FTC offers Third Circuit a primer on how to properly evaluate ‘product hopping’

 The Federal Trade Commission (FTC) filed an amicus brief with the U.S. Court of Appeals for the Third Circuit explaining that the U.S. District Court for the Eastern District of Pennsylvania “made significant analytical errors” in granting summary judgment to brand-name drug manufacturer, Warner Chilcott PLC, in a dispute with generic competitor, Mylan Pharmaceuticals, Inc., involving allegations that Warner Chilcott unlawfully suppressed generic competition and maintained its monopoly power through a strategy called “product hopping.”

In its brief, the FTC takes no position on the ultimate merits of the lawsuit, but claims that in examining whether “product hopping” is unlawful, the district court erroneously expressed a “broad-brush opposition to product-hopping liability in any circumstances” and failed to account for the unique aspects of the pharmaceutical marketplace, including the nature of competition between brand name drugs and their generic equivalents. The FTC argues that the Third Circuit should remand the case to the district court with instructions to apply the antitrust principles discussed in its brief.

Typical “product-hopping” scheme defined

A typical product-hopping scheme may arise when generic rivals are expected to win FDA approval to compete with a company’s profitable brand-name drug using automatically substitutable equivalents. First, the brand-name company introduces minor changes to the drug’s formulation, such as therapeutically insignificant tweaks to dosage levels or to the form of administration (such as capsules vs. tablets). Second, before generic equivalents have a chance to enter the market, the brand-name manufacturer takes various steps to extinguish demand for the original version. For example, the manufacturer might restrict or eliminate the supply of the original formulation, increase its effective price to patients, or flood physician offices with free samples of the revised formulation to divert prescriptions to the revised formulation.

In addition, because automatic pharmacy substitution ordinarily requires an FDA determination of therapeutic equivalence—an “AB rating,” and because an AB rating is specific to dosage and form, a pharmacist cannot automatically substitute a generic drug that differs even slightly from the dosage or form of the prescribed brand-name drug. The generic entrant is thereby faced with trying to make conforming changes to its own product, which it cannot sell without starting a new FDA approval process. Therefore, according to the FTC, “the brand-name manufacturer’s well-timed tweaks to its drugs can create an ever-retreating horizon of generic competition at the expense of consumers.”

Allegations

The alleged product-hopping scheme in this case involves delayed-release doxycycline hyclate, a prescription drug used primarily to treat severe acne. Warner Chilcott markets a brand-name form of the drug sold under the name Doryx. Mylan alleges that, before generic entry, Warner Chilcott engaged in anticompetitive product-hopping by curtailing the availability of the original formulation in order to shift the market to three successive product reformulations that offered little or no therapeutic benefit to consumers. Mylan claims that this conduct impeded meaningful generic competition and preserved Warner Chilcott’s monopoly profits, not because the market valued the reformulations on the merits, but because Warner Chilcott had successfully manipulated the pharmaceutical regulatory system.

District court ruling

To prove unlawful monopolization under Section 2 of the Sherman Act, Mylan must prove two elements: (1) the possession of monopoly power by Warner Chilcott in the relevant market; and (2) its willful acquisition or maintenance of that power through anticompetitive means, as distinct from competition on the merits.

In granting summary judgment to Warner Chilcott, the district court concluded that no reasonable juror could find, based on “uncontradicted evidence” of “the interchangeability of Doryx with other oral tetracyclines,” that Warner Chilcott had monopoly power. The court also concluded that, even if Warner Chilcott had monopoly power, the product-hopping scheme would not have violated the Sherman Act.

In making its ruling, the district court accepted Mylan’s claims that Warner Chilcott “made the Doryx ‘hops’ . . . primarily to defeat generic competition” and that the hops “prevented Mylan from taking advantage of more profitable means of distributing its generic Doryx.” Nevertheless, the district court held that Mylan could have competed against Warner Chilcott through means other than automatic substitution and faulted Mylan for not promoting its generic versions of Doryx through advertising and marketing. The court also characterized automatic substitution as a “regulatory windfall” to generic manufacturers and concluded that Warner Chilcott’s efforts to deny Mylan the benefits of that mere “windfall” were “hardly predatory.”

Mylan appealed the district court’s ruling to the Third Circuit.

FTC arguments

In its brief, the FTC first argues that in deciding that Warner Chilcott did not possess monopoly power the district court erred by ignoring the unique characteristics of the pharmaceutical market. Monopoly power, under previous court decisions, may be established through direct evidence, such as prices substantially above the competitive level, or indirect evidence, such as a large share of a relevant market subject to entry barriers. In addition, the U.S. Supreme Court has stated that antitrust inquiries must be attuned to the particular structure and circumstances of the industry at issue.

Therefore, according to the FTC, the district court was mistaken when, in denying monopoly power, it found a broader market here on the basis of outward evidence that many dermatologists view other oral tetracyclines as therapeutically interchangeable with Doryx. The functional interchangeability between products, however, is the beginning, not the end of the analysis, according to the FTC. The FTC believes that the district court’s monopoly-power analysis needs to go farther and ask whether the prospect of substitution is strong enough to keep prices at competitive levels. The FTC bases this argument on evidence that price competition from other interchangeable drugs “is often so attenuated in the absence of automatic substitution that brand-name manufacturers can maintain prices substantially above the competitive level, the key criterion for monopoly power.”

The FTC also argues that the district court erred in granting summary judgment on the alternative ground that, even if Warner Chilcott had monopoly power, its product hopping did not constitute the willful maintenance of the power through anticompetitive means. The FTC believes that the district court’s reasoning reflects a misunderstanding of how competition works in the drug industry and, in effect, “embraces a rule of nearly per se legality for product-hopping conduct by brand-name manufacturers. This approach, the FTC argues, contradicts the decisions several courts.

For example, on May 22, 2015, the Second Circuit in New York v. Actavis PLC, 787 F.3d at 655, decided that a pharmaceutical manufacturer can violate Section 2 of the Sherman Act if it uses a product-hopping scheme to foreclose rival generic manufacturers from their most efficient distribution channel: automatic substitution at the pharmacy for AB-rated drugs. In that case, the brand-name manufacturer altered the formula for an anti-Alzheimer’s drug to avoid automatic generic substitution, and it took various steps, including sharply limiting supply of the original version, to ensure that most physicians would prescribe only the reformulated version before the expected date of generic entry. The Second Circuit concluded that because the brand-name manufacturer’s product switch was accomplished through something other than competition on the merits, and it had the effect of significantly reducing usage of generic products and protecting its own monopoly, it was anticompetitive.

Finally, the FTC addressed the fact that the district court seemed to accept innovation as a basis for rejecting product-hopping in any context, no matter how trivial the revised formulation may be and no matter how aggressively the brand-name manufacturer shifts the market to the revised formulation prior to facing generic competition on the original formulation. According to the FTC, the district court’s position on innovation contradicts established antitrust doctrine, which states that judicial deference to product innovation does not mean that a monopolist’s product design decisions are per se lawful.

The FTC notes that genuine innovation is unlikely to be chilled simply because the antitrust laws may hold brand-name manufacturers liable for minor product tweaks that have little or no therapeutic value and serve only to avoid generic competition. The FTC also believes that a brand-name manufacturer is unlikely to face potential antitrust liability if it does not take steps to damage the market for the original formulation and instead allows the marketplace to choose between the original formulation and the revised version.