As of July 2008, twenty-five states and the District of Columbia have filed antitrust suits against Abbott Laboratories and Solvay’s Fournier Industrie et Santé and Laboratories Fournier in Delaware District Court, charging them with blocking generic competition by engaging in product hopping, among other “anti-generic strategies.”  Patent Baristas reported the initial filing here.

As Stephen reported: “According to the AGs in the states, the companies made trivial changes to the formulations of TriCor, and marketed those while withdrawing the original drug from the market. The companies deleted references to the original forms of the drug from national drug databases, according to prosecutors, making it more difficult for a generic version of TriCor to obtain generic status.”

This product hopping amounts to little more than a thinly disguised scheme to game the pharmaceutical industry’s regulatory system. It entails introducing a product change that serves little purpose but to impair generic competition and reduce the market for generics.  But product hopping is not an easy target for antitrust enforcement.  Brand name manufacturers are under no legal duty to help their generic competitors by curtailing formulation changes that broaden the selection of prescription drugs on the market and may better meet consumer preferences.  Most importantly, generic manufacturers remain free to enter the market and sell versions of the old formulation under their own separate brand name. That rival brand name manufacturers are more powerful competitors — engaging in successful advertising campaigns and directing consumers to the new formulation — falls short of an antitrust violation.

But there might be a way around this.  The Supreme Court’s 2004 decision in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko emphasized the importance of attention to an industry’s regulatory regime in determining the role of antitrust law and suggested a possible “expansion of the contours” of the Sherman Act in certain regulatory contexts. Trinko may have interesting implications for antitrust enforcement in the pharmaceutical industry which, though heavily regulated, lacks an industry regulator that polices competition.

As Trinko noted, the role of antitrust law in a heavily regulated industry depends on whether “the [regulatory] regime is an effective steward of the antitrust function.”  Two Supreme Court decisions represent the extremes of antitrust law’s role in a regulated industry: (1) where unsupervised private firm discretion dominates the market and any regulatory intervention fails to police competition, as in Silver v. New York Stock Exchange, antitrust law has an active role to play, and (2) where anti-competitive conduct is thoroughly policed by the industry’s regulator,” as in Trinko, antitrust law has been ousted from its role as the guardian of competition.

In the pharmaceutical industry, while the FDA goes to great lengths to regulate drug safety and efficacy, it deliberately avoids regulating competition in the pharmaceutical industry.  According to the FDA’s stance, “the whole point of the [Hatch-Waxman] Act’s [ANDA IV] scheme is to let private parties sort out their respective intellectual property rights [and the market exclusivity they confer] through patent infringement suits while the FDA focuses on its primary task of ensuring that drugs are safe and effective.”  Since anti-competitive conduct would easily slip under the pharmaceutical industry’s regulatory radar, the industry’s regulatory system accordingly leaves ample room for antitrust law to intervene with full force, rather than squeezing it out.

Unlike in Trinko’s telecommunications industry, antitrust law has a role to play in the pharmaceutical industry.  In dicta, Trinko recognized the possible “expansion of the contours of [Sherman Act] § 2″ depending on the regulatory context.  An article by Professor C. Scott Hemphill proposes that the application of antitrust law to the heavily regulated pharmaceutical industry depends on the regulatory regime itself, particularly “its role as a congressional judgment about the proper balance between [policy goals] and competition.”  Such enforcement of the Sherman Act extends beyond policing ordinary market antitrust concerns to condemning conduct that directly undermines the specific type of competition the legislature sought to establish in fashioning the regulatory system.

The relevant regulatory system in the context of product hopping is a regime of state drug product selection (DPS) laws.  Today, every state has passed DPS laws that allow for generic substitution, though the specific provisions vary state by state.  Where a physician prescribes a brand name drug, generic substitution under state DPS laws allows pharmacists to fill that prescription with a generic equivalent.  DPS laws reflect a legislative decision to contain prescription drug costs through generic substitution, sacrificing even-footed competition between brand name manufacturers and their generic rivals.

Disfavoring the unfettered market competition of other unregulated industries, states recognized that the forces of competition don’t map on well to the prescription drug market where the customer pays but doesn’t choose, and the physician chooses but doesn’t pay.  DPS laws accordingly sought to establish a specific type of generics-favoring competition between brand name manufacturers and their generic rivals: Though brand name manufacturers may succeed in winning the prescription of physicians, there must be a choice at the pharmacy-level to fill that prescription with a generic version (unless a prescription indicates the physician’s unwillingness to permit substitution).

In this light, the real anti-competitive harm from Abbott and Fournier’s product hopping is straightforward.  In each hop, Abbott and Fournier, without justification, contacted First Data Bank and set in motion changes that ultimately prevented pharmacists from substituting prescriptions for older formulations with their generic equivalents.  This strategy stopped generic substitution that should — and would — have taken place under DPS laws.  This obstruction is the real harm Abbott and Fournier’s product hopping inflicted on competition:  They impermissibly undermined the specific type of generics-favoring competition state legislatures sought to establish in fashioning DPS laws and accordingly raises compelling regulatory antitrust concerns.

This is a summary of an earlier Law Review Note “An Antitrust Analysis of Product Hopping in the Pharmaceutical Industry,” 108 Colum. L. Rev. 1471.  See the full Note here.

This post was contributed by Guest Barista Jessie Cheng, currently a 3L at Columbia Law School.

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    […] Baristas serves up a new argument against “product hopping,” the process in which companies make small changes to products in order to avoid antitrust […]