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Second Circuit Affirms Preliminary Injunction in Antitrust Suit Against Drug Companies for "Product Hopping"

On May 22, 2015, in People of the State of New York v. Actavis, PLC and Forest Laboratories, LLC1, the Second Circuit issued an Order affirming a preliminary injunction issued by the United States District Court for the Southern District of New York2 in an antitrust suit brought by the Attorney General for the State of New York challenging the marketing practices of defendants Actavis, PLC and Forest Laboratories, LLC. (Forest)3.  In its Order, the Second Circuit noted that its opinion has been filed under seal concurrently with its Order.  The court of appeals also ordered the parties to show cause why its opinion should not be unsealed, together with proposed redactions, by May 26, 2015.         

Actavis is the parent company of its subsidiary Forest.  Forest holds the patent rights to Namenda IR.  Forest markets Namenda IR, the brand-name of the drug memantine.  Defendants have a monopoly for Namenda IR in the relevant market, the United States.  In its amended complaint, New York alleges that through “product hopping,” the defendants plan to withdrawal Namenda IR from the market prior to patent expiration and substitute their newly branded drug Namenda XR.  By  affirmatively withdrawing Namenda IR from the market, a tactic known as “forced switch,” Defendants intend to preclude entry into the market of lower cost generic memantine, and thus maintain monopoly power for their drug, used to treat moderate to advanced Alzheimer’s disease.4  

The State of New York alleges that the defendants’ marketing scheme violates federal and New York State antitrust laws.  Specifically, the complaint alleges violations of Section 1 and Section 2 of the Sherman Act5, as well as New York State’s Donnelly Act6.  In its action, New York seeks injunctive relief, enjoining the defendants from implementing its unlawful marketing scheme.  The State also seeks disgorgement of profits, civil penalties and/or damages and restitution7.     

On December 1, 2014, the district court issued a preliminary injunction, enjoining the defendants from discontinuing the sales of its drug Namenda IR, and thus precluding the defendants from undertaking its forced switch scheme that would have required physicians to prescribe, and pharmacies to dispense, its new drug Namenda XR for the treatment of Alzheimer’s disease.     

The Second Circuit granted expedited appeal sought by the defendants to challenge the preliminary injunction.       

Regulatory Regime

The Federal Food, Drug and Cosmetic Act (FDCA)8 establishes the framework for the manufacture, sale and distribution of drugs in interstate commerce.  The FDCA mandates that a pharmaceutical company  seek prior approval for a new drug before it can be marketed in interstate commerce.  Specifically, a New Drug Application (NDA) must be filed with the Food and Drug Administration (FDA), demonstrating, through scientific data, that the drug is safe and effective for its intended use.  This is a costly and time consuming process.9    

In 1984, Congress enacted the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the “Hatch-Waxman Act.”10  That statute addresses dueling interests between pharmaceutical companies with brand-name drugs and companies that seek to market generic versions of those drugs.  In enacting the Hatch-Waxman Act, Congress intended to encourage innovation and research for new drugs and, at the same time, foster price competition in the pharmaceutical market.  To this end, the Hatch-Waxman Act amended the FDCA by providing a different pre-marketing approval regime for generic drugs.  A manufacturer who seeks to market a generic version of a drug that has already been approved by the FDA under a NDA may file an Abbreviated New Drug Application (ANDA).  This process allows for approval of the generic version provided it has the same active and is “bioequivalent” to the previously approved drug (the “reference listed drug”) under the NDA route. 11   This regime allows the generic to rely on studies that were previously submitted with a NDA by the manufacturer of the brand-name drug, thereby lessening the time and expense to obtain approval for marketing the generic drug.  In exchange, the Hatch-Waxman Act provided benefits for manufacturers of brand-name drugs by extending the patent term, and market exclusivity, for the brand-name drugs.12  In Caraco Pharm. Labs., Ltd. v. Novo Nordisk A/S13, the Supreme Court explained that the ANDA provides an avenue for the generic competitor to “piggy-back[ ] on the brand’s NDA.”  The ANDA process thus is “designed to speed the introduction of low-cost generic drugs to market.”14

A generic drug that receives an ANDA approval as bioequivalent to a reference listed drug may also be “AB-rated” by the FDA.  A generic drug deemed AB-rated means that the generic, in addition to being bioequivalent, is therapeutically equivalent to the branded drug.15  This has significance since an AB-rated drug is listed in the Orange Book, and can be substituted for a brand-name drug (or reference listed drug) by a pharmacist when dispensing the drug to the consumer, at lower cost.  Many states have generic substitution laws that either mandate or permit pharmacies to substitute a lower cost generic drug for a brand-name drug, unless otherwise directed by the prescribing physician. 16           

Background

Forest holds a patent for its brand-name drug Namenda IR.  Through the NDA regime, that drug was approved by the FDA for the treatment of moderate and severe forms of Alzheimer’s.17  Forest holds a monopoly in the market for that product because it is the exclusive seller of the drug.  The patent for Namenda IR is due to expire in July 2015, at which time the pharmaceutical companies would face competition from the generic versions of Namenda IR.    

To avoid loss of market share to generic versions of the drug upon patent expiration for Namenda IR, defendants plan to cease distribution of that drug prior to the date for patent expiration, and substitute another patented drug, Namenda XR, for the treatment of moderate and severe Alzheimer’s.18  The patent for Namenda XR expires in 2029, extending Forest’s market exclusivity.  Namenda XR has the same therapeutic effect as Namenda IR.  Namenda XR differs from Namenda IR with respect to the time-release properties of the two drugs.  Namenda IR was the immediate-release version of that drug.  The new drug, Namenda XR, was an extended-release version.  Thus, the new drug would be taken by consumers once daily, whereas the older version was taken twice daily.  Additionally, Namenda IR is in a tablet form, whereas Namenda XR is in a capsule form.  In its amended complaint, New York contends that in the NDA for Namenda XR, no data was submitted to demonstrate that Namenda XR was more efficacious than Namenda IR.19  In the State’s view, Manenda XR lacks any meaningful benefits compared with Namenda IR.20  (“Namenda IR and Namenda XR are practically the same drug.”)21   The State argues that defendants’ plan to discontinue Manenda IR prior to expiration of market exclusivity is driven solely to maintain a monopoly and reap financial rewards.22           

In February 2014, Forest announced plans to discontinue Namenda IR on August 15, 2014.  By removing Namenda IR from the market prior to the expiration of its patent, the defendants would engineer a strategy to influence physicians to prescribe the new drug, Namenda XR, as the only drug available for the treatment of moderate to severe Alzheimer’s.  In pursuit of this marketing scheme, New York accuses the defendants of erecting barriers to entry to thwart competition from makers of the generic form of the drug Namenda IR.                       

In its lawsuit, New York argues that defendants’ plans to force switch consumers of Namenda IR by withdrawing that drug from the market to substitute Namenda XR is a “manipulated ploy”23 that will “devastate generic competition.”24  According to the State, the balance struck under the Hatch-Waxman Act, to encourage price competition from generic drugs, in exchange for longer exclusivity rights, would be “circumvented.”25  This is so since generic memantine will not be AB-rated to Namenda XR.  Thus,   defendants’ marketing scheme will preclude the operation of state generic substitution laws mandating pharmacies to switch from Forest’s brand-name drug Namenda XR to the lower cost generic version of Namenda IR.  New York contends in its amended complaint that state generic substitution laws “is the primary mechanism”26 that allows generic drugs to compete in the market.         

New York challenges defendants’ marketing scheme as creating barriers to competition from generic drug manufacturers.  By withdrawing its older drug Namenda IR from the market prior to patent expiration, and substituting its newer patented drug Namenda XR, consumers will be forced to switch to Namenda XR, thereby protecting Forest’s monopoly for the drug, and denying access to the generic version of Namenda, at a lower price, to consumers (through lower co-payments), and payors.  In its amended complaint, the State of New York contends that the defendants’ marketing scheme would impact negatively on the already “financially strapped”27 health care system, and on Alzheimer’s patients who “must bear . . . unwanted costs” and “unnecessary changes to their medical routine.”28             

New York State insists that there is no legitimate business justification for defendants’ plans to withdrawal Namenda IR from the market.29  Thus, the scheme to force switch consumers amounts to exclusionary conduct precluding lawful competition In the market place for the generic version of Namenda IR.  New York asserts defendants’ actions constitute unlawful monopolization, and an unreasonable restraint of trade, in violation of federal and state antitrust laws.30

The views and opinions expressed herein are those of the author, and cannot be attributed to the Office of the Inspector General for the District of Columbia Government. 

[1]Case No. 14-4624 (2nd Cir. May 22, 2015).      

[2]Case No. 14-CV-7473 (S.D.N.Y. opinion on December 11, 2014 granting preliminary injunction; preliminary injunction order entered on December 15, 2014).    

[3]Amended Complaint, Case No. 14-CV-7473 (RWS)(S.D.N.Y filed Dec. 10, 2014)

[4]New York State’s amended complaint, at par. 2. 

[5]15 U.S.C. § 1 and 15 U.S.C. § 2, respectively. 

[6]New York State General Business Law §§ 340-47.  The complaint also alleges violation of New York State Executive Law § 63(12). 

[7]Amended complaint, par. 9.  

[8]21 U.S.C. § 301, et seq

[9]21 U.S.C. § 355(b)(1). 

[10]Pub. L. No. 98-417, codified at: 21 U.S.C. § 355, 21 U.S.C. § 2201, and 35 U.S.C. §§ 156, 271, 282.    

[11]See 21 U.S.C. §§ 355(j).  A generic is “bioequivalent” to a branded drug when the rate and extent of absorption of the generic drug is not significantly different from the rate and extent of absorption of the branded drug, when administered at the same dosage.  See 21 U.S.C. § 355(j)(8)(B); 21 C.F.R. § 320.1(a).     

[12]The drug manufacturer could seek extension of the patent term for up to five years to compensate for the time in obtaining FDA approval for the drug.  35 U.S.C. § 156.  Additionally, under amendments made to the Hatch-Waxman Act by the Food and Drug Administration Modernization Act of 1997, Pub. L. No. 105-115, the manufacturer would be eligible for six months of non-patent “pediatric exclusivity” provided it undertook certain pediatric research.  35 U.S.C. § 156; 21 U.S.C. § 355a.              

[13]132 S. Ct. 1670 (2012). 

[14]Id. at 1676. 

[15]To obtain an AB rating, the generic drug must not only have the same active ingredient, but also the same form, dosage, strength, and safety and efficacy to the branded drug.  See U.S. Food & Drug Admin., Approved Drug Products with Therapeutic Equivalence Evaluations, Preface (32d ed. 2012).    

[16]See, e.g., N.Y. Educ. Law, § 6816-a. 

[17]The FDA approved Namenda IR on October 16, 2003, and defendants commenced marketing that branded drug in January 2004.  

[18]The Food and Drug Administration approved Namenda XR in June 2010.  Defendants began to market Namenda XR in July 2013.   

[19]Amended complaint, par. 67. 

[20]Id., par. 78. 

[21]Amended complaint, par.118. 

[22]Id., par. 99. 

[23]Amended complaint, par. 103; New York’s Memorandum of Law In Support of Its Motion for Preliminary Injunction, at 32.   

[24]Id.

[25]Id.

[26]Amended complaint, par. 24.  

[27]Id., par. 6. 

[28]Id.

[28]Id., par. 100. 

[29]Id.at par. 43.  

[30} Id.at par. 43.

© Copryright Stuart SilvermanNational Law Review, Volume V, Number 142

TRENDING LEGAL ANALYSIS


About this Author

Stuart Silverman, Washington College Law Professor,

Mr. Silverman was an attorney with the Medicaid Fraud Control Unit in the Office of the Inspector General for the District of Columbia Government (OIG).  While with the OIG, he was designated as a Special Assistant United States Attorney and a Special Assistant Attorney General for the District of Columbia.  

Mr. Silverman has practiced health care law for most of his professional life. Prior to joining the OIG, Mr. Silverman was in private practice with Greenberg Traurig, and was also with the Office of the General Counsel for the U.S....

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