Robert D. Stoner has expertise related to intellectual property, particularly as it relates to pharmaceuticals. He has worked on a number of cases that involve potential generic entry and strategic reactions by the established brand to such entry.

Granting Preliminary Injunctions to Branded Pharmaceutical Suppliers to Stop Generic Entry

When a prospective generic entrant challenges the patent of a branded pharmaceutical supplier, the branded supplier can ask the courts for a preliminary injunction (PI) to prevent the entry. PI requests usually follow the expiration of the Hatch-Waxman (H-W) Act’s initial restrictions on entry. Courts grant a PI when (a) there is substantial likelihood of success on the merits of the patent claim; (b) there is significant likelihood of irreparable harm if the injunction is not granted; and (c) the balance of harms weighs in favor of the injunction. The economic analysis of the likelihood of irreparable harm must consider the H-W Act’s provisions to encourage entry, and the other strategic responses that branded suppliers have to the threat of entry.

The H-W Act gives entrants the right to challenge a patent with a Paragraph IV “abbreviated new drug application” (ANDA) filing. In such a filing, the generic drug applicant claims that relevant patents are either invalid or non-infringed by the proposed generic entry. To encourage such filings, the entrant is given a period of 180 days in which other generic suppliers will not be allowed to enter. H-W, however, also provides protections for the branded product. Upon the initial ANDA filing, the branded producer may sue for infringement, which triggers a 30-month stay period during which entry is not allowed. In a sense, the 30-month stay under the H-W Act is an injunction that takes effect immediately on the filing of a patent infringement case without requiring the brand name manufacturer to show that it is entitled to a PI.

At the end of the 30-month period the firms have several strategic alternatives. At this juncture, the Food and Drug Administration (FDA) will likely have granted approval to market the generic, but the patent infringement suit is often still pending. Accordingly, the Paragraph IV filer may decide to enter “at risk” of losing the infringement suit and incurring liability for damages. If the generic supplier enters, the branded firm may pursue one or more options. The branded firm can file for a PI to try to prevent entry, or it can try to forestall generic entry by reaching an agreement (sometimes with a reverse payment) with the potential entrant. The branded firm also may introduce an authorized generic to recapture some of the profits lost from generic entry, or establish some alternative form of its branded drug that would not be susceptible to immediate generic challenge.

Each of the branded firm’s options is controversial. The FTC has repeatedly attacked payments by branded firms to forestall entry as anticompetitive, with some early success. The appellate courts have recently not upheld the FTC’s position, holding that the patent laws immunize these payments from antitrust scrutiny, but the tactic nevertheless remains potentially suspect.

Similarly, opinions differ on the competitive effects of authorized generics. Some emphasize the short-term gain because authorized generics increase the number of competitors. Others emphasize possible long-term costs because authorized generics may discourage independent generic competition. The FTC is currently studying the circumstances under which authorized generics should be considered anti-competitive.

If the branded firm files for a PI, it may have a strong case for showing irreparable harm because of the manner in which branded drugs are marketed, and the effect of generic entry on branded profits. Branded drugs are usually heavily promoted during their period of exclusivity. That promotion, which supports extremely high profit margins, often ends quickly after generic entry. The first generic competitor typically enters the market at a price that is perhaps 70 percent or less of its brand-name counterpart, and it rapidly gains substantial share. The branded supplier may suffer a dramatic fall in market share, and it typically responds to this loss of share by ending promotional support of the product. Further generic entry occurring after the 180-day exclusive period typically exacerbates these effects. A return to the status quo ante is virtually impossible once this process is unleashed.

The possibility of irreparable harm is increased because the generic will earn less from entry than the branded firm will lose. The monopoly profit of the branded producer exceeds the combined profit of two firms in a more competitive industry. Therefore, both firms may be better off if the branded firm keeps its monopoly and shares the monopoly profits with the potential entrant (e.g., through a settlement postponing entry). In addition, were the generic to enter and subsequently lose the patent infringement suit, the amount required to compensate the branded firm for lost profits would exceed the profits that the generic had made from the infringing sales. As a result, a PI may well be warranted, as long as there is a strong likelihood of success on the merits of the patent suit.

The case for an injunction under these circumstances may be particularly strong given the antitrust issues surrounding other strategic options in the H-W environment. For example, the antitrust agencies have opposed settlements involving cash payments that delay entry. But the antitrust agency arguments against those settlements depend in part on the court’s willingness to protect patent pioneers. If the courts won’t grant a PI to protect a firm with a strong patent from irreparable harm by a generic, then the FTC is on weaker ground when it argues against settlements that postpone generic entry to any time that is not after patent expiration.

The FTC has recognized as much in its Amicus Curiae Brief to the Federal Circuit Court in the Ciprofloxacin case. In this brief, the FTC argues to reverse the US District Court decision that found that certain payments to delay generic entry could not be challenged on antitrust grounds because they were within the nominal scope of the patent. The FTC argued, “Thus, when a patentee asserts its patent and threatens a lawsuit with the goal of excluding a competitor from the market, the patentee can hope that the strength of its patent will either convince the infringer to accede or convince the court to issue an injunction.” This argument implies that a pioneering patent holder can rely on certain rights, which assumes that those rights are properly upheld in deserving circumstances. If that is true, then it is more tenable for the FTC to argue that conduct that bypasses or goes beyond these rights, such as reverse payments, is anticompetitive.

Additional Articles in Spring 2008 Issue of Economists Ink

DOJ Decides Not to Challenge the XM-Sirius Merger

Digital Television May Stimulate Video Competition

EI News and Notes