Shearman & Sterling LLP | Antitrust Blog | United States Federal Trade Commission Administrative Law Judge Dismisses Complaint Challenging Reverse Payment Settlement Between Pharmaceutical Manufacturers<br >  
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  • United States Federal Trade Commission Administrative Law Judge Dismisses Complaint Challenging Reverse Payment Settlement Between Pharmaceutical Manufacturers
     
    05/30/2018
    On May 11, 2018, U.S. Federal Trade Commission (“FTC”) Administrative Law Judge D. Michael Chappell issued an initial decision ruling that a reverse payment settlement by Endo Pharmaceuticals (“Endo”) with Impax Laboratories (“Impax”) did not violate Section 5 of the FTC Act, and dismissing the FTC’s complaint.  In the Matter of Impax Labs., Inc., Docket No. 9373 (Initial Decision, May 11, 2018).  Judge Chappell concluded that despite the reverse payment Endo made to Impax, the anticompetitive harm arising from the settlement was “largely theoretical,” and that the settlement’s procompetitive benefits outweighed any anticompetitive effect from the agreement.  The initial decision is the first administrative ruling on a reverse payment trial since the U.S. Supreme Court’s 2013 Actavis decision.  The decision has been noticed for appeal to the Commission.

    Endo, a branded drug manufacturer, settled patent litigation in June 2010 with Impax, a generic drug manufacturer, over patents covering Endo’s Opana ER, an extended-release oxymorphone opioid used to alleviate severe pain.  As part of the settlement:  (1) Endo granted Impax a broad license for all of the patents covering Opana ER (not just those at issue in the litigation), which  allowed Impax to offer its generic product beginning on January 1, 2013, (2) Endo agreed not to launch its own authorized generic version of Opana ER for the first 180 days after Impax’s launch (a “no-AG” provision), and (3) Endo agreed to pay Impax a credit of up to $110 million if branded sales declined prior to Impax’s launch because such a decline would reduce Impax’s expected revenue from generic sales.  Simultaneously, Endo and Impax agreed to an up-to-$40 million development and co-promotion deal for an unrelated drug that was in early-stage development.

    The FTC’s 2017 complaint alleged that the settlement agreement prevented generic entry between June 2010 and January 2013 that would otherwise have increased competition and reduced drug prices.  Specifically, the FTC alleged that Impax received $102 million from the credit for branded sales decline, that the co-development deal was an up-to-$40 million payment to induce delay, and that the “no-AG” provision provided approximately $33 million in value to Impax, for total compensation of up to $175 million for delaying generic entry by approximately 30 additional months.  Impax argued that the broad license allowed it to enter the market prior to patent expiration and to compete without fear of further infringement suits.  Impax also argued that the FTC overstated the other settlement provisions and that the co-development agreement was a legitimate venture at market value.

    Judge Chappell’s initial decision relied on the framework set out in the U.S. Supreme Court’s opinion in FTC v. Actavis, 570 U.S. 756 (2013).  In Actavis, the Court held that reverse payments should be evaluated under a modified rule of reason test that considers whether the settlement includes a “large, unjustified reverse payment” as a proxy for the alleged anticompetitive effects, and that judges should balance the anticompetitive harms against the procompetitive benefits.  With that guidance, Judge Chappell concluded that the “magnitude or extent of [anticompetitive] harm is largely theoretical,” because entry of Impax’s generic version into the market prior to January 1, 2013 was unlikely.  Instead, Judge Chappell found, “the real world procompetitive benefits of the Endo-Impax Settlement are substantial.”  Specifically, Judge Chappell explained that the broad license enabled generic entry eight months before Endo’s patents expired, and allowed Impax to sell its generic version unimpeded since 2013.  In addition, due to supply disruptions affecting Endo’s production of Opana ER, Impax’s product is currently the only available version of an extended-release oxymorphone opioid on the market.  Judge Chappell found that these benefits to consumers outweighed the anticompetitive harm caused by the settlement and delayed generic entry, and dismissed the agency’s complaint.

    As Judge Chappell’s initial decision is appealed to the FTC’s new set of Commissioners, their analysis will be instructive on the future of pay-for-delay cases at the FTC and the development of the post-Actavis law.

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