Pharmaceutical manufacturers could face a new line of attack related to Hatch-Waxman reverse payment settlement agreements (so-called, "pay-for-delay" settlements). The FTC has challenged these agreements under the antitrust laws for over a decade, and the Supreme Court’s 2013 decision in FTC v. Actavis arguably created greater ambiguity for antitrust compliance. But newly unsealed federal litigation threatens to introduce even greater risk. On May 7, 2015, a False Claims Act case was unsealed, asserting that reverse payment agreements intentionally cause Medicare and Medicaid to overpay for drugs. This novel theory of False Claims Act liability—being pursued by one of the law firms at the center of the decades-long Average Wholesale Price (AWP) litigation—is worth following for its potential to impact dozens, if not hundreds, of these agreements.

The Complaint’s Allegations

The complaint was originally filed on July 11, 2014, on behalf of the federal government, 25 states, and the District of Columbia. The relator, John Radice, is an attorney who has represented companies asserting that reverse payment settlements raise prices for pharmacies and other retailers in violation of the antitrust laws. His False Claims Act complaint focuses on the prescription hypertension drug Flomax, patented by Astellas Pharma, Inc. and marketed by Boehringer Ingelheim Pharmaceuticals, Inc. (BI) since 1997. After Ranbaxy, Inc. filed an Abbreviated New Drug Application (ANDA) in 2004 to market a generic version of Flomax, Astellas and BI brought suit to enforce the patent. That litigation resulted in a reverse payment settlement by which Ranbaxy agreed to not sell a generic Flomax product until March 2010. A similar arrangement was later reached with Impax Laboratories, Inc.

According to the complaint, the agreements among the companies resulted in BI maintaining higher prices for branded Flomax for months, and perhaps years, longer than it would have had generic competitors been permitted to enter the market. In turn, the complaint alleges that the reverse payment agreements among Astellas, BI, Ranbaxy, and Impax resulted in Medicare and Medicaid paying “substantially greater than the prices they would have paid absent the Defendants’ illegal conduct because: (1) the price of brand-name Flomax (and later, and for some time, generic Flomax) was artificially inflated by Defendants’ illegal conduct; and (2) the government payors were deprived of the opportunity to purchase lower-priced generic versions of Flomax sooner.” As a result, “government health care payors paid claims . . . at fraudulently inflated high prices resulting from Defendants’ conspiracy and fraud.”

Medicare Part D provides coverage for self-administered drugs such as Flomax. Reimbursement is negotiated by and among Medicare Part D Plan sponsors and pharmacies participating in their Medicare Part D pharmacy networks. Generally, brand name drugs are reimbursed at a discount off AWP while multiple source generic drugs are reimbursed by Medicare Part D plans using a maximum allowable cost formula which considers the actual acquisition prices of all therapeutically equivalent drugs in the therapeutic class. As such, the complaint suggests that but for the pay-for-delay settlements, generic Flomax would have entered the market sooner, resulting in Medicare Part D beneficiaries electing to use generic Flomax instead of the brand, whereby Medicare Part D plans would have paid lower reimbursement for the generic alternatives.

Reimbursement for multiple-source generic drugs is capped at what is known as the Federal Upper Limit (FUL), historically set at 150% of the price of the least costly therapeutic equivalent as published in the pricing compendia. State use and imposition of the FUL varies with most state reimbursement formulas applying the FUL to all brands and generic drugs in a therapeutic class. As such, unlike the allegation related to increased Medicare Part D reimbursement, in most states, the argument of sustained higher reimbursement for Medicaid beneficiaries does not require proof that the beneficiaries would have elected to switch to a generic therapeutic equivalent product in the event there was a generic equivalent, given the application of the FUL to brands and generics in a given therapeutic class.

The federal and state governments all declined to intervene in the case, and Judge Fitzgerald of the U.S. District Court for the Central District of California ordered on May 7, 2015, that the case be unsealed and that service on the defendants should proceed.

Three Reasons to Follow The Case  

  1. The complaint may be the first to suggest that a reverse payment settlement agreement results in a violation of the False Claims Act. If this theory were to succeed—or even if it able to overcome a motion to dismiss—the case could impact the hundreds of other, similar agreements entered into between brand and generic manufacturers during the last decade.  
  2. Although the complaint’s allegations emphasize the antitrust implications of the defendants’ agreements (e.g., monopoly power and resultant pricing), the relator may not necessarily need to prove an antitrust violation to support his claims. The relator’s theory of liability could mean that the mere formation of an agreement to allow the brand manufacturer to maintain market exclusivity knowingly enables the manufacturer to maintain in higher prices, and thus constitutes a conspiracy to cause the government to pay inflated claims. This would mean that the potentially more difficult-to-prove antitrust claims are not a prerequisite to the False Claims Act violation. If so, then the relator would argue that reverse payment settlements per se represent conspiracies to violate the False Claims Act.
  3. Because the federal and state governments declined to intervene in the case, the law firm that filed the suit will run the litigation. The case was filed by Hagens Berman Sobol Shapiro LLP, the law firm that spearheaded federal litigation positing the theory that manufacturers caused overpayments for their drugs by inflating the AWPs. That theory ultimately resulted in two decades of litigation against scores of drug companies, across dozens of states. Hagens Berman undoubtedly perceives this case as a trial run.

Arent Fox’s health care litigation, prescription drug pricing and government price reporting teams are monitoring this litigation and other potential sources of guidance to help our pharmaceutical clients continue to successfully implement their market strategies. For more information, contact Randall Brater, D. Jacques Smith, Stephanie Trunk, or Brian D. Schneider.

The case caption is U.S. ex rel. Radice v. Astellas Pharma, Inc., et al., 2:14-CV-05389 (C.D. Cal.).