Rational Competition Policy and Hatch-Waxman Reverse Settlement Payments

Prof. David W. OpderbeckSeton Hall University Law SchoolGibbons Institute of Law, Science & Technology

Background

FDA new drug approval process requires multiple phases of clinical testing (NDA)

Hatch-Waxman Act seeks to balance pharmaceutical innovation and generic competition

Background

Potential generic competitor may file ANDAOne option challenges validity /

infringement of pioneer’s patent (paragraph IV)

First paragraph IV filer entitled to 180-day generic exclusivity period upon launch of generic

Pioneer may respond to paragraph IV certification with an infringement suit

Background

“Reverse payment” settlement: paragraph IV cases are being settled with payments from the patent owner to the generic. Variations include:No generic entry until patent expiresDelayed generic entry before patent

expirationFirst paragraph IV filer retains (or does

not retain) 180-day exclusivity periodAncillary agreements for related or

unrelated products

Enforcement Agency Response FTC: settlements in which generic

receives value for delay are presumptively anticompetitive; “a matter of pressing national concern.”

Enforcement Agency Response DOJ:

prior view (2006) “not necessarily impermissible.” Current view (2009) (2nd Cir. Brief Barr litigation)

Evaluate under rule of reason “[s]ettlements involving a payment in exchange for an

agreement to withdraw a validity challenge and limit competition are presumptively unlawful.”

D may rebut the presumption if “there is no reason to find that the settlement does not provide a degree of competition reasonably consistent with the parties’ contemporaneous evaluations of their prospects of litigation success.”

But: “[i]t is neither necessary nor appropriate to determine whether the patent holder would likely have prevailed in the patent infringement litigation. . . .”; do not a want a mini-trial on validity

Enforcement Agency Response DOJ:

Current view (2009) (2nd Cir. Brief Barr litigation) Payment commensurate with patent holder’s avoided

litigation costs is generally acceptable Payment “greatly in excess of litigation costs”

suspect• Delay until patent expiration invalid• Delay until some time prior to expiration: “defendants

can overcome the presumption by showing that avoiding the Paten Act’s procedures for excluding alleged infringers did not depart from the balance struck in the Patent Act” – that the delay “reasonably reflected [the parties’] contemporaneous evaluations of the likelihood that a judgment in the patent litigation would have resulted in generic competition before patent expiration.”

Courts

Second Circuit: presumptively lawful; public policy favors settlement“the patent holder is seeking to arrive at

a settlement in order to protect that to which it is presumably entitled: a lawful monopoly over the manufacture and distribution of the patented product.”

Courts

Sixth Circuit: per se unlawful“[t]here is simply no escaping the

conclusion that the Agreement . . . was, at its core, a horizontal agreement to eliminate competition in the market for Cardizem CD throughout the entire United States, a classic example of a per se illegal restraint of trade.”

Courts

Eleventh Circuit: exclusionary zone test, mixed signals about presumptive legalityValley Drug: “[g]iven the asymmetries

of risk and large profits at stake, even a patentee confident in the validity of its patent might pay a potential infringer a substantial sum in settlement.” But, a settlement that extends beyond the

patent’s “exclusionary zone” is invalid

Courts

Eleventh Circuit: exclusionary zone test, mixed signals about presumptive legalitySchering-Plough: “examination of: (1) the scope

of the exclusionary potential of the patent; (2) the extent to which the agreement exceeded that scope; and (3) the resulting anticompetitive effects.” “[r]everse payments are a natural by-product of the

Hatch-Waxman process”Andrx: if paragraph IV filer had no real intent to

market the product, “this dynamic would exceed the scope of the exclusion intended by the . . . patent.” (12(b)(6) motion)

Courts

Federal Circuit: presumptively lawful“the essence of the Agreements was to

exclude the defendants from profiting from the patented invention. This is well within Bayer’s rights as the patentee.”

Pending Legislation

“Preserve Access to Affordable Generics Act,” S. 369 (111th Cong.); “Protecting Consumer Access to Generic Drugs Act of 2009,” H.R. 1706 (111th Cong.).

Unlawful for ANDA filer to receive anything of value in return for agreement “not to research, develop, manufacture, market, or sell the ANDA product for any period of time.”

Academic Commentators

Hovenkam, Janis & Lemley: test based on zone of patent exclusion; prohibition on payments in excess of litigation costs: “(1) that the ex ante likelihood of prevailing in its infringement lawsuit is significant, and (2) that the size of the payment is no more than the expected value of litigation and collateral costs attending the lawsuit.”

Cotter: no scrutiny of merits of litigation, no payments in excess of defendant’s potential loss at trial (D’s potential loss at trial presumably equals D’s potential profits from selling the generic)

Academic Commentators

Hemphill: “a settlement should be accorded a presumption of illegality as an unreasonable restraint of trade if the settlement both restricts the generic firm’s ability to market a competing drug and includes compensation from the innovator to the generic firm.”

Crane: “the optimal rule would permit exit payment settlements when the ex ante likelihood of success of the patentee’s infringement suit is high and prohibit them when the ex ante probability is low.”

My Proposal

None of the existing proposals examine the effects of a given settlement within a particularized product market

The assumption that pharmaceutical product markets are essentially monopolies (with patent protection) or duopolies (with generic competition) is unfounded.

Reverse payment settlements can be analyzed, in some ways, like other IP licenses

My Proposal

Three factor analysis: (1) The likely change in product market

concentration resulting from the agreement.

(2) The probability that the patent will be held to be valid and infringed.

(3) The amount of the reverse settlement payment in light of any information asymmetries in the bargaining process.

My Proposal

Assess market structure:

(1) The likely difference in product market concentration resulting from the agreement. (∆HHI)

HHI: a measure of market concentration used in merger analysis and for antitrust analysis of exclusive IP licenses – sum of the squares of each competitor’s market share in the relevant product market before and after the proposed merger (or exclusive license)

Relevant product market definition:• Therapeutic choices available to the doctor -- Expert

testimony from physicians, pharmacists, third party payors, and other sources can help establish which products are therapeutic substitutes.

• Possibly also cross-price elasticity of demand

My Proposal

Assess market structure: Where ∆HHI is relatively small, no further

scrutiny is required (consistent with Merger Guidelines) – the patent at issue is not significant and resolution of the litigation should be left to private bargaining

Where ∆HHI is relatively large, proceed to step (2) – the potential exclusionary zone of the patent at issue is significant and the probability of litigation success is important

My Proposal

(2) The probability that the patent will be held to be valid and infringed.

Contra the DOJ, a full “mini-trial” would not be required.

In other settlement contexts implicating non-named-party interests, courts routinely evaluate the likelihood of success in the underlying litigation Class actionsDerivative suits

My Proposal

Steps (1) and (2) result in the “Settlement Index”

SI = ∆HHI * pESettlement Index = change in

Herfindahl-Hirschman Index multiplied by the probability of patent enforcement

The “Settlement Index”

SI = ∆HHI * pEUnique approach: weighs both product market

structure and exclusionary power of the patentHigher SI values represent an increasing likelihood

that any increased concentration in market is due to a valid patent;

Lower SI values represent greater likelihood that increase in market concentration is due to a weak patent, and consequently settlement is more likely anticompetitive as a matter of antitrust policy and/or deviates from the purposes of the Hatch-Waxman Act.

Flexible administration by courts and agencies; ability to develop “safety zones”

My Proposal

For agreements in a middle zone of the SI, examine:

(3) The amount of the reverse settlement payment in light of any information asymmetries in the bargaining process.

The “Settlement Index”

Manufacturer Market Share Alpha 50% Beta 10% Gamma 10% Delta 30% HHI 3600

Manufacturer Market Share Alpha 25% Generic 25% Beta 10% Gamma 10% Delta 30% HHI 2350 ∆HHI 1250

∆HHI Prob. Patent Enforcement

Settlement Index

1250 0 0 1250 .25 312.5 1250 .5 625 1250 .75 937.5 1250 1 1250

The “Settlement Index”Manufacturer Market Share Alpha 25% Beta 25% Gamma 25% Delta 25%

Manufacturer Market Share Alpha 12.5% Generic 12.5% Beta 25% Gamma 25% Delta 25%

∆HHI Prob. Patent Enforcement

Settlement Index

312 0 0 312 .25 78 312 .5 156 312 .75 234 312 1 312

The “Settlement Index”

Manufacturer Market Share Alpha 12.5% Beta 12.5% Gamma 12.5% Delta 12.5% Kappa 12.5% Epsilon 12.5% Iota 12.5% Omega 12.5% HHI 1250

Manufacturer Market Share Alpha 12.5% Beta 6.25% Generic 6.25 Gamma 12.5% Delta 12.5% Kappa 12.5% Epsilon 12.5% Iota 12.5% Omega 12.5% HHI 1174 ∆HHI 76

∆HHI Prob. Patent Enforcement

Settlement Index

76 0 0 76 .25 19 76 .5 38 76 .75 57 76 1 76

The “Settlement Index”

Safe Harbor: Over 1000 Heightened Scrutiny: 501-1000 Presumptive Illegality: 0 – 500

Prob. Patent Enforcement

Mean SI (Ex. 1-3) Median SI (Ex. 1-3)

0 0 0 .25 136.5 78 .5 273 156 .75 409.5 234 1 546 312

The “Settlement Index”Manufacturer Drug Sales (Millions

USD) Market Share

Pfizer LYRICA NEURONTIN DILANTIN

2,500 387

65% 10%

Novartis TEGRETAL 451 11% King (Alpharma) Gabapentin Teva Gabapentin 500 (guess) 14% Ivax Total 3,838 100%

Manufacturer Drug Sales (Millions USD)

Market Share

Pfizer LYRICA NEURONTIN DILANTIN

2,500 387

45% 10%

Novartis TEGRETAL 451 11% King (Alpharma) Gabapentin Teva Gabapentin 500 (guess) 34% Ivax Total 3,838 100%

The “Settlement Index”

∆HHI Prob. Patent Enforcement

Settlement Index

1240 0 0 1240 .25 310 1240 .45 558 1240 .5 620 1240 .75 930 1240 .85 1054 1240 1 1240