The FTC scored a win on the Fifth Circuit diamond in its first challenge of a reverse payment settlement between branded and generic drug makers fully litigated since the Supreme Court’s 2013 landmark FTC v. Actavis decision. Actavis established that a reverse payment deal can be anticompetitive but must be analyzed under the “Rule of Reason” – i.e., its anticompetitive effects must be balanced against its procompetitive benefits before being deemed unlawful. The Fifth Circuit applied this balancing test in its decision in Impax v. FTC.
Impax At-Bat
In June 2010, Endo and Impax reached a private settlement under which Endo agreed to abandon an ongoing patent challenge against Impax and pay Impax to delay entering the market with its generic for 2.5 years post-FDA approval (i.e., “reverse payment”) – permitting Impax’s generic entry approximately 8 months before the patents asserted in the infringement suit expired. Had Impax entered, its generic would have provided an alternative to Endo’s Opana ER (oxymorphone hydrochloride), an extended release opioid used to relieve moderate to severe pain.
The settlement had two key components. First, Endo agreed not to launch an Authorized Generic (i.e., “no-AG” agreement) during the first 180 days after Impax’s launch, guaranteeing Impax’s generic was the only generic offering on the market for 6 months post entry. Endo further guaranteed that if market conditions were to change to devalue this agreement, Endo would pay Impax a cash amount based on Impax’s expected profits for that 6-month period of generic exclusivity. Endo ultimately paid Impax $102 million under this provision. Second, Endo agreed to pay Impax $40 million for an unrelated development and co-promotion deal for a potential Parkinson’s disease treatment. This required Endo to make a $10 million up front payment for research, with $30 million to be paid later for certain milestones.
In January 2017, the FTC sued Impax claiming that the settlement amounted to an illegal restraint on competition under US antitrust law (Endo reached a settlement with the FTC, and thus was not a party in this litigation). Although an administrative law judge found the settlement lawful, concluding its procompetitive benefits outweighed its anticompetitive effects, a unanimous Commission sided with the FTC. Impax petitioned the Fifth Circuit for review of the FTC’s order.
Impax Strikes Out
The Court’s ruling focused on three key analytical points, giving the FTC a strikeout to close-out the win.
Strike 1: The magnitude of the payment implied anticompetitive effects. As established in Actavis, the “likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.” The Court explained that the fact that generic competition was possible, and that Endo was willing to pay a large amount to prevent that risk, was enough to infer an anticompetitive effect. The need for Endo to substantially entice Impax to reach this settlement indicated that at least some portion was meant to prevent Impax’s generic entry beyond a point that would have simply resulted from legitimate patent ligation.
Strike 2: The payment lacked any convincing justification. The Court found that the payment was not justified by avoided litigation expense, any additional services provided by Impax, or Endo’s likelihood of success in its patent claim. Under the settlement agreement, Endo ultimately paid Impax over $112 million, including $10 million for an unrelated Parkinson’s research co-promotion. The FTC estimated the settlement saved Endo only $3 million in litigation expenses. Even if the $10 million payment for Parkinson’s research co-promotion was considered a service under the agreement, that left $102 million unaccounted for – far beyond reasonably anticipated litigation expenses.
The Court also rejected Impax’s argument that the reverse payment settlement was not anticompetitive if Endo was highly likely to win its patent infringement suit because the settlement allowed the generic entry prior to patent expiry. The Court reasoned that if both parties believed Endo was highly likely to win the infringement suit, then Impax would have been satisfied with a settlement allowing nothing more than the entry of its generic just months in advance of the patent’s expiration. Any reverse payments with the potential to exceed nine figures would have been a windfall.
Strike 3: There was a less restrictive alternative to the reverse payment settlement that wouldn’t have resulted in delayed entry of a generic. Impax did not dispute that an agreement with an earlier entry date would have been less restrictive. In addition, the court noted that a “no-AG” agreement may be inherently anticompetitive, even if it did not delay generic entry, as the practical effect is minimized generic competition and attendant higher pricing.
The FTC Wins in a Shutout
With Impax striking out, the FTC took its big win away in the Fifth Circuit. The Court denied Impax’s petition for review of the FTC’s Order, which bars Impax from entering into any type of reverse payment that defers or restricts generic entry, including “no-AG” agreements. Impax is also prohibited from entering into any agreement with another oxymorphone ER manufacturer that prevents or restricts competition between oxymorphone ER products.
Crafting a Winning Playbook
Avoid a Strikeout: While a majority of pharmaceutical patent settlements don’t raise any competitive concerns, the FTC’s on-going enforcement action demonstrates that the agency is committed to scrutinizing reverse payment settlements it considers large in scale and potentially without compelling, pro-competitive justification or via the least restrictive alternative. Patent settlement terms should therefore be considered in detail and as applied in the specific factual scenario with a view toward mitigating the risk of a potential FTC investigation and enforcement action.
Hit a Home Run: Involve your antitrust counsel in the early stages of patent litigation to avoid issues that may arise in any settlement negotiation. While such guidance is helpful irrespective of context, it can prove particularly important today given the present public perception and political climate surrounding antitrust enforcement, in particular with respect to certain sectors (e.g., life sciences and pharmaceuticals).
