antitrust aspects of acquiring a generic drug manufacturer

Current Issues in Healthcare

and Pharmaceutical Competition

Law

2012 Antitrust & Trade

Regulation Section Annual

Meeting

North Carolina Bar

Association

February 9, 2012

Antitrust Aspects of Acquiring a Generic Drug Manufacturer

Presented By:Robin K. Vinson, Esq.Nexsen Pruet, PLLC919.755.1800, [email protected]

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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, andThe Oaks ignore their pleas.

From "Trees"

By progressive rock band Rush from their 1978 album

Hemispheres.

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.

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)

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.”

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)

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.

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.

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.

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

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

STATE OF THE UNION : Emerging Markets

IMAP’s Pharma & Biotech Industry Global Report 2011: Page 5

STATE OF THE UNION : Size and Diversification


STATE OF THE UNION :Generics are Both the “Problem” and the “Solution”

IMAP’s Pharma & Biotech Industry Global Report 2011: Appendix A-i

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.


FTC Enforcement : A Blueprint for Antitrust Analysis

The Federal Trade Commission (“FTC”) historically has reviewed mergers involving pharmaceutical companies:

1.Authority to challenge transactions that harm consumers.

2.FTC enforcement history provides a framework of enforcement.

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).

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.


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).


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.


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.


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.


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.


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.


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.


(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.

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

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

CRITERIA :The Impact of Branded Drugs on Generic Versions

1. In enforcement actions, the FTC has excluded the branded version from relevant markets.

2. 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.

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.

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.

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.

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.


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.


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.

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.

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.

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.

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.


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.


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.


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.

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.

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).

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

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.

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).

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.”

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.”

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.

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.

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.

CONTACT INFORMATION

Robin K. Vinson, Esq.Nexsen Pruet, PLLC4141 Parklake Avenue

Suite 200Raleigh, NC 27612

919.755-1800

[email protected]

antitrust aspects of acquiring a generic drug manufacturer

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