An extract from The Pharmaceutical Intellectual Property and Competition Law Review, 1st Edition

Merger control

Federal enforcers, state enforcers and private parties have standing to challenge mergers or acquisitions affecting interstate commerce under Section 7 of the Clayton Act. A transaction violates Section 7 of the Clayton Act if it may substantially lessen competition. In general, an actionable harm to competition may occur if, post-transaction, the combined firm has the ability and incentive to raise prices, decrease supply, reduce innovation or product quality – either unilaterally or in coordination with other firms – or harm competition by foreclosing competitors from supply inputs or outlets for their products. Potential harms to competition are more likely to occur if the parties already compete, or are likely to compete in the future.

Merger analysis focuses on competitive effects within defined product and geographic markets. Product markets are defined around products and their substitutes, usually by application of the 'hypothetical monopolist' test (HMT). The HMT includes in a product market the products to which a consumer would switch in response to a small price increase by a hypothetical monopolist of one product. In the pharmaceutical industry, this has resulted in a variety of product market definitions, sometimes limited to a narrow market, including only a branded drug and its generic equivalents or biosimilars, or even just a market of generic drugs. In other cases, the market may include all drugs that treat a given indication using a particular mechanism of action or even more broadly as all drugs used to treat the indication. Product markets may also include products still in the research and development stage that may compete in the future.

If the merging parties' products compete now or may in the future, the antitrust authorities then examine whether any loss of competition from the transaction is likely to result in anticompetitive effects. This includes analysing the parties' and other competitors' market shares and the levels of market concentration both pre- and post-merger. In addition, the antitrust authorities will consider whether entry or expansion by third parties would be timely, likely and of a sufficient magnitude to offset any competitive harm arising from the transaction.

Finally, if the antitrust authorities determine a transaction is likely to result in anticompetitive effects, they will then consider whether the transaction will lead to cognisable efficiencies that would offset any competitive harm. To be cognisable, efficiencies must be both merger-specific and verifiable.

Anticompetitive behaviour

i Patents and antitrust law

Patent law provides pharmaceutical patent owners (in most cases, branded drug companies) with the limited right to exclude others, but does not exempt them from antitrust scrutiny. Pharmaceutical patent owners have been the subject of litigation in a number of cases regarding alleged anticompetitive conduct through various means, including, but not limited to: reverse-payment settlements, product switching, brand-for-generics strategies (B4G), sham litigation and bundled discounts. These examples are not exhaustive; indeed, there may be other antitrust theories of harm advanced by both antitrust authorities and private plaintiffs.

ii 'Reverse payment' settlements

The Hatch-Waxman Act creates a framework for generic drug companies to challenge patents quickly. It also provides generic companies with a research exemption to develop generic drugs lawfully while the original brand's patent is still in effect.

Patent disputes between branded and generic companies often settle. These settlements commonly involve the parties negotiating entry dates for the generic product, either at or before the branded drug's loss of exclusivity (LOE), based on anticipated litigation costs and respective litigation risk assessments. In 'reverse payment' settlements, the plaintiff branded drug company pays the defendant generic drug company as part of the settlement. In FTC v. Actavis, the Supreme Court held that reverse payment settlements are subject to antitrust scrutiny because they may harm competition by delaying the entry of the generic competitor. Lower courts have extended Actavis to non-cash 'payment' consideration, such as an agreement by the branded drug company not to launch an authorised generic for a period of time.

iii Product switching

Product switching (product hopping) may occur when a branded drug company reformulates a branded drug at or near LOE, and encourages patients and doctors to switch to the new product. Product switching can be either a 'soft switch' (when the original drug remains available to patients) or a 'hard switch' (when the original drug is made unavailable or significantly more difficult for patients to obtain).

While introduction of a new and improved product is not unlawful, a hard switch that removes the older product from the market may create significant antitrust risk because it can eliminate demand for the original branded drug before generics can enter the market and thus exclude generic competition.

iv B4G

A B4G strategy includes offering to a pharmaceutical benefit programme deeper discounts on branded drugs at or near LOE in exchange for preferred formulary placements. B4G strategies can be pro-competitive and pro-patient because they reduce prices of branded drugs for consumers, but they also may create antitrust risk to the extent that the brand goes beyond securing formulary placement by offering lower prices and contractually limits competition from generic drugs. Other market circumstances can affect the antitrust risk from B4G strategies; for example, risk may be higher when customer co-pays are higher for branded drugs than for the non-preferred generic (usually because the customer's pharmaceutical benefit programme requires a higher co-pay for branded products) or if agreements between a branded manufacturer and pharmaceutical benefit programs are long-term and cover a substantial portion (at least 30 per cent) of a given market.

v Sham petitioning and litigation

Under the Noerr-Pennington doctrine, parties are generally immune from liability under antitrust laws for engaging in actions to influence government decision-making (e.g., government petitioning, lobbying and litigation), even if the action they are seeking would limit competition. However, branded drug companies may face antitrust liability for engaging in such conduct if their actions were a sham. Litigation will be found a sham only if the claim is 'objectively baseless' and – if baseless – the litigation itself, rather than the outcome of the litigation, harms the competitor. Similarly, petitioning of regulatory bodies will be found a sham only if the arguments made are 'objectively and subjectively baseless' and the petitioning itself harms the competitor (e.g., through delaying introduction of a competing product while the FDA considers a 'citizen petition').

vi Bundled discounts

Companies sometimes offer discounts for purchasing multiple types of products at one time. This strategy is often pro-competitive because it lowers prices. However, a bundling strategy can create antitrust risk if it makes it more difficult for a seller of only one of the bundled products to compete, in particular if the bundling competitor is forced to sell the bundled products below cost to be able to compete with the bundle.