The document discusses antitrust issues related to acquisitions of generic drug manufacturers, including an overview of FTC enforcement actions challenging mergers in this industry from 1995 to present. It outlines criteria the FTC applies in their analysis, such as the impact of branded drugs on generics, delivery methods, number of competitors, and parties' innovation pipelines. The FTC takes into account these factors to determine whether a merger will reduce competition and harm consumers in generic drug markets.

1. Antitrust Aspects of
Current Issues in Acquiring a Generic Drug
Healthcare and
Pharmaceutical
Competition Law
Manufacturer
2012 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

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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. 1984: Generics Given Seat at the Table
In 1984, the U.S. Drug Price Competition and Patent
Term Restoration Act, informally known as the Hatch-
Waxman Act, standardized the regulatory procedures
for recognition of generic drugs in the United States.

5. 1984-2012: Generic Drugs Have Evolved
From Infancy to Mature Industry
The Generic Pharmaceutical Association (GPhA) was formed
in 2001 from the merger of three smaller groups.
The generic industry has grown dramatically, from $1 billion in
annual revenues to $63 billion in the United States today. From a
modest beginning, today nearly 69% of all prescriptions are filled
with generic medicines. And the value remains -- roughly 16
cents of every dollar spent on prescriptions are spent on generic
medicines.
(http://www.gphaonline.org/about-gpha/history)

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. Today’s Generics Create Savings in the
United States Healthcare System
From 2001-2010, generic prescription drugs used in
lieu of brand counterparts resulted in savings of $931
Billion.
In 2010 alone, generic use resulted in more than
$157 Billion in savings.
More than $1.3 Billion may be saved annually from
Medicaid by increasing generic use by just two
percentage points.
(GPhA Market Study Report released September 21, 2011)

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. STATE OF THE UNION :
Innovation Too Expensive and Too Slow
“Despite continued efforts to raise pharmaceutical industry
research and development in the United States to higher
productivity levels, the historical pace of innovation remains
anemic.
While spending as much as 18 percent of revenues on
research and innovation, successful discoveries of new drugs
by national pharmaceutical companies have declined
dramatically over the last ten years.”
“Pharmaceuticals & Biotech Industry Global Report—2011,” IMAP, Inc. at 2.

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 drug
industry for new sources of revenue and increased profit margins.
At the same time, generic drug manufacturers have determined
that increasing size is important to meet the demands of matching the
pharmaceutical industry’s offerings to the consuming public upon the
expiration of pharmaceutical patents.
Thus, the generic drug industry has experienced significant
consolidation in the last decade, both by mergers between generics within
the industry and by mergers with or acquisitions by national name-brand
pharmaceutical manufacturers.

11. Generic Market Overview & Trends
The US generics market is the world’s largest with
generic penetration estimated at 68 percent by volume and
13 percent by value in the year to June 2008, making the US
one of the most mature and saturated generics markets in the
world. An estimation of the US generics market size of $36.3
billion USD in 2009 is calculated.
IMAP’s Pharma & Biotech Industry Global Report 2011: Appendix D-i

12. Generic Market Overview & Trends
Generics will account for more than 80 percent of all US prescriptions in
the next few years.
The key driver for the uptake of generic drugs is the cost-savings they
bring, particularly as the US contemplates adoption of universal healthcare.
In principle, savings derived from generics may be obtained both by
increasing use and by extracting greater “value” from current levels of
utilization (such as greater pressure on prices). While both strategies are
employed in the US, it is the former that dominates.
IMAP’s Pharma & Biotech Industry Global Report 2011: Appendix D-i

13. STATE OF THE UNION :
Emerging Markets
IMAP’s Pharma & Biotech Industry Global Report 2011: Page 5

14. STATE OF THE UNION :
Size and Diversification
IMAP’s Pharma & Biotech Industry Global Report 2011: Page 12

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. 2012 and Beyond
Pharma companies are striving hard to stave off the R&D
crisis through mergers and acquisitions, geographic expansion
and diversification into new areas such as consumer health.
From an investment standpoint, the companies best
equipped to deal with these challenges are those with robust
pipelines capable of offsetting the impact from patent expiries.
Diversified players, those that can offset difficulties in one
segment or region with better performance in another, are also
well placed.
IMAP’s Pharma & Biotech Industry Global Report 2011: Page 5

17. FTC Enforcement : A Blueprint for Antitrust Analysis
The Federal Trade Commission (“FTC”) historically has
reviewed mergers involving pharmaceutical companies:
3.Authority to challenge transactions that harm consumers.
5.FTC enforcement history provides a framework of
enforcement.

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., FTC
File No. 021-0171 (Feb. 7, 2003).

19. FTC Enforcement By Divestiture : 2006 - 2010
With increasing consolidation in the generic drug
industry and the Agency’s findings as to the effect of
generic drugs on the pricing behavior underlying brand
pharmaceutical products, the remedy of divestiture has
become a common condition of Agency approval.

20. FTC Enforcement : 2006 - 2010
In the Matter of Teva Pharmaceutical Indus. Ltd. and IVAX
Corp., 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 Andrx
Corp., FTC File No. 061-1039 (Oct. 31, 2006).
In the Matter of Hospira, Inc. and Mayne Pharma Ltd., FTC
File. No. 071-0002 (Jan. 18, 2007).

21. FTC Enforcement : 2006 - 2011
Valeant Pharmaceuticals International Inc., Docket No. 4342, FTC
File No. 111-0215 (complaint and proposed order issued
December 9, 2011).
The proposed order requires Valeant to sell to Mylan all rights to
generic BenzaClin. It also requires Valeant to license to Mylan the
rights to manufacture and market the authorized general version of
Efudex.

22. FTC Enforcement : 2006 - 2011
Teva Pharmaceutical Industries Ltd., FTC File No. 111-0166 (complaint
issued 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. FTC Enforcement : 2006 - 2011
Perrigo Company, C-4329, FTC File No. 111-0083 (complaint and proposed
consent 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. FTC Enforcement : 2006 - 2011
Cardinal 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. FTC Enforcement : 2006 - 2011
Grifols, 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. FTC Enforcement : 2006 - 2011
Watson Pharmaceuticals, Inc./Robin Hood Holdings (“Arrow”).
C-4276, FTC File No. 0910116 (consent order issued January
7, 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. FTC Enforcement : 2006 - 2011
(Watson Continued)
–The consent order requires Watson to divest its generic cabergoline
product to Impax Laboratories, Inc. The order also requires Arrow to
divest its Resolution subsidiary to a new entity named Reso Holdings,
which is owned in part by Resolution’s current management. The order
also requires Arrow to sells is U.S. marketing rights for generic dronabinol
to Impax, which will replicate Arrow’s role as the U.S. marketer for that
product once Resolution obtains all necessary regulatory approvals. The
acquirers of the divested assets must receive prior approval from the
Commission, so that the competitive environment that existed in these
markets prior to the proposed acquisition will be maintained.

28. CRITERIA APPLICABLE TO GENERIC DRUG
MERGER ANALYSIS
Enforcement actions provide insight into the FTC’s
oversight 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. 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. CRITERIA :
The Impact of Branded Drugs on Generic Versions
1. 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. CRITERIA :
The Impact of Branded Drugs on Generic Versions
FTC’s July 2002 study on the impact of generic drug
entry on prices:
While generic market entry usually results in a
significant decrease in the price of generic drugs, it may
actually lead to a slight increase in the price of the branded
version, probably due to the inelastic demand among the
remaining users of brand-name drugs.

32. CRITERIA :
The Delivery Method of a Generic Drug
The delivery method of a drug constitutes an
important factor in the definition of the relevant market.
Counsel should evaluate whether there are
situations where only certain delivery methods would be
suitable for certain patients. Where this is the case, recent
cases suggest that the Agency is unlikely to include in the
relevant market products that contain the same active
ingredient but are administered in a different form.

33. CRITERIA :
The Number and Significance of Competitors
The FTC has been compelled to act when a merger
reduced the number of competitors to three or fewer.
FTC Study : Price continues to fall until at least the
fifth generic firm enters the market.
FTC may likely scrutinize those transactions that
lower the number of market participants from five to four.

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. CRITERIA : Development and Innovation Pipelines
of the Parties and their Competitors
Historically, the FTC has not been active in
challenging generic drug mergers based on a potential
competition theory.
In three of the four most recent generic drug merger
consent orders, however, the FTC required divestitures in
markets where neither merging party had a product currently
on the market.

36. CRITERIA : Development and Innovation Pipelines
of the Parties and their Competitors
In assessing a Company’s non-generic products, as in
Baxter and Hoechst, a company’s branded products may play an
important role in the FTC’s evaluation of an acquisition of a generic
drug supplier. Where the FTC concludes that a company’s non-
generic products compete with the merging party’s generic
products, the Commission will consider the transaction to be
eliminating a competitor.
The timing and likelihood of the parties’ entry efforts, as well
as the development activities of competitors, can have a significant
impact on the likelihood of the FTC taking action in a particular
market.

37. CRITERIA :
Relationships with Third Parties
The FTC has taken great strides to understand the
relationships that the merging companies have with other
similar companies.
The FTC routinely has required the termination of
manufacturing and marketing agreements with third parties
(or other remedial relief) where the Agency believes those
agreements create competitive problems.

38. CRITERIA :
Identity of Purchaser of Divested Assets
“Commission-approved buyer”
Although the Commission in recent years has relaxed
its preference for a buyer up-front in many industries, the
trend in pharmaceutical enforcement appears to be moving in
the opposite direction.
In contrast, in the 2003 Baxter and 2005 Novartis
consent orders, a buyer up-front for all the assets to be
divested was required.

39. CRITERIA : Size of Markets
The size of commerce affected may not be a relevant factor
from the perspective of the FTC.
Where a detrimental effect on the consumer may be
presumed, the FTC has found that enforcement action is warranted
notwithstanding the fact that the size of an overlapping product
market is small.
InTeva/IVAX, the FTC took enforcement action in six
markets that each had annual U.S. sales of less than $10 million. In
one of those markets, the total U.S. sales for the drug were only
$674,000.

40. THE EFFECT OF PATENT EXPIRATIONS ON THE GENERIC
DRUG MARKET : APPROVED GENERICS
The Food and Drug Administration (“FDA”) must
approve the marketing of all pharmaceutical drugs, both
brand-name and generic, in the United States.
The Federal Food Drug and Cosmetic Act, as
amended by the Hatch-Waxman Amendments, establishes
the regulatory framework.

41. THE EFFECT OF PATENT EXPIRATIONS ON THE GENERIC
DRUG MARKET : APPROVED GENERICS
Typically, a brand-name drug obtains FDA approval through
a New Drug Application (“NDA”). A generic drug
manufacturer obtains FDA approval through an Abbreviated
New Drug Application (“ANDA”) in which it is allowed to rely
on the clinical data first submitted by the brand-name drug
manufacturer to establish the safety and efficacy of the
generic drug.

42. THE EFFECT OF PATENT EXPIRATIONS ON THE GENERIC
DRUG MARKET : APPROVED GENERICS
The Hatch-Waxman amendments allow generic drug
manufacturers to seek FDA approval prior to expiration of
claimed patent protection for the corresponding brand-name
drug.
To do so, a generic drug manufacturer must first
submit to the FDA a “Paragraph IV” ANDA with certification.

43. THE EFFECT OF PATENT EXPIRATIONS ON THE GENERIC
DRUG MARKET : APPROVED GENERICS
The first biotech drugs of the present generation have
gone off patent, which has presented a very interesting
phenomenon, that is, the advent of “biosimilar” products.
For biosimilars (equivalents of off-patent biotech
drugs), the regulatory demands are much higher, requiring
full-blown phase I and III studies for each production line, as
small changes in manufacturing can substantially impact the
medical outcome.

44. THE EFFECT OF PATENT EXPIRATIONS ON THE GENERIC
DRUG MARKET : PATENT CLIFFS
The pharmaceutical industry is facing a number of key
impediments to growth, including “patent cliffs,” which will
erode substantial branded sales in the near future.
Price cuts, reimbursement restrictions and growing
regulatory pressure make the dive steeper.

45. STATE OF THE UNION :
Generics are Here to Stay
The United States generics market is the world’s
largest.
The United States is one of the most mature and
saturated generics markets in the world.
It’s simple math: savings derived from generics may
be obtained both by increasing use and by extracting greater
“value” from current levels of utilization (such as greater
pressure on prices).

46. Authorized Generics
The FTC recently completed a study concerning the
effect of so-called “Authorized Generics” on the
pharmaceutical market and the appetite for generic drugs.
Meier, M.; Albert, B.; Brau, S. (2011). Overview of FTC Antitrust Actions in
Pharmaceutical Services and Products.
http://www.ftc.gov/bc/healthcare/antitrust/rxupdate.pdf

47. Authorized Generics
By lowering expected profits for generic competitors, the
introduction of an authorized generic could affect a generic
drug company’s decision to challenge patents on branded drug
products with low sales.

48. Authorized Generics
Some brand companies may have used agreements not
to launch an authorized generic as a way to compensate
would-be generic competitors for delaying entry into the
market.
“Authorized Generic Drugs: Short-Term Effects and Long-Term Impact,”
Federal Trade Commission Report (August 2011).

49. Authorized Generics
The agency has found that promises by a branded firm not to
market competing authorized generics are frequently present in
pharmaceutical patent settlements:
“Today’s report finds that authorized generics modestly
reduce drug prices during the first 180 days of generic competition,
and identifies some evidence suggesting that the presence of an
authorized generic could affect decisions by generic competitors to
challenge patents on drugs with low revenues.”

50. Authorized Generics
“[T]he clearest and most disturbing finding is that some brand
companies may be using the threat of launching an authorized generic
as a powerful inducement for generic companies to delay bringing
their drugs to market. When companies employ this tactic it is a
double whammy for consumers. Consumers have to pay the higher
brand prices while the generic delays its entry and, once generic entry
does occur, consumers pay higher prices without the benefit of
competition from the authorized generic.”

51. Authorized Generics
An “authorized generic” is a lower-cost, generic-label version
of a brand-name drug that is already sold by the same
manufacturer. The Hatch-Waxman Act is designed to ease the
introduction of generic drugs by, in certain circumstances,
granting a 180-day period of marketing exclusivity to the first
generic competitor of a brand-name drug, known as a “first-filer.”
However, this marketing exclusivity period does not prevent
brand-name companies from introducing their own authorized
generic versions.

52. Authorized Generics
The 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. CONCLUSION
The future will reveal increasing and mutual interdependence of
Pharma and Generic manufacturers.
The key principles and criteria applied by the FTC will include
specific attention to each product market using the behavioral
remedy of divestiture to as a major tool to justify approvals.
Having the benefit of the Agency’s enforcement history in this
industry is a benefit to the practicing bar when marshaling merger
transactions before the watchful eye of the Commission and toward
a successful conclusion and antitrust clearance.

54. CONTACT INFORMATION
Robin K. Vinson, Esq.
Nexsen Pruet, PLLC
4141 Parklake Avenue
Suite 200
Raleigh, NC 27612
919.755-1800
rvinson@nexsenpruet.com