Antitrust and Authorized Generics: A New Predation Analysis.

• Author: Peelish, Natalie

Introduction I. Regulation and Competition in the Pharmaceutical Market A. Primary Actors B. The Federal Food, Drug, and Cosmetic Act C. The Hatch-Waxman Act D. Authorized Generics and Hatch-Waxman II. Competition Within the Hatch-Waxman Act's Regulatory Framework A. Price Competition B. Brand Manufacturers' Response to Generic Competition C. The Effects of Authorized Generics D. Potential Antitrust Concerns with Authorized Generics III. Authorized Generics as Price Predation A. The Theory of Predatory Pricing B. The Current Framework: The Brooke Group Test C. Authorized Generics as a Price-Predation Strategy D. The Failure of Current Predation Doctrine IV. Limit Pricing: A Better Measure of Predation for Authorized Generics A. Theory B. Application C. Potential Limitations Conclusion Introduction

Brand drug prices continue to rise at high rates and to increasingly high levels. In 2018, prices for 267 commonly used brand-name drugs rose by 5.8%--over twice the rate of inflation. (1) While the rate at which prices increased over the past several years peaked at a whopping 15.9% in 2014, (2) the still-lofty rate of rising drug prices means that Americans will pay more for their healthcare--through their own insurance plans or ultimately, as government spending on healthcare increases, through higher taxes. (3) Examples of exorbitantly priced brand-name prescription drugs have dominated headlines recently--Humira, an immunosuppressant, costs $3,000 per month, (4) while Zytiga, which treats prostate cancer, costs $10,000 per month. (5) Even common drugs such as insulin can now cost over $300 for a single vial (triple what the price was in 2002). (6)

Patients lose when drug prices are high, especially as "cost-containment strategies" by insurance companies have shifted a greater share of prescription drug costs to patients themselves. (7) In a recent poll, 29% of adults reported that cost prevented them from taking their medicine as prescribed at some point in the past year, and 8% reported that their condition worsened because of this. (8)

The main reason that prescription drugs cost so much is that "branded products [are] protected by market exclusivity provisions granted by the U.S. Patent and Trademark Office and the Food and Drug Administration (FDA)." (9) While generic manufacturers have come under criticism as well for price spikes in certain generic drugs, (10) generics are nonetheless critical to providing a low-cost drug option for consumers. Yet efforts by brand drug manufacturers to delay or deter generic entry can have a severely negative impact on consumer welfare in the form of higher drug prices. (11)

Competition between brand and generic drugs in the pharmaceutical industry has long been a topic of discussion for antitrust commentators. The unique nature of the regulatory environment and the patent protection afforded to most brand drug manufacturers makes the pharmaceutical market ripe for antitrust concerns. And indeed, antitrust violations have materialized across the industry as brand drug manufacturers seek to maintain their market exclusivity by delaying or deterring generic entry even after their patents have expired or have been invalidated. (12)

Recently, brand manufacturers have engaged in a more insidious form of exclusionary conduct: launching authorized, or branded, generics to compete with potential generic entrants. There is nothing inherently problematic under the antitrust laws with a brand drug manufacturer launching another product line--after all, antitrust laws encourage competition to lower prices for consumers, and an authorized generic may be just another competitor. (13) An antitrust problem, however, begins to emerge when authorized generics are launched as a means to deter generics from entering the market before patent expiration. If authorized generics are priced in such a way as to effectively deter generics, this may be a form of predation meant to exclude generics from the market in order to maintain the brand manufacturer's patent-induced monopoly. This monopolistic conduct harms consumers because it eliminates generic competitors with lower-priced drug options from the market, leaving consumers with a supracompetitively priced brand drug and an authorized generic that may be only temporarily available at a low price. And harm to consumer welfare is the exact problem the antitrust laws are meant to remedy.

As other efforts by brand drug manufacturers to maintain their patent-protected monopolies over drug markets have faced increasing scrutiny by the courts, (14) brand drug manufacturers may now rely more heavily on launching authorized generics in an effort to thwart generic entry and extend the length of their patent and market exclusivity, making this tactic a pressing problem for the antitrust laws.

This Note argues that current antitrust doctrine is ill equipped to account for such practices and advocates for a new predation test using limit pricing, rather than below-cost pricing, as a mechanism for determining whether the launch of an authorized generic during a generic's exclusivity period is anticompetitive.

Part I provides an overview of the various competitors in the pharmaceutical market and the federal regulatory framework that governs the market, particularly the Hatch-Waxman Act. Part II describes competition within the Hatch-Waxman regulatory framework. Part III explains how the launch of authorized generics may be a form of price predation if certain conditions are met, but argues that the Supreme Court's current predatory pricing doctrine is ill equipped to impose liability on this type of exclusionary action. Finally, Part IV puts forth a theory of limit pricing and argues that a limit-pricing test is better suited than the Court's current below-cost test to account for predation by authorized generics.

1. Regulation and Competition in the Pharmaceutical Market

   This Part introduces the main cast of characters competing in the pharmaceutical market and the unique regulatory framework in which they act.

   1. Primary Actors

      As a preliminary matter, significant competition in the pharmaceutical market occurs between brand drugs and generic drugs. (15) Brand drugs are those which are protected by patents. These patents enable brand manufacturers to exclude other competitors during the patent term, thereby allowing them to maintain a legal monopoly over the market for the patent-protected drug. (16) A generic drug is one "created to be the same as an already marketed brand-name drug in dosage form, safety, strength, route of administration, quality, performance characteristics, and intended use." (17) Generics may differ in their inactive ingredients, colors, or flavors, since trademark laws prohibit generic drugs from looking identical to brand drugs. (18) The advantage of generic drugs is that they are priced much lower than brand drugs because, at least under the current legal framework, the generic manufacturers need not conduct the same costly clinical trials on generic drugs or spend "huge sums [on] advertising, marketing, and lobbying." (19) Authorized generics add another element to this competitive framework, discussed further in Part II below.

      The nature of this competition between the brands and generics in the pharmaceutical market is due in large part to this market's unique regulatory structure, which determines which drugs may enter, when they may enter, and how long they may stay.

   2. The Federal Food, Drug, and Cosmetic Act

      The Federal Food, Drug, and Cosmetic Act (FDCA) (20) governs the manufacturing and marketing of all pharmaceuticals in the United States. The FDCA requires that any pharmaceutical company wishing to market a new drug first submit a New Drug Application (NDA). (21) The application must set forth "full reports of investigations" showing whether the drug is safe and effective and "a full list of the articles used as components of such drug." (22) The FDA must approve the NDA before the new drug may be marketed. (23)

      Even before the FDCA underwent significant changes in 1984, (24) the FDA permitted the marketing of generic copies without requiring generic manufacturers to submit an NDA, at least for drugs whose brand-name equivalents were approved and had been in use "to a material extent or for a material time." (25) In a 1970 rulemaking, the FDA established the Abbreviated New Drug Application (ANDA) for generic manufacturers wishing to enter the market, (26) whereby the generic manufacturers needed only to confirm that the generic drug had the same therapeutic effect and active ingredient as the brand drug. (27)

      However, there were still significant limitations on the ability of generic manufacturers to take advantage of the abbreviated approval process. Critically, "the FDA's initial ANDA process applied only to generic forms of drugs approved by the FDA prior to 1962." (28) For any drug approved after 1962, the FDA kept confidential the reports attached to the brand drug's NDA. (29) Section 301(j) of the original FDCA "prohibited the public disclosure or use of any method or process obtained by FDA ... where such information was entitled to protection as a trade secret." (30) This prevented generic manufacturers from leveraging the brand manufacturer's existing information and research in order to bring a drug to market without having to incur the same, often highly expensive, start-up costs. As a result, before the Hatch-Waxman Act amended the FDCA, generics did not have a large presence in the pharmaceutical market. (31)

   3. The Hatch-Waxman Act

      While the FDCA has been amended several times, the most influential changes came in 1984. Concerned about rising drug prices, Congress enacted the Drug Price Competition and Patent Term Restoration Act of 1984, (32) otherwise known as the Hatch-Waxman Act, which governs the approval of brand and generic drugs today. The Act emerged as a balance between the...