Lose the Anticompetitive Edge

Generics licensing agreements are getting attention from regulators and prosecutors alert to potential antitrust violations.
Oct 01, 2004

Bryan Schaefer
Two important pharma antitrust developments took place late last year. First, President Bush signed the Medicare Modernization Act (MMA) into law. A portion of this legislation was designed to prevent anticompetitive agreements between innovative and generic drug manufacturers that limit consumers' access to affordable drugs. Second, the Federal Trade Commission (FTC) ruled that Schering-Plough, Upsher-Smith Laboratories, and American Home Products (AHP, now Wyeth) violated the Sherman Antitrust Act by illegally entering into agreements in 1997 and 1998 to delay the entry of lower-cost generic competition for Schering-Plough's prescription drug K-Dur 20. Together, the new Medicare law and FTC decision indicate that this type of agreement, a source of judicial discord among circuit courts in the past, will be closely scrutinized in the future.

Submit for Review Even after the passage of MMA, the basic framework of the generic drug approval process established by Hatch-Waxman—through abbreviated new drug applications (ANDAs)—remains the same. A generics company can still be awarded 180 days of market exclusivity by making a successful "paragraph IV" challenge that a patent listed by an innovative manufacturer in FDA's Orange Book is either invalid or will not be infringed by the manufacture, use, or sale of a generic version. But one important change established by MMA is that agreements between generics and innovative manufacturers must be submitted to the FTC and the U.S. Assistant Attorney General within 10 days of the agreement or before the generic drug is commercially marketed, whichever comes first.

In addition, generics companies that file ANDAs on the same compound must also submit for review any agreements they have regarding its 180-day exclusivity period. Companies that fail to do so are not only subject to fines of up to $11,000 per day, they may also be forced to comply and be subjected to equitable relief, such as an injunction, by a federal district court. What's more, generics producers risk losing their 180 days of exclusivity if they enter agreements found to be anticompetitive.

What Not to Do The Schering-Plough case illustrates the type of agreement MMA is intended to prevent. The company held a patent on a drug due to expire in 2006. To settle patent litigation that arose under separate paragraph IV challenges from two companies in 1997, Schering-Plough agreed to pay Upsher $60 million not to enter the market with a generic until 2001. And in 1998, Schering-Plough agreed to pay AHP $30 million to refrain from entering the market until 2004. The administrative law judge who originally heard the case asserted that "Schering's patent gave it the legal right to exclude a generic competitor from the market, absent proof that the patent was not valid or that the generic products did not infringe."

On appeal, FTC employed the Rule of Reason—one of the two major modes of antitrust analysis—and looked at the Schering-Plough agreement's effects, efficiency justifications, and other factors. Schering-Plough argued that it paid $60 million to Upsher to license six products, but FTC found that the contract's true purpose was to delay Upsher's market entry. FTC determined that the agreement was an unreasonable restraint of trade under Part 1 of the Sherman Antitrust Act.

Enter in Good Faith Various courts have examined this issue, and there is no consensus among the circuits on how such agreements should be treated. Earlier in 2003, two cases with similar scenarios were decided in different ways. In Valley Drug Company v. Geneva Pharmaceuticals, the11th circuit held that such agreements were not illegal under Part 1 of the Sherman Act because of the inherently exclusive nature of patents and suggested that they would have to be examined case by case. In Cardizem CD Antitrust Litigation, however, the Sixth Circuit held that such agreements were illegal and did not consider the implication of the patent system on antitrust concerns.

Congress and FTC seem intent on preventing tactics that might increase drug prices or delay competition. So makers of both innovative and generic drugs must avoid blatantly anticompetitive litigation settlements.

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