Pharma's Day in Court

July 1, 2008
Pharmaceutical Executive
Volume 0, Issue 0

A look at some of the court cases that could actually change the pharma playing field

In the early morning cold of mid-January, members of the European Commission were poised for a cross-continental raid on the biggest pharmaceutical companies in the world. These dawn raids hit GlaxoSmithKline, Pfizer, and AstraZeneca, among others, with regulators intent on proving that the companies were engaged in price fixing and misusing patent rights. Strangely enough, the EC didn't have any evidence of these charges, or any wrongdoing whatsoever. Rather, the raids were prompted by a general sense that the market was broken. Competition in pharmaceutical markets, according to EC claims, didn't seem to be working. Drugs were too expensive, and not enough new ones were coming to market.

"This all reflects a very aggressive attitude by the Commission against the industry which is unprecedented," says David Roberts, former global head of intellectual property at GlaxoSmithKline, now chairman of the consultancy Stratagem IPM. "Expect anti-competition action to follow."

These are lively times for pharma. Governments are pushing back hard against the cost of healthcare, partly by putting the industry under a microscope. Generics companies are going after patents with a variety of new strategies. Tort lawyers are busily hunting for the next Vioxx, while consumer groups are on the prowl against marketing and advertising techniques they feel are misleading.

In short, pharma's finding itself in the courtroom pretty often these days. To date, some interesting trends have emerged:

  • The US government has shown increasing finesse with leveraging the qui tam provision of the False Claims Act, and now has a pipeline of whistle blowers' testimonies to fuel a generation of lawsuits against the industry.

  • The Feds have shown the states how to go after Big Pharma in a number of different areas, specifically in Medicare and Medicaid fraud. Meanwhile, the lines are being redrawn in the area of product liability and states' powers.

  • The effects of court decisions are reaching well beyond the compliance officer's jurisdiction, and are having meaningful impact throughout the rest of the industry, particularly in medical marketing.

There also seems to be no ceiling to charges over off-label promotion. Lilly recently paid $1 billion—the largest sum ever—to settle the investigation surrounding the off-label promotion of its bipolar and schizophrenia drug, Zyprexa.

But there's more to prosecutions and lawsuits than fines and settlements. Some of the most interesting legal cases facing pharma these days could actually change the playing field. With that in mind, here's a look at some of the most important pharma-related legal cases of the past year or so.

Preemption: Who Can Sue?

The US Constitution states that the laws of the United States shall be the supreme law of the land. When federal and state laws conflict, what the federal government says, goes. If this concept—called preemption—holds true in the realm of pharmaceutical regulation, FDA's decisions should trump the states. If FDA says a drug is safe, the states shouldn't be able to rule that it's dangerous. If FDA approves a drug's labeling, a state court shouldn't be able to hold a pharma company liable for failure to warn of a side effect.

So how thoroughly does preemption protect drug and device companies? The question has been before the Supreme Court twice in 2008, with another important case expected to be heard this fall. "This is the most active the Supreme Court has been on the topic of preemption probably ever," says Mark Hermann, partner at Jones Day and coauthor of the popular "Drug & Device Law Blog."

In February, the Supreme Court heard Riegel v. Medtronic, which involved a patient who was injured when a Medtronic balloon catheter burst during an angioplasty procedure. Five days later, the Court heard Warner-Lambert v. Kent, a case brought by a group of Michigan citizens who say they were injured by Rezulin (troglitazone), a diabetes drug that was withdrawn from the market in 2000 because of liver toxicity.

Both cases dealt with the issue of whether state courts and juries had the power to resolve negligence claims for damages, or if the FDA's decision to approve a drug or device, through powers granted by Congress, preempted them. "At the base of the preemption argument in Riegel is a premarket FDA approval process, which is a very stringent, well-considered process," says Caitlin Halligan, a former Solicitor General of New York State and now a partner with Weil, Gotshal & Manges. "Where you have decisions by FDA based on a less stringent review process, that's where you may see continued litigation over whether state laws can be enforced."

In Riegel, the justices voted 8-to-1 in favor of preemption. But that was a device-related case involving premarket approval, and there is specific language in the Medical Device Amendments of 1976 establishing preemption. Closer to home is Warner-Lambert—but once again, the case has limited applicability. Michigan, where the case was first brought, is one of a handful of states that have laws granting FDA-approved drugs protections against liability suits, except when the approval was obtained by fraud. In Warner-Lambert v. Kent, the plaintiffs charged that the company concealed data about Rezulin's toxicity when it submitted the drug to FDA for approval. With Chief Justice John Roberts recusing himself, the Court split 4-4, affirming the decision of the lower court, which had ruled that the suit could go forward.

The case to watch is Wyeth v. Levine, which goes before the Supreme Court this fall. In this case, a musician named Diane Levine was administered Wyeth's anti-nausea drug Phenergan (promethazine) by IV push. Somehow, the drug came into contact with arterial blood (something the label warns against); Levine's arm turned gangrenous and had to be amputated.

The Phenergan label not only warns against the dangers of injecting into the artery, it urges "extreme caution" to prevent this outcome when the drug is given by IV push. The plaintiffs argued that the label should have prohibited IV push injection. Wyeth argued that FDA's authority over labeling prevented them from doing so, and that the suit was preempted. The Vermont Supreme Court rejected the claim, and the case now awaits review by the US Supreme Court.

It's a case that potentially offers companies a broad shield against product liability suits. "If the court in Wyeth finds that state court actions are preempted, it would set a new base line by taking a wide range of tort claims off the table," says Halligan. "That's a powerful tool for industry in terms of predicting and containing its litigation exposure."

Intellectual Property: Isn't It Obvious?

To be patentable in the United States, an invention must be novel, non-obvious, and useful. In one of the most important intellectual property cases in recent memory, KSR v. Teleflex, the Supreme Court examined an adjustable gas pedal connected in a specific way to an electronic throttle, and declared the invention obvious and unpatentable. In the process, the Court laid out new guidelines for obviousness that have had significant impact on the pharmaceutical industry, making pharmaceutical patents harder to obtain and easier to invalidate.

Jonathan Singer, a principal for Fish & Richardson, explains that the whole way of looking at obviousness has changed. "It used to be a much more rigid analysis," he says. The patent stood if the elements of it weren't specifically disclosed in prior art or the total body of knowledge available, and if one had to combine two or more references of prior art to create the invention. "Now it's more about, if one looks at prior art, how would one with ordinary skill interpret it? If it's a logical next step to get where the patent is, there can be a finding of obviousness. Watch for companies on trial to focus on telling the 'invention story' and demonstrating unexpected results," says Singer.

What could be at stake are formulations, controlled releases, and enantiomer patents, which in many cases represent line extensions and next-generation dosing of pharma's remaining blockbusters. KSR has already been used to invalidate several such patents. For example, Mylan successfully overturned the patent to Pfizer's Norvasc by attacking as obvious the idea of creating the besylate salt of amlodipine, the drug's active ingredient. (The patent on amlodipine itself had already expired.) The formulation of Merck's Pepcid Complete—which uses an impermeable coating on granules of famotidine—was similarly declared obvious under the new rules.

But the rules for obviousness are still being written. As a single enantiomer of a previous drug, Forest's SSRI Lexapro looked like a good target. The court found otherwise, at least partly because of the difficulty of separating the enantiomers. And Mylan argued that the chemical structure of Takeda's Actos (pioglitazone) was an obvious development on a known compound. The court said that wasn't enough, stating, "[I]n cases involving new chemical compounds, it remains necessary to identify some reason that would have led a chemist to modify a known compound in a particular manner to establish prima facie obviousness of a new claimed compound."

"The fact that the Supreme Court chose to rejigger the standard for determining whether a patent is enforceable or valid is huge," says Jim Hurst, litigation partner at Winston & Strawn. "It's too early to tell if it going to result in patents being held invalid or not, but we know that in 90 percent of patent cases, the parties and the court are analyzing KSR."

Criminal Prosecutions: DOJ Gets Personal

By now, just about every Big Pharma has been investigated for off-label marketing, and gone through what's become a fairly standard settlement process: huge fines, a Corporate Integrity Agreement, and a long list of compliance and monitoring tasks. It's only in the biggest and most egregious cases—such the Feds' whopping $875 million bust of TAP in 2001 for using kickbacks and other questionable tactics to promote Lupron (leuprolide)—that criminal charges have been levied against specific individuals. (The TAP defendants, by the way, were all found not guilty.)

But now the Justice Department is raising the specter of individual liability in the pharmaceutical industry. Over the last three years, it has brought criminal charges in three important cases. In 2006, the US District Court in Brooklyn charged Maryland psychiatrist Peter Gleason with the unlawful promotion of Xyrem, a drug approved for narcolepsy that shows promise in fibromyalgia and other conditions. (The charges were against Orphan Medical, a company that was later acquired by Jazz Pharmaceuticals.) It contains the active ingredient gamma-hydroxybutyrate, which the Drug Enforcement Agency classes as a Schedule III drug. Although physicians enjoy far greater liberties to talk about off-label uses for drugs, the state felt that Gleason went too far, taking tens of thousands of dollars from the drug's manufacturer in exchange for touring the country touting Xyrem's benefits in treating depression and pain relief. The indictment raises troubling issues about regulation of physicians' free speech and the use or lack of use of scientific evidence in forming medical opinions. The case has not yet come to trial.

In 2007, the three top executives at Purdue Pharma pled guilty to criminal charges of misbranding for their part in promoting OxyContin as safer and less subject to abuse than other pain relievers. The company paid more than $700 million to settle the case. Then-CEO Michael Friedman, general counsel Howard Udell, and former chief scientific officer Paul Goldenheim paid fines ranging from $7.5 million to $19 million.

Perhaps the most curious case is the indictment this past March of Scott Harkonen, former CEO of the biotech InterMune. Starting in 1999, InterMune marketed Actimmune (interferon gamma 1B), which was approved for chronic granulomatous disease and severe malignant osteopetrosis—both rare, hereditary conditions. However, most of the sales of Actimmune were for idiopathic pulmonary fibrosis (IPF)—also a rare disease, but a much bigger market than either of the approved uses. In 2006, the company paid nearly $37 million to settle False Claims Act violations and off-label marketing charges, and Harkonen moved on to become CEO of the biotech CoMentis.

But now, the DOJ has come back for Harkonen personally, charging him with wire fraud and felony violations of the Food, Drug, and Cosmetic Act for his part in the off-label promotion. The smoking gun: a press release, issued in 2002, reporting on a clinical trial of Actimmune in IPF. The trial, as subsequently written up in the New England Journal of Medicine, was a failure. The drug had no effect on progression-free survival, pulmonary function, or quality of life. More patients died on placebo—17 percent, compared with 10 percent on Actimmune—but the difference wasn't statistically significant. That didn't stop InterMune, though. "InterMune Announces Phase III Data Demonstrating Survival Benefit of Actimmune in IPF," read the press release headline.

"The fact that the case involves a press release as a central facet [makes it] a ripple effect case—it has importance for everybody in the PR business," says Wayne Pines, president of regulatory services at APCO Worldwide and former associate commissioner for public affairs at FDA. "It shows the seriousness with which the government takes off-label cases."

Harkonen's first court appearance, to review discovery, is scheduled for September.

Patents: Deal or No Deal?

Until a recent key decision, if you outlicensed a piece of patented technology to another company, the deal brought with it a bonus piece of protection for your intellectual property: The company you licensed it to wasn't allowed to ask a court for a declaratory judgment holding the patent invalid. The Federal Circuit interpreted a license as a settlement between parties and said a licensee cannot challenge a patent held by its partner without first breaching that contract—a risky action, to be sure.

That rule has changed, thanks to a Supreme Court decision over one of the most controversial of biotech patents—a decision that seems likely to change the playing field for both licensing and at-risk launches of generics.

The suit involved Genentech's so-called Cabilly patents, (named for inventor Shmuel Cabilly), which protect the company's method for developing antibodies. The original Cabilly patent was filed in 1983. The same year, a company called Celltech filed a similar patent in the UK. After long and complicated proceedings before the patent office and the courts, Genentech ended up with a new patent, Cabilly II, granting it a full 17 years of protection—for a total of 29 years of patent life, expiring in 2018. This was great news for Genentech, but bad news for companies that licensed the technology, including MedImmune, which paid royalties to use the Cabilly technology on Synagis, a drug for pediatric respiratory viruses.

MedImmune had few options. With 80 percent of its revenues wrapped up in Synagis, the company couldn't risk breaching the contract. But if it didn't breach the contract, there could be no suit. The Supreme Court saw things differently. "Where threatened government action is concerned, a plaintiff is not required to expose himself to liability before bringing suit to challenge the basis for the threat," wrote Justice Antonin Scalia in the majority opinion. He argued that the same should hold true in private disputes as well.

The decision now gives licensees the best of both worlds. "The issue has always been: you would have to give up your license to challenge the patent, which meant if you lost, you'd be stuck," says Stephen Albainy-Jenei, an attorney with Frost Brown Todd, and the editor of the "PatentBaristas" blog. "That has really put a damper on anyone challenging. It's going to make licensees to take a harder look. Are they paying a bunch of money where they don't need to?"

While MedImmune may destabilize thousands of existing patent settlements and license agreements, a more immediate effect, as shown in Teva v. Novartis and Caraco Pharmaceutical Laboratories v. Forest Laboratories, seems to be the wider opening for generic companies to seek the court's decision on a patent's status.

And by the way, acting on its own, the Patent Office voided Cabilly II. Genentech is appealing, which should take a couple of years. The patent remains enforceable in the meantime, but Genentech and MedImmune have settled, terms undisclosed.

False Claims: The Price Is Wrong

Ever wonder why the federal government is so relentless in pursuing pharma companies for violations of the False Claims Act? It could be a matter of return on investment. Every dollar invested in FCA healthcare investigations brings in a return of $15.

"I would like to say the explosion in growth and dollars is capping off, but unfortunately, I don't think we've reached the peak," says Paul Kalb, MD, head of Sidley Austin's healthcare group. "This has been a major priority for the government."

While off-label promotion has been the focus of some of the highest profile investigations and settlements, some important recent cases focus on different aspects of pricing.

One approach involves "nominal pricing." Under federal law, the government is supposed to pay the lowest price manufacturers offer any customer. It makes just one exception: to encourage companies to sell its drugs cheaply to charity, it doesn't count products that are discounted 90 percent or more.

Many pharma companies offered nominal prices to hospitals to encourage use of their drugs. That may have been legal, but it stuck in the craw of many critics. "It's heroin-dealer economics," said Patrick Burns, spokesperson for Taxpayers Against Fraud, in an interview with The Washington Post. "Your first shot is for free, and after that it becomes more expensive—not to the hospital but to Medicaid, which is paying the bill." In 2005, when the Deficit Reduction Act rewrote the rules, nominal pricing was limited to institutions such as intermediate-care facilities for the mentally retarded, state-owned nursing facilities, and other "safety net" providers.

In the meantime, state and federal prosecutors started putting together a case against Merck, arguing that the nominal prices it offered hospitals weren't really nominal because they were tied to conditions—giving the drug preferred status or hitting market-share goals. That theory might or might not have persuaded a jury, but it didn't need to. Why? Because drug companies found guilty of Medicare fraud can be banned from all federal programs—the "pharma death penalty"—so such cases rarely if ever go to trial. This February, Merck agreed to pay $650 million to settle the case.

And litigation continues over one of the key numbers used for years in calculating Medicare and Medicaid reimbursement and rebates: Average Wholesale Price. AWP may have been intended to reflect actual wholesale prices, but in practice it was always a "sticker price" set by the companies. Many states, however, have argued that AWP was supposed to be what the name implied, and that by reporting anything else to the government, pharma companies were gouging Medicaid programs. In June 2007, Judge Patti Saris heard a nationwide, multi-district class action case involving AWP and came to some fairly temperate conclusions. She didn't buy the idea that AWP meant just what the name implied, but she determined that government and payers expected a fairly standard "markup" in AWP. She shot down companies that had exceeded it. In March, 11 companies paid $125 million to settle their part in the case.

But the multi-state suit was hardly the last gasp of AWP cases. Alabama is suing 79 companies it accuses of defrauding the state's Medicaid program. The first suit resulted in a $215 million fine against AstraZeneca. The second, against Novartis, was getting under way as this article went to press. Similar cases are in the works in Mississippi, South Carolina, Utah, Hawaii, and Alaska. Alongside the Merck case and others, these investigations illustrate how states are stepping up to the plate. "[The states ] are responsible for paying for a substantial chunk of the drug bill, and for that reason, they have a strong interest in this area," says Kalb.

Advertising: Settling for Less

If the industry has been aggressive in attempting to self-regulate advertising practices, it's partly in hope of fending off onerous legislation and FDA regulation. But as a recent legal case illustrates, there are more ways to impose limits on advertising than pharma may have imagined.

The case was a multistate action accusing Merck of using aggressive and deceptive advertising to conceal the cardiovascular risks associated with Vioxx. The company ended up paying 29 states and the District of Columbia $58 million—the largest consumer protection settlement to date involving the promotion of a prescription drug, but a small number compared with nine-figure OIG settlements.

Yet the money is only part of the settlement. Merck also agreed to have the FDA review all DTC television advertising for the next seven years (ten years for painkiller ads). FDA can also delay the launch of advertising. Merck promised not to present misleading data to physicians, and—the surprise addition—not to use pro-company "ghost writers" to craft medical papers for doctors.

Ghostwriting, long a target of industry critics, gained notoriety from the suit. Joseph Ross, MD at New York's Mount Sinai School of Medicine, led the team that combed through documents provided by Merck in discovery. In the April 2008 issue of the Journal of the American Medical Association, described in excruciating detail the guest authorship and ghostwriting that took place at Merck on journal articles about rofecoxib.

The ghostwriting clause may be a sign of things to come. "Two months ago, if you asked what the big issues confronting promotion were, this would not have made the list," says Pines. "Because Merck agreed to a legal settlement, it can set a trend and become much more institutionalized."