Federal Trade Commission Doorway Sign“Product-hopping” refers to a practice employed by some brand-name pharmaceutical companies in which the company attempts to shift users from an older prescription drug that is going off-patent and will soon face generic competition to a newly introduced similar product from that company. Often, the new product will have a significant term of patent protection or other exclusivity remaining.

“Product-hopping” can be used to fend off generic competition, in part, because it prevents or delays “automatic substitution” by pharmacies. Under automatic substitution, a pharmacy filling a prescription can dispense a generic version of the prescribed drug—if one is available—absent a specific “dispense as written” instruction. Importantly, however, substitution is only allowed if the generic is an “AB-rated” equivalent to the branded drug, meaning that it has the same active ingredient, dosage, and form, and a similar absorption profile in the body. Therefore, by moving the market for an older drug facing imminent generic competition to a newer alternative for which no AB-rated equivalent exists, brand-name companies can potentially mitigate the severe drop in sales and profits that follows from automatic substitution by pharmacies.

Eastern District Rejects Product-Hopping Theory

In Mylan Pharmaceuticals v. Warner Chilcott Public, No. 12-3824 (E.D. Pa.), the plaintiff, Mylan Pharmaceuticals, a generic drugmaker, asserted the defendants’ various “product-hopping” activities were anti-competitive in violation of the Sherman Antitrust Act. The defendants, Mayne Pharma and its exclusive distributor, Warner Chilcott, sold Doryx, an antibiotic used to treat acne. Over the course of six years, the defendants took the Doryx franchise through a series of “hops”: from a capsule form to a tablet form, then to a “scored” tablet at a higher dose (allowing the tablet to be more easily split in half), then to a “dual-scored” tablet (allowing even more dosing options by splitting the tablet). Sometime after a new Doryx product was introduced, the defendants would stop promoting and/or selling the older product. For example, when the tablet form was first introduced, Mayne stopped selling the capsule form, worked with retailers to “auto-reference” the tablet instead of the capsule when filling prescriptions, destroyed some of its capsule inventory, and bought back capsule inventory from the market.

U.S. District Judge Paul S. Diamond of the Eastern District of Pennsylvania granted the defendants’ motion for summary judgment, dismissing Mylan’s monopolization claim under Section 2 of the Sherman Act because Mylan had not produced (after full discovery) evidence of monopoly power in a relevant market. The market, the court found, based on undisputed evidence, is not limited to Doryx, as Mylan claimed, but included other oral tetracyclines—drugs in the same chemical class. The court also rejected Mylan’s claim under Section 1 of the Sherman Act, holding the defendants’ actions associated with the introduction of new Doryx products did not constitute anti-competitive conduct. The court commented that, as a “general rule,” a company may “bring its products to market whenever and however it chooses,” though conduct may be anti-competitive when it involves efforts to monopolize through “competition on some basis other than the merits.”

In Diamond’s view, Doryx was able to maintain market share due to the defendants’ marketing and promotional efforts. To the extent Mylan was not able to benefit from automatic substitution, which the court characterized as a “regulatory windfall,” Mylan was merely a “victim of its own business strategy.” That “strategy,” in the court’s view, was to rely on automatic substitution laws for sales rather than using advertising and promotion, like its branded competitors. However, it was unclear from the court’s opinion whether generic companies use such advertising and promotion, as opposed to the automatic-substitution regulatory procedures. The court found that even if Mylan was prevented from using one more profitable avenue for selling its generic products, the defendants’ actions did not bar Mylan from the market or “severely restrict the market’s ambit.” Indeed, the court seemed to reject the entire notion of antitrust liability for product-hopping, stating that “defendants have no duty to facilitate Mylan’s business plan by keeping older versions of branded Doryx on the market.”

The Mylan court also expressed concern about the policy implications of holding that the defendants’ conduct made out a prima facie case of anti-competitive conduct, for purposes of trial, since pharmaceutical manufacturers would potentially bear the burden of proving the pro-competitive benefits of any product change that affected a generic competitor. The court boldly expressed skepticism that courts could ever fashion an appropriate workable test to assess whether product changes are “sufficiently innovative” to justify their anti-competitive effects. Whether expert opinion could ease that determination was not addressed by the court. In Diamond’s view, recognition of Mylan’s “anti-competitive product redesign” theory would “risk slowing or even stopping pharmaceutical innovation.”

Notably, the U.S. Court of Appeals for the Second Circuit reached a very different conclusion from Diamond regarding “product-hopping” conduct earlier this year in State of New York v. Actavis PLC (Namenda), No. 14-4624 (2d Cir. 2015), a case involving the Alzheimer’s disease drug Namenda. In Namenda, the defendant allegedly sought to move patients from an immediate-release form of Namenda, which was soon to lose patent protection, to a newer extended-release form of the drug. The defendant first attempted to move the market using a “soft switch” to the new drug—ceasing promotion of the older drug while aggressively promoting and discounting the new drug. After this “soft” approach was unsuccessful in moving significant numbers of patients to the new extended-release form, the defendant opted for a “hard switch”—withdrawing the older immediate-release drug from the market prior to generic entry. The district court, based on fairly compelling facts, granted an injunction, which was affirmed by the Second Circuit. Judge John M. Walker for an unanimous panel affirmed requiring the defendant to continue to make the immediate-release form of Namenda available.

The FTC’s Amicus Brief in ‘Mylan’

The plaintiff has appealed the Mylan ruling to the Third Circuit, which will hear the case sometime next year. Recently, the Federal Trade Commission filed an amicus brief in that appeal, intended to “highlight the distinct economic and legal dimensions of product-hopping disputes.” In that filing, the FTC states that the district court made “significant analytical errors in ruling for the defendants.” Regarding the district court’s monopoly power analysis, the brief states that the court erred by overlooking the disconnect in the prescription drug market between those who choose the drugs—prescribing physicians—and those who pay for the drugs—consumers and insurance carriers. The FTC also noted that a drugmaker’s decision to pursue a product-hopping strategy might in itself suggest monopoly power, since it suggests that the older product still enjoys monopoly profits that have not been constrained by competition from non-generic competition. Otherwise, the “hop” would have little value, the FTC argues.

The FTC also criticized Diamond’s analysis regarding whether the conduct at issue was anti-competitive, bluntly characterizing the opinion as “effectively embrac[ing] a rule of nearly per se legality for product-hopping conduct.” The agency analogized the tactic of frustrating a generic drugmaker’s ability to benefit from generic substitution to unlawful exclusive-dealing arrangements in which a monopolist ties up the most efficient routes of distribution, raising competitors’ prices by forcing them to less efficient channels. The FTC also took issue with the district court’s characterization of automatic substitution as a “regulatory windfall,” claiming that these laws are specifically intended to address the defects in the prescription drug market caused by the prescriber-payor disconnect. The FTC noted that, in contrast, the Second Circuit in Namenda found that generic substitution laws may provide the only cost-efficient way for generic pharmaceutical companies to compete. Finally, the FTC’s brief criticized the district court’s suggestion, for purposes of summary judgment, that Mylan could have competed with Doryx through using marketing and promotion. Given the automatic substitution laws, the FTC explained, a generic company’s promotional spend would likely benefit all generics, not just the company that pays for it. Additionally, undertaking an expensive promotional campaign would undermine the generic’s ability to offer its product at a low price. The FTC seemed to imply these are disputed issues for the jury to decide and not for the district court to opine about on summary judgment.

‘Product-Hopping’ Raises Tough Questions

The FTC’s amicus brief in the Mylan appeal includes some arguably cogent criticism relating to the need for courts to consider the idiosyncrasies of the U.S. prescription drug market when addressing product-hopping claims. Certainly, product-hopping may in some cases result in an “ever-retreating horizon of generic competition at the expense of consumers,” to use the FTC’s words. At the same time, the Mylan opinion raises a valid concern about the difficulty of courts devising a workable test of “sufficient innovation” to justify the effects of product change on the timing of generic entry. Neither Mylan nor Namenda involved product changes that were merely trivial—Namenda involved a switch from a twice-daily to a once-daily regimen, and Mylan involved a dual-scored tablet permitting more flexible dosing options. “Product-hopping” claims raise other difficult questions about the interplay and tension between antitrust law with intellectual property rights and with statutory and regulatory schemes reflecting their own balances between innovation and competition. Question is can (and should) such issues be effectively determined by courts and/or juries? The verdict is still out.

While the FTC has not recently announced any “product-hopping” enforcement action of its own, the amicus filing in Mylan makes clear that the agency is watching these cases closely. Notably, the agency also filed an amicus brief in connection with summary judgment briefing before the district court in Mylan. The FTC has long been focused on perceived “gaming” of the Hatch-Waxman scheme, as indicated by its many challenges to “pay-for-delay” settlements, culminating in its 2013 U.S. Supreme Court victory in FTC v. Actavis, 570 U.S. ___ (2013). Given this history, and the FTC’s acquired expertise in pharmaceutical markets, it would be no surprise to see FTC enforcement in this area in the near future. The FTC could use either the Sherman Act in the courts or, alternatively, Section 5 of the FTC Act (which the FTC has recently claimed has a broader reach) in an administrative proceeding. That looking-glass view is probable especially if the Mylan dispute generates favorable case law for the FTC’s position on appeal. Stay tuned.

Reprinted with permission from the November 2, 2015 issue of The Legal Intelligencer. Copyright 2015. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.