Product Hopping in the Pharmaceutical Industry
|✅ Paper Type: Free Essay||✅ Subject: Law|
|✅ Wordcount: 5382 words||✅ Published: 30th Jul 2021|
The Pharmaceutical industry is composed of brand name and generic drug markets. Typically, generic drugs directly compete with their brand name counterparts and are competitively priced. The introduction of new drugs in both markets is heavily regulated in the United States. The Food and Drug Administration ("FDA") requires each proposed drug to submit a New Drug Application ("NDA"), a process that evaluates the drug's safety and effectiveness for public consumption. NDA drugs, commonly called brand name drugs, enjoy a period of exclusivity that prevents their generic equivalents from entering the market. Upon expiration of exclusivity rights, generic manufacturers can apply for an Abbreviated New Drug Application ("ANDA"). The ANDA process allows generic drug manufacturers, demonstrating bioequivalence and pharmaceutical equivalence, to piggy-back on approved NDAs. This expedites the testing process, allowing generic drugs to enter the market more quickly.
The Sherman Antitrust Act (''Sherman Act"), passed by Congress in 1890, prohibits certain business activities that federal government regulators deem to be anti-competitive. One tactic that is pervasive and of concern in the pharmaceutical industry, falling within the arena of restricted practices under the Sherman Act, is product hopping.
"Product hopping" is a tactic that drug manufacturers use to keep generic competitors out of the market. Typically, it involves making insignificant modifications to existing brand-name drug formulations, forcing generic competitors to exit the market, and re-enter a cumbersome regulatory process. This results in monopolizations by brand-name manufacturers. This note will review two cases in which generic manufacturers are complaining of brand name manufacturers "hard-switching" their products to obstruct the generic drug market.
In New York ex rel. Schneiderman v. Actavis PLC, plaintiff filed for preliminary injunction, alleging that defendants violated section 2 of the Sherman Act. The 2nd Circuit upheld the lower court's decision to grant preliminary injunction.However, a recent opinion from the 3rd circuit rejected reasoning in Namenda.
In Mylan Pharmaceuticals Inc. v, Warner Chilcott, plaintiff brought an action against manufacturer, alleging the creation of an unfair monopoly and the entering into an agreement under restraint trade under section 1 and 2 of the Sherman Act. The 3rd Circuit in Mylan found that defendant's actions did not obstruct plaintiff from entering the market, and were not anti-competitive. 
Through the review of relevant anti-trust legislation and case law, I hope to reconcile the courts' split decisions by creating a test that preserves the intent of the Sherman Act, while also preserving brand name manufacturers' right to be competitive.
THE HATCH-WAXMAN ACT AND STATE SUBSTITUTION LAWS
In 1984 Congress enacted the Drug Price Competition and Patent Term Restoration Act, an act meant to amend the Federal Food, Drug and Cosmetic Act (FD&C Act), better known as the Hatch-Waxman Act. The Hatch-Waxman Act was a method of enabling competition between brand name and generic pharmaceutical markets while also incentivizing the development of new drugs. The 1962 amendments to the FD&C Act imposed burdensome requirements that made the approval process costly and lengthy.Moreover, only 35% of top-selling branded drugs with expired patents had generic competition before the passing of the Hatch-Waxman amendments. 
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The Hatch-Waxman amendments sought out the cure these unintended consequences by extending patent exclusivity, while also simplifying the process for generic drugs to enter the market. Prior to 1984, the Food and Drug Administration (FDA) required that both brand name drugs manufactures and generic drugs manufactures submit a New Drug Application (NDA), "a long, comprehensive, and costly testing process" that required filing scientific literature to support the safety and efficacy of a drug before market entry was allowed. An approved brand drug enjoys a 20 year patent exclusivity period in the market at the end of which one or more generic drugs, exhibiting the same characteristics as the brand drug, may enter the market at a lower price to compete with the brand drug.
The Hatch-Waxman act introduced the Abbreviated New Drug Application (ANDA) to expedite the process of introducing lower cost generic drugs to the market. Under the ANDA, generic manufacturers can "piggyback" on the application of brand name comparable drugs if they can demonstrate bioequivalence and pharmaceutical equivalence. Once approved, the generic receives an "AB-rating," which allows pharmacists to fill prescriptions for brand-name drugs with its generic doppelganger. 
By the time Hatch-Waxman was passed, many states enacted drug substitution legislation, further facilitating generic drug competition. Today, drug substitution laws are present in all 50 states and permits, and in many states require, pharmacists to substitute subscriptions for brand name drugs with generic drugs. In over 30 states, drug substitution laws require not only that generic drugs be bioequivalent but also pharmaceutically equivalent in accordance with FDA AB-rating standards. However, because AB-rating requirements are so stringent, the Hatch-Waxman Act and state substitution laws create loopholes for brand name drug manufacturers to extend their periods of exclusivity.
One way in which brand name manufacturers extend their exclusivity is by product hopping, accomplished by making trivial changes to the brand name drug in order to force its genetic equivalent back into the regulatory process.
The most significant threat to brand name drug profitability is generic drug entry. This is inevitable once a brand firm loses its ability to market exclusively to the public. When generic products enter the market, the price of brand name drugs drops dramatically. Brand firms thus have every incentive to delay the entry of generic competition for as long as possible.
Most product-hopping antitrust claims allege that a brand name drug manufacture has manipulated the FDA system. When brand name drug manufacturers are confronted with the likelihood of rivalry once a patent lapses or is held invalid, they can make minor changes to their endorsed drugs, get FDA approval for those paltry modifications, and supplant the old formulation with the new one.
Product hopping can be achieved through several methods; manufacturers can either change some physical trait of the drug, by switching from a capsule to a tablet or serrating the capsule itself for self-controlled dosing, they can change the molecular components without having any bearing on the drug's activity itself, or they combine drugs that were once marketed individually.  From 1989 to 2000, for instance, only 35% of the 1,035 new drug applications approved by the FDA were for new molecular entities.  Moreover, 54% of all approvals were for drugs with new dosage forms, route of administration, or that were combined with another active ingredient.
While these changes may seem insignificant to consumers, they present unwarranted challenge to generic manufacturers and ultimately obstruct consumers' access to lower cost genetic drugs. This divergence between the interests of manufacturers and consumers occurs because prescription pharmaceutical markets are characterized by a "price disconnect"-a doctor, rather than the consumer, decides which product will be bought, but the product is ultimately paid for by the consumer. In consequence, consumer choice is commandeered and true market competition is obstructed.
Resolving issues pertaining to product hopping has proved difficult for the courts. While courts are typically hesitant to question the judgment of the legislator, they also have a duty to preserve the integrity of the market by ensuring a balance between competition and innovation in these markets.
- The Sherman Act
The Sherman Antitrust Act (Sherman Act) is a federal statute that prohibits certain business activities that federal government regulators deem to be anti-competitive, and requires the federal government to investigate and pursue trusts.
Historically, parties have challenged product hopping as anticompetitive under Â§ 2 of the Sherman Act, and the judicial treatment thus far has hinged on the presence of consumer coercion. Section 2 of the Sherman Act focuses on single-firm monopolization of a market. Under Â§ 2, it is a felony "to monopolize, attempt to monopolize, or combine or conspire with another person to monopolize trade."
Attempted monopolization in violation of the Sherman Act has three elements: "(1) the defendant engaged in predatory or exclusionary conduct; (2) the defendant had a specific intent to monopolize; and (3) there was a dangerous probability that the defendant would successfully attain monopoly power."  A claim in a civil action for such a violation requires these elements plus an antitrust injury caused by the violation. An antitrust injury is an injury "attributable to an anti-competitive aspect of the practice under scrutiny."
Courts have held that brand name manufacturers are under no legal duty to help their generic competitors, however, they must refrain from activities that have no basis other than to thwart competition.  From an antitrust perspective, product hopping is within the class of behaviors and practices that the Sherman Act expressly condemns.
The courts have attempted to create a workable rule to reconcile these undermining practices. The Court's earliest attempts begin with Abbott Laboratories v. Teva Pharmaceuticals USA, Inc, the first case to allege an antitrust injury on the basis of product hopping, and Walgreen Co. v. AstraZeneca Pharmaceuticals L.P.
- Framing the Rule against Product Hopping
Abbott Laboratories v. Teva Pharmaceuticals USA appears to have been the first case to squarely frame an antitrust claim predicated on allegations of pharmaceutical product hopping. In Abbott Lab, Defendants Abbott and Fournier were accused of making insignificant modifications to the brand name drug TriCor in order to sabotage the entry of its generic equivalent in the pharmaceutical market. Moreover, Defendants also removed the older versions of TriCor off the shelves and changed the code for TriCor in the National Drug Date File (NDDF) to "obsolete", preventing pharmacies from filling both brand name and generic prescriptions for TriCor's earlier formulations.
The Court articulated that to violate Â§ 2 of Sherman Act, a monopolist's conduct "must harm competitive process and thereby harm consumers, but harm to one or more competitors will not suffice." As long as a manufacturer does not rob the consumer of choice, "[c]ourts should not condemn a product change (â€¦) unless they are relatively confident that the conduct in question is anticompetitive."  Moreover, the Court found that the "rule-of-reason" test should be applied, balancing the "merits of new product innovations against the arguable competitive obstacles such innovations may erect."
In Walgreen v. AstraZeneca, Plaintiffs brought an action against AstraZeneca, alleging that Defendant violated the Sherman Act by introducing over-the-counter and prescription drug replacements for its prescription heartburn drug Prilosec as Prilosec's patent was about to expire. The court found that Plaintiffs failed to state a claim for attempted market monopolization. The court, relying on and distinguishing from the reasoning in Abbott Lab and Microsoft, found that there was no "eliminat[ion] [of] consumer choice", adding that introduction of the new drug by AstraZeneca competed with both its own and others' drugs.
Extrapolating from both cases, a clear rule is articulated: A change in product design is per se legal, and courts will give deference to product innovation. However, the presumption is rebuttable if a plaintiff can articulate an anticompetitive injury. Upon showing an injury, the court will apply the rule-of-reason test to balance the benefits of innovation with the harms and obstructions those innovations might create in the competitive market.
It is noteworthy that, although in Abbott Lab and AstraZeneca the courts arrived at two different decisions, the 'rule-of-reason' test was never applied in either case. Moreover, these cases fail to address the "grey area" between two polar-opposite scenarios.
2015 SPLIT COURT DECISIONS
In 2015, the 2nd and 3rd circuit rendered decisions for cases involving product hopping.
New York v. Actavis plc
In New York v. Actavis plc, the United States Court of Appeals for the Second Circuit became the first appellate court to address a pharmaceutical industry practice known as "product hopping." This case raised a novel question of antitrust law: "under what circumstances does conduct by a monopolist to perpetuate patent exclusivity through successive products, commonly known as "product hopping,"2 violate the Sherman Act, 15 U.S.C. Â§Â§ 1 and 2?"
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Defendants manufacture the drug Namenda, a medication used to treat Alzheimer's disease. Defendants have two formulations for the drug, Namenda IR (IR), an immediate-release drug, and Namenda XR (XR), an extended-release drug. Both versions of Namenda are medically the same except that the IR version is taken twice a day while the XR version is only taken once a day, providing different dosing. More importantly, they have different patent expiration dates; IR's patent was set to expire in July 2015, while XR's patent is will expire in 2029. At the time before this action, Actavis had a monopoly on the memantine-drug market.
Upon expiration of IR's patent, several generic equivalents were poised to enter the market. Defendants removed their original formulation form the market. Namenda XR could not be substituted for Generic IR formulas because those drug were not bioequivalent. Thus, a cause of action arose out of this dilemma.
In September 2014, New York State filed for a preliminary injunction against Actavis, alleging violations of antitrust laws. (add footnote The State alleges that in 2013, Actavis made a "soft switch" to the XR drug in response to IR's approaching patent expiration. Actavis continued to sell both IR and XR formulas but ceased to promote IR, while vigorously promoting XR to doctors, patients and pharmacies. Moreover, in 2014, Defendants attempted to make a hard-switch; they announced that they would discontinue IR and attempted to prevent medical providers from prescribing IR unless it was "medically necessary".
The State argued that Actavis attempted to impede the entry of generic IR by removing Namenda IR from the market, and thus, coercing consumers into purchasing XR by depriving them of choice. As a result, Actavis would maintain their monopoly over the memantine-drug market.
The court analyzed whether Actavis attempted to maintain their monopoly under Â§ 2 of the Sherman Act. Applying the rule-of-reason test articulated in Microsoft, the court sought to extricate "conduct that defeats a competitor because of efficiency and consumer satisfaction" from conduct that thwarts the competition by way of "gaming" the system.
The court found Defendants' introduction of Namenda XR and subsequent withdrawal of IR to be coercive and would "likely impede generic completion by precluding generic substitution." By Actavis removing IR from the market, leaving XR as the only available drug of choice, Actavis is forcing consumers to purchase XR. Because XR has patent protection, no other bioequivalent drug can compete until its patent expires in 2029.
Moreover, it is likely that once generic IR is introduced, its marketability would be severely impaired by XR's status as the drug of choice, ridding consumers of incentive to switch back. In this scenario, XR's popularity is not generated by consumer choice but by an artificial monopolization of the memantine-drug market. Additionally, the court found Actavis' procompetitive defense to be "pretextual", reasoning that Defendants' conduct "makes sense only because it eliminates competition."
The court concluded that the "combination of withdrawing a successful drug from the market and introducing a reformulated version of that drugâ€¦ without a legitimate business justification" violated Â§ 2 of the Sherman Act.
Mylan v. Warner Chilcott
In Mylan v. Waner, Plaintiff alleges that Warner Chilcott, the manufacturer of an unpatented acne medication, violated antitrust laws by engaging in a "product-hoping scheme" designed to impede generic competition. Mylan brings several claims under the Sherman Act; relevant to this discussion is Mylan's allegation that in anticipation of generic entry, Defendant executed three product switches and then subsequently removed their original formulation off the shelves. Plaintiff argues that "these switches," provided "little or no therapeutic benefit to consumers," but "devastated the market for the prior versions of Doryx". 
Defendant rebutted that branded drug companies were under no duty assist generic drug companies by waiting to phase out older branded formulations until a generic substitute was available to the public,  suggesting that this type of "free riding" is "'the antithesis of competition.'" Plaintiff, on the other hand, contends that this case was indistinguishable from New York v. Actavis, and that Warner Chilcott's act of removing its branded medication off the market combined with the introduction of three substitute formulations violated Â§ 2 of the Sherman Act. 
The court articulated that the Sherman act "directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself." Here, the court distinguished from Actavis, finding that the Defendant had not established a monopoly over tetracycline-drug market, and arguing that the Plaintiff, Mylan, was not "foreclosed" from the market.  Plaintiff was able to introduce generic Doryx at any time after 1985, as Doryx has been on the market for more than 20 years with no patent protection. However, Mylan failed to begin its own production until 2003.
Mylan eventually was able obtain FDA approval for several of its formulations that would be allowed to compete against other tetracycline drugs. Thus, any argument that the Defendant's subsequent formulations obstructed the generic market failed. Ultimately, the court found that Mylan failed to state an anticompetitive injury. Reconciling other claims, the court addressed the second prong of the Microsoft test. The court found that even if an anticompetitive injury was present, Defendant presented legitimate business justifications. Accordingly, the 3rd circuit held that Plaintiff's did not meet its burden under Â§ 2 of the Sherman Act.
RECONCILING THE SPLIT
- Product Shifting
Articulated in AstraZeneca and Microsoft, courts will give deference to innovation. Perceivably frivolous changes made to an existing product formulation are legal per se. In both Actavis and Mylan, brand name manufacturers made changes to their drug formulations related to either dosing or switching from capsule to tablet form. As expressed in Berkey, courts do not investigate the significance of these innovations; the purview of their inquiry deals with whether those innovations create an injury to the competitive market.
- Anticompetitive Injury
Injury to the competitor alone is not sufficient to raise an antitrust claim. The injury must cause harm to the consumer by way of coercion. In both cases, generic manufactures accused brand name manufactures of strategically timing the release of their derivative products in order to interfere with generic competition. In Actavis, the court held that the introduction of patented Namenda XR followed by the removal of Namenda IR from the market in response to impending generic IR entry rose to the level of coercion. Thus, Defendants' acts were violative of the Sherman Act. Conversely, Mylan arrived at a different conclusion, finding that Willcott's introduction of three varied Doryx formulas and removal of its capsulated Doryx formula did not violate the Sherman Act.
In arriving at the holding in these cases, both courts addressed whether respondent has a pre-existing monopoly or attempted to create a monopoly over their perspective drugs markets. Under this analysis, Actavis is distinguished from Mylan. In Actavis, Namenda IR and XR were the only memantine drugs on the market. In Mylan, however, there were several bioequivalent generic drugs on the market prior to Willcott's new formulation releases. Under Â§ section 2 of the Sherman Act, Actavis had an existing monopoly and their attempts at product hopping would have likely resulted in them extending that monopoly. In Mylan, however, it was unlikely for Wilcott to obtain a monopoly, as their drug competed with many others in the market and their market share had never exceeded 18%.
These cases are further distinguished by the protections granted to the brand name manufacturers' subsequent formulations. In Actavis, Namenda XR was patent protected. In Mylan, Doryx's new formulations were not patented. Namenda XR provided the Defendant with an advantage by artificially extending Actavis' absolute monopoly for another 15 years. In Mylan, however, neither the original nor derivative formulations were patented. Doryx's popularity in its market was merit based while Namenda became a leading brand through exclusivity.
- Legitimate Business Justifications
Microsoft provided that defendants may rebut a claim that they engaged in anticompetitive practices by providing procompetitive justifications. Under this prong, the cases were further distinguished. In Actavis, the court found that Defendant's purpose was flagrant; Defendants wanted to fend off generic competition. In Mylan, on the other hand, Defendant provided substantial justifications. 
While the 2nd and 3rd circuits have appeared to reach unequivocal decisions in two factually similar cases, both courts have followed the doctrine of staris decisis, rendering decisions consistent with the holdings of Abbott Lab and AstraZeneca. Where the precedent cases remained silent, the 2nd and 3rd circuits have filled in the gaps. Accordingly, courts should defer to the rule-of-reason test, initially weighing procompetitive benefits and anticompetitive harms, disregarding whether an intent to establish a monopoly was present. If a product on its merits results in a monopoly, it reflects the choice of the consumer. Thus, further inquiry would frustrate the purpose of antitrust laws.
 J.D. candidate at North Carolina Central University School of Law, Class of 2018; B.S. Biology 2015, Tuskegee University.
 See Mylan Br. 11, 42 (referring to Defendants' conduct of pulling the Doryx capsule from the market, destroying existing supplies, and introducing the Doryx tablet as a "hard switch").
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