1. Recent FTC Pharmaceutical Cases: Background and Examples Sue H. Kim This presentation was prepared from public sources. The views expressed herein do not necessarily reflect those of the U.S. Federal Trade Commission.

2. Topics for Discussion The Regulatory Background for Pharmaceutical Products: –Food and Drug Administration (FDA) –The Hatch-Waxman Act –Federal Trade Commission (FTC) Recent Pharmaceutical Cases: –Patent Settlement (Reverse Payment Settlement)

3. The Regulatory Background: Food and Drug Administration (FDA) A brand drug company must submit a new drug application (NDA) to the FDA for approval. The brand drug company also can obtain a patent covering the drug. A patent grants the brand drug company the right to exclude others from activities infringing its patent.

4. The Regulatory Background: FDA Generic drug companies are copies of the brand drug companies’ products that are sold at substantial discounts. Generic drug companies file Abbreviated New Drug Applications (ANDA) to gain FDA approval for a drug. Generic drugs that are determined by the FDA to be “equivalent” to the brand drug may be automatically substituted by a pharmacist for the brand drug.

5. The Regulatory Background: The Hatch-Waxman Act The Hatch-Waxman Act was enacted in 1984. Goals: –Maintain incentives for brand drug companies to develop new drugs –Expedite the approval process of generic drugs for earlier market entry

6. Hatch-Waxman Act Provisions at Issue in FTC Cases Patent Listing Requirements Paragraph IV Certification 30-Month Stay First ANDA Filer & 180-Day Exclusivity

7. The Hatch-Waxman Act: Patent Listing Requirements Requires a NDA holder (brand drug company) to list the patents covering the new drug in the “Orange Book” that: –Claim the drug or a method of using the drug –With respect to which a claim of patent infringement could reasonably be asserted. Purpose is to give notice of patents that cover a drug.

8. The Hatch-Waxman Act: Patent Certification For each patent listed in the Orange Book, an ANDA filer must certify either: –No patent listed (Paragraph I) –Patent expired (Paragraph II) –Will not market until patent expires (Paragraph III) –Patent invalid or not-infringed (Paragraph IV Certification) The idea is to provide notice to the FDA, the NDA holder, and the patent owner.

9. The Hatch-Waxman Act: 30-Month Stay of Generic Approval Brand drug company has 45 days to evaluate the paragraph IV certification and to decide whether to file a lawsuit for patent infringement. If the brand drug company files a lawsuit, the FDA is automatically prevented from approving the ANDA for 30 months unless, before that time, the patent expires or is judicially determined to be invalid or not infringed. Idea is to give the brand and generic companies time to resolve the litigation.

10. The Hatch-Waxman Act: 180-Day Exclusivity for First ANDA Filer First generic company to file an ANDA with a paragraph IV certification is granted 180-days (about 6 months) to exclusively market its generic drug. This means that FDA will not approve any other ANDAs during the first-filer’s exclusivity. Purpose: to give generic companies an incentive to challenge or design around weak patents.

11. What Does This Mean for Antitrust and the FTC? Brand drug company faces significant loss in sales when generic drugs enter the market. When generic drugs enter the market, they do so at a substantially lower price. –The first generic enters at 65% to 75% of the brand drug’s price and takes more than 50% of the brand drug’s sales within a year. –Subsequent generics compete price down further.

12. 0 200 100 150 50 250 300 123 4 5678910111213141516171819212223202425 Months Since Generic Entry New Prescriptions CARDIZEM CD Aventis Generic Cardizem Total Generic Cardizem Entry

13. What Does This Mean for Antitrust and the FTC? Brand drug company has significant financial incentive to delay generic entry. Brand drug company’s lost sales exceed generic entrant’s revenues. Thus, brand drug company is able to pay the generic more not to compete than the generic can earn by competing. And the generic drug company has incentive to split brand drug’s monopoly profits by agreeing not to market its generic drug. Consumers lose the benefit of lower price from faster generic entry. A Congressional Budget Office report estimated that consumers saved $8 to $10 billion at retail pharmacies in one year by purchasing generics.

14. Brand’s Incentives to Pay for Delay Competition Generic’s Profits Consumer Savings Brand’s Profits Reverse Payment Brand’s Profits Payment to Generic Pre-Generic Filing Brand’s Profits

15. Patent Settlement Case Example: The Shering/Upsher Case Schering makes K-Dur 20, a potassium supplement. Schering’s K-Dur 20 patent was set to expire in 2006. Upsher filed the first ANDA with FDA in 1995 to make a generic. Schering sued Upsher for patent infringement. Parties settled patent litigation in 1997: –Upsher agreed not to enter before September 2001 –Schering agreed to pay Upsher $60 million –Upsher licensed Niacor-SR rights to Schering

17. Patent Settlement Case Example: The Shering/Upsher Case –There was no legitimate justification for the terms of the settlement: $ 60 million was not for Niacor-SR Extraordinary payment for an ordinary product Due diligence was strikingly superficial Schering simultaneously rejected a better niacin product Over 40 other companies declined Niacor-SR

18. Schering’s Pharmaceutical Licensing Agreements Non-contingent Payments Source: Schering’s Response to Complaint Counsel Interrogatory No. 1.

19. Patent Settlement Case Example: The Shering/Upsher Case The FTC “Rule of Reason” Approach: –The entry of generic K-Dur 20 would benefit consumers (more than $100 million). –The Schering/Upsher settlement had the likely effect of delaying generic entry absent a reverse payment, the parties would inevitably have settled with an earlier generic entry date.

20. Patent Settlement Case Example: The Shering/Upsher Case In 2001, the FTC charged that the Schering/Upsher settlement agreement was unreasonable restraints of trade and that the companies have conspired to monopolize the market for potassium chloride supplements in violation of Section 5 of the FTC Act. In addition, the complaint charged Schering with unlawful acts of monopolization.

21. Balancing Patent Rights and Antitrust Law The FTC Approach is grounded in the following idea: –Patent gives the holder the right to exclude: Through litigation or the threat of litigation, or Refusal to license –However, the patent’s scope does not include using those profits to eliminate potential entrants. –Where the agreement is secured by sharing monopoly profits, rather than the strength of the patent, patent law does not trump antitrust. Distinction between settlements without a payment and those with a payment.

22. Patent Holders Don’t Always Win 1989 to 1996: 46% of all patents challenged in litigation invalidated –Allison & Lemley, Empirical Evidence on the Validity of Patents, 26 AIPLA Q.J. 185, 205-06 (1998) 1992 to 2000: Generics prevailed 73% of the time in paragraph IV litigation –FTC, “Generic Drug Entry Prior to Patent Expiration,” (July 2002) Patents are not absolute rights. Rather, they extend only as far as the patent’s ability to withstand a legal challenge.

23. In Conclusion… This is the approach FTC has recommended as representing a sound balance of patent law and antitrust law. –a patent holder should not be able to transfer part of its monopoly profits to a potential competitor to convince that potential competitor not to compete. Though courts have not always agreed with our position, we continue to litigate these cases. –courts have rejected antitrust claims involving “reverse payment” settlements holding that entry restrictions inside the patent term are justifiably within the patent’s exclusionary scope.