A recent summary judgment opinion from the Eastern District of Pennsylvania breaks new ground in the developing antitrust law on “product hopping” claims. “Product hopping” refers to the practice of changing the form or dosage of a branded drug without changing its underlying composition. Though drug manufacturers often make such changes for legitimate business reasons, they may also – thanks to the vagaries of the Hatch-Waxman Act and the Food and Drug Administration’s (FDA) approval processes – have the effect of preventing a generic competitor from entering the market as soon as it otherwise could have.
Back in February, this blog explained this dynamic and the resulting antitrust concerns about product hopping by branded drug manufacturers. We also surveyed the cases that had addressed such claims up to that time, noting that the only reported decisions were from district courts in the context of a motion to dismiss. With District Judge Paul Diamond’s April 16 opinion in Mylan Pharmaceuticals, Inc. v. Warner Chilcott Public Limited Company, Civ. No. 12-3824 (E.D. Pa.) – which granted summary judgment for the defendant branded drug manufacturer on all counts – we have the first extended analysis of antitrust liability for product hopping based on a fully developed factual record. The court’s reasoning is worth pondering, not least because the decision takes a clear stand on the proper relationship between innovation and antitrust law.
In Mylan, the court found that the defendants had made several product-hopping changes to Doryx, an oral medication used to treat acne. Those “hops” included a change from capsule to tablet form, changes in the dosage of the tablet, and the introduction of tablet “scoring” (a line across the tablet that allows it to be easily broken into smaller doses). Mylan alleged that these changes forced delays in its introduction of various generic Doryx “AB-rated” equivalents. An AB-rated equivalent is a generic drug that the FDA has identified as bioequivalent to a branded drug with the same dosage, strength, and form. Generic drug makers often seek to develop AB-rated equivalents because most states have “drug product selection” laws that either permit or require a pharmacist to substitute a (normally less expensive) AB-rated equivalent when filling a prescription for a branded drug. In that way, the generic maker can benefit from the marketing of the branded drug. In Mylan’s case, the court found, it made no expenditures at all to promote its generic Doryx.
Significantly, the court found that Mylan had presented some evidence that the Doryx product hops were indeed part of a strategy intended to delay generic market entry (at least of AB-rated equivalents) – a conclusion the court then accepted as true for summary judgment purposes. Nevertheless, the court ultimately held that Mylan’s claims under Sections 1 and 2 of the Sherman Act failed because Mylan did not meet its initial burden of showing anticompetitive conduct. (The court also held that the Section 2 claim failed because Mylan did not properly define a relevant product market.)
Given that generic Doryx remained on the market in some form during the time period at issue, the court found no evidence that the defendants’ conduct had excluded rivals or otherwise restricted the market: “Defendants did not exclude competition when they reformulated Doryx, introduced new versions of Doryx into the marketplace, marketed the new versions of Doryx, and withdrew old versions.” Further, “doctors remained free to prescribe generic Doryx; pharmacists remained free to substitute generics when medically appropriate; and patients remained free to ask their doctors and pharmacists for generic versions of the drug.”
Against that background, the court proved unsympathetic to Mylan’s theory of the defendants’ anticompetitive conduct. Under that theory, the defendants’ product hopping was exclusionary because “Mylan’s generic would not automatically be substituted [under state drug product selection laws] unless Mylan redesigned the generic to match the new version of Doryx and secured an AB rating from the FDA.” The court observed that Mylan was essentially complaining, not that it could not sell generic Doryx, but that it could not piggyback on the defendants’ marketing expenditures for the post-“hop” versions of branded Doryx. “Mylan,” the court noted acidly, “thus seeks to transform its own refusal to incur promotion costs into Defendants’ anticompetitive conduct.” At the same time, the court found Mylan had become the sole generic producer of older, smaller Doryx dosages after the defendants withdrew the branded versions of those dosages from the market, making a gross profit of $146 million over three years by raising prices higher than the last reported price of the branded equivalents.
Stepping back from the specific facts of the case, the court opined that Mylan’s product-hopping liability theory would, if accepted, open a Pandora’s box of antitrust litigation. Whenever a pharmaceutical manufacturer changed the formulation of a branded drug and thereby compelled a generic competitor to reformulate its competing version, any resulting lawsuit could force the court into a burden-shifting analysis as in United States v. Microsoft Corporation, 253 F.3d 34 (D.C. Cir. 2001). In the court’s view, that would be an unworkable outcome: “Once the branded drug manufacturer offered a procompetitive justification for the product change that the generic manufacturer could not rebut, courts and juries would have to determine which product changes were ‘sufficiently innovative’ to justify their anticompetitive effects.” But Mylan “failed to offer an intelligible test of innovation ‘sufficiency,’ and I doubt that courts could ever fashion one.” Thus, Mylan’s theory risked slowing or halting pharmaceutical innovation, which would be unequivocally bad for consumers and contrary to the intent of Congress when it passed the Hatch-Waxman Act.
Mylan filed its notice of appeal on May 14, 2015, and if that appeal proceeds to completion, it will provide the first opportunity for a federal court of appeals to address this developing area of antitrust law with the benefit of a full-blown summary judgment record. If the Third Circuit substantially affirms Judge Diamond’s reasoning, that precedent may substantially curtail future product-hopping claims by requiring plaintiffs to show exclusionary conduct beyond mere product hopping itself to survive summary judgment. If the Third Circuit reverses, it will most likely have to meet the implicit challenge of Judge Diamond’s opinion by supplying its own standard for evaluating the costs and benefits of product innovation under the antitrust laws. Either way, the debate over product hopping – and over the broader concept of subjecting innovation to antitrust scrutiny – will surely continue.