Sword or shield? An overview and competitive analysis of the marketing of "authorized generics"

Food and Drug Law Journal

Volumn 62, Issue 4, 2007, Pages 739-777

  Zain, Saami ^a  

^a Antitrust Bureau   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

GENERIC DRUG; NEW DRUG;

COST BENEFIT ANALYSIS; COST CONTROL; DRUG COST; DRUG INDUSTRY; DRUG MARKETING; FOOD AND DRUG ADMINISTRATION; GOVERNMENT REGULATION; HEALTH CARE COST; HEALTH CARE PLANNING; HEALTH CARE POLICY; LAW ENFORCEMENT; MANAGED CARE; MEDICAID; MEDICARE; PHARMACY; PHARMACY BENEFIT MANAGER; PHYSICIAN ATTITUDE; PROFIT; REVIEW;

ANTITRUST LAWS; DRUG COSTS; DRUG INDUSTRY; DRUG LABELING; DRUGS, GENERIC; ECONOMIC COMPETITION; HUMANS; MARKETING OF HEALTH SERVICES; MEDICAID; MEDICARE; UNITED STATES; UNITED STATES FEDERAL TRADE COMMISSION; UNITED STATES FOOD AND DRUG ADMINISTRATION;

EID: 36949010977     PISSN: 1064590X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (289)

1. See, IMS Health Reports U.S. Prescription Sales Jump 8.3 Percent in 2006, to $274 Billion, Forbes.com Business Wire, Mar. 9, 2007, available at http://www.forbes.com/businesswire/feeds/businesswire/2007/ 03/09/businesswire20070308006159r1.html.
2. The Centers for Medicare & Medicaid Services (CMS) estimated that prescription drug expenditures were $200.7 billion in 2005, with total health care cost of approximately $2 trillion. See CMS press release dated Jan. 9, 2007, available at http://www.cms. hhs.gov/apps/media/press/release.asp?Counter=2069&intNumPerPage= 10&checkDate=&checkKey= &srchType=&numDays=3500&srchOpt= 0&srchData=&keywordType=All&chkNewsType=1%2C+2 %2C+3%2C+4%2C+5& intPage=&showAll=&pYear=&year=&desc=&cboOrder=date.
3. Id.
4. See infra note 82
5. th Congress as S.3695 and H.R. 5993). H.R. 806 available at http://www.govtrack.us/data/us/bills. text/110/h/h806.pdf. S.438 available at http://www.govtrack.us/data/us/bills.text/110/s/s438.pdf
6. http://www.ftc.gov/opa/2006/03/authgenerics.htm
7. 21 U.S.C. § 301 et seq
8. For an excellent yet brief history of the Act, up through (but not including) the 2003 amendment, see Elizabeth Stotland Weiswasser & Scott Danzis, The Hatch-Waxman Act: History, Structure, and Legacy, 71 ANTITRUST LJ 585 (2003);
9. Ellen Flannery & Peter Hutt, Balancing Competition and Patent Protection in the Drug Industry: The Drug Price Competition and Patent Term Restoration Act of 1984, 40 FOOD DRUG COSM. L.J. 269, 271-76 (1985).
10. For an overview of relevant provisions of the 2003 amendments to the Act, see Stephanie Greene, A Prescription for Change: How the Medicare Act Revises Hatch-Waxman to Speed Market Entry of Generic Drugs, 30 JCORPL 309, 349-353 (Winter 2005).
11. 21 U.S.C. § 355(b)(1). See also Weiswasser and Danzis, supra note 7, at 3.
12. See FDA's Guidance for Industry: Providing Clinical Evidence of Effectiveness for Human Drugs and Biological Products, available at http://www.fda.gov/cber/gdlns/clineff.pdf.
13. FDA has provided the following definition of "generic": "A generic drug is identical, or bioequivalent to a brand name drug in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use. Although generic drugs are chemically identical to their branded counterparts, they are typically sold at substantial discounts from the branded price." http://www.fda.gov/cder/ogd/.
14. "Bioequivalence" is defined as when the rate and extent of absorption of the generic drug is not significantly different from the rate and extent of absorption of the listed pioneer drug when administered at the same dosage. See 21 CFR 320.1; FDA Office of Generic Drugs, http://www.fda.gov/cder/ogd/
15. 21 U.S. C. § 355(b)(1).
16. See Weiswasser and Danzis, supra note 7, at 4.
17. Drug Price Competition & Patent Term Restoration Act, Public Law 98-417, commonly referred to as the Hatch-Waxman Act, and codified as 21 U.S.C. § 355(j). The Hatch-Waxman Act increased incentives for the NDA by effectively extending the statutory patent period. See Abbot Labs v. Young, 920 F.2d 984, 991 (D.C.Cir.1990)(Edwards, J., dissenting on other grounds)("The Act emerged from Congress' efforts to balance two conflicting policy objectives: to induce name-brand pharmaceutical firms to make the investments necessary to research and develop new drug products, while simultaneously enabling competitors to bring cheaper, generic copies of those drugs to market.")
18. 21 U.S.C. § 355(j)(2)(A). See Weiswasser & Danzis, supra note 7, at 7.
19. 21 U.S.C. § 355(j)(2)(A)(vii).
20. 21 U.S.C.§ 355(j)(2)(A)(vii).
21. 21 U.S.C.§ 355(j)(5)(B)(iii). If the NDA does not file suit after notice of an ANDA certification, FDA may shortly approve the ANDA application, permitting the ANDA generic to rapidly come to market.
22. 21 U.S.C.§355(j)(5)(B)(iv).
23. Id.
24. 21 U.S.C.§355(j)(5)(D). Circumstances that may lead to forfeiture include failure to commercially market in a timely manner, withdrawal of first ANDA, amendment or withdrawal of patent certification, failure to obtain tentative approval in a timely manner, an anticompetitive agreement between the NDA and ANDA or the expiration of all relevant patents.
25. See Generic Entry Prior to Patent Expiration: An FTC Study (2002)("FTC Study on Generic Entry"), available at http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf.
26. In 1984, generics accounted for only 19 percent of sales in the prescription drug market, whereas in 1996, they accounted for 43 percent. Congressional Budget Office, How Increased Competition from Generic Drugs Has Affected Prices and Returns in the Pharmaceutical Industry (1998) ("CBO Study on Generic Entry") at Chapter 2, available at http://www.cbo.gov/showdoc.cfm?index=655&sequence=0.
27. According to the FTC Study on Generic Entry, generics accounted for about 50 percent of all drug sales in 2001. According to the National Association of Chain Drug Stores, the national average generic dispensing rate for Medicaid enrollees was 51.9 percent. Craig Fuller, CEO, National Association of Chain Drug Stores, Drug Generic Utilization: Perspectives from the National Association of Chain Drug Stores, Generic Drug Summer, Sept. 20, 2005, available at http://www.nacds.org/user-assets/pdfs/newsrelease/ GenericDrugSummit093005. pdf#search= %22Drug%20Generic%20Utilization%3A%20Perspectives%20from%20the%20National %20Association%20of%20Chain%20Drug%20Stores%22
28. See e.g., CUTTING EDGE INFORMATION, "Defending Brand Revenue: Pharmaceutical Lifecycle Management Planning," (2005), available at http://www.cuttingedgeinfo.com/ pharmalifecyclemanagement/index.htm;
29. Insight Strategy Advisors, "Lifecycle Management" Case study, available at http://www. insightstrategyadvisors.com/case_life_cycle. shtml;
30. Capgemini Consulting, Pharmaceutical Industry Success Dependent on Better Product Lifecycle Management (Oct. 4, 2004), available at http://www. capgemini.com/news/2004/1006plm.shtml.
31. See e.g. Jeremy Bulow, The Gaming of Pharmaceutical Patents, in INNOVATION POLICY AND THE ECONOMY, Adam B. Jaffe, Scott Stern & Josh Lerner (2004), at 145-87;
32. Elizabeth Powell-Bullock, Gaming The Hatch-Waxman System: How Pioneer Drug Makers Exploit The Law To Maintain Monopoly Power In The Prescription Drug Market, 29 J. Legis. 21 (2002); Statements by (former) FTC Commissioner Timothy Muris on Apr. 23, 2002, before the Committee on Commerce, Science & Transportation, on Competition in the Pharmaceutical Industry, available at http://www.ftc.gov/opa/2002/04/biovail.htm;
33. Marcia Angell, THE TRUTH ABOUT THE DRUG COMPANIES (2004), at 180-182; FTC Study on Generic Entry, supra note 21, at Chapters 4-6.
34. th Cir. 2005); In Re Relafen Antitrust Litigation, 346 F.Supp.2d 349 (D.Mass.2004); Teva Pharmaceuticals v. Lester Crawford, 410 F.3d 51 (D.C.Cir.2005); Smithkline Beecham v. Apotex, 383 F.Supp.2d 686 (E.D.Pa.2004).
35. For more detail on these practices, see FTC Study on Generic Entry, supra note 21; Ellen Flannery & Peter Hutt, supra note 7.
36. rd Ed. 2004), at § 6.04d.
37. 15 U.S.C. § 1 et seq.
38. Section 3 of the Clayton Act, 15 U.S.C. § 14, which prohibits certain types of tying arrangements and exclusive dealings may also be applicable to the marketing of authorized generics. However, because modern case law has applied the same analysis to conduct challenged under Section 3 of the Clayton Act as the Sherman Act, the author will refrain from undertaking a separate examination. See Jon Jacobson, Exclusive Dealing, "Foreclosure," and Consumer Harm, 70 ANTITRUST L.J. 311 (2002)(noting the lack of distinguishing features between the case law's analysis under § 1 of the Sherman Act and § 3 of the Clayton Act). See also Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 , 29-30 at note 51 (1984)(brought under Section 1 of the Sherman Act but citing and relying on cases under Section 3 of the Clayton Act).
39. Section 1 provides in part: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." Despite its broad, prohibitive terms, it has long been held that Section 1 only condemns "unreasonable" restraints. See, e.g, Standard Oil v. United States, 221 U.S. 1 (1911).
40. The classic analysis for determining whether a restraint is "reasonable" (termed the "rule of reason" in antitrust parlance), was first articulated by Justice Brandeis in Chicago Board of Trade v. United States, 246 U.S. 231 (1918), as follows: "Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts."
41. For example, it has long been held that certain types of conduct are believed to be so likely to be harmful to competition and to have no significant pro-competitive benefit, that such conduct may be condemned outright and held to be per se illegal, without any assessment of its particular effects: "[T]here are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without any elaborate inquiry as to the precise harm they have caused or the business excuse for their use." Northern Pacific Railroad v. United States, 356 U.S. 1, 5 (1958). Alternatively, conduct that is not deemed per se illegal, but nevertheless "appears likely, absent an efficiency justification, to restrict competition and decrease output," may be presumed to be "unreasonable" without an extensive analysis, although such presumption is rebuttable upon plausible and legally cognizable pro-competitive justification(s) for the conduct. Polygram Holding Inc. v. Federal Trade Commission, 416 F.3d 29, 33 (D.C. Cir.2005). This type of analysis is generally termed a "quick look" analysis. See also., California Dental Association vs. Federal Trade Commission, 526 U.S. 756, 119 S.Ct.1604 (1999); Federal Trade Commission v. Indiana Federation of Dentists, 476 U.S. 447, 106, S.Ct.2009 (1986).
42. Section 2 of the Sherman Act provides: "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation or if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments in the discretion of the court."
43. United States v. Grinnell Corp, 384 U.S. 563, 570-571 (1966).
44. United States v. E.I. Du Pont de Nemours & Co., 351 U.S. 377, 391 (1956).
45. United States v. Microsoft, 253 F.3d 34, 51 (D.C.Cir.2001)(citing AREEDA, ET AL, ANTITRUST LAW, 2A ¶501, at 85 (1995)).
46. "The purpose for evaluating a firm's 'market power' is to prevent misguided and overly aggressive antitrust enforcement which may benefit competitors rather then consumers. That is, absent sufficient market power, conduct will not likely have an adverse effect on competition. "Antitrust is concerned with the power of market participants to distort the competitive process. This distortion can misallocate resources, transfer wealth from consumers and other protected groups to market participants with power or stifle new entry or innovation and commercialization. Without power, a market participant can do none of these things but is, instead, itself subject to the discipline of competition." Lawrence Sullivan & Warren Grimes, THE LAW OF ANTITRUST: AN INTEGRATED HANDBOOK (2000), at § 2.1.
47. th Cir.2000).
48. Spectrum Sports vs. McQuillan, 506 U.S. 447, 459 (1993).
49. Not all exclusionary conduct is illegal or anticompetitive. Only "inefficiently exclusionary-practices that predictably will lead to lower output and higher prices by reducing competition in the market as a whole" are typically held to violate the Sherman Act. See Earl W. Kintner et al, FEDERAL ANTITRUST LAW (2004), at § 14.14.
50. For in-depth analysis of exclusionary conduct, See Symposium on Exclusionary Conduct, Volume 73, Issue 2, of the Antitrust Law Journal (2006).
51. United States v. Socony-Vacuum Oil, 310 US 150, at note 59 (1940)
52. th Cir.2002)(citing United States v. Socony-Vacuum Oil, 310 US 150 (1940)). See also United States v. Microsoft, 253 F.3d 34, 70 (D.C.Cir.2001)("[W]e agree with plaintiffs that a monopolist's use of exclusive contracts, in certain circumstances, may give rise to a § 2 violation even though the contracts foreclose less than the 40 percent or 50 percent share usually required in order to establish a § 1 violation.")
53. Courts have so far avoided defining the term. A Congressional report, defined an authorized generic as "a pharmaceutical that is marketed by or on behalf of a brand-named drug company, but is sold under a generic name. The brand-name firm may distribute the drug under its own auspices or via a license to a generic drug company." John Thomas, Authorized Generic Pharmaceuticals: Effects on Innovation, CRS Report to Congress (August 2006), at 1, available at http://opencrs.cdt.org/rpts/ RL33605_20060808.pdf A pharmaceutical trade periodical defined it as "drugs that are essentially the innovator drug packaged and sold as a generic (i.e., not under the brand name and presumably at a lower price) by the innovator manufacturer under its own NDA, generally either through its own generic subsidiary, or through an independent (generic) company."
54. Authorized Generics: To Switch Rather Than Fight? Generic Engineering & Biotechnology News Vol 25, No. 13 (July 1 2005), available at http://www.genengnews.com/articles/chitem.aspx?aid=553&chid=0.
55. FDA response to Citizen Petition 2004-P0075 and 2004P-0261 (July 2, 2004).
56. In its July 2, 2004 denial of Citizen Petitions, supra note 42, FDA stated that it was aware that authorized generics have been marketed since the early 1990s, but that it does not consider the practice to be in violation of the Act. See also AUTHORIZED GENERICS: LOOKS LIKE THEY'RE HERE TO STAY, published by Prudential Equity Group (Mar. 3, 2005)(on file with the author), listing the following popular branded drugs which have been marketed as authorized generics as of 2005: Wellbutrin, Paraplatin, Gluvovance, Marcrobid, Cutivate, Augmentin ES, Paxil, Ortho Cyclen, Mircette, Monopril, Glucotrol XL, Glucophage XR, Cipro, Tambocor, Celexa, Glucotrol XL, Diflucan, Tiazac, Rebetol, Neurontin.
57. See also Rich Silver, Lehman Brothers, Investment Opportunities in Specialty Pharmaceuticals (Mar. 2006)(on file with the author), listing 36 drugs for which an authorized generic was marketed between 1993 and 2005. Authorized generic agreements announced in 2006 include generic Oxandrin (oxandrolone) by Watson and Savient, and generic Toprol-XL (metoprolol succinate) by Par.
58. Sandra Levy, Why Authorized Generics Are Making a Comeback, DRUG TOPIC, Nov. 3, 2003, available at http://www.drugtopics.com/drugtopics/article/articleDetail.jsp?id=111159.
59. See also Anthony Vecchione, Exclusive Drug Topics Survey: Generic Switching on the Rise, DRUG TOPICS, Aug. 7, 2006 (discussing a survey that revealed a marked increase in generic substitution), available at http://www. drugtopics.com/drugtopics/article/articleDetail. jsp?id=360617
60. See supra notes 4 and 5.
61. th Edition of the Orange Book, at § 1.7, available at http://www.fda. gov/cder/orange/obannual.pdf.
62. See e.g., Citizen Petition 2004P-0075 submitted by Mylan Pharmaceutical (Feb. 17, 2004); Comment of Generic Pharmaceutical Association in Support of Citizen Petition 2004P-0075, dated May 21, 2004; David Balto, We'll Sell Generics, Too, LEGAL TIMES, Mar. 10, 2006; Comments of Senators Patrick Leahy, Charles Schumer and John D. Rockerfeiler in July 2006, in support of Senate Bill 3695 banning the practice of authorized generics, available at http://leahy.senate.gov/press/200607/072006b.html.
63. Unless prior to such time, a court decision is rendered holding the patent invalid or not infringed. 21 U.S.C.§ 355(j)(5)(B).
64. Id.
65. See comments of Apotex in Support of Citizen Petition 2004P-0075 (Mar. 24, 2004).
66. FDA response to Citizen Petition 2004-P0075 and 2004P-0261 (July 2, 2004).
67. th Cir.2006)("Mylan concedes that the language of § 355(j)(5)(B)(iv) is plain. The provision makes no mention of drugs under approved NDAs. It speaks only about the rights of the paragraph IV ANDA applicant who files first as against all subsequent paragraph IV ANDA applicants."); Teva Pharmaceuticals v. Lester Crawford, 410 F.3d 51 (D.C.Cir.2005)("Section 355(j)(5)(B)(iv) says nothing about how the holder of an approved NDA may market its drug; rather, that provision grants 'exclusivity' to the first to file an ANDA containing a paragraph IV certification by delaying the effective date upon which FDA may approve any subsequent ANDA containing a paragraph IV certification with respect to the same drug.").
68. Citizen Petition 2004P-0075 submitted by Mylan Pharmaceutical (Feb. 17, 2004); comments of Apotex in Support of Citizen Petition 2004P-0075 (Mar. 24, 2004); comment of Generic Pharmaceutical Association in Support of Citizen Petition 2004P-0075 (May 21, 2004); Citizen Petition 2004P-0563 submitted by Andrx Pharmaceuticals (Dec. 23, 2004).
69. Id.
70. FDA response to Citizen Petition 2004-P0075 and 2004P-0261 (July 2, 2004).
71. Of course, the same argument could be made for any patent. Once an invention has been commercialized, consumers would always be better off with more competition. The purpose for granting patent rights is to provide incentives for people to innovate in the first place. Likewise, under the Hatch-Waxman scheme, although in the short run consumers would benefit from additional competition during the exclusive period, if the additional competition acts to deter generics from challenging patents in the first place, the outcome may result in less competition (or an undeserved monopoly, should the patent by invalid or not infringed). This is particularly troublesome given the probabilistic nature of patent rights. See Carl Shapiro, Antitrust Limits to Patent Settlements, 34 RAND J. ECON 391 (2003).
72. th Cir.2006), the Court of Appeals for the Fourth Circuit largely deferred to the prior D.C. Circuit opinion and ignored the policy issues, finding that the statue was unambiguous.
73. 21 U.S.C. § 356a.
74. 21 C.F.R. 314.70.
75. Id; 21 U.S.C. § 356a(c)(2).
76. Supplement to Citizen Petition 2004-P0075 (June 28, 2004); comment of Generic Pharmaceutical Association in Support of Citizen Petition 2004P-0075 (May 21, 2004).
77. FDA response to Citizen Petition 2004-P0075 and 2004P-0261 (July 2, 2004).
78. FDA response to Citizen Petition 2004-P0075 and 2004P-0261 (July 2, 2004).
79. th Cir.2006).
80. Citizen Petition 2004P-0563 submitted on behalf of Andrx (Dec. 23, 2004).
81. Id.
82. By letter dated June 24, 2005, FDA responded to the petition, stating that it had not yet resolved the matter. See http://www.fda.gov/ohrms/ dockets/dailys/05/Jun05/062905/062905.htm#04P0563. This is the last correspondence from FDA that the author was able to find on this matter.
83. 207 F.Supp.2d 476 (D.W.V.2001).
84. See Mylan Pharmaceuticals v. Tommy Thompson, 207 F.Supp.2d 476 (N.D.W.V.2001). The Act was amended in 2003, in part to stop these types of roadblocks.
85. "[According to FDA,] whether Mylan markets the produce [sic] approved in its ANDA or the product approved is [sic] Pfizer's NDA is of little importance to the statutory scheme; Mylan has begun commercial marketing of generic nifedipine, permitting Mylan to market nifedipine without triggering the beginning of exclusivity would be inconsistent with the intent of the statutory scheme. Therefore, because more than 180 days had passed since March 28, 2000, the date FDA determined Mylan began the commercial marketing, the exclusivity period has expired. At this point, this Court believes that FDA's interpretation of the phrase 'commercial marketing of the drug under the previous application' is a reasonable one." Mylan Pharmaceuticals v. Tommy Thompson 207 F.Supp.2d 476, 488 (N.D.W.V.2001)
86. See, e.g., Citizen Petition 2004P-0261 submitted by Teva Pharmaceutical (June 9, 2004).
87. FDA's response to Citizen Petition 2004-P0075 and 2004P-0261 (July 2, 2004).
88. Asahi Glass v. Pentech Pharmaceuticals, 289 F.Supp.2d 986 (N.D.Ill.2003). Note that in this case, the marketing of the authorizing generic occurred as the result of a settlement of a patent suit. In 2004, Mylan Pharmaceuticals filed a lawsuit against Proctor & Gamble and Watson Pharmaceutical in California state court, alleging antitrust violations, inter alia, as a result of their agreement to market an authorized generic of Macrobid. See Mylan Pharma. v. Proctor & Gamble, CGC-04-429860 (Cal. Sup.Ct.2004). However, as of date of submission of this article, the author has been unable to locate or access any opinionconcerning antitrust issues.
89. 289 F.Supp.2d 986 (N.D.Ill.2003)
90. Smithkline Beecham v. Apotex, 247 F.Supp.2d 1011, 1052 (N.D.Ill.2003).
91. Smithkline Beecham v. Apotex, 403 F.3d 1331 (Fed.Cir.2005).
92. Id. at 1004. Thus, according to the agreement, if a court found that Torpharm's generic infringed Glaxo's patent, then Pentech would not enter the remainder of the U.S. market (or would have to exit, in the event that the finding of infringement was an appellate finding reversing a District Court finding).
93. Asahi Glass v. Pentech Pharmaceuticals, 289 F.Supp.2d 986, 989 (N.D.Ill.2003).
94. Id. Interesting also is that Apotex filed a motion to intervene, arguing that the agreement, by permitting Pentech to create an authorized generic if and only if a generic entered, would harm its efforts to sell its generic version: "Apotex, the defendant in the previous suit that I mentioned, expects to be the first company to market such a generic and it has moved to intervene in the present suit to oppose the motion to dismiss on the ground that the settlement agreement in effect makes unbranded Paxil a "fighting brand" that will thwart Apotex's effort to sell its own unbranded paroxetine hydrochloride." Smithkline Beecham v. Pentech and Asahi Glass, 261 F.Supp.2d 1002, 1004 (N.D.Ill.2003)
95. "A firm that has received a patent from the patent office (and not by fraud, a separate issue in this case, discussed later in this opinion), and thus enjoys the presumption of validity that attaches to an issued patent, 35 U.S.C. § 282, is entitled to defend the patent's validity in court, to sue alleged infringers, and to settle with them, whatever its private doubts, unless a neutral observer would reasonably think either that the patent was almost certain to be declared invalid, or the defendants were almost certain to be found not to have infringed it, if the suit went to judgment. It is not 'bad faith' to assert patent rights that one is not certain will be upheld in a suit for infringement pressed to judgment and to settle the suit to avoid risking the loss of the rights. No one can be certain that he will prevail in a patent suit. Apt here is the principle that a suit charging sham litigation as a method of monopolization must fail unless the litigation is objectively baseless." * * * "Had Pentech litigated Glaxo's patent infringement suit to judgment and lost, it would have no right to compete until patent 723 expires in 2007 (and perhaps not until other patents held by Glaxo expire even further in the future). The settlement gave it the right to compete with Glaxo in Puerto Rico immediately. It is true that it has to pay a hefty royalty to Glaxo, but since it is obtaining the product free of charge, so that its only expenses are marketing, packaging and distribution, it can afford to undersell Glaxo. And now, Apotex having begun to market a generic paroxetine antidepressant, Pentech is selling its generic version of Paxil (which, remember, is Paxil, just under another name) throughout the United States, which it couldn't have done had Glaxo's suit against Pentech not been settled under terms that permitted Pentech to sell throughout the United States as soon as Apotex entered the market. It is true that if and when Apotex is held to be an infringer and forced to leave the market, Pentech under the terms of the license must go too. But that is not a suspicious circumstance, since if Apotex is an infringer by virtue of selling an anhydrous form of paroxetine, it is likely that Pentech is as well, though it is not certain. (But certainty is not the test.) Pentech's product is amorphous and Apotex's, while also anhydrous, is crystalline. The original and now expired patent on paroxetine probably was on an amorphous form of the molecule, [citation omitted] and so Pentech's product may be closer than Apotex's to being securely within the public domain. But this Glaxo fiercely contests and there is no reason to think that its infringement case against Pentech was so weak that the settlement amounts to paying Pentech to stay out of the market." Asahi Glass v. Pentech Pharmaceuticals, 289 F.Supp.2d 986, 993-995 (N.I.Ill.2003).
96. Id. at 994.
97. Major economic studies on authorized generics published through Spring 2007 were reviewed. Particularly interesting ones include: Ernst Berndt, Richard Mortimer, Ashoke Bhattacharjya, Andrew Parece & Edward Tuttle, Authorized Generic Drugs, Price Competition and Consumers' Welfare, 26:3 HEALTH AFFAIRS 790-799 (2007 ("Berndt I"),
98. Ernst Berndt, Richard Mortimer & Andrew Parece, Do Authorized Generics Deter Paragraph IV Certifications? Recent Evidence (Draft 2007)("Berndt II"), available at http://www.ag-inc.com/ analysisgroup/article.aspx?id=2622;
99. Aidan Hollis, The Importance of Being First: Evidence from Canadian Generic Pharmaceuticals, 11 HEALTH ECONOMICS 723-734 (2002)("Hollis I");
100. Aidan Hollis, The Anti-competitive Effects of Brand-Controlled 'Pseudo-Generics' in the Canadian Pharmaceutical Market,24 CANADIAN PUBLIC POLICY 22-30 (2003)("Hollis II");
101. Aidan Hollis, How do Brand's "Own Generics" Affect Pharmaceutical Prices, 27 REVIEW OF INDUSTRIAL ORGANIZATION 329-350 (2005)("Hollis III");
102. David Reiffen & Michael Ward, Branded Generics' As a Strategy to Limit Cannibalization of Pharmaceutical Markets, (Draft May 2005) ("Reiffen & Ward I)" available at http://www. uta.edu/faculty/mikeward/brandedgenerics.pdf;
103. Ying Kong & James Seldon, Pseudo-Generics and Entry in Pharmaceutical Markets, 25 REVIEW OF INDUSTRIAL ORGANIZATION 71-86 (2004)("Kong & Seldon I");
104. Brian Liang, The Anti-Competitive Nature of Brand Name Firm Introduction of Generics Before Patent Expiration, 41 ANTITRUST BULLETIN 590 (1996).
105. In addition, leading articles on the effects of generic entry on drug prices were also reviewed. See, e.g. David Reiffen & Michael Ward, Generic Drug Industry Dynamics, 87:1 REVIEW OF ECONOMICS AND STATISTICS 37-49 (2005) ("Reiffen & Ward II");
106. Jorge Ferrandiz, The Impact of Generic Goods in the Pharmaceutical Industry, 8 HEALTH ECONOMICS 599-612 (1999);
107. J.P Bae, Drug Patent Expirations and the Speed of Generic Entry, 32:1 HEALTH SERVICES RESEARCH 87-101 (1997);
108. Richard Frank & David Salkever, Generic Entry and the Pricing of Pharmaceuticals, 6:1 JOURNAL OF ECONOMICS AND MANAGEMENT STRATEGY 75-90 (1997);
109. Fiona Morton, Entry Decisions in the Generic Pharmaceutical Industry, 30:3 RAND JOURNAL OF ECONOMICS 421-440 (1996);
110. Henry Grabowski & John Vernon, Brand Loyalty, Entry, and Price Competition in Pharmaceuticals After the 1984 Drug Act, 35:2 JOURNAL OF LAW & ECONOMICS 331-350 (1992);
111. Richard Caves, Michael Whinston & Mark Hurwicz, Patent Expiration, Entry, and Competition in the U.S. Pharmaceutical Industry, BROOKINGS PAPERS ON ECONOMIC ACTIVITY: MICROECONOMICS 1-66 (1991).
112. Berndt I and Berndt II, supra note 82, argue that in most cases, authorized generics will neither deter paragraph IV filings by ANDA's nor generic entry in general. In cases where authorized generics deter or forestall generic entry, there are two potential anticompetitive effects. First, because generic entry lowers prices, if authorized generics thwart or forestall otherwise legitimate entry (i.e. generics that would not infringe on a valid patent) then it results in higher prices. Second, when a branded drug is protected by an invalid patent (and assuming that generic entry occurs in tandem with patent challenges), then impeding generic entry will result in protecting an undeserved monopoly (and its accompanying monopoly pricing).
113. Another factor that was found to be significant to deter entry was the cross price elasticity between a branded product and the generic. See Ying Kong & James Seldon,, Games People Play - The Pricing of Generic Pharmaceuticals, Business Briefings: Pharmagenerics 2004 ("Kong & Seldon II"), available at http://www.touchbriefings.com/pdf/955/Seldon.pdf. The cross price elasticity of demand for two products measures the change in the quantity demanded of one product resulting from a price change of the other product. It is often used to measure whether consumers view the products as good substitutes for each other.
114. For as simple explanation of cross-price elasticity of demand, see http://economics.about.com/cs/micfrohelp/a/cross_price_d.htm.
115. th Ed. 2005), at 139-140. In addition, classic industrial organization theory as well as empirical evidence suggests an inverse relationship between price and the number of generics on the market. See Caves et al., supra note 82; Morton, supra note 82; and Reiffen & Ward II, supra note 82. But see Hollis III, supra note 82 (finding a weak relationship between the number of generics and generic pricing in the Canadian pharmaceutical marketplace).
116. For example, several of the models used data solely from the Canadian market. Other models were completely theoretical-based on models employing game theory and industrial organization instead of actual data. As a non-economist, the author merely attempts to summarize these studies for other non-economists. A thorough evaluation and critique of the studies requires a degree of economic understanding and training that the author lacks.
117. See e.g, Carl Shapiro, supra note 56, at 394 (discussing the patents not as property rights but as probabilistic rights). See also Suzanne Michel, Deputy Assistant Director for Policy and Coordination, FTC's Bureau of Competition, American Innovation at Risk: The Case for Patent Reform, before the House Subcommittee on Courts, the Internet, and Intellectual Property, Committee on the Judiciary (Feb. 15, 2007), available at http://www.ftc.gov/os/2007/02/02152007patenttestimonyhouse.pdf (expressing concerns with "questionable patents").
118. th Ed. 2001), at 1152 (finding that the Federal Circuit held 72 percent of the patents litigated before it valid and 28 percent invalid);
119. Kimberly Moore, Forum Shopping in Patent Cases: Does Geographic Choice Affect Innovation? 79 N.C. L.REV. 889, 918 (2001)(surveying every patent case going to trial between 1983 and 1999, and finding that courts held 67 percent of litigated patents valid and 33 percent invalid);
120. John R. Allison & Mark Lemley, Empirical Evidence on the Validity of Litigated Patents, 26 AIPLA Q.J. 185, 194-205 (1998)(surveying all final, written validity decisions in federal court between 1986-1996 and finding the courts held 54 percent of patents valid and 48 percent invalid). As most of these studies focus on patents litigated to judgment, one might argue that they likely underestimate the degree of patent invalidity, as more questionable patents would probably settle, rather then risk an adverse judgment.
121. Note, however, that although these characteristics are typical in pharmaceutical markets, there are likely many drug markets that do not share some or all of these characteristics. Accordingly, one should be cautious about being overly reliant on these studies when dealing with such drugs.
122. See e.g., Grabowski & Vernon, supra note 82; Reiffen & Ward II, supra note; Berndt I, supra note 82; Stephen Wiggins & Robert Maness, Price Competition in Pharmaceuticals: The Case of Anti-Infectives, ECONOMIC INQUIRY (2004) 42:247-263;
123. Jayanta Bhattacharya & William Vogt, A Simple Model of Pharmaceutical Price Dynamics, JOURNAL OF LAW & ECONOMICS (2003) 46:599-626.
124. See e.g., CBO Study on Generic Entry, supra note 21, at 32; IMS study cited by FDA's Office of Generic Drugs, Generic Competition and Drug Prices, available at http://www.fda.gov/cder/ogd/generic_competition.htm.
125. rdEd.2005), at Chapters 10-11;
126. Robert Gibbons, GAME THEORY FOR APPLIED ECONOMIST (1992) at 14-22.
127. John Lu & William Comanor, Strategic Pricing of Pharmaceuticals, 80 REVIEW OF ECONOMICS AND STATISTICS 108-118 (1998)(finding that average prices of branded drugs increased after "me too" drugs were introduced); CBO Study on Generic Entry, supra note 21 at Chapter 3; Marcia Angell, supra note 23, at 89. But see Wiggins & Mannes, supra note 89, (concluding that all drugs in the same class compete).
128. See e.g., CBO Study on Generic Entry, supra note 21, at 32-33; IMS study cited by FDA's Office of Generic Drugs, Generic Competition and Drug Prices, available at http://www.fda.gov/cder/ ogd/generic_competition.htm. See also Frank & Salkever, supra note 82; Reiffen & Ward II, supra note 82; Grabowski & Vernon, supra note 82; Caves et al., supra note 82; Wiggins & Maness, supra note 89; Bhattacharya & Vogt, supra note 89.
129. Id.
130. Frank & Salkever, supra note 82; Caves et al, supra note 82; CBO Study on Generic Entry, supra note 21; Reiffen & Ward II, supra note 82; Grabowski & Vernon, supra note 82. But see Hollis II, supra note 82 (finding that in Canada, generic entry had little effect on branded prices).
131. See Frank & Salkever, supra note 82; Grabowski & Vernon, supra note 82; Caves et al., supra note 82. According to the price discrimination model of pharmaceutical markets, once a generic version of a drug has been approved and marketed, rather then competing with the generic, the branded company relinquishes that portion of the market that is price sensitive, and focuses on the remainder of the market. Thus the branded company will focus on those who are either not as price sensitive or unable to switch, e.g., those with long term contracts. The lack of price sensitively may be the result of numerous factors, including: 1) a patient may be familiar and comfortable with a branded drug and not willing to switch, even to save money; 2) the physician prefers the branded drugs for whatever reason and does not permit generic substitution; 3) a patients insurance and/or health plan is structured in such a way as to causes disincentive to switch to generic (e.g., the generic is only modestly cheaper if at all); and 4) PBMs obtains substantial payments from the branded company for preferred formulary status and related services.
132. See Bhattacharya & Vogt, supra note 89. According to the authors, in the beginning of a drug's life cycle, branded companies spend substantial resources on promotion and advertisement while offering the drug at a low price. This is done to overcome reluctance of doctors and patients to try new drugs (referred to as product "stickiness"). Yet, as a drug nears the end of its patent life (and with generic entry on the horizon), prices increase while promotional decreases. This is the result of stickiness and free rider problems (i.e. generics would benefit from promotions/ advertisements without having to pay). "...[T]he firm wishes to set a low price and exert high levels of promotional effort early in its program in order to build a stock of knowledge. As time passes, the buildup of the knowledge stock and the impending patent expiry erode the firm's incentive to disseminate knowledge, so its price rises and its level of promotional effort falls. After the patent has expired, the firm engages in steadily lower levels of promotional effort and steadily higher prices as the effect of the spillovers in knowledge between branded and generic drugs blunts its incentives to facilitate knowledge dissemination." Id. at 69.
133. See e.g., Frank & Salkever, supra note 82; Grabowski & Vernon, supra note 82; Caves et al., supra note 82 (finding that branded prices increased after generic entry). But see Wiggins & Maness, supra note 89 (finding that prices of all drugs in same therapeutic class are affected by prices of all other drugs in class, and that there is significant competition between branded drugs and generics). Clearly there is some competition between branded and generics, as certain persons will prefer one over the other. By asserting that they do not "directly" compete, I claim that consumers cross-price elasticity of demand between generics and branded drugs is small.
134. See infra Part V on distributional issues. The "disconnect" is caused by the fact that the selection of drugs is dependent on: i) formularies created by Pharmacy Benefits Managers or Managed Care Organizations; and ii) physicians who may not be price sensitive. Moreover, so long as the drug is on the formulary, payment is usually done by a third party, and thus consumers are also not price sensitive. As explained in greater detail, infra, formularies are typically "tiered" in terms of cost, placing branded drugs in a different (and more expensive) tier then generics (branded having a higher co-payment then generics).
135. If branded and generic markets were not sufficiently distinct, generics would be able to free-ride off advertising and promotions of branded drugs. This would decrease the incentive to advertise and promote. In contrast to branded drugs, instead of advertising and promotions, generics appear to rely on generic substitution practices - mandated by many third party payers-as well as price sensitive consumers, to drive their sales.
136. nd Cir.2004)(finding that the generic was in a separate market, as evidenced by different prices showing that there existed a subset of customers who were not willing to switch despite price difference, and based on the fact that generic entry had no effect on branded prices). The FTC has also recently challenged several mergers that it found would substantially lessen competition in generic markets, finding that the high pricing of branded drugs would not restrain pricing of generics. See, In the Matter of Watson Pharmaceuticals, Inc. and Andrx Corporation, File No. 061-1039 (FTC Dec. 12, 2006); In the Matter of Barr Pharmaceuticals, Inc. and Pliva d.d., File No. 061-0217 (FTC Dec. 8, 2006); In the Matter of Teva Pharmaceuticals, Inc. and IVAX Corporation, File No. 051-0214 (FTC Mar. 7, 2006); In the Matter of Novartis AG, FTC File No. 051-0106 (Sept. 23, 2005)(placing branded and generics in a different relevant market because generics would not sufficiently restrain branded pricing).
137. Compare Reiffen & Ward I, supra note 82, with Hollis II, supra note 82.
138. Id. See also Berndt I, supra note 82 (concluding that authorized generics are not likely to have an anticompetitive effect, based on data of drugs in larger markets).
139. Id.
140. The classic example of "first mover" advantage is the so-called Stackelburg-Cournot game. In this game, there are two equally efficient firms with the same costs. Yet, the "first mover" has knowledge of its opponents reaction function and is thus able to anticipate its rival's move. As a result, the "first mover" obtains a substantially greater profit than its rivals. See Robert Gibbons, GAME THEORY FOR APPLIED ECONOMIST (1992) at 61-64;
141. Christian Montet & Daniel Serra, GAME THEORY & ECONOMICS (2003), at 101-103.
142. Reiffen & Ward I, supra note 82; Hollis I, supra note 82. But see Brett Skinner, Generic Duopoly, Why Patented Prescription Drugs Cost More in Canada then in the United States and Europe, Policy Sources, No. 82 (2004)(disagreeing with Hollis that first moved advantage is the reason why generic prices are high in Canada).
143. Id. Assuming that generics are perfect substitutes, then based on the market characteristics of pharmaceuticals, profitability decreases with entry because: 1) prices will decrease; and 2) entry causes all firms to have less market share. Thus, assuming entry occurs over period of time, the first entrant will make more profit then successive entrants, because it was able to sell its generics at higher prices for a longer period of time and with a higher markets share prior to entry - with both prices and market share decreasing with additional entry. First mover advantage will be particularly acute if suppliers or pharmacies find it cost effective to only carry one generic.
144. That is, if there is a direct relationship between the number of market participants and price or output competition, then entry deterrence would appear to have an effect on price. Yet, it is possible that entry may not affect prices. Compare Reiffen & Ward I, supra note 82 (noting that their data evinced that generic entry resulted in decreased generic prices) with Hollis II, supra note 82 (indicating that in Canadian generic markets, entry had little affect on prices).
145. Liang, supra note 82; Hollis III, supra note 82; Kong & Seldon II, supra note 84.
146. Id. Of course, sales of the authorized generic would cannibalize sales of the branded drug, and thus the branded company would probably not want to issue it any sooner than necessary to deter a true generic. The best scenario for a branded drug company would be if the mere threat of an authorized generic deterred generic entry, since then no losses to cannibalization would occur.
147. Kong & Seldon I, supra note 82. Note, however, that this study was solely theoretical, with no empirical data used. Moreover, the model used was very limited, based on a simplified game theory model with two players and two stages, assuming that the incumbent has first mover advantage. The authors conclude that authorized generics may improve welfare compared to the alternative of a two-stage capacity output game, as modeled by Avinash Dixit, A Model of Duopoly Suggesting a Theory of Entry Barriers, THE BELL JOURNAL OF ECONOMICS (1979) 10(1) 20-32.
148. Berndt I, supra note 82. This study, however, relied upon little empirical support for its conclusions. Rather, it based its conclusions on a general review of the effects of generic entry (and paragraph IV challenges), and empirical data of three large drugs: Paxil, Cipro and Ortho-Tricyclen.
149. Reiffen & Ward I, supra note 82. In addition, the authors believed that fewer firms would result in less dissipation of economic rents, and thus less waste to society.
150. Hollis III, supra note 82; Ferrandiz, supra note 82. The first study, though fairly extensive, dealt exclusively with the Canadian market, which appears to be quite different than the U.S. market. The second study is theoretical and based on a simple model with two branded companies, one whose patent has expired, producing perfect substitutes. The study concluded that consumer surplus was higher when the generic was produced by an independent company rather then the branded company.
151. See IMS Consulting: Assessment of Authorized Generics in the U.S. (2006), available at www. phrma.org/files/ IMS%20Authorized%20Generics%20Report_6-22-06.pdf;
152. Aidan Hollis and Brian Liang, An Assessment of the Effect of AG on Consumer Prices (2006), available at http://www.gphaonline. org/AM/Template.cfm?Section=Home&Template=/CM/ContentDisplay. cfm&ContentID=2647.
153. The IMS study was sponsored by PhRMA, while the Hollis & Liang study by GPhRMA. The Hollis & Liang study was done expressly as a means of critiquing the IMS study. That is, it is no coincidence that both studies used the same data set. Rather, Hollis & Liang did so on purpose as a means of demonstrating that even using the same data set, the findings and conclusions of IMS were flawed. PhRMA has not published a reply to GPhRMA's critique.
154. "Discounts" were measured on a monthly basis during the 180 day exclusivity period, with an average of the discounts during the six month period being used as the final comparison. In markets with an authorized generic, the monthly "discount" was calculated by averaging the discount of both the "true" generic and authorized generic.
155. Hollis & Liang, supra note 115, make numerous other criticisms of the PhRMA study, including a lack of disclosure of how prices were determined (considering many drugs are sold in various strengths and dosage forms), inconsistent selection of its data (i.e., not clear why the 9 drugs out of the 27 were chosen), making misleading conclusions based on limited data, and most essential, that a direct comparison between drugs for which authorized generic was marketed and those for which one was not is improper, because the markets have very different characteristics.
156. Moreover, it is important to note that these two studies only sought to evaluate the short-term competitive effects of authorized generics, and assumed the validity of the branded drugs' patents.
157. Barbara Martinez, Heath-Care Gold Mines: Middlemen Strike it Rich - Strategic Position: Selling Generic Drugs by Mail Turns Into Lucrative Business - Benefits Managers Say They Save Employers Money, As Their Own Profits Rise,, WALL STREET JOURNAL, May 9, 2006.
158. st quarter profits in 2006 for Abbot, Schering-Plough and Pfizer). See also Marcia Angell, supra note 23, at 3 (noting that since the 1980s, the pharmaceutical industry has consistently been the most profitable industry).
159. th Cir.2007).
160. Major branded companies include Abbot, Pfizer, Glaxosmithklein (GSK), AstraZeneca, Bristol-Myers Squibb, Hoffman-La Roche, Eli Lilly, Johnson & Johnson, Proctor & Gamble, Novartis, Schering-Plough and Wyeth. Major generic companies include Barr, Watson, Andrx, Teva, Par and Mylan.
161. For instance, Pfizer, Novartis and Johnson & Johnson have generic divisions (Greenstone, Sandoz and Patriot, respectively). However, this is not typical for branded companies. Moreover, in recent years, several branded companies that had some involvement in the generic business, exited the generic business. See Rich Silver, Lehman Brothers, Investment Opportunities in Specialty Pharmaceuticals (Mar. 2006 Presentation, on file with author). Alternatively, although uncommon, generic companies have acquired competitors with branded drugs in their portfolio. For example, Ranbaxy Labs, an Indian generic pharmaceutical company acquired 13 branded products from Bristol Myers Squibb in May 2007. Available at http://www.ibtimes.com/articles/ 20070528/india-ranbaxy-bristol-myers-squibb.htm.
162. See also Andrew Sorkin, Generic Drug Manufacturer to Buy Rival for $4 Billion, NEW YORK TIMES, July 26, 2004 (Noting that Mylan purchased King Pharmaceutical in part to get foot in the branded business).
163. Bruce Buckley, Wholesaler Look to Programs, Services to Sharpen Relationships at Retail, DRUG STORE NEWS, Feb. 2, 2003, at 52.
164. 21 U.S.C. §§ 353(b), 829; 21 C.F.R. § 1306.03 See also William Bogner & Howard Thomas, DRUGS TO MARKET, at 36-37 (1996);
165. nd Ed.).
166. See Marcia Angell, supra note 23, at 115-119 (noting that in 2001, drug companies gave doctors nearly $11 billion worth of free samples and spent on average 35 percent of revenues on "marketing and administration" which include promotional activities to doctors), and 126-130 (discussing efforts made by drug companies to entreat physicians to prescribe their drugs).
167. The substantial increase in recent years of Direct to Consumer (DTC) Advertising has aggrandized the importance of this role. For although DTC advertising may increase consumer awareness of various treatments, due to their necessary brevity and limited ability to educate, they also increase the informative role of physicians, as consumers make more inquiries to their physicians regarding advertised drugs. See GAO Study, Prescription Drugs: Improvement Needed in FDA's Oversight of Direct-To-Consumer Advertising (2006)(Noting the large increase in DTC advertising since 1997, and addressing certain concerns raised by it), available at http://www.gao.gov/new. items/d0754.pdf. Although the Internet often provides an abundance of information on drugs and treatment, whether such information is reliable and easily understood by consumers limits is usefulness.
168. CBO Study on Generic Entry, supra note 21, at Chapter 2; Department of Justice & Federal Trade Commission Joint Study: Improving Health Care - A Dose of Competition (2004)(hereinafter referred to as "DOJ/FTC Study on Health Care"), at 1-9, available at http://www.usdoj.gov/atr/public/ health_care/204694.htm. See also Becker, supra note 130, at § 7.01[3][g] ("'Managed care' broadly encompasses any effort to monitor and control health care utilization, including capitation, case management systems, utilization review, pre-admission screening and the requirement of second opinions.").
169. Pub L. No. 93-222, 87 Stat. 914.
170. Becker, supra note 125, at , §7.01[3][g]. Unlike traditional health insurance plans, one key characteristic of Managed Care is to limit enrollees in choices of providers to a limited network. This permitted managed care organizations to negotiate lower costs.
171. CBO Study on Generic Entry, supra note 21, at 10-11; DOJ/FTC Study on Health Care, supra note 133, at 5. The consumer does pay indirectly via monthly premiums and co-payments. These costs, however, are often not directly related to an individual consumers consumption levels.
172. Id. See also Organization for Economic Development (OECD) Report on Competition in the Pharmaceutical Industry (2000)(hereinafter referred to as "OECD Report on Pharmaceuticals"), at 307-322 (In the United States, "Managed care payers accounted for about 68 percent of all retails pharmacy prescriptions dispensed between June 1998 an June 1999"), available at http://www.oecd. org/dataoecd/35/35/1920540.pdf.
173. OECD Report on Pharmaceuticals, supra note 132, at 313.
174. FTC Study: "Pharmacy Benefits Managers: Ownership of Mail Order Pharmacies," (Aug. 2005)(hereinafter referred to as "FTC Study on PBMs"), at Chapter 1, available at http://www.ftc. gov/reports/pharmbenefit05/050906pharmbenefitrpt.pdf. Certain PBMs are owned by insurance companies or pharmacy chains, while others are independent. CVS pharmacies and Caremark have obtained shareholder approval to merge.
175. See infra notes 149-154 (discussing different cost controlling services). It is worth mentioning that PBMs do not actually obtain drugs, but rather, depend on manufacturers, wholesalers, and retailers to provide drugs to plan enrollees (as well as actually implement many of the cost control services). For a background on PBMs FTC Study on PBMs, supra note 134, at Chapter 1; General Accounting Office Report, Federal Employees' Health Benefits, Effects of Using Pharmacy Benefits Managers on Health Plans, Enrollees, and Pharmacies (2003), available at http://www.gao.gov/ new.items/d03196.pdf;
176. Regina Johnson, PBMs: Ripe for Regulation, 57 FOOD & DRUG L.J 323, 330-331 (2002).
177. DOJ/FTC Study on Health Care, supra note 127, at Chapter 7, page 11.
178. Barbara Martinez, Heath-Care Gold Mines: Middlemen Strike it Rich - Strategic Position: Selling Generic Drugs by Mail Turns Into Lucrative Business - Benefits Managers Say They Save Employers Money, As Their Own Profits Rise,, WALL STREET JOURNAL, May 9, 2006.
179. For a background on Medicare and a brief summary of its provisions, see Becker, supra note 130, at § 7.02.
180. DOJ/FTC Study on Health Care, supra note 127, Executive Summary, at 8.
181. Medicare Prescription Drug, Improvement and Modernization Act of 2003, Public Law 108-173
182. http://hhs.gov/news/press/2006pres/20060614.html.
183. See infra note 149 for a discussion of formularies.
184. For a basic overview of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, see Pi-Yi Mayo, Medicare Part D, 43 Houston Lawyer 22 (May/June 2006); Melissa Ganz, The Medicare Prescription Drug, Improvement & Modernization Act of 2003: Are We Playing the Lottery with Healthcare Reform? DUKE LAW & TECHNOLOGY REVIEW 11 (2004).
185. See also CMS's official website at www.cms.gov . One of the biggest criticisms against Part D is that it prohibits Medicare from using it enormous purchasing power to bargain with companies over price. Rather, by requiring that benefits be administered by private companies with much less purchasing power, it effectively neuters Medicare's ability to influence price of drugs it purchases. Angell, supra note 23, at 194. Other criticism is that it benefits insurers more than people.
186. See Milt Freudenheim, A Benefit to Insurers, NEW YORK TIMES, May 31, 2006.
187. For a background on Medicaid and a brief summary of its provisions, Becker, supra note 125, at § 7.03. In 2003, Medicaid provided health care to over 50 million individuals, at a cost of $276 billion. Kaiser Commission on Medicaid & Uninsured, June 2005 Fact Sheet, available at http://www.kff. org/medicaid/upload/Medicaid-Enrollment-and-Spending- Trends-Fact-Sheet.pdf.
188. In 2002, Medicaid's expenditures for prescription drugs were approximately $23.4 billion. See Congressional Budget Office, "Medicaid's Reimbursement to Pharmacies for Prescription Drugs," (Dec. 2004), at 1, available at http://www.cbo.gov/ftpdocs/60xx/doc6038/12-16- Medicaid.pdf.
189. CBO Study on Generic Entry, supra note 21, at 26. See also Craig Fuller, National Association of Chain Drug Stores, supra note 21 (finding that in 2004, Medicaid accounted for 15.2 percent of pharmaceutical sales in community retail pharmacies).
190. DOJ/FTC Study on Health Care, supra note 127, at 8-9; OECD Report on Pharmaceuticals, supra note 137, at § 3.3. See also Centers for Medicare & Medicaid Services website, http://www.cms. hhs.gov/home/medicare.asp).
191. For a detailed analysis of how this rebate is calculated, see the Congressional Budget Office's report: The Rebate Medicaid Receives on Brand-Name Prescription Drugs (June 2005), available at http://www.cbo.gov/ftpdocs/64xx/doc6493/06-21-MedicaidRebate.pdf. The current fixed discount is 15.1 percent off the average manufacturer's price (AMP) for branded drug price and 11 percent off the AMP for generics. AMP is defined as the average price the manufacturer charges for drugs distributed to retail pharmacies.
192. For an excellent analysis of the pharmaceutical distributional system, see the Congressional Budget Office's report: Prescription Drug Pricing In the Private Sector, (Jan. 2007)(hereinafter referred to as "CBO Study on Prescription Pricing"), available at http://www.cbo.gov/ftpdocs/77xx/doc7715/01-03-Prescription-Drug.pdf.
193. For a recent summary and evaluation of antitrust concerns with distributional issues, see Joshua Wright, Antitrust Law and Competition for Distribution, 23 YALE JOURNAL ON REGULATION 169 (2006).
194. The FTC Study on PBMs summarizes the claims administration process as follows: "When a consumer fills a prescription at a local pharmacy, the pharmacist usually asks whether the consumer has insurance to cover the prescription's cost. If there is coverage, the consumer provides the insurance card to the pharmacist. While the pharmacist fills the prescription, sophisticated computer interactions between the pharmacy and the PBM ensure that the prescription is filled according to the insurance coverage provided by the plan sponsor. The consumer usually is unaware of these processing interactions, and the consumer's only additional responsibility is to pick up the filled prescription and pay the retail pharmacy the co-payment that is due. During these computer interactions, the pharmacy transmits the insurance coverage information to a PBM, which verifies the insurance and determines if the consumer's insurance plan covers the prescribed drug. If so, the PBM determines three amounts: a) the consumer's co-payment; b) how much the PBM will reimburse the pharmacy to dispense the drug; and c) how much the PBM will bill the plan sponsor for the transaction. The PBM transmits the first two items (the consumer co-payment and the pharmacy reimbursement amount) back to the pharmacy, logs the payment information on its computer system, and transmits the billing information to the plan sponsor. The plan sponsor then remits payment to the PBM, which then pays the local pharmacy." FTC Study on PBMs, supra note 134, at 1.
195. A formulary is a list of preferred drugs that a health plan predetermines that it will cover for plan enrollees. "Formularies can be open, incentive-based or closed. An open formulary usually implies that the plan will cover all drugs except those listed as exclusions to the drug reimbursement policy. An incentive-based formulary provides enrollees with financial benefits if their physicians prescribe formulary drugs. Under the arrangement, the health plan still reimburses enrollees for non-formulary drugs but requires them to make higher co-payments than for formulary drugs. A closed formulary details the specific drugs that meet the plan's reimbursement policy. Under a closed formulary, enrollees generally pay the full cost of non-formulary drugs prescribed." See FDA REPORT: PROFILE ON THE PRESCRIPTION DRUG INDUSTRY (2001), available at www.fda.gov/oc/pdma/report2001/attachmentg/5.html. PBMs commonly use "tiered" formularies as a means of encouraging the use of a particular drug in each therapeutic class. In such formularies, drugs listed in "tier 1" have the smallest co-payment (usually generics), while those listed in lower tiers have higher co-payments (usually branded). See FTC Study on PBMs, supra note 134, at 11. Formularies help control drug costs by: i) encouraging the use of cheaper drugs; and ii) obtaining discounts and payments from drug manufacturers for being listed on formularies. Manufacturers are willing to pay to be listed on formularies because formulary compliance is an indication of the PBMs ability to steer enrollees to various drugs. DOJ/FTC Study on Health Care, supra note 133, at Chapter 7, pages 12-13.
196. For a summary of how formularies are created, see, J. Russell Teagarden, The Effect of PBM Clinical Program and Services on Access to Prescription Drug Coverage, PBMs: RESHAPING THE PHARMACEUTICAL DISTRIBUTION NETWORK, at 65-66 (1998).
197. "Step-therapy" refers to health plan designs that pay for certain more expensive drugs only if a physician first prescribes lower-cost options, such as an over the counter drug or cheaper prescription in the same therapeutic class. "Prior approval" refers to a requirement that a physician or patient obtain prior approval from the PBM in order to receive reimbursement for certain non-preferred drugs. See FTC Study on PMBs, supra note 134, at Chapter 1, pages 13-14. See also J. Russell Teagarden, supra note 149, at 66-68.
198. Drug Utilization Review (DUR) is a means by which PBMs control prescribing patterns of physicians and pharmacists, by reviewing prescriptions and possibly intervening to recommend alternatives. DUR may be done at the time a prescription is being dispensed (via an electronic pharmacy network) or retrospectively. DUR programs purport to both control cost (by ensuring that cheaper alternatives are prescribed) and improve the quality of health (by ensuring that the most effective treatment is prescribed). See Stuart Schweitzer, PHARMACEUTICAL ECONOMICS AND POLICY (1997), at 177-178.
199. Disease State Management (DSM) is a systems approach to medical care that attempts to identify the best treatment for certain diseases by creating protocols for treatment of various diseases based on medical literature. DSM protocols start at the first sign of a disease and take the form of decision trees, indicating what diagnostic procedures should be undertaken and what should be done under each outcome. Id. at 180-181, 190-191.
200. Generic substitution encourages - or even requires - use of a generic drug instead of a branded drug whenever a generic is available for the prescribed drug. See DOJ/FTC Study on Health Care, supra note 127, at Chapter 7, pages 12-13. Because generics can generally be substituted by a pharmacist without physician approval, and because generics are usually cheaper then branded drugs, PBMs often taut their generic substitution rates as an indicator of cost control. In contrast, "[a] MAC program encourages - but does not require - generic drug dispensing by setting participant coverage amounts at the MAC list price when a brand-name drug is dispensed for which a generic version is available. A MAC list is a list of drugs for which a generic equivalent is available and a maximum allowable cost for such drugs." Ann Tobin and Rebekah Crosby, Legal Issues Arising from Managing the Pharmacy Benefits, PBMs: RESHAPING THE PHARMACEUTICAL DISTRIBUTION NETWORK (1998), at 79-80.
201. Therapeutic Interchange involves substitution of drugs in the same therapeutic class. It generally occurs when a pharmacist substitutes a therapeutically equivalent, but chemically distinct, drug for the drug listed on a prescription. Therapeutic Interchange may involve substituting another (and usually cheaper) branded drug in the same therapeutic class or substituting a
202. In re Pharmaceutical Industry Average Wholesale Price Litigation, 230 FRD 61, 71 (D.Mass.2005); Margaret McGlynn, How PBMs Work, PBMs: RESHAPING THE PHARMACEUTICAL DISTRIBUTION NETWORK (1998), at 15-27.
203. FTC Study on PBMs, supra note 134, at Chapter 1, pages 4-6; FTC Study on Health Care, supra note 128, at 13-14.
204. FTC Study on PBMs, supra note 134, at Chapter 1, page 7. Sometimes contracts between PBMs and drug manufacturers provide for additional payments, such as administrative fees, data sharing fees and promotional programs.
205. Id; Johnson, supra note 135, at 330-331 ; FTC Study on Health Care, supra note 128, at 13; GAO Report: Federal Employees' Health Benefits: Effect of Using Pharmacy Benefit Managers on Health Plans, Enrollees, and Pharmacies, supra note 135, at 25-27.
206. Ann Tobin and Rebekay Crosby, supra note 153, at 83-86; Milt Freudenheim, Critics Attack Secret Deals By Middlemen to Buy Drugs, NEW YORK TIMES, Dec. 20, 2003 (noting lack of transparency in PMB contracts). See also FTC Study on PBMs at Ch 3, Part IV, noting that rebate retention was varied dramatically in PBMs considered in the study.
207. For example, in 2003, larger PBMs retention rate ranged between 32 and 64 percent, while smaller PBMs ranged from 25 to 49 percent. See also David Wessel, Bernard Wyocki and Barbara Martinez: Health Care Gold Mines: Middlemen Strike it Rich, WALL STREET JOURNAL, Dec. 29, 2006 (Discussing the growth of PBMs and the recent turn against them, with larger companies moving toward not using them).
208. See CBO Study on Prescription Pricing, supra note 147 (finding that 2/3 of consumer prescription drug purchases occur at retail pharmacies); FDA's Profile of the Prescription Drug Wholesale Industry (2001), Section 2.3, available at www.fda.gov/oc/pdma/report2001/ attachmentg/toc.html
209. For a list of states generic substitution laws, see Survey of Pharmacy Law, 2003-2004, by the National Association of Boards of Pharmacy, Part XIX at 56, available at http://www.express-scripts. com/ourcompany/ pressroom/mediakit/generics/docs/laws.pdf#search= %22drug%20product%20selection%20laws%20generic%20substitution%22. During the early/mid 1950s most states enacted laws prohibiting generic substitution. Most of these laws were repealed in the 1970s. See Bogner & Thomas, supra note 125, at 35-37, 77-78; 110-111.
210. Of course, an enrollee can always decline to substitute and pay costs out of his/her own pocket.
211. See CBO Study on Prescription Pricing, supra note 147, at 20-22; FTC Study on PBMs, supra note 134, at 4-6, 48-50.
212. th Cir.1999)(giving credence to the argument that pharmacies lack bargaining power with branded manufacturers because they are have no clout with doctors and because they must carry a full line of branded drugs.)
213. Lawrence Adams, Contrary to What Wall Street and the FTC Say, The PBM Business Model is Misaligned, at 7, available at www.nu-retail.com; CBO Study on Prescription Pricing, supra note 152, at 4. See also In re Pharmaceutical Industry Average Wholesale Price Litigation, 230 F.R.D. 61, 72 (D. Mass 2005)(Noting that pharmacies have little bargaining power with branded drug companies but notably more with generics, since pharmacies can decide which generic to use).
214. See Bruce Buckley, Wholesaler Look to Programs, Services to Sharpen Relationships at Retail, DRUG STORE NEWS, Feb. 27, 2003 (Vol 25 issue 2 pg 52);
215. One Stop Helps Maximize Generic Utilization, Profits, DRUG STORE NEWS, July 19, 2004;
216. Michelle Kirsche, Generic Substitution Spells Big Money For Retail Pharmacy, DRUG STORE NEWS (Aug. 22, 2005). It will be interesting to see the effect of the CVS/Caremark merger (the merger closed). Post-merger, not only will the entity have numerous cost savings by combining a national PBM with a large retail pharmacy chain, but will result in the alignment of interests of PBM and pharmacy and increased bargaining power with drug manufacturers. Should other PBMs follow suit by acquiring other retail pharmacy chains, a power shift might result in the pharmaceutical industry. Although this would result is significant change in the industry, the effect on consumers is unclear.
217. As branded drugs are often protected from direct competition by patents and typically do not price compete, manufacturers generally maximize profits by charging a high (supra-competitive) price. Consequently, wholesalers and pharmacists are only able to offer the drug at a modest mark-up. With generics, however, because the cost of acquisition is substantially lower than that of the respective branded drug (due to a lack of patent protection, lower costs and risk of production and price competition), downstream sellers can sell the generic at a substantial markup-while still maintaining significantly cheaper prices compared to the branded drug. See e.g., Barbara Martinez, Discount Card Still Leave Fat Markups for Generic Drugs, WALL STREET JOURNAL, May 26, 2006 ;
218. Elyse Tanouye, Price Markups for Generics Can Top Brand-Name Drugs, WALL STREET JOURNAL, Dec. 31, 1999.
219. See Eric Cramer and Daniel Berger, The Superiority of Direct Proof of Monopoly Power and Anticompetitive Effects in Antitrust Cases Involving Delayed Entry of Generic Drugs 39 USFLR 81 (2005).
220. An exception would be cases where the branded company attempts to extend its patent exclusivity or FDA granted exclusivity by illegitimate means. Some have argued that less than novel product line extensions would fit into such a category.
221. See Cramer & Berger, supra note 168, at 123-128.
222. Areeda & Hovenkamp, FUNDAMENTALS OF ANTITRUST LAW, supra note 26, at § 18.01d.
223. th Cir.1997).
224. Sullivan & Grimes, supra note 35, at § 7.3b; Wright, supra note 147; Jacobson, supra note 28.
225. nd Ed.2004) at § 2.04[5][b].
226. th Cir.1984)(exclusive dealings did not violate §1). See also Areeda & Hovenkamp, FUNDAMENTALS OF ANTITRUST LAW, supra note 26, at § 18.02b; Von Kalinowski, et al., supra note 174, at § 2.04[5][b]; W. Kintner, et al, supra note 38, at § 13.4.
227. th purchase), and the discount may be progressive (i.e. the greater the quantity purchased, the greater the rebate). "Target rebates" are those which are granted on the condition that the purchaser exceeds some specified "target" or threshold of purchases. Target rebates that include a "roll back to unit one" clause granting the rebate to all goods purchased during a specified period once the target threshold has been met (rather than only those products purchased after the threshold) have been controversial. Finally, "loyalty rebates" are those granted in exchange for exclusivity or near exclusivity. As with target rebates, loyalty rebates are often based upon non-linear pricing, especially in the case of near exclusive requirement contracts or unilateral de facto exclusive contracts (where the discount is merely a carrot offered to the customer to entice him to purchase a large percentage of its needs from the seller, rather than where a set discount is given in exchange for a specific large order or exclusivity).
228. th Ed. 2004), at 223;
229. th Ed. 2005), at 227.
230. "Economies of scope" occur when a single firm can produce two or more products at lower costs then if the products were produced by separate firms. See Mansfield & Yohe, supra note 177, at Chapter 10, page 267; Pindyck & Rubinfeld, supra note 177, at 306-307. This may occur when due to the nature and similarity of the products, a firm can share labor, inputs, equipment, distribution, marketing and/or advertising costs for the products.
231. Reduced transaction cost may arise due to having to negotiate and deal with only one supplier, instead of numerous. See, e.g., Thomas Nagel & Reed Holden, THE STRATEGY AND TACTICS OF PRICING: A GUIDE TO PROFITABLE DECISION MAKING (1999), at 245.
232. Areeda & Hovenkamp, FUNDAMENTALS OF ANTITRUST LAW, supra note 26, at § 18.01a3. Other "quasi"- exclusives include slotting allowances and category management. For an analysis of how these types of conduct may be exclusionary, see e.g., presentation of Barry Nalebluff at the FTC/DOJ Hearings on Single Firm Conduct, Nov. 29, 2006, available at http://www.ftc.gov/os/sectiontwohearings/docs/ Nalebuff_Presentation.pdf; Wright, supra note 152.
233. nd Cir. 2001)(dominant firm had majority of slots at Heathrow Airport and constituted a substantial amount of travel agents' commissions); Federal Trade Commission Report, Selected Case Studies in Five Category Products (Nov. 2003), available at http://www.ftc.gov/os/2003/11/slottingallowancerpt031114. pdf (discussing concerns when dominant firms have control over limited shelf space at retailers).
234. Important characteristics are: i) type of discount, i.e., whether it is a volume, target or loyalty discount, as well as a single product vs. bundled discount; ii) how the discount is given (e.g. whether the discount is progressive or a retroactive "roll back to unit one"); iii) length of the "reference period" during which the rebate is measured; iv) what percentage of the market is the discount offered to and accepted by; v) for target rebates, what percentage is required prior to getting the rebate, and is it a percentage of all sales during the upcoming reference period or as measured against prior reference periods.
235. For an analysis of these factors and their importance in the assessment determining whether there is anticompetitive effects, see e.g., Willard K. Tom, David Balto, Neil Averitt, Anticompetitive Aspects of Market-Share Discounts and Other Incentives to Exclusive Dealings, 67 ANTITRUST LAW 615-40 (2000);
236. OECD Competition Committee, Loyalty and Fidelity Discounts and Rebates, OECD JOURNAL OF COMPETITION LAW AND POLICY, Vol.5, No2 (2003);
237. John Lang and Robert O'Donoghue, Defining Legitimate Competition: How to Clarify Pricing Abuses Under Article 82EC, 26 FDMILJ 83 (2002);
238. S.O. Spinks, Exclusive Dealing, Discrimination, and Discounts under EC Competition Law, 67 ANTITRUST LJ 641 (2000).
239. st Cir.1983)(price cuts by dominant firm are per se legal if above incremental and average costs). Of course, determining the appropriate level of cost, i.e. marginal cost, average variable cost or average cost, and actually calculating the cost in any specific situation can be a formidable task. Moreover, evidence of likely anticompetitive harm (not just harm to a competitor) as a result of pricing below cost can be even more challenging, as it mandates consideration of market concentrations and entry, among other things.
240. rd Cir.1978); Massimo v. Tyco Health Group, 2006 US Dist. Lexis 29977 (C.D.Cal.2006); Ortho Biotech v. Amgen, 2006 U.S. Dist. LEXIS 85331 (D.N.J.2006); Ortho Diagnostic Systems v. Abbot Laboratories, 920 F.Supp. 455 (S.D.N.Y.1996). For commentary, see e.g., OECD Competition Committee, Loyalty and Fidelity Discounts and Rebates, supra note 183, at 146-149;
241. Andrew Gavil, Exclusionary Distribution Strategies by Dominant Firms: Striking a Better Balance, 72 ANTITRUST L.J. 3, 10 (2002);
242. Thomas Lambert, Evaluating Bundled Discounts, 89 MINN.L.R. 1688 (2005);
243. Barry Nalebluff, "Bundling as a Way to Leverage Monopoly," Working Paper#36 available at http://ssnr.com/abract= 586648;
244. Daniel Rubinfeld, 3M's Bundled Rebates: An Economic Perspective, 72 U.CHI.L.R. 243, 252 (2005);
245. Patrick Greenlee, David Reitman, and David Sibly, An Antitrust Analysis of Bundled Loyalty Discounts, Economic Analysis Group Working Paper, available at http://papers.ssrn. com/sol3/papers.cfm?abstract_id= 586648.
246. Therapeutic Interchange is governed by state law. Unlike generic substitution, state laws on therapeutic interchange vary substantially and are often more ambiguous. Nevertheless, it does appear that in most states, some type of prior authorization from a physician would be required. See Jesse Vivian, Legal Aspects of Therapeutic Interchange Programs, U.S. PHARMACIST 28:08 (Aug. 2003);
247. Frank Ascione et al, Historical Overview of Generic Medication Policy, JOURNAL OF THE AMERICAN PHARMACEUTICAL ASSOCIATION (July/Aug. 2001);
248. Patricia Kuker-Staub, A Legal Risk Assessment of Pharmacy Network Retail Therapeutic Substitution Programs, 5 J. PHARMACY & LAW 201 (1995).
249. Liang, supra note 82; Hollis III, supra note 82.
250. Unfortunately, I was unable to corroborate whether this is in fact typical, that is, whether pharmacies only stock one generic. However, given that pharmacies generally have the ability and authority to substitute whichever generic they desire (assuming that multiple generics exists for the same drug), it would not be irrational for the pharmacy to stock only one (thereby saving transaction cost and shelf space). The FTC's Study on PBMs also suggests this possibility, although it is not substantiated with evidence. See FTC Study on PBMs, supra note 134, at Chatper 3, page 46. See also Hess et al, Authorized Generics: Lifecycle Management's Compromise in the Patent Wars (2006), available at http://www. cuttingedgeinfo.com/ reports/WP203_Authorized_Generics.htm ("Given generics drugs small profit margin, it becomes less attractive to other generics manufacturers to come to market when pharmacies' shelves are already stocked with the authorized generic") The ability to substitute any generic might be mitigated, if third party payers or PBMs required that the lowest priced generic be used in all cases.
251. th Cir.2007).
252. Areeda & Hovenkamp, FUNDAMENTALS OF ANTITRUST LAW, supra note 26, at § 17.01a.
253. In truth, the distinction between tying and bundling is more nuanced. For example, there are actually two distinct types of ties (mixed ties and pure ties) as well as two types of bundling (mixed bundling and pure bundling), yet for purposes of this article the stated definition will suffice. For more detailed analysis of tying and bundling, and their distinctions, see Barry Nalebluff, Bundling, Tying and Portfolio Effects, DTI Economics Paper No.1, Part I - Conceptual Issues (2003), at 14, available at http://www.dti.gov.uk/ccp/topics2/pdf2/bundle1.pdf.
254. Exclusive dealings, tying, and bundling are all types of "exclusionary conduct," having similar potentials for anticompetitive harm as well as pro-competitive benefits. Thus, despite being analyzed differently under current antitrust jurisprudence, the effects are nearly identical: "Notwithstanding the divergent formal tests of illegality, cases falling within any one of these classifications of exclusion all begin and end at the same point. In each, the expressed fear is that, rather than enhancing competition by reducing costs or improving quality, the challenged practice may destroy competition by providing a few firms with advantageous access to goods, markets or customers, thereby enabling the advantaged few to gain power over price quality or output." Thomas Krattenmaker and Steven Salop, Anticompetitive Exclusion: Raising Rivals' Cost to Achieve Power over Price, 96 YALE LAW JOURNAL 2 (1986).
255. nd Cir.2001). Tying, however, may be per se illegal, while bundling and exclusive dealings are always evaluated under a more extensive "rule of reason" analysis. See Jefferson Parish Hospital District No. 2 v. Hyde, 104 S.Ct. 1551, 466 U.S. 2 (1984); William Holmes, ANTITRUST LAW HANDBOOK (2006), at §§ 2.21, 2.22.
256. For a short review of the history of antitrust treatment of tying , see Illinois Tool Works, Inc. v. Independent Ink, 126 S.Ct. 1281, 1285-91 (2006); Sullivan & Grimes, supra note 35, at § 7.2a. For an analysis of tying, see e.g., Areeda & Hovenkamp, FUNDAMENTALS OF ANTITRUST LAW, supra note 26, at §§ 17.06, 17.07;
257. Hylton & Salinger, Tying Law and Policy: A Decision-Theoretical Approach, 69 ANTITRUST L.J. 469 (2001).
258. For discussions on bundling and bundled discounts, see e.g., Thomas Lambert, Evaluating Bundled Discounts, 89 MINN.L.R. 1688 (2005);
259. Barry Nalebluff, Bundling as a Way to Leverage Monopoly, Working Paper#36 available at http://ssnr.com/abract=586648;
260. Daniel Rubinfeld, 3 M's Bundled Rebates: An Economic Perspective, 72 U.CHI.L.R. 243, 252 (2005););
261. Ioana Chioveanu, Is Bundling Anticompetitivel (2004), available at http://ideas.repec.org/p/aub/autbar/568.03.html.;
262. David Evans and Michael Salinger, Why Do Firms Bundle and Tie? Evidence From Competitive Markets and Implications on Tying Law, 22 YALE J.REG. 37 (2005);
263. David Reitman, and David Sibly, An Antitrust Analysis of Bundled Loyalty Discounts, Economic Analysis Group Working Paper, available at http:// papers.ssrn.com/sol3/papers.cfm?abstract_id=600799.
264. Id. In general, for tying to be found unlawful, the Plaintiff must satisfy the four elements of a so-called per se tie: 1) There are two separate products or services; 2) The purchase of one of the products is conditioned on the purchase of another product; 3) The seller has appreciable economic power in the market for the tying product to enable it to restrain trade in the market for the tied product and 4) a "not insubstantial" amount of commerce in the market for the tied product is foreclosed. Eastman Kodak v. Image Technical Service, Inc., 112 S.Ct. 2072, 504 U.S. 451, 112 S.Ct. (1992); Jefferson Parish Hospital District No. 2 v. Hyde, 104 S.Ct. 1551, 466 U.S. 2 (1984). A more flexible rule of reason analysis is possible, but few tying challenges are brought under a rule of reason. Regarding bundling, antitrust challenges are generally raised in the following contexts: i) alleged anticompetitive bundled discounts or ii) anticompetitive de facto tie. Most recent cases have involved the former, see, e.g., Cascade Health Solutions v. Peace Health 2007 US App Lexis 21075 (9th Cir. 2007) ;Lepage v 3M, 324 F.3d 141 (3rd Cir.2003); SmithKJine v. Eli Lilly, 575 F.2d 1056 (3rd Cir.1978); J.B.D.L v. Wyeth-Averst Labs, 2005 US Dist LEXIS 11676 (S.D.Oh.2005), affirmed 485 F.3d 880 (6th Cir.2007); Massimo v. Tyco Health Group, 2006 US Dist. Lexis 29977 (C.D.Cal.2006); Ortho Biotech v. Amgen, 2006 U.S. Dist. LEXIS 85331 (D.N.J.2006); Invacare Corp. v. Respironics, Inc., 2006 U.S. Dist. LEXIS 77312 (N.D.Ohio); Ortho Diagnostic Systems v. Abbot Laboratories, 920 F.Supp. 455 (S.D.N.Y.1996).
265. Significant price inelasticity of demand for the product despite substantial competition may be a good indication of market power. However, courts will not presume that by itself, having a patent on a product or process confers market power. See Illinois Tool Works, Inc. v. Independent Ink, 126 S.Ct. 1281, 1285-91 (2006)
266. Because the branded drug is patented and is the same drug as the authorized generic, the branded company is able to offer its authorized generic prior to any generic competitor.
267. Generic drugs typically have a higher markup then branded drugs, and thus are more profitable for wholesalers and retailers. See the Congressional Budget Office's paper: Medicaid's Reimbursement to Pharmacies for Prescription Drugs (2004), supra note 144 (noting that average markups for generics have been increasing significantly and are an important source of pharmacy revenues);
268. Barbara Martinez, Discount Card Still Leave Fat Markups for Generic Drugs, WALL STREET JOURNAL, May 26, 2006;
269. Michele Kirsche, Generic Substitution Spells Big Money For Retail Pharmacies, DRUG STORE NEWS, Aug. 22, 2005. Howeer, to ascertain whether a generic is actually more profitable to pharmacists than the branded version, one need compare generic markups to any payment received from branded drug companies. Although traditionally branded companies have not made payments to retail pharmacies, this may change in a tying or bundling arrangement, particularly if the retailer is vertically integrated with a PBM.
270. For example, the branded company could agree to offer the authorized generic several months earlier in a tying or bundling arrangement than if purchased as a stand alone product. So long as the authorized generic can be the first generic on the market, the branded company will be able to make such offers. (Although in the short run, releasing an authorized generic substantially before a true generic is marketed might not be profitable, as the earlier the authorized generic enters the market, the more it cannibalizes the branded drugs' profits).
271. For example, a PBM agrees to grant both the authorized generic and branded drug preferred status on the formulary in exchange for increased formulary payments and the ability to sell the authorized generic several months prior to its general release. One issue of interest is whether under current tying jurisprudence, the authorized generic and branded drug would be considered "separate products." On the one hand, they are the exact same product. On the other hand, they are packaged, labeled, marketed and distributed differently, and do not directly compete.
272. Under § 1927(c)(1)(C) of the Social Security Act, 42 U.S.C. §1396r-8(c)(1)(C), the term "best price" is defined to mean, with respect to single-source and multiple-source brand name drugs, the lowest price available from the brand name firm offered to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity or United States governmental entity, with certain statutory exclusions. See, Kurt Karst, Authorized Generics - A Historical Perspective, REGULATORY AFFAIRS FOCUS MAGAZINE (Mar. 2005), available at http://www.raps.org/s_raps/rafocus_article.asp?TRACKID=&CID= 61&DID=24967;
273. Comments of Ronald David in Response to FTC's Request for Public Comments to Study on Authorized Generics (June 4, 2006), available at http://www.ftc.gov/os/comments/genericdrugstudy3/060604davis. pdf#search=%22federal%20trade%20commission%20authorized%20generics%20davis%22.
274. The amendments changed the definition of "best price" to include the price of any drug approved under an NDA, whether sold as a generic or branded drug. See Section 6003 of the Deficit Reduction Act of 2005, 42 U.S.C. § 1396r-8(c)(1)(C).
275. See comments of Ronald Davis to FTC's proposed study on authorized generics, available at http://www.ftc.gov/os/comments/genericdrugstudy3/ 060604davis.pdf.
276. "Authorized Generics: Looks Like They're Here to Stay," published by Prudential Equity Group (Mar. 3, 2005)(on file with the author).
277. In 2002, Medicaid's expenditures for prescription drugs were approximately $23.4 billion. See Medicaid's Reimbursement to Pharmacies for Prescription Drugs, supra note 144, at 1.
278. Product differentiation done for the purpose of preventing entry and "establishing flanking brands" or "fighting brands" is sometimes referred to as "spatial predation." Opinions differ as to whether it harms consumer welfare. See e.g. Justin Johnson and David Myatt, Multiple Quality Competition: Fighting Brands and Product Line Pruning, 93 AMERICAN ECONOMIC REVIEW 748 (2003);
279. Dennis Carlton & Jeffrey Perloff, MODERN INDUSTRIAL ORGANIZATION (2000), at Chapter 11;
280. Jonathan Baker, Product Differentiation Through Space & Time: Some Antitrust Policy Issues, 42 Antitrust Bulletin 177 (1997);
281. Richard Schmalensee, Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry, BELL JOURNAL OF ECONOMICS 9:305 (1978);
282. Douglas West and Balder Van Hohenbalken, Spatial Predation in a Canadian Retail Oligopoly (1984)
283. A chief proponent of this view would likely be Richard Epstein of the University of Chicago. See Richard Epstein, HOW EXCESSIVE GOVERNMENT REGULATION STIFLES PHARMACEUTICAL INNOVATION (2006).
284. See also Howard Morse & Richard Coe, Authorized Generics Are Good For You, LEGAL TIMES, Vol 29 No. 15 (Apr. 2006).
285. To succeed on a claim of predatory pricing requires a showing that defendant: i) priced below some appropriate level of cost and ii) has a " dangerous probability of recouping its investment. See, Weyerhauser v. Ross-Simmons Hardware Lumber, 127 S. Ct. 1069 (2007); Brook Group v. Brown & Williamson, 509 U.S. 209 (1993).
286. Some argue that most new drugs are not very innovative at all, but rather minor modifications to existing drugs, done for the purpose of impeding generic competition and preserving branded manufactures profits. See Tony Pugh, New Drugs Hardly Better Then Existing Medicines, THE MIAMI HERALD, May 29, 2002, at A1; Marcia Angell; supra note 23, at 55-57 (noting just how few innovative drugs were introduced in 2001/2002) and Chapter 5 (opining that "me too" drugs are the real bread and butter of "Big Pharma"). A recent U.S. Supreme Court opinion on the standard for "obviousness" under patent law may make it more difficult for pharmaceutical companies to obtain new patents on minor modifications. See KSR Int'l Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007)("Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may, in the case of patents combining previously known elements, deprive prior inventions of their value or utility").
287. As is often the case in antitrust, however, motive is not particularly helpful. Authorized generics appear to both benefit branded companies and harm generics (and thus is not a case where a firm is acting irrationally but for anticompetitive effect). See Joe Nocera, Generic Drugs: The Window Has Loopholes, THE NEW YORK TIMES, July 1, 2006 (Quoting a Pfizer executive, who in response to whether authorized generics are intended to harm generics or preserve sales, states "both are good."), available at http://query.nytimes.com/gst/fullpage.html? res=9403E4DC1530F932A35754C0A9609C8B63&sec= &spon=&pagewanted=all.
288. If the authorized generic competes with the true generic during the generic's 180 day exclusivity period, price competition will likely result in reduced prices. Yet, after the exclusivity period the benefits are not so clear. In cases where after the exclusivity period, an authorized generic merely displaces a true generic or where numerous true generics enter, studies suggest little price benefits.
289. See e.g. Polygram Holding Inc. v. Federal Trade Commission, 416 F.3d 29, 33 (D.C. Cir.2005)(affirming the FTC's evaluation of conduct that is "inherently suspicious.")