone is anticompetitive. But under Berkey Photo, when a monopolist combines product withdrawal with some other conduct, the overall effect of which is to coerce consumers rather than persuade them on the merits, and to impede competition, its actions are anticompetitive under the Sherman Act."6

The Court rejected the defendants' arguments that courts should not distinguish between hard and soft switches by again invoking Berkey: "the market can determine whether one product is superior to another only 'so long as the free choice of consumers is preserved.'"7 Citing Microsoft, the Court found that forcing patients to switch to XR would prevent generic substitution, the hard switch would eliminate what would otherwise have been competition on the merits.8

The Court also rejected Forest's "free riding" argument that the antitrust laws do not protect competitors simply free riding on the innovations or competitive efforts of others. Forest suggested that generic manufacturers should advertise their products, lobby insurance companies for placement on formularies, and seek prior authorization requirements for their products over other competitors. But, according to the Court, that promotion is not practical or cost-effective because there is no guarantee that a pharmacist would substitute that particular generic for the branded product instead of any other approved generic.9 Critically to the Court, Congress and the state legislatures had made a policy decision to endorse generic "free riding" by developing Hatch-Waxman and the automatic substitution laws.

In addition to the coercion question, the Court recognized the long-held antitrust tenet that a willingness to forsake short-term profits in favor of long-term monopolization or market power was evidence of anticompetitive intent. Here, the Court couched the withdrawal of Namenda IR from the market as a willingness to forego short-term profits – with revenues in excess of $1.5 billion annually since 2012 – in favor of achieving long-term market power by switching the market to Namenda XR. This evidence was persuasive to the Court.

The Second Circuit used the Supreme Court's recent decision in FTC v. Actavis, Inc., 133 S. Ct. 2223 (2013) to reject Defendants' argument that their patent rights shield them from antitrust liability. The Defendants argued that they had merely exercised rights afforded by the Patent Act. But to the Court, "it is the combination of Defendants' withdrawal of IR and introduction of XR in the context of generic substitution laws that places their conduct beyond the scope of their patent right for IR or XR individually."10

Lastly, the Court upheld the unorthodox remedy that Forest must continue to produce Namenda IR and must not delist the product prior to anticipated generic entry in July because either path would irreparably harm competition and consumers. Allowing the switch in any way would cause "[p]ermanent damage to competition" and economically harm consumers by imposing higher prices to the tune of nearly $300 million for consumers, $1.4 billion for third-party payors, and $6 billion for Medicare over ten years.11 Importantly, these significant sums and potential for irreparable harm to competition by effectuating the switch and effectively excluding all future generic competition were sufficient to impose this highly unusual injunctive relief.

Takeaways

The opinion leaves several critical takeaways. First, this was an issue of first impression with the Courts of Appeal, and it is ironic that it arose in the Second Circuit, which then utilized dicta in its somewhat dated Berkey opinion upon which to ground its analysis. Several other similar cases have reached the same result – that is, when a pharmaceutical company delists its branded product in advance of generic entry, then it is a violation of the antitrust laws. The District Court of Delaware came to this result nine years ago in Abbott Labs. v. Teva Pharm. USA, Inc. when Abbott pulled various dosage strengths of TriCor from the market and the Eastern District of Pennsylvania reached the same result just six months ago regarding Reckitt Benckiser's Suboxone lifecycle management strategy.12

Second, the Court implicitly endorsed the "soft switch" strategy as inherently procompetitive, suggesting that it was a form of price and product superiority competition that the antitrust laws encourage. According to the Court, the "soft switch" was not coercive and allowed patients and physicians to "evaluate the products and their generics on the merits in furtherance of competitive objectives."13 The "hard switch," that is, the removal of Namenda IR from the market, was the only potentially anticompetitive action because it effectively forced patient conversion. This result is in line with the results of other pharmaceutical cases. Nonetheless, it probably overstates the case to suggest a "soft switch" is per se legal – one can anticipate challenges to such programs as having coercive elements that puts it within the holding here, but a well-crafted program should withstand antitrust scrutiny.

Third, the Court considered innovation and the incentives to innovate to be a significant potential procompetitive justification or benefit, but indicated that it will look skeptically upon innovation arguments that appear pretextual.14 Here, the Court found that there was no significant innovation between the immediate-release and extended-release product for at least two reasons: (1) Namenda IR was the sole twice-daily Alzheimer's treatment on the market and all other drugs were once-daily treatments, like Namenda XR, and (2) branded success here would incentivize incremental innovative changes such as dosage changes or timed-release formulations with minimal risk rather than larger, more significant new chemical developments with greater market risk.15 The Court believed it would embolden larger investment in research and development instead of marginal changes.

Finally, this case is another example of the considerable antitrust product market narrowing in Hatch-Waxman cases over the past few years. Here, the Court found (and, indeed, the parties did not dispute) that the product market was the molecule, rather than the broader market for Alzheimer's treatments.16 This limited market definition essentially leads a court to skip the market power analysis and nearly assume that the branded pharmaceutical company has market power in the market for the particular molecule. This Court's endorsement only furthers that oversimplification.

Footnotes

1 State of New York v. Actavis PLC, No. 14-4624 (2nd Cir. May 22, 2015) [hereinafter referred to as Slip Op.], available at http://www.ca2.uscourts.gov/decisions/isysquery/aac987e0-7a3a-4d3b-8495-983bb309036f/1/doc/14-4624_redacted_opn.pdf.

2 Memantine partially blocks the brain's n-methyl d-aspartate ("NMDA") receptor by preventing the receptor from becoming overexcited, which can cause neuron toxicity and brain degeneration. Another class of Alzheimer's therapies are acetylcholinesterase inhibitors ("CIs") that work by reducing the breakdown of chemical messengers transmitting information between nerve cells in the brain. Because of these differences, the Court found that the drugs are prescribed in conjunction with, not independently of, memantine, and, as a result, memantine was a relevant antitrust market on its own.

3 State automatic substitution laws, for the most part, require that a generic product be bioequivalent and be AB-rated to their branded alternative in order to be automatically substituted. Because Namenda XR is a different formulation of memantine and at a different dosage level, generic Namenda IR cannot be automatically substituted. As a result, generic companies must file a new Abbreviated New Drug Application seeking FDA approval for the new formulation and dosage level, which is also likely to result in new patent litigation over the patents specifically listed for Namenda XR.

4 Slip Op. at 22-23.

5 Slip Op. at 33.

6 Slip Op. at 35-36 (citations omitted).

7 Slip Op at 38, citing Berkey, 603 F.2d at 287.

8 Slip Op. at 39-40, citing Microsoft, 253 F.3dat 65.

9 Slip Op. at 40-41, 45.

10 Slip Op. at 52-53.

11 Slip Op. at 56.

12 See, e.g., Abbott Labs. v. Teva Pharm. USA, Inc., 432 F. Supp. 2d 408, 424, 430 (D. Del. 2006) (denying the motion to dismiss the antitrust claims because it was likely anticompetitive to remove old versions of TriCor from the market, including buying back stock of the older product, prior to expiration of various regulatory exclusivities); In re Suboxone (Buprenorphine Hydrochloride & Naloxone) Antitrust Litig., 2014 U.S. Dist. LEXIS 167204, *21-32 (E.D. Pa. Dec. 3, 2014) (allowing the antitrust claims to proceed on grounds that the active removal of the old product from the market, as opposed to soft switch tactics, could constitute an antitrust violation).

13 Slip Op. at 37.

14 Slip Op. at 50.

15 Slip Op. at 16.

16 Slip Op. at 30.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Bruce D. Sokler
Timothy J. Slattery
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions