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People v. Actavis PLC

United States Court of Appeals, Second Circuit

May 22, 2015

PEOPLE OF THE STATE OF NEW YORK, by and through ERIC T. SCHNEIDERMAN, Attorney General of the State of New York, Plaintiff-Appellee,
v.
ACTAVIS PLC, FOREST LABORATORIES, LLC, Defendants-Appellants

Argued April 13, 2015.[1]

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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Appeal from the United States District Court for the Southern District of New York. No. 14 Civ. 7473 Robert W. Sweet, Judge.

The State of New York brought this antitrust action against Defendant-Appellant Actavis plc and its wholly-owned subsidiary Forest Laboratories, LLC (collectively, " Defendants" ). New York alleges that as Namenda IR, Defendants' twice-daily drug designed to treat moderate-to-severe Alzheimer's disease, neared the end of its patent exclusivity period in July 2015, Defendants introduced a new once-daily version called Namenda XR. The patents on XR ensure exclusivity, and thus prohibit generic versions of XR from entering the market, until 2029. Faced with the prospect of competition from generic IR, Defendants decided to withdraw virtually all Namenda IR from the market in order to force Alzheimer's patients who depend on Namenda IR to switch to XR before generic IR becomes available. Because generic competition depends heavily on state drug substitution laws that allow pharmacists to substitute generic IR for Namenda IR--but not for XR, New York alleges that Defendants' forced-switch scheme would likely impede generic competition for IR. Moreover, the substantial transaction costs of switching from once-daily XR back to twice-daily IR therapy would likely further ensure that Defendants would maintain their effective monopoly in the relevant drug market beyond the time granted by their IR patents.

The United States District Court for the Southern District of New York (Robert W. Sweet, Judge) issued a preliminary injunction barring Defendants from restricting access to Namenda IR prior to generic IR entry. We conclude that the district court did not abuse its discretion by granting New York's motion for a preliminary injunction because New York has demonstrated a substantial likelihood of success on the merits of its claim under the Sherman Act, 15 U.S.C. § 2, and has made a strong showing of irreparable harm to competition and consumers in the absence of a preliminary injunction. Accordingly, we affirm the district court's order issuing a preliminary injunction.

LISA S. BLATT, Arnold & Porter LLP, Washington, D.C. (Sarah M. Harris, Robert A. DeRise, Arnold & Porter, LLP, Washington, D.C.; George T. Conway III, Wachtell, Lipton, Rosen & Katz, New York, N.Y.; J. Mark Gidley, Peter J. Carney, Claire A. DeLelle, White & Case LLP, Washington, D.C.; Jack E. Pace III, Martin M. Toto, White & Case LLP, New York, N.Y., on the brief), for Defendants-Appellants.

ANISHA S. DASGUPTA, (Barbara D. Underwood, Andrew Kent, Eric J. Stock, Elinor R. Hoffmann, on the brief), for Eric T. Schneiderman, Attorney General of the State of New York, New York, N.Y., for Plaintiff-Appellee.

Before: WALKER, RAGGI, and DRONEY, Circuit Judges.

OPINION

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John M. Walker, Jr., Circuit Judge :

The State of New York brought this antitrust action against Defendant-Appellant Actavis plc and its wholly-owned subsidiary Forest Laboratories, LLC (collectively, " Defendants" ). New York alleges that as Namenda IR, Defendants' twice-daily drug designed to treat moderate-to-severe Alzheimer's disease, neared the end of its patent exclusivity period in July 2015, Defendants introduced a new once-daily version called Namenda XR. The patents on XR ensure exclusivity, and thus prohibit generic versions of XR from entering the market, until 2029. Faced with the prospect of competition from generic IR, Defendants decided to withdraw virtually all Namenda IR from the market in order to force Alzheimer's patients who depend on Namenda IR to switch to XR before generic IR becomes available. Because generic competition depends heavily

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on state drug substitution laws that allow pharmacists to substitute generic IR for Namenda IR--but not for XR, New York alleges that Defendants' forced-switch scheme would likely impede generic competition for IR. Moreover, the substantial transaction costs of switching from once-daily XR back to twice-daily IR therapy would likely further ensure that Defendants would maintain their effective monopoly in the relevant drug market beyond the time granted by their IR patents.

The United States District Court for the Southern District of New York (Robert W. Sweet, Judge ) issued a preliminary injunction barring Defendants from restricting access to Namenda IR prior to generic IR entry. We conclude that the district court did not abuse its discretion by granting New York's motion for a preliminary injunction because New York has demonstrated a substantial likelihood of success on the merits of its claim under the Sherman Act, 15 U.S.C. § 2, and has made a strong showing of irreparable harm to competition and consumers in the absence of a preliminary injunction. Accordingly, we affirm the district court's order issuing a preliminary injunction.

BACKGROUND

This case raises 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. § § 1 and 2. This question is an issue of first impression in the circuit courts. Determining whether Defendants' actions are unlawfully anticompetitive requires some understanding of the idiosyncratic market characteristics of the complex and highly-regulated pharmaceutical industry, as well as some peculiar characteristics of treatment for Alzheimer's disease. We begin by describing several key features of the pharmaceutical industry.

I. FDA Requirements, the Hatch-Waxman Act, and State Drug Substitution Laws

In compliance with the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. § § 301-399f, when a pharmaceutical manufacturer seeks to bring a new drug to market, it must submit a New Drug Application (" NDA" ) for approval by the U.S. Food and Drug Administration (" FDA" ). 21 U.S.C. § 355. An NDA must contain scientific evidence that demonstrates the drug is safe and effective, which inevitably requires " a long, comprehensive, and costly testing process." F.T.C. v. Actavis, Inc., 133 S.Ct. 2223, 2228, 186 L.Ed.2d 343 (2013). NDA-approved drugs are generally referred to as brand-name or brand drugs. An approved brand drug enjoys a period of patent exclusivity in the market at the end of which one or more generic drugs,[3] exhibiting the same characteristics as the brand drug, may enter the market at a lower price to compete with the brand drug.

In 1984, Congress amended the Federal Food, Drug, and Cosmetic Act by enacting the Drug Price Competition and Patent Term Restoration Act (the " Hatch-Waxman Act" or " Hatch-Waxman" ), Pub. L.

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No. 98-417, 98 Stat. 1585. Hatch-Waxman was designed to serve the dual purposes of both encouraging generic drug competition in order to lower drug prices and incentivizing brand drug manufacturers to innovate through patent extensions. To incentivize innovation, Hatch-Waxman grants brand manufacturers opportunities to extend their exclusivity period beyond the standard 20-year patent term: it allows a brand manufacturer to seek a patent extension of up to five years to compensate for time that lapsed during the FDA regulatory process, 35 U.S.C. § 156, and an additional six-month period of " pediatric exclusivity" if the manufacturer conducts certain pediatric studies, 21 U.S.C. § 355a. Defendants applied for, and received, both extensions for Namenda IR.

Hatch-Waxman also promotes competition from generic substitute drugs. It permits a manufacturer that seeks to market a generic version of an NDA-approved drug to file what is known as an Abbreviated New Drug Application (" ANDA" ). See 21 U.S.C. § 355(j); see also In re Adderall XR Antitrust Litig., 754 F.3d 128, 130 (2d Cir. 2014). An ANDA allows a generic manufacturer to rely on the studies submitted in connection with the already-approved brand drug's NDA to show that the generic is safe and effective, provided that the ANDA certifies that the generic drug has the same active ingredients as and is " biologically equivalent" or " bioequivalent" to the already-approved drug.[4] 21 U.S.C. § 355(j)(2)(A)(iv); see also Caraco Pharm. Labs., Ltd. v. Novo Nordisk A/S, 132 S.Ct. 1670, 1676, 182 L.Ed.2d 678 (2012) (citing 21 U.S.C. § § 355(j)(2)(A)(ii), (iv)).

A generic drug is bioequivalent to a brand drug if " the rate and extent of absorption" of the active ingredient is the same as that of the brand drug. 21 U.S.C. § 355(j)(8)(B)(i). In other words, two drugs are bioequivalent if they deliver the same amount of the same active ingredient content into a patient's blood stream over the same amount of time. By enabling generic manufacturers to " piggy-back" on a brand drug's scientific studies, Hatch-Waxman " speeds the introduction of low-cost generic drugs to market, thereby furthering drug competition." Actavis, 133 S.Ct. at 2228 (internal quotation marks, alteration, and citation omitted); see also H.R. Rep. No. 98-857, pt. 2, at 9 (1984) (stating the Hatch-Waxman Act's " policy objective" was to " get[] safe and effective generic substitutes on the market as quickly as possible after the expiration of the patent" ).

By the time Congress enacted the Hatch-Waxman Act, many states had enacted drug substitution laws to further encourage generic competition.[5] Today, all 50 states and the District of Columbia have drug substitution laws.[6] Although

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the specific terms of these laws vary by state, drug substitution laws either permit or require pharmacists to dispense a therapeutically equivalent, lower-cost generic drug in place of a brand drug absent express direction from the prescribing physician that the prescription must be dispensed as written.[7] For example, New York's drug substitution law requires a pharmacist to " substitute a less expensive drug product containing the same active ingredients, dosage form and strength as the drug product prescribed" provided certain conditions are met. N.Y. Educ. Law § 6816-a(1).

All state drug substitution laws prohibit pharmacists from substituting generic drugs that are not therapeutically equivalent to the brand drug, but state laws do not all define therapeutic equivalence in the same way.[8] Thirty states, including New York and the District of Columbia, adopt the FDA's definition of therapeutically equivalent and only allow generic substitution if the FDA designates the generic as " AB-rated" in a publication commonly referred to as the " Orange Book." [9] N.Y. Education Law § 6816-a(1); N.Y. Public Health Law § 206(1)(o). To receive an AB-rating, a generic must not only be bioequivalent but pharmaceutically equivalent to the brand drug, meaning it has the same active ingredient, dosage form, strength, and route of administration as the brand drug. U.S. Dep't of Health & Human Servs., FDA, Approved Drug Products with Therapeutic Equivalence Evaluations vii-x (35th ed. 2015), available at http://1.usa.gov/1PzbMxF (the " Orange Book" ). The AB-rating requirement is designed to provide guidance regarding which drugs are therapeutically equivalent, but, as has been observed, it also provides an opportunity for brand manufacturers to " game" the system.[10] S.A. 28.

Hatch-Waxman and state substitution laws were enacted, in part, because the pharmaceutical market is not a well-functioning market. In a well-functioning market, a consumer selects and pays for a product after evaluating the price and quality of the product. In the prescription

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drug market, however, the party who selects the drug (the doctor) does not fully bear its costs, which creates a price disconnect. Moreover, a patient can only obtain a prescription drug if the doctor writes a prescription for that particular drug. The doctor selects the drug, but the patient, or in most cases a third-party payor such as a public or private health insurer, pays for the drug. As a result, the doctor may not know or even care about the price and generally has no incentive to take the price into account. See American Antitrust Institute Amicus Brief in Support of Appellee (" AAI Br." ) at 6; see also Intellectual Property and Antitrust Professors Amicus Brief in Support of Appellee (" IP and Antitrust Prof. Br." ) at 12. As the Federal Trade Commission has explained:

The basic problem is that the forces of competition do not work well in a market where the consumer who pays does not choose, and the physician who chooses does not pay. Patients have little influence in determining which products they will buy and what prices they must pay for prescription.

Fed. Trade Comm'n Bureau of Consumer Prot., Drug Product Selection 2-3 (1979), available at http://bit.ly/1JqKd4G. (" FTC, Drug Product Selection" ). State substitution laws are designed to correct for this price disconnect by shifting drug selection, between brand drugs and their corresponding generics from doctors, to pharmacists and patients, who have greater financial incentives to make price comparisons.[11] See AAI Br. at 8-9.

II. The Relevant Market

The relevant market, undisputed on appeal, is the memantine-drug market in the United States. Defendants manufacture Namenda, a memantine hydrochloride-based[12] (" memantine" ) drug designed to treat moderate-to-severe Alzheimer's disease. Namenda is currently available in two formulations: a twice-daily immediate-release drug, Namenda IR, and a once-daily extended-release drug, Namenda XR. When Forest introduced Namenda IR tablets

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in January 2004, Namenda IR was the first medication approved for individuals suffering from moderate-to-severe Alzheimer's disease.[13] Namenda IR became one of Forest's best-selling drugs--generating approximately $1.5 billion in annual sales in 2012 and 2013. The FDA approved Namenda XR in June 2010, and Forest began marketing XR in 2013. The two drugs are the only memantine therapies in their class--N-Methyl D-Aspartate (" NMDA" ) receptor antagonists--currently on the market.[14]

Namenda IR and Namenda XR have the same active ingredient and the same therapeutic effect. The relevant medical difference between the two is that IR, which is released immediately into the bloodstream, is taken twice a day while XR, which is released gradually, is taken once a day.[15] All other Alzheimer's disease treatments are administered once a day.

The non-medical difference between IR and XR relates to their patent protection. Defendants' patents on Namenda IR prohibit any manufacturer from marketing a generic version of IR until July 11, 2015 (Namenda IR's " exclusivity period" ).[16] The exclusivity period for Namenda XR does not expire until 2029. A brand drug's exclusivity period is significant because when that period ends and generic versions enter the market, the brand drug often loses more than 80 to 90% of the market within six months. This period following the ...


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