Antitrust Aspects of Acquiring a Generic Drug Manufacturer

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Antitrust Aspects of Acquiring a Generic Drug Manufacturer

  1. 1. Antitrust Aspects ofCurrent Issues in Acquiring a Generic Drug Healthcare and PharmaceuticalCompetition Law Manufacturer2012 Antitrust &Trade Regulation Section Annual Meeting North Carolina Bar Association Presented By: Robin K. Vinson, Esq.February 9, 2012 Nexsen Pruet, PLLC 919.755.1800, rvinson@nexsenpruet.com
  2. 2. DisclaimerThese materials have been prepared by Nexsen Pruet, LLC for informationalpurposes only. They are not legal advice. This information is not intended toand does not create a lawyer-client relationship.In addition, receipt of theinformation does not constitute or create a lawyer-client relationship.Do not send us any information that you or anyone else considers to beconfidential or secret unless we have first agreed to be your lawyers in thatmatter. Any information you send us before we agree to be your lawyers cannotbe protected from disclosure.Internet subscribers and other readers of the information should not act uponthis information without seeking professional legal counsel.Do not send us confidential information or information regarding a legal matteruntil you speak with one of our lawyers and get authorization to send thatinformation to us.
  3. 3. Pre-1984: Big Pharma against Little Generic There is unrest in the forest; There is trouble with the trees; For the Maples want more sunlight, and The Oaks ignore their pleas. From "Trees"By progressive rock band Rush from their 1978 album Hemispheres.
  4. 4. 1984: Generics Given Seat at the Table In 1984, the U.S. Drug Price Competition and PatentTerm Restoration Act, informally known as the Hatch-Waxman Act, standardized the regulatory proceduresfor recognition of generic drugs in the United States.
  5. 5. 1984-2012: Generic Drugs Have Evolved From Infancy to Mature Industry The Generic Pharmaceutical Association (GPhA) was formedin 2001 from the merger of three smaller groups. The generic industry has grown dramatically, from $1 billion inannual revenues to $63 billion in the United States today. From amodest beginning, today nearly 69% of all prescriptions are filledwith generic medicines. And the value remains -- roughly 16cents of every dollar spent on prescriptions are spent on genericmedicines. (http://www.gphaonline.org/about-gpha/history)
  6. 6. Today’s Generics Add Value to the United States Healthcare System In 1984, President Ronald Reagan stated that Hatch- Waxman provided “regulatory relief, increased competition, economy on government, and best of all, the American people will save money, and yet receive the best medicine that pharmaceutical science can provide.”
  7. 7. Today’s Generics Create Savings in the United States Healthcare System From 2001-2010, generic prescription drugs used inlieu of brand counterparts resulted in savings of $931Billion. In 2010 alone, generic use resulted in more than$157 Billion in savings. More than $1.3 Billion may be saved annually fromMedicaid by increasing generic use by just twopercentage points. (GPhA Market Study Report released September 21, 2011)
  8. 8. Brand Name Pharma Companies Are Still taking the Laboring Oar in R & D and Innovation United States Pharmaceutical Companies remain the world-wide leaders in new drug development and therapies. U. S. patent law still affords protection and provides economic incentives for risk-taking and scientific innovation.
  9. 9. STATE OF THE UNION : Innovation Too Expensive and Too Slow “Despite continued efforts to raise pharmaceutical industryresearch and development in the United States to higherproductivity levels, the historical pace of innovation remainsanemic. While spending as much as 18 percent of revenues onresearch and innovation, successful discoveries of new drugsby national pharmaceutical companies have declineddramatically over the last ten years.” “Pharmaceuticals & Biotech Industry Global Report—2011,” IMAP, Inc. at 2.
  10. 10. STATE OF THE UNION :Pharma Acquisitions and Generic Consolidations To maintain growth and profitability during these times of change,pharmaceuticals companies have increasingly turned to the generic drugindustry for new sources of revenue and increased profit margins. At the same time, generic drug manufacturers have determinedthat increasing size is important to meet the demands of matching thepharmaceutical industry’s offerings to the consuming public upon theexpiration of pharmaceutical patents. Thus, the generic drug industry has experienced significantconsolidation in the last decade, both by mergers between generics withinthe industry and by mergers with or acquisitions by national name-brandpharmaceutical manufacturers.
  11. 11. Generic Market Overview & Trends The US generics market is the world’s largest withgeneric penetration estimated at 68 percent by volume and13 percent by value in the year to June 2008, making the USone of the most mature and saturated generics markets in theworld. An estimation of the US generics market size of $36.3billion USD in 2009 is calculated. IMAP’s Pharma & Biotech Industry Global Report 2011: Appendix D-i
  12. 12. Generic Market Overview & Trends Generics will account for more than 80 percent of all US prescriptions inthe next few years. The key driver for the uptake of generic drugs is the cost-savings theybring, particularly as the US contemplates adoption of universal healthcare.In principle, savings derived from generics may be obtained both byincreasing use and by extracting greater “value” from current levels ofutilization (such as greater pressure on prices). While both strategies areemployed in the US, it is the former that dominates. IMAP’s Pharma & Biotech Industry Global Report 2011: Appendix D-i
  13. 13. STATE OF THE UNION : Emerging MarketsIMAP’s Pharma & Biotech Industry Global Report 2011: Page 5
  14. 14. STATE OF THE UNION : Size and DiversificationIMAP’s Pharma & Biotech Industry Global Report 2011: Page 12
  15. 15. STATE OF THE UNION :Generics are Both the “Problem” and the “Solution” IMAP’s Pharma & Biotech Industry Global Report 2011: Appendix A-i
  16. 16. 2012 and Beyond Pharma companies are striving hard to stave off the R&Dcrisis through mergers and acquisitions, geographic expansionand diversification into new areas such as consumer health. From an investment standpoint, the companies bestequipped to deal with these challenges are those with robustpipelines capable of offsetting the impact from patent expiries. Diversified players, those that can offset difficulties in onesegment or region with better performance in another, are alsowell placed. IMAP’s Pharma & Biotech Industry Global Report 2011: Page 5
  17. 17. FTC Enforcement : A Blueprint for Antitrust Analysis The Federal Trade Commission (“FTC”) historically hasreviewed mergers involving pharmaceutical companies:3.Authority to challenge transactions that harm consumers.5.FTC enforcement history provides a framework ofenforcement.
  18. 18. FTC Enforcement : 1995 - 2005 In the Matter of Hoechst AG, FTC File No. 951-0090(Sept. 26, 1995). In the Matter of Novartis AG, FTC File No. 051-0106(Sept. 23, 2005). In the Matter of Baxter Int’l, Inc. and Wyeth Corp., FTCFile No. 021-0171 (Feb. 7, 2003).
  19. 19. FTC Enforcement By Divestiture : 2006 - 2010 With increasing consolidation in the generic drugindustry and the Agency’s findings as to the effect ofgeneric drugs on the pricing behavior underlying brandpharmaceutical products, the remedy of divestiture hasbecome a common condition of Agency approval.
  20. 20. FTC Enforcement : 2006 - 2010 In the Matter of Teva Pharmaceutical Indus. Ltd. and IVAXCorp., FTC File No. 051-0214 (Jan. 23, 2006). In the Matter of Barr Pharmaceuticals, Inc., FTC File No.061-0217 (Dec. 8, 2006). In the Matter of Watson Pharmaceuticals, Inc. and AndrxCorp., FTC File No. 061-1039 (Oct. 31, 2006). In the Matter of Hospira, Inc. and Mayne Pharma Ltd., FTCFile. No. 071-0002 (Jan. 18, 2007).
  21. 21. FTC Enforcement : 2006 - 2011Valeant Pharmaceuticals International Inc., Docket No. 4342, FTCFile No. 111-0215 (complaint and proposed order issuedDecember 9, 2011).The proposed order requires Valeant to sell to Mylan all rights togeneric BenzaClin. It also requires Valeant to license to Mylan therights to manufacture and market the authorized general version ofEfudex.
  22. 22. FTC Enforcement : 2006 - 2011Teva Pharmaceutical Industries Ltd., FTC File No. 111-0166 (complaintissued October 7, 2011). – In a proposed settlement order, the Commission will require Teva to sell the rights and assets relating to generic Actiq or transmucosal fentanyl citrate lozenges, and Actiq or generic extended release cyclobenzaprine hydrochloride capsules, to Par Pharmaceuticals, Inc. (Par), a generic drug manufacturer based in New Jersey. – In order to remedy the consolidation of marketers of modafinil drugs during the 180-day exclusivity period, the proposed order requires Teva to enter into a supply agreement to provide Par with generic modafinil tablets in the United States for one year.
  23. 23. FTC Enforcement : 2006 - 2011Perrigo Company, C-4329, FTC File No. 111-0083 (complaint and proposedconsent order issued July 22, 2011). – The complaint charged that the $540 million acquisition of Paddock Laboratories, Inc. (Paddock) by Perrigo Company would reduce the number of suppliers for four generic drugs and harm future competition in the market for three generic drugs. – The proposed settlement order requires the combined Perrigo-Paddock to sell all Perrigo or Paddock assets related to the six products to Watson Pharmaceuticals, Inc. within 10 days of the acquisition. – To preserve competition in the testosterone gel market, the proposed order prohibits Perrigo from accepting payments from Abbott relating to AndroGel. It also bars Perrigo from entering into any “pay-for-delay” arrangements with Abbott.
  24. 24. FTC Enforcement : 2006 - 2011Cardinal Health, Inc./Biotech Pharmacy Inc., et al., FTC File No.091-0136 (complaint issued July 21, 2011; final order issued October 21,2011). – The complaint charges that the purchase by Cardinal Health, Inc. (Cardinal) of nuclear pharmacies from Biotech Pharmacy Inc., et al. (Biotech) reduced competition for low-energy radiopharmaceuticals in three cities. The Commission has approved an order requiring Cardinal to reconstitute and sell certain nuclear pharmacies to restore competition lost as a result of the acquisition. – Under the order, Cardinal is required to reconstitute the three nuclear pharmacies it had operated in Las Vegas, Alburquergue and El Paso before the acquisition and sell each one to an FTC-approved buyer.
  25. 25. FTC Enforcement : 2006 - 2011Grifols, S.A., C4322, FTC File No. 101-0153 (complaint issued May 31,2011; final order issued July 20, 2011). – The complaint charged that the proposed acquisition by Grifols, S.A. (Grifols) of Talecris Biotherapeutics Holdings Corp. (Talecris) would be anticompetitive because it would eliminate direct competition for products in three blood plasma-derived markets. The Commissioner approved a final order on July 20, 2011 requiring Grifols to make significant divestitures prior to its acquisition of Talecris.
  26. 26. FTC Enforcement : 2006 - 2011Watson Pharmaceuticals, Inc./Robin Hood Holdings (“Arrow”).C-4276, FTC File No. 0910116 (consent order issued January7, 2010). – The Commission’s complaint challenges Watson’s proposed $1.75 billion acquisition of Arrow. The complaint charges that the acquisition would violate Section 7 of the Clayton Act and Section 5 of the FTC Act by eliminating significant future competition by reducing the number of potential generic pharmaceutical suppliers in the U.S. markets for generic cabergoline tablets and generic dronabinol capsules.
  27. 27. FTC Enforcement : 2006 - 2011(Watson Continued)–The consent order requires Watson to divest its generic cabergolineproduct to Impax Laboratories, Inc. The order also requires Arrow todivest its Resolution subsidiary to a new entity named Reso Holdings,which is owned in part by Resolution’s current management. The orderalso requires Arrow to sells is U.S. marketing rights for generic dronabinolto Impax, which will replicate Arrow’s role as the U.S. marketer for thatproduct once Resolution obtains all necessary regulatory approvals. Theacquirers of the divested assets must receive prior approval from theCommission, so that the competitive environment that existed in thesemarkets prior to the proposed acquisition will be maintained.
  28. 28. CRITERIA APPLICABLE TO GENERIC DRUG MERGER ANALYSIS Enforcement actions provide insight into the FTC’soversight of generic drug mergers: 1. Impact of branded drugs on generic versions 2. Delivery method of generic drugs 3. Number and significance of competitors
  29. 29. CRITERIA APPLICABLE TO GENERIC DRUG MERGER ANALYSIS 4. Development and innovation pipelines of the parties and their competitors 5. Relationships with third parties 6. Size of Markets 7. Identity of purchaser of directed assets
  30. 30. CRITERIA :The Impact of Branded Drugs on Generic Versions1. In enforcement actions, the FTC has excluded the branded version from relevant markets.3. Where there are multiple generic versions of a drug on the market or in development, the branded version of the drug no longer significantly constrains pricing of generics except to act as a backstop to outrageous pricing behavior.
  31. 31. CRITERIA :The Impact of Branded Drugs on Generic Versions FTC’s July 2002 study on the impact of generic drugentry on prices: While generic market entry usually results in asignificant decrease in the price of generic drugs, it mayactually lead to a slight increase in the price of the brandedversion, probably due to the inelastic demand among theremaining users of brand-name drugs.
  32. 32. CRITERIA : The Delivery Method of a Generic Drug The delivery method of a drug constitutes animportant factor in the definition of the relevant market. Counsel should evaluate whether there aresituations where only certain delivery methods would besuitable for certain patients. Where this is the case, recentcases suggest that the Agency is unlikely to include in therelevant market products that contain the same activeingredient but are administered in a different form.
  33. 33. CRITERIA : The Number and Significance of Competitors The FTC has been compelled to act when a mergerreduced the number of competitors to three or fewer. FTC Study : Price continues to fall until at least thefifth generic firm enters the market. FTC may likely scrutinize those transactions thatlower the number of market participants from five to four.
  34. 34. CRITERIA : Development and Innovation Pipelines of the Parties and their Competitors The FTC has historically focused upon the innovation pipeline activities of the merging companies. Antitrust concerns may be raised where one of the parties to the merger has a drug on the market or in development and the other has a potentially competing product in its development pipeline. Rationale: The merger will delay or eliminate the pro- competitive effects resulting from the independent development of the new product by each company separately.
  35. 35. CRITERIA : Development and Innovation Pipelines of the Parties and their Competitors Historically, the FTC has not been active inchallenging generic drug mergers based on a potentialcompetition theory. In three of the four most recent generic drug mergerconsent orders, however, the FTC required divestitures inmarkets where neither merging party had a product currentlyon the market.
  36. 36. CRITERIA : Development and Innovation Pipelines of the Parties and their Competitors In assessing a Company’s non-generic products, as inBaxter and Hoechst, a company’s branded products may play animportant role in the FTC’s evaluation of an acquisition of a genericdrug supplier. Where the FTC concludes that a company’s non-generic products compete with the merging party’s genericproducts, the Commission will consider the transaction to beeliminating a competitor. The timing and likelihood of the parties’ entry efforts, as wellas the development activities of competitors, can have a significantimpact on the likelihood of the FTC taking action in a particularmarket.
  37. 37. CRITERIA : Relationships with Third Parties The FTC has taken great strides to understand therelationships that the merging companies have with othersimilar companies. The FTC routinely has required the termination ofmanufacturing and marketing agreements with third parties(or other remedial relief) where the Agency believes thoseagreements create competitive problems.
  38. 38. CRITERIA : Identity of Purchaser of Divested Assets “Commission-approved buyer” Although the Commission in recent years has relaxedits preference for a buyer up-front in many industries, thetrend in pharmaceutical enforcement appears to be moving inthe opposite direction. In contrast, in the 2003 Baxter and 2005 Novartisconsent orders, a buyer up-front for all the assets to bedivested was required.
  39. 39. CRITERIA : Size of Markets The size of commerce affected may not be a relevant factorfrom the perspective of the FTC. Where a detrimental effect on the consumer may bepresumed, the FTC has found that enforcement action is warrantednotwithstanding the fact that the size of an overlapping productmarket is small. InTeva/IVAX, the FTC took enforcement action in sixmarkets that each had annual U.S. sales of less than $10 million. Inone of those markets, the total U.S. sales for the drug were only$674,000.
  40. 40. THE EFFECT OF PATENT EXPIRATIONS ON THE GENERIC DRUG MARKET : APPROVED GENERICS The Food and Drug Administration (“FDA”) mustapprove the marketing of all pharmaceutical drugs, bothbrand-name and generic, in the United States. The Federal Food Drug and Cosmetic Act, asamended by the Hatch-Waxman Amendments, establishesthe regulatory framework.
  41. 41. THE EFFECT OF PATENT EXPIRATIONS ON THE GENERIC DRUG MARKET : APPROVED GENERICSTypically, a brand-name drug obtains FDA approval througha New Drug Application (“NDA”). A generic drugmanufacturer obtains FDA approval through an AbbreviatedNew Drug Application (“ANDA”) in which it is allowed to relyon the clinical data first submitted by the brand-name drugmanufacturer to establish the safety and efficacy of thegeneric drug.
  42. 42. THE EFFECT OF PATENT EXPIRATIONS ON THE GENERIC DRUG MARKET : APPROVED GENERICS The Hatch-Waxman amendments allow generic drugmanufacturers to seek FDA approval prior to expiration ofclaimed patent protection for the corresponding brand-namedrug. To do so, a generic drug manufacturer must firstsubmit to the FDA a “Paragraph IV” ANDA with certification.
  43. 43. THE EFFECT OF PATENT EXPIRATIONS ON THE GENERIC DRUG MARKET : APPROVED GENERICS The first biotech drugs of the present generation havegone off patent, which has presented a very interestingphenomenon, that is, the advent of “biosimilar” products. For biosimilars (equivalents of off-patent biotechdrugs), the regulatory demands are much higher, requiringfull-blown phase I and III studies for each production line, assmall changes in manufacturing can substantially impact themedical outcome.
  44. 44. THE EFFECT OF PATENT EXPIRATIONS ON THE GENERIC DRUG MARKET : PATENT CLIFFS The pharmaceutical industry is facing a number of keyimpediments to growth, including “patent cliffs,” which willerode substantial branded sales in the near future. Price cuts, reimbursement restrictions and growingregulatory pressure make the dive steeper.
  45. 45. STATE OF THE UNION : Generics are Here to Stay The United States generics market is the world’slargest. The United States is one of the most mature andsaturated generics markets in the world. It’s simple math: savings derived from generics maybe obtained both by increasing use and by extracting greater“value” from current levels of utilization (such as greaterpressure on prices).
  46. 46. Authorized Generics The FTC recently completed a study concerning theeffect of so-called “Authorized Generics” on thepharmaceutical market and the appetite for generic drugs.Meier, M.; Albert, B.; Brau, S. (2011). Overview of FTC Antitrust Actions inPharmaceutical Services and Products.http://www.ftc.gov/bc/healthcare/antitrust/rxupdate.pdf
  47. 47. Authorized Generics By lowering expected profits for generic competitors, theintroduction of an authorized generic could affect a genericdrug company’s decision to challenge patents on branded drugproducts with low sales.
  48. 48. Authorized Generics Some brand companies may have used agreements notto launch an authorized generic as a way to compensatewould-be generic competitors for delaying entry into themarket. “Authorized Generic Drugs: Short-Term Effects and Long-Term Impact,”Federal Trade Commission Report (August 2011).
  49. 49. Authorized Generics The agency has found that promises by a branded firm not tomarket competing authorized generics are frequently present inpharmaceutical patent settlements: “Today’s report finds that authorized generics modestlyreduce drug prices during the first 180 days of generic competition,and identifies some evidence suggesting that the presence of anauthorized generic could affect decisions by generic competitors tochallenge patents on drugs with low revenues.”
  50. 50. Authorized Generics “[T]he clearest and most disturbing finding is that some brandcompanies may be using the threat of launching an authorized genericas a powerful inducement for generic companies to delay bringingtheir drugs to market. When companies employ this tactic it is adouble whammy for consumers. Consumers have to pay the higherbrand prices while the generic delays its entry and, once generic entrydoes occur, consumers pay higher prices without the benefit ofcompetition from the authorized generic.”
  51. 51. Authorized Generics An “authorized generic” is a lower-cost, generic-label versionof a brand-name drug that is already sold by the samemanufacturer. The Hatch-Waxman Act is designed to ease theintroduction of generic drugs by, in certain circumstances,granting a 180-day period of marketing exclusivity to the firstgeneric competitor of a brand-name drug, known as a “first-filer.” However, this marketing exclusivity period does not preventbrand-name companies from introducing their own authorizedgeneric versions.
  52. 52. Authorized GenericsThe Final Report contains four main findings: – Competition from authorized generics during the 180-day marketing exclusivity period has led to lower retail and wholesale drug prices. – Authorized generics have a substantial effect on the revenues of competing generic firms. – Lower expected profits could affect a generic company’s decision to challenge patents on products with low sales. – There is strong evidence that agreements not to compete using authorized generics have become a way that some branded firms compensate generic firms for delaying entry to the market.
  53. 53. CONCLUSION The future will reveal increasing and mutual interdependence ofPharma and Generic manufacturers. The key principles and criteria applied by the FTC will includespecific attention to each product market using the behavioralremedy of divestiture to as a major tool to justify approvals. Having the benefit of the Agency’s enforcement history in thisindustry is a benefit to the practicing bar when marshaling mergertransactions before the watchful eye of the Commission and towarda successful conclusion and antitrust clearance.
  54. 54. CONTACT INFORMATION Robin K. Vinson, Esq. Nexsen Pruet, PLLC 4141 Parklake Avenue Suite 200 Raleigh, NC 27612 919.755-1800 rvinson@nexsenpruet.com

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