Second Circuit Affirms Preliminary Injunction in Namenda Product Hopping Case | Practical Law

Second Circuit Affirms Preliminary Injunction in Namenda Product Hopping Case | Practical Law

The US Court of Appeals for the Second Circuit affirmed the US District Court for the Southern District of New York's order for a preliminary injunction in State of New York v. Actavis. The injunction prohibits Actavis plc and its subsidiary Forest Laboratories from withdrawing Alzheimer's drug Namenda IR from the market in favor of a new drug, Namenda XR, before generic versions of Namenda IR become available.

Second Circuit Affirms Preliminary Injunction in Namenda Product Hopping Case

Practical Law Legal Update 9-614-9665 (Approx. 5 pages)

Second Circuit Affirms Preliminary Injunction in Namenda Product Hopping Case

by Practical Law Antitrust
Published on 28 May 2015 • USA (National/Federal)
The US Court of Appeals for the Second Circuit affirmed the US District Court for the Southern District of New York's order for a preliminary injunction in State of New York v. Actavis. The injunction prohibits Actavis plc and its subsidiary Forest Laboratories from withdrawing Alzheimer's drug Namenda IR from the market in favor of a new drug, Namenda XR, before generic versions of Namenda IR become available.
On May 22, 2015, a three-judge panel for the US Court of Appeals for the Second Circuit in State of New York v. Actavis plc affirmed a US District Court for the Southern District of New York preliminary injunction order preventing Actavis and its subsidiary, Forest Laboratories, from product hopping, which involved:
  • Withdrawing Alzheimer's drug Namenda IR from the market before:
    • its patent expired; and
    • generic versions of Namenda IR become available.
  • Replacing Namenda IR with patent-protected, reformulated drug Namenda XR, which would force Namenda IR patients to switch to Namenda XR.
(No. 14-4624 (2d Cir. May 28, 2015)).
In September 2014, New York Attorney General Eric Schneiderman announced a lawsuit seeking to prevent Actavis and Forest from the Namenda product hopping. AG Schneiderman alleged that the product hopping will allow Actavis to insulate its profits from generic competition because, even after the Namenda IR generics come to market:
  • Pharmacies cannot automatically substitute generic versions of the original product for the reformulated product.
  • Patients who have switched to Namenda XR are unlikely to switch back to the generics due to practical difficulties.
(See Legal Update, NY Attorney General Files Lawsuit to Block Pharmaceutical Product Hopping.)
The Second Circuit found that:
  • The district court applied the correct preliminary injunction standard.
  • Product hopping is anticompetitive under Section 2 of the Sherman Act.
  • Defendants' patent did not immunize them from antitrust liability.
  • New York made a strong showing that defendants' conduct in the absence of an injunction would irreparably harm competition.

Preliminary Injunction Standard

The Second Circuit noted that where a preliminary injunction will provide plaintiff with nearly all the relief sought, as a preliminary injunction would in this case, a heightened standard for a preliminary injunction applies. Under the heightened standard, the plaintiff must show a clear or substantial likelihood of success on the merits rather than mere likelihood of success on the merits. The court held that New York satisfied the heightened standard by showing that:
  • There is a substantial likelihood of success on the merits for its monopolization and attempted monopolization allegations.
  • Defendant's conduct would cause irreparable harm to the Namenda market and consumers.

Monopolization and Attempted Monopolization under Section 2

Defendants did not dispute that they have a monopoly in the market for Alzheimer's drug memantine, as Namenda IR and Namenda XR constitute 100% of the market. However, defendants argued that they did not willfully maintain or attempt to maintain that monopoly power by introducing Namenda XR to the market.
Defendants argued that Namenda XR was a superior product and introducing it was not intentionally exclusionary. However, the court reasoned that because defendants combined withdrawing Namenda IR with introducing the new formulation Namenda XR (a "hard switch"), the conduct was intended to:
  • Coerce customers to switch to Namenda XR.
  • Impede competition.

Consumer Coercion

The court found that defendants' actions effectively forced Namenda patients to switch to the new formulation and were therefore anticompetitive. The court reasoned that had defendants simply introduced the new formulation without withdrawing the older version (a "soft switch"), doctors and patients would have had the ability to consider the merits of both drugs and whether to switch to the newer formulation. In finding that defendants acts were not benign, the court pointed to the district court's findings that a soft switch would only result in a 30 percent patient migration to Namenda XR prior to generic entry, whereas a hard switch would result in an 80 to 100 percent patient migration and thereby prevent substantial generic competition.

Impede Competition

The court found that the hard switch:
  • Was likely to impede generic competition in the memantine market.
  • Would create a dangerous probability that defendants would maintain their monopoly power in the memantine market even after generic entry.
The court noted that though states often mandate pharmacies to substitute available generic versions of a drug for the brand name drug where available, in certain states, including New York, pharmacies cannot automatically substitute generic versions of a drug for a new, reformulated product. Therefore, after introduction of Namenda XR, future generic versions of Namenda IR would be prescribed much less frequently and would be less profitable. Though defendants pointed to various other ways generic drugs could be marketed to consumers, the court noted that:
  • State drug substitution is the most cost-efficient marketing method.
  • Precluding the most cost-efficient opportunity could constitute an antitrust violation.
The court further noted that the unique aspects of Alzheimer's disease makes its patients less receptive to change in routine. The court explained that once the patients switched to Namenda XR, they would be unlikely to switch back to generic versions of Namenda IR.
Finally, the court noted that despite defendants' argument that their conduct was intended to prevent free-riding (generic drugs being substituted for brand-name Namenda), free-riding:
  • Is authorized by law as the expressed goal of state substitution laws.
  • Promotes drug competition intended under the Hatch-Waxman Act.

Procompetitive Justifications

Defendants argued that:
  • Withdrawing Namenda IR was necessary to maximize their return on investment for Namenda XR.
  • Antitrust scrutiny of the pharmaceutical industry deters innovation.
The court found both of defendants' procompetitive justifications to be pretextual, particularly relying on statements by defendants' CEO that the switch was intended to erect barriers to competition. However, the court noted that:
  • Defendants stood to earn fewer profits from Namenda XR than from Namenda IR, and defendants' willingness to forsake short-term profits for the alleged anticompetitive goal of eliminating generic competition is an indication of anticompetitive conduct.
  • Antitrust scrutiny of the pharmaceutical market should in fact encourage pharmaceutical companies to devote their time and money to innovation and not minor product reformulations.
The court explained that while introducing the newer formulation of Namenda to the market was procompetitive, there is no procompetitive justification for removing Namenda IR. The court concluded that any procompetitive benefits are outweighed by anticompetitive harm of consumer coercion and impeded competition.

Patent Rights

Defendants argued that their patents over Namenda IR and XR protect them from antitrust liability. However, the court stated that in the US Supreme Court's decision in FTC v. Actavis, the Supreme Court made clear that patent rights do not confer antitrust immunity (133 S. Ct. 2223 (2013)). The court further reasoned that defendants' combined acts of withdrawing Namenda IR and introducing Namenda XR as a way to skirt generic substitution laws places their conduct outside the scope of their Namenda patent rights.

Irreparable Harm

The court noted that according to defendants' data, absent an injunction, consumers would pay approximately $300 million more and third-party payors nearly $1.4 billion more for memantine therapy. Further, because of state laws barring antitrust recovery by indirect purchasers, many consumers would be precluded from seeking antitrust damages due to defendants' conduct. Therefore, an injunction would prevent irreparable harm to consumers and the memantine drug market.
As the court found that New York has a substantial likelihood of success on the merits of its Section 2 claim, the court did not address New York's Sherman Action Section 1 or Donnelly Act claims.