Schering the Market: Analyzing the Debate over Reverse-Payment Settlements in the Wake of the Medicare Modernization Act of 2003 and In re Tamoxifen Citrate Litigation

• Author: Erica N. Andersen
• Position: J.D. Candidate, The University of Iowa College of Law
• Pages: 01

J.D. Candidate, The University of Iowa College of Law, 2008; A.B., Chemistry, Princeton University, 2005. I would like to thank Professor Mark D. Janis for his advice and insight throughout this entire process; Professor Michael A. Carrier for his comments on earlier drafts; the writers and editors of Volumes 92 and 93 of the Iowa Law Review for their friendship and truly invaluable editing skills; and, of course, my family and friends for their unwavering love and support. Errors and omissions are my own.

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I Introduction

In 2001, the U.S.-based drug company AstraZeneca made $618 million in profits from Nolvadex, the leading prescription drug for breast cancer at the time.¹ By summer 2006, however, AstraZeneca decided to stop marketing Nolvadex, not because newer drugs had made it obsolete, but because generic competition had lowered the price of the drug to the point where AstraZeneca no longer found production sufficiently profitable.²Indeed, by 2005 the profits from Nolvadex had fallen to $114 million.³

The entry of generic drugs into the market affects nearly every consumer in America, as well as the pharmaceutical companies that produce them. For the individuals who benefited from the generic forms of Nolvadex, the price decrease made the cost of treatment more manageable.⁴ For a large drug company producing a name-brand product, however, generic entry into a blockbuster market can have disastrous consequences, especially if that company has few new drugs in its pipeline that can replace the lost profits.

Brand-name drug companies, otherwise known as "pioneers," will often spend considerable time and money protecting their drug patents in order to stall generic entry into the market as long as possible. This Note focuses on reverse-payment settlements, where a brand-name pharmaceutical company pays a generic to delay market entry, thereby maintaining its monopoly on a given drug. These settlements have come under considerable scrutiny as potential antitrust violations. Parts II.A and II.B of this Note explain the relevant statutory background in both patent and antitrust law,⁵ and Part II.C investigates potential conflicts between the two fields of law.⁶ Part II.D highlights some major pieces of scholarship that discuss reverse-payment settlements and propose various ways courts should analyze these settlements for antitrust violations.⁷ Page 1018

Part III details three major opinions from the Second, Sixth, and Eleventh Circuits that highlight the debate over reverse payments.⁸ Part IV of this Note attempts to resolve these three circuit-court decisions and concludes that although the circuits used different approaches, no circuit split currently exists.⁹ Part V.A analyzes recent amendments to the governing statutory background and the impact these amendments have on reverse- payment settlements.¹⁰ Part V.B integrates these amendments with scholarship and case law in order to propose a test for analyzing the validity of these settlements and drug companies' potential antitrust liability.¹¹ Part VI then applies this test to data recently released by the Federal Trade Commission ("FTC") on settlements between drug companies in the 2006 fiscal year.¹²

II Background

In order to understand the debate over the reverse-payment settlements taking place in the pharmaceutical industry, one must have an adequate conception of the regulatory framework that underlies the entry of new and generic drugs into the market. Further, one must understand the applicable provisions of the Sherman Act and the tensions between the patent and antitrust regimes, both of which affect the pharmaceutical industry and lie at the heart of the reverse-payment debate. Finally, an overview of the scholarly analysis on reverse-payment settlements is helpful and pertinent to the Note's analysis.

A The Hatch-Waxman Act

A pharmaceutical company first must obtain Food and Drug Administration ("FDA") approval in order to market a prescription drug.¹³In order for an initial brand-name company to gain approval, it must submit a New Drug Application ("NDA"), which details all safety and efficacy studies, the components in the drug, the methods used in "the manufacture, process and packaging" of the drug, and any patents issued on the composition or methods of using the drug.¹⁴ The FDA publishes the patent Page 1019 information in the "Orange Book."¹⁵ Prior to the Hatch-Waxman Act, a generic drug company also had to undertake its own costly studies regarding the efficacy and safety of a drug, even if the drug was a bioequivalent of a brand name already on the market.¹⁶ The generic would then file its own NDA on its version of the drug. The generic company could not even begin testing the drug until after the patent life on the brand-name drug ran out, since before that time the pioneer company could sue the generic for patent infringement.¹⁷ As a result, infringement suits were extremely high-stakes affairs for generics, which stood to lose the substantial assets they had expended in conducting these studies.¹⁸

Congress enacted the Hatch-Waxman Act in 1984 "'to make available more low cost generic drugs by establishing a generic drug approval procedure . . . ,' while providing additional protections for innovator firms."¹⁹ The Hatch-Waxman Act alleviated part of the regulatory and monetary burden imposed by the previous requirements for generic entry into the pharmaceutical market.²⁰ The original drug manufacturer (the "pioneer") still files an NDA with full-scale safety and efficacy studies and lists the patents that generics might infringe in the future.²¹ The FDA then maintains a list of those patents in the Orange Book. The generic company now files an Abbreviated New Drug Application ("ANDA"), where the generic must prove that the new drug is the bioequivalent of a brand-name drug on the market but does not have to conduct the time-consuming Page 1020 studies required for an NDA.²² Further, the generic may now begin testing before the pioneer's patent life expires.²³ Notably, for patent-infringement litigation, the ANDA filer must indicate one of the following: (1) that the "patent information has not been filed" on the generic's brand-name equivalent (known as a paragraph I certification); (2) that a "patent [on the brand name] has expired" (known as a paragraph II certification); (3) that a brand-name patent exists, "the date on which such patent will expire," and with a promise not to market until that date (known as a paragraph III certification); or (4) "that such patent is invalid or will not be infringed by the manufacture, use, or sale of the new drug for which the application is submitted" (known as a paragraph IV certification).²⁴

If the ANDA filer uses a paragraph IV certification, it must consult the Orange Book and provide notification to each NDA or patent owner impacted by the ANDA certification "not later than [twenty] days after the date of the postmark on the notice with which the Secretary informs the applicant that the application has been filed."²⁵ The paragraph IV certification allows the patent holders to sue, as it is considered an act of infringement, even though in actuality the generic has not yet begun marketing its version of the drug.²⁶ The owners of the patents then have forty-five days to take action and bring an infringement suit against the generic; if the affected patent owners do not bring suits, then the FDA can approve the ANDA without delay.²⁷ If, however, an affected patent owner brings an infringement suit, then the approval of the application is automatically stayed for thirty months, or until a district court renders a decision regarding the validity of the patent.²⁸ Initially, pioneers could list additional patents after the generic filed the ANDA and still trigger the Page 1021 thirty-month stay.²⁹ Further, the Hatch-Waxman Act did not limit the number of consecutive stays a pioneer could invoke.³⁰ These provisions led to abuse by pioneer companies, which would file frivolous patents to stall generic entry.³¹

In 2003, the FDA added new rules and Congress passed the Medicare Modernization Act ("MMA") to combat some of these abuses. The FDA limited the types of patents that a pioneer could list in the Orange Book because certain classes of patents were being filed frivolously by pioneer companies.³² Further, the MMA Amendments to the Hatch-Waxman Act limited the pioneer to only one thirty-month stay per ANDA, and that stay only takes effect when a pioneer alleges infringement of a patent already...