The U.S. Court of Appeals for the Second Circuit’s opinion (issued May 22, 2015 with a public, redacted version available May 28, 2015), affirming the district court’s grant of a preliminary injunction in State of New York v. Actavis PLC, et al., No. 14-4624-cv, demonstrated the importance of corporate disclosures regarding marketing plans and antitrust law. Actavis PLC (“Actavis”) and Forest Laboratories, LLC (“Forest”) (hereinafter collectively, “Defendants”) allegedly violated Sections 1 and 2 of the Sherman Act in addition to New York state law via “product hopping,” i.e., withdrawing a drug from the market whose exclusivity or patent protection is about to expire and encouraging health care providers and third-party insurers to switch patients to a new version of the drug product with the same active ingredient approved for the same indication as the withdrawn drug. The alleged goal of such maneuvers is to avoid the “patent cliff” of imminent generic entry.

The backstory: Actavis manufactures Namenda IR®(memantine hydrochloride), which is a drug designed to treat moderate-to-severe Alzheimer’s disease. Namenda IR® is a twice-daily, immediate release drug. Namenda IR® does not currently face generic competition; however, five generic versions of Namenda IR® have tentative approval from the FDA to enter the market on July 15, 2012. In 2010 Actavis obtained approval for Namenda XR®, which is also designed to treat moderate-to-severe Alzheimer’s disease. Namenda XR® has the same active ingredient as Namenda IR®; however, Namenda XR® has a different strength and dosage regimen than Namenda IR®. In 2013, Forest began marketing Namenda XR®. That same year, Defendants stopped marketing Namenda IR®, sold Namenda XR® at a reduced rate, and encouraged Namenda XR®prescriptions. On February 14, 2014, the Defendants publicly announced that they were discontinuing the sale of Namenda IR® in six months and engaged in efforts to convert patients, prescribers, and third-party payers to switch patients to Namenda XR®.

The State of New York filed a complaint alleging violations of Sections 1 and 2 of the Sherman Act along with violations of New York state law and sought a preliminary injunction. The district court granted the preliminary injunction, and the Defendants appealed. By this time, Namenda IR® was effectively no longer available except through a mail-order pharmacy for those patients in which Namenda IR® was “medically necessary.”

The result of the appeal: The court of appeals affirmed the district court’s decision. Focusing mostly on the Section 2 claim, the Court found that the State demonstrated a likelihood of success on the merits.

The rub: The Court failed to consider any of the Defendants’ procompetitive justifications and found that all of the Defendants’ alleged reasons are pretextual. Indeed, the State had “hot documents” that implied that the Defendants’ removal of Namenda IR® from the market was designed to thwart generic competition. The Court cited to numerous materials in an effort to show that Namenda XR® did not replace Namenda IR® for the benefit of patients, but allegedly would maintain a monopoly. For instance, some quotes included:

  • “We need to transition volume to XR to protect our Namenda revenue from generic penetration in 2015 when we lose IR patent exclusivity.”
  • “[W]hat we’re trying to do is make a cliff disappear and rather have a long―a prolonged decline. And we believe that by potentially doing a forced switch, we will hold on to a large share of our base users.”
  • “Our mission is to convert to Namenda XR and lift the franchise . . . . We need to convert as much IR business to Namenda XR as quickly as possible.”

In light of these statements, the court found that “[a]ll of the Defendants’ procompetitive justifications for withdrawing [Namenda] IR® are pretextual.”

In a Section 2 rule of reason analysis, the Court weighed the alleged anticompetitive effects against the procompetitive justifications. Because the Court found all of the Defendants’ procompetitive justifications pretextual, the Court did not consider them in its analysis. Effectively, the Court did not conduct the rule of reason “balancing test” at all, stating “[b]ecause we have determined that the Defendants’ procompetitive justifications are pretextual, we need not weigh them against the anticompetitive harms.” Thus, all of the alleged anticompetitive harms tipped the scale in the State’s favor.

The lesson learned: While pharmaceutical companies must engage in lifecycle management and protect the bottom line, employees must take care to draft these documents in a way that appropriately captures the rationale behind corporate decision-making. Arguably, Actavis may have launched Namenda XR® to improve its product and to make it easier for Alzheimer’s patients to receive care. However, by emphasizing the fiscal benefits of switching patients from Namenda IR® to Namenda XR®, the State and the court interpreted these actions as an effort to improperly maintain a monopoly and reduce competition in violation of the antitrust laws. As a result, the Defendants’ arguments fell on deaf ears.