Using Antitrust to Fix Broken Markets

The prescription drug market is a real mess, in my view. At the very least, it is complicated, and prices for drugs seem to be higher in the U.S. than elsewhere (though teasing that out is hard, since very few pay sticker price and insurance companies negotiate deals). But I don't know what the solution is, and I'm not convinced anyone else does, either. The recent article that triggers my thoughts on this is: A Non-Coercive Approach to Product Hopping, 33 Antitrust 102 (2018), by Michael Carrier (Rutgers) and Steve Shadowen (Hilliard & Shadowen LLP). Their paper is on SSRN, and the abstract is here:

The antitrust analysis of product hopping is nuanced. The conduct, which consists of a drug company’s reformulation of its product and encouragement of doctors to switch prescriptions to the reformulated product, sits at the intersection of antitrust law, patent law, the Hatch-Waxman Act, and state substitution laws, and involves uniquely complicated markets with different buyers (insurance companies, patients) and decision-makers (physicians).

In Doryx, Namenda, and Coercion, Jack E. Pace III and Kevin C. Adam applaud some courts’ use of a product-hopping analysis that finds liability only where there is an element of coercion. In this response, we explain that the unique characteristics of pharmaceutical markets render such a coercion-based approach misguided. We also show that excessively deferential analyses would give brand-name drug firms free rein to evade generic-promoting regulatory regimes. Finally, we offer a conservative framework for analyzing product hopping rooted in the economics and realities of the pharmaceutical industry.

This very brief response essay does a good job of highlighting some of the difficult nuances associated with product hopping (something I'll describe more in a minute) in the prescription drug market. I don't necessarily agree with it - I actually disagree with the final proposal. I share this here because it prompted me to think more closely about an issue I had mostly ignored, and I respect Mike Carrier and think that he does about as good a job at presenting this particular viewpoint as anyone.

Still, I'm troubled by the use of the blunt weapon of antitrust against product hopping, even as I have misgivings about other areas of this market. Product hopping occurs when a name brand (read, patented) drug is pulled from the market in favor of a "new and improved" product (that is also patented). The concern is that the removal of the old brand from the market just as generics are arriving will fail to trigger mandatory generic substitution rules, because doctors can't prescribe the old name brand. Instead, the fear is that doctors will only fill prescriptions for the new, improved (though the parties debate the improved point) drug, for which there is no generic to substitute. Further, they won't ever prescribe the generic once the name brand is off the market.

Here's what gives me a bit of trouble about this. While I am a big fan of automatic generic substitution laws, I am skeptical that they should be used as innovation policy, to the point where the inability of a generic to take advantage of it creates an antitrust injury and also forces a company to make a product that it may or may not want to make for profit or other reasons. In other words, a system that requires a company to make a product so that other companies can sell a substitute product that sellers are required by law to sell is a broken system indeed.

The question is, where is the system broken? Some will, no doubt say that it is the patent system and exclusivity. Surely that plays a role. But I'd like to point to three other points of market failure that drug makers point to. None of these are really new, but I'm taking the blogger's prerogative to talk about them.

1. I think it is a huge assumption that doctors will only prescribe the new drug and won't prescribe the generic once it hits the market. The argument in the article above is that because doctors don't have to pay for it, they have no incentive to cost minimize. Which the incentive is certainly diminished in theory, this is not my experience with (many) doctors at all. I have had many doctors prescribe me (or my wife) "older" generic versions of drugs because they were cheaper. One funny thing is that often times those older versions were awful - like a drug my wife had to take as an awful tasting liquid because the pill version cost 3 or 4 times as much and wasn't covered by the (generally good) insurer, or a blood pressure medication I had to take because it was the standards--until I could show that I had a rare side effect.

2. I think insurance companies can regulate much of this through formularies. If you make the new drug non-formulary (or even brand cost), people will migrate to the cheaper generic substitute, even if there is no prescription available. Even if doctors don't pay, insurers sure do, and they have every incentive to make sure that generic substitutes are used if the new drug is not really an improvement.

3. I bristle a bit at the notion that generic companies must rely on substitution laws to get doctors to prescribe. I realize that's how it is done now, and while substitution laws are a good thing, there is nothing stopping generics from telling doctors why the new-fangled drug is no better than the one that was just removed from the market for the same money. We make every other industry do this. I suspect that litigation is cheaper than advertising, and while I am happy to give the industry a leg up, I am wary of giving it a pass on basic business requirements, and I am wary to taking something that's a regulatory windfall to generics (even if it is good for consumers) and making it an affirmative innovation policy. .

4. Taking this last point further, from an innovation standpoint, is there any reason why generics can't innovate their own product hopping drug? Knowing that a deadline is coming, why can't they innovate (or license) their own extended relief version in addition? Indeed, I take an extended release version of a generic drug. It costs a fortune (before insurance), and the generic is benefiting from having created/licensed it. I suppose a more salient example is Mylan's Epi-Pen, which uses a protected delivery system for a generic drug. While most people are not thrilled with Mylan's pricing strategy, it illustrates the basic point I'm trying to make: generic manufacturers are not helpless victims of the system stacked against them, they are active, rent-seeking participants willing to exploit systematic flaws in their favor.


Finally, I will say that all of my arguments are empirically testable, as are the arguments on the other side. If folks can point to studies that have demonstrated actual physician, consumer, and insurer behavior in product hopping cases, I will be happy to post here and assess!

What do Generic Drug Patent Settlements Say about Patent Quality?

An interesting study about Orange Book patents challenged both under Hatch-Waxman and Inter Partes Review caught my eye this week, but perhaps not for the ordinary reasons. One of the hot topics in drug patent challenges today is reverse payments: when the patentee pays the generic to stop a challenge. The Supreme Court has ruled that these payments can constitute antitrust violations. Though the drug companies give reasons, I'll admit that I've always been skeptical of these types of payments.

One of the key questions is whether the patent was going to survive. Most seem to assume that if a company pays to settle, then the patent was likely going to be invalidated. That's where the draft, Maintaining the Balance: An Empirical Study on Inter Partes Review Outcomes of Orange Book-Listed Drug Patents and its Effect on Hatch-Waxman Litigation, by Tulip Mahaseth (a recent Northwestern Law grad) comes in. Here is the abstract from SSRN:

The Hatch-Waxman Act intended to strike a delicate balance between encouraging pioneer drug innovation and promoting market entry of affordable generic versions of pioneer drugs by providing a streamlined pathway to challenge validity of Orange Book patents in federal district courts. In 2012, the America Invents Act introduced Inter Partes Review (IPR) proceedings which provide a faster, cheaper pathway to challenge Orange Book patents than Hatch-Waxman district court litigation. IPRs also have a lower evidentiary burden of proof and broader claim construction standard, which should make it easier, in theory, to obtain patent invalidation in IPRs as compared to Hatch-Waxman litigation. This empirical study on IPR outcomes of Orange Book patents in the past six years shows that both generic manufacturers and patent owners obtain more favorable final decisions in IPRs as compared to their Hatch-Waxman litigation outcomes because the rate of settlement in IPRs is much lower than in Hatch-Waxman litigation. Moreover, generic manufacturers do not appear to be targeting Orange Book patents in IPRs during their drug exclusivity period. Only 2 out of more than 400 IPRs against Orange Book patents were filed by generic petitioners during the patents’ New Chemical Entity exclusivity period. About 90% of the 230 Orange Book patents challenged in IPR proceedings were also challenged in Hatch-Waxman litigation. It is likely that generic manufacturers are not deterred from Hatch-Waxman litigation because of the lucrative 180-day exclusivity period, which gives the first generic filer 180 days to exclusively market their generic version without competition from other generics when the Orange Book drug patent is successfully invalidated in a subsequent district court proceeding. Therefore, IPR proceedings do not appear to be disrupting the delicate balance sought by the Hatch-Waxman Act. Instead, the IPR process has provided generic manufacturers a dual track option for challenging Orange Book patents by initiating Hatch-Waxman litigation in district courts and also pursuing patent invalidity in IPRs before the Patent Trial and Appeal Board, which has reduced rate of settlements resulting in more patents being upheld and invalidated.

There's a lot of great data in this paper, comparing Orange Book IPRs with non-Orange Book IPRs, including comparison of win rates and settlement rates.

But I want to focus on one seemingly minor point: as the number of IPRs has increased, the rate of settlement has decreased. And, more important, the decreasing rate of settlement has led to more invalidation and more affirmance of patents.

This result gives a nice window into how we might view settlements. Traditional Priest-Klein analysis says that this is exactly what we should see - that the previously settled cases were 50/50. But proving this is harder, and this data set would allow for a nice differences-in-differences analysis in future work.

Additionally, a split among outcomes implies that the settlements were not necessarily because the patentee believed the patent was at risk.  If anti-competitive settlements were ruling the day, I would have predicted that most of the (recent) non-settlements would have resulted in patent invalidation. Then again, it is possible that a 50% chance was risky enough to merit a reverse payment settlement in the past. Regardless of how one comes out on this issue, this study provides some helpful details for the argument.

Kevin Soter on Causation in Reverse Payment Antitrust Claims

Readers of this blog are likely familiar with the Supreme Court's 2013 FTC v. Actavis decision, which concluded that certain "reverse payment" pharmaceutical patent litigation settlements could violate the antitrust laws and that "it is normally not necessary to litigate patent validity to answer the antitrust question." Actavis had plenty of academic input before it was decided and has continued to spark vigorous scholarly debates, such as an article by Edlin, Hemphill, Hovenkamp & Shapiro, a response by Harris, Murphy, Willig & Wright, and a reply from the original group.

But until I read Kevin Soter's forthcoming Stanford Law Review Note, Causation in Reverse Payment Antitrust Claims, I wasn't aware of the developing circuit split over reverse-payment antitrust suits brought by private individuals rather than the government.

Unlike the government, private individuals must establish "antitrust standing," including the need to show causation of injury-in-fact, which limits enforcement to groups like drug purchasers, consumer groups, or insurers that might actually be harmed by the settlement. Under the approach to causation adopted by the Fifth and Third Circuits, "plaintiffs must prove precisely how, absent the illegal settlement agreement, generic entry would have happened earlier," which can require litigation of patent invalidity or noninfringement. Other courts—including the California Supreme Court, three district courts, and perhaps the Second Circuit—use the same inference as in Actavis, "reasoning that a plaintiff who has shown an antitrust violation based on a reverse payment settlement agreement has necessarily shown an agreement to delay generic entry beyond the otherwise expected date of generic entry."

Soter sides with the latter approach, arguing that the causation inquiry for private plaintiffs is no different from the inquiry over anticompetitive effects at issue in Actavis, for which litigation of patent validity is unnecessary. And he notes that a burden-shifting approach could address lingering concerns by allowing defendants to rebut the inference of causation.

The best part of teaching at Stanford is having extraordinarily talented students who can produce works like this, and I thought it was worth highlighting for anyone who has been following the pharmaceutical patent litigation antitrust debates.

Brad Shapiro on the Cost of Strategic Entry Delay in Pharmaceuticals

Pharmaceutical companies sometimes engage in "product hopping," in which they attempt to move patients to a new product with longer patent protection before the generic version of an older drug becomes available. Product hopping was recently in the news with New York state's antitrust suit against Actavis for its decision to withdraw Namenda IR, its 2x/day Alzheimer's drug (with patent protection ending July 2015), to force patients to switch to Namenda XR, a 1x/day version (with patent protection until 2029). In an opinion by Judge Walker, the Second Circuit upheld a preliminary injunction barring withdrawal of Namenda IR prior to generic entry, concluding that the "hard switch crosses the line from persuasion to coercion and is anticompetitive."

The cost to consumers of product hopping that obstructs access to generic drugs is clear. But these marketing strategies raise another potential welfare loss that receives less attention: when a pharmaceutical company delays the introduction of a new drug version until just before patent protection on the old version is set to expire, that delay can harm consumers who prefer the new version. This later cost is the focus of a new empirical paper by Professor Brad Shapiro (Chicago Booth), Estimating the Cost of Strategic Entry Delay in Pharmaceuticals: The Case of Ambien CR.

Cloned, Cloned Horses, We’ll Ride Them Today (With Profuse Apologies to the Rolling Stones)

The American Quarter Horse is a breed that excels at sprinting over short distances—Quarter Horse races may range from 220 to 870 yards. It is the most popular breed in the United States, and the American Quarter Horse Association (AQHA), headquartered in Amarillo, TX, is the largest horse breed registry in the world. Because of the interest in this breed, Quarter Horses have become the subject of commercial efforts at reproductive cloning. One company, Viagen, has produced over 150 cloned foals. The cloning is achieved via somatic cell nuclear transfer (SCNT), the technique that famously created Dolly the Sheep. As some readers may be aware, Dolly was the focus of In re Roslin Institute (Edinburgh), 750 F.3d 1333 (2014), an important patentable subject matter eligibility case decided by the Federal Circuit last May.

FTC v. Actavis Argument Recap

I attended the Supreme Court argument in FTC v. Actavis today (as I noted in my earlier post previewing the case), which involves when a brand name pharmaceutical company may make a "reverse payment" to a generic company as part of a settlement that delays the generic's market entry. The Court expressed skepticism toward both the pharmaceutical companies' desired hands-off approach (which would find such payments to almost always be within the "scope of the patent") and the FTC's "quick look" approach (which would find such payments to presumptively be antitrust violations). The Court might find middle ground by holding that such settlements, like most antitrust issues, are subject to the "rule of reason."

Academics on FTC v. Actavis

This morning the Supreme Court hears argument in FTC v. Actavis (previously FTC v. Watson), in which the Court will decide when a brand-name pharmaceutical company may offer a "reverse payment" settlement to a generic company in exchange for the generic dropping a patent challenge and staying out of the market. Brand-name companies can use this strategy without triggering an endless stream of generic settlements because the first generic to file a "paragraph IV" certification challenging the brand's patents gets 180 days of market exclusivity before the FDA will approve another generic (unless forfeited), which gives a second generic less incentive to challenge the patents and thus less leverage in extracting a settlement.

Christopher R. Leslie: Patent Tying, Price Discrimination, and Innovation

Do patent tying arrangements diminish incentives for innovation? In his recent article Patent Tying, Price Discrimination, and Innovation, 77 Antitrust Law Journal 811 (2011), Professor Christopher R. Leslie (University of California, Irvine School of Law) argues that, contrary to the views of commentators who justify patent tying as pro-innovation, metered tying can diminish incentives for innovation. He therefore recommends that antitrust law not recognize a price discrimination defense to patent tying.

Lemley & McKenna: Is Pepsi Really a Substitute for Coke? Market Definition in Antitrust and IP

Traditionally, antitrust law has viewed product markets as relatively static domains where products compete solely based on price and quality. But intellectual property rights complicate this simple picture. For example, while basic intuition would make one assume that Pepsi and Coke compete in the same market (the market for colas or sodas, for example), reality suggests otherwise. Though research indicates that consumers prefer Pepsi over Coke in blind taste tests (better quality), consumers still prefer Coke over Pepsi when the blinders are removed—the “Coke” trademark, on its own, differentiates the product such that Coke and Pepsi may, in reality, compete in separate markets. Using this observation as a springboard for their recently-released working paper, Professors Mark Lemley of Stanford Law School and Mark P. McKenna at Notre Dame Law School ask us to consider the impact of IP rights on market power generally; and, in so doing, they provide some useful insights about the use of market definition in IP cases.

Herbert Hovenkamp: Patent Exclusions and Antitrust After Therasense

While Therasense has received a significant amount of coverage due to its implications on the inequitable conduct defense, few have discussed its implications in other areas. In Patent Exclusions and Antitrust After Therasense, Professor Herbert Hovenkamp of the University of Iowa takes the opportunity to analyze the potential implications of Therasense on patent exclusion suits.

Sarah R.W. Rajec: Tailoring Remedies To Spur Innovation

Will we ever find a perfect remedial scheme in patent law? Ever since the dawn of the patent system, our law has sought to tailor the patent system so that it optimally balances its grants of exclusive monopoly power with the incentives it provides to prospective inventors. In Tailoring Remedies To Spur Innovation, Sarah R. Wasserman Rajec, a Visiting Associate Professor at GW, has written a thought-provoking draft paper in which she seeks to move us one step closer to that ideal balance. Incorporating useful insights from the economics and antitrust literatures, she argues that the law surrounding permanent injunctions in patent suits can be better adapted to promote innovative ends.

Michael Carrier on the Patent-Antitrust Paradox

Studying for my antitrust exam made me think about the intersection of patents and antitrust—something we only had time to touch on briefly during the class. I've already blogged about the chapters my professor, George Priest, wrote for the Kauffman Foundation's new book on innovation, including Chapter 8 on the role of antitrust law in promoting innovation. But to learn more about the specific patent-antitrust intersection, I read Unraveling the Patent-Antitrust Paradox (U. Pa. L. Rev. 2002) by Professor Michael Carrier (Rutgers Law), which seems to be the most-cited article to tackle the topic in the past decade.