Pharmaceuticals and Medical Devices

• Pages: 307-356

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CHAPT ER VIII

PHARMACEUTICALS

AND MEDICAL DEVICES

A. Introduction

This chapter provides an overview of how antitrust markets are

defined for pharmaceuticals and medical devices. For a general

discussion of how the Merger Guidelines’ economic principles are used

to define relevant markets in the health care industry,1 and an overview

of how antitrust markets are defined in hospitals and physician services,

see Chapter VII.

B. Pharmaceutical Industry

1. Industry Background

Defining relevant markets is context-specific.2 Recently, market

definition issues in pharmaceuticals have generally arisen in two

contexts: mergers between pharmaceuticals manufacturers and

investigations of settlements of patent disputes involving “reverse

payments,” payments by the branded companies (patent holders) to the

generic firms in exchange for delayed entry by the generics.

In evaluating a merger of two manufacturers of brand-name

pharmaceuticals, the market definition inquiry begins with a

determination of whether the companies’ drugs treat the same medical

condition in a similar manner (i.e., fall within the same “therapeutic

class”). If so, an initial proposed market might consist of the merging

parties’ brand-name drugs, and the final relevant market might

1. See U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL

MERGER GUIDELINES § 4.1 (2010), reprinted in 4 Trade Reg. Rep. (CCH)

¶ 13,100, available a t http://www.justice.gov/atr/public/guidelines/hmg-

2010.html [hereinafter 2010 MERGER GUIDELINES]. For a general

introduction to this approach, see Chapter I.

2. See U.S. Healthcare v. Healthsource, Inc., 986 F.2d 589, 598 ( 1st Cir.

1993).

308 Market Definition in Antitrust

encompass all the brand-name drugs—and possibly also the generic

drugs—within that therapeutic class.3 Also, in an acquisition by a

manufacturer of a brand-name drug of a generic equivalent, the relevant

product market inquiry would likely begin with only the brand-name

drug and its generic equivalents. However, in a merger of two

manufacturers of generic equivalents of a particular brand-name drug,

the relevant market inquiry may start with a prospective market limited

to the generic versions of the pharmaceutical and thus exclude the brand-

name drug itself.

An important institutional feature of the U.S. pharmaceutical

industry is the special role of the U.S. Food and Drug Administration

(FDA).4 The FDA must approve all prescription and over-the-counter

(OTC) pharmaceuticals as safe and effective treatments for specified

therapeutic indications before the products can be marketed in the United

States.5 In general, innovator (i.e., brand-name) drugs are approved

under a New Drug Application (NDA), where NDA applicants must

demonstrate the safety and effectiveness of their products through

extensive clinical trials.6

Other salient features of the U.S. pharmaceutical industry relevant to

market definition derive from legislation enacted by Congress in an

3. Where the merging parties are develop ing drugs within the same

therapeutic class, the product market analysis may involve an assessment

of the drugs in the companies’ respective research and development

(R&D) pipelines and focus on the merger’s potential impact on the

companies’ incenti ves to engage in R &D. See Chapter XII for a

discussion of innovation markets.

4. See M. Howard Morse, P roduct Market Definition in the Pharmaceutica l

Industry, 71 ANTITRUST L.J. 633, 635 (2003) (“Research and

development, as well as marketing of pharmaceuticals, is heavily

regulated by the FDA.”).

5. 21 U.S.C. § 355; see CONG. BUDGET OFFICE, HOW INCREASED

COMPETITION FROM GENERIC DRUGS HAS AFFECTED PRICES AND

RETURNS IN THE PHARMACEUTICAL INDUSTRY 21 (1998) [hereinafter

CBO Study] (“[E]ntry in the pharmaceutical i ndustry is limited by . . . the

FDA approval process.”). Once a drug is approved for marketing for one

indication, physicians are allowed to prescribe it for other indications

(therapeutic uses). See, e.g., David C. Radley, Stan N. Finkelstein, &

Randall S. Stafford, Off-label Pr escribing Among Office-Based

Physicians, 166 ARCHIVES INTERNAL MED. 1021 (2006). In 2001, 21%

of the overall usage o f 160 commonly prescribed drugs was for

“unapproved” indications. Id.

6. See 21 C.F.R. §§ 314.50, 314.125(b)(2)-(b)(5), 314.126.

Phar maceuticals and Medical Devices 309

effort to foster innovation and promote competition.7 The developer of a

new medicine may acquire patents covering the compound itself, specific

formulations of the compound (e.g., tablets), or the compound’s use.8 In

addition, under the Drug Price Competition and Patent Term Restoration

Act of 1984, commonly known as the Hatch-Waxman Act,9 the FDA can

grant patent extensions beyond the life of applicable patents.10 “Those

extensions compensate for the fact that part of the time a drug is under

patent it is being reviewed by the [FDA] rather than being sold.”11

Patents and other forms of exclusivity conferred through, and regulated

by, the Hatch-Waxman Act provide branded drug makers with a

significant period of market exclusivity: “Pursuant to the Hatch-Waxman

7. See Mylan Pharms. v. Shalala, 81 F. Supp. 2d 30, 32 (D.D.C. 2000) (“The

stated purpose of this legislation [the Hatch-Waxman Act] was to ‘make

available more low cost generic drugs’”); CBO Study, supr a note 5, at x

(noting that “the Hatch-Waxman Act has helped increase the supply of

generic drugs”); Schering-Plough Corp., 136 F.T.C. 956, 957 (2003)

(opinion of the commission) (the Hatch-Waxman Act “was intended to

facilitate earlier entry by the manufacturers of generic drugs . . . and

thereby reduce average prices paid by consumers. At the same time,

Congress wanted to preserve incentives for continued innovation by

research-based pharmaceutical companies[.]”), vacated on other grounds,

Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1058 (11th Cir. 2005).

8. See FED. TRADE COMM’N, GENERIC DRUG ENTRY PRIOR TO PATENT

EXPIRATION: AN FTC STUDY 5 (2002), a vailable at

http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf [hereinafter FTC

Study]. Brand-na me drug manufacturers are required to list all of the

patents on a new drug with the FDA either at the time the y file the NDA

or within 30 days of the patent approval date if it is later than the ND A

filing date. The FDA publishes a list of all approved drugs and the ir

relevant patents in an agency publication titled “Approved Drug Products

with Therapeutic Equivalence Evaluations,” commonly known as t he

“Orange Book.” See id.; see a lso 21 U.S.C. § 355(b)(1), (c)(2); Warner-

Lambert Co. v. Apotex Corp., 316 F.3d 1348, 1361 n.6 (Fed . Cir. 2003)

(describing patents that may be listed in the Orange Book); 21 C.F.R.

§ 314.53.

9. 21 U.S.C. § 355(j).

10. Id.; see CBO Study, supr a note 5, at ix.

11. CBO Study, supr a note 5, at ix; see id. at 3-4 (“Because [innovator] drugs

receive patents from the Paten t and Trademark Office before they receive

approval from the FDA, part of their ti me under patent is spent in the

clinical trials necessary for FDA approval. The patent extensions were

intended to offset part o f the patent term used up during the approval

process.”).