Third Circuit Upholds Dismissal of Doryx ‘Product Hopping’ Suit

On September 28, 2016, the Third Circuit issued an opinion in Mylan v. Warner Chilcott, upholding the Eastern District of Pennsylvania’s holding on summary judgement that Defendants’ “product hopping” conduct did not violate the Sherman Act.[1]  “Product hopping” generally “involves making various insignificant modifications to a drug to keep generic competitors out of the market by forcing them to re-enter a cumbersome regulatory approval process.”[2]  Only a handful of federal courts have delivered substantive opinions assessing the viability of antitrust challenges to pharmaceutical product hopping, primarily at the motion to dismiss stage.[3]  In May 2015, the Second Circuit became the first appellate court to address the issue in New York v. Actavis, in which the court affirmed a preliminary injunction, finding a substantial likelihood that Actavis had violated Section 2 of the Sherman Act.  The decision in New York v. Actavis confirmed district court determinations that, in certain scenarios, pharmaceutical product hopping is subject to antitrust scrutiny.  However, New York v. Actavis did little to delineate the outer boundaries of the conduct that can give rise to antitrust claims.  The Third Circuit’s opinion in Mylan v. Warner Chilcott sheds some light on the potential limits of antitrust remedies for pharmaceutical product hopping.

Mylan brought claims against Defendants Warner Chilcott and Mayne Pharmaceuticals in the District Court for the Eastern District of Pennsylvania, alleging monopolization and attempted monopolization under Section 2 of the Sherman Act.[4]  To establish a claim of monopolization under Section 2 of the Sherman Act, a plaintiff must demonstrate that (1) the defendant possessed monopoly power in the relevant market and (2) the defendant willfully acquired or maintained monopoly power “by means other than superior product, business acumen, or historic accident.”[5]  The second element is commonly described as “anticompetitive conduct.”

The allegations in Mylan v. Warner Chilcott centered on Defendants’ reformulation of the acne drug Doryx (delayed release doxycycline hyclate).  Mylan asserted that Defendants intentionally thwarted generic competition by making insubstantial changes to the drug product, thereby preventing pharmacies from dispensing the generic version in place of the branded version.  The District Court opinion explains that under generic substitution laws a pharmacist who fills a prescription for a branded drug can—and in some cases is required to—substitute an AB-rated generic version of the drug unless the prescribing physician expressly indicates otherwise.[6]  In order to be considered an AB-rated equivalent, a generic drug must be bioequivalent to the branded drug and in the same dosage, strength, and form.[7]

Doryx capsules were first launched by Mayne Pharmaceuticals in 1985 without patent protection.[8]  Mylan began developing a generic version of Doryx capsules in 2003.[9]  In 2005, Defendants launched 75 mg and 100 mg Doryx tablets and effectively removed the capsule formulation from the market.[10]  In order to switch the market from Doryx capsules to Doryx tablets, Defendants: (i) stopped selling the capsules to wholesalers; (ii) informed wholesalers, retailers, and doctors that the capsules had been replaced by tablets; (iii) worked with retailers to “auto-reference” tablet when a doctor filed for a Doryx prescription; and (iv) destroyed some of the remaining inventory of capsules.[11]  Mylan continued to develop a generic capsule version until 2006, when another generic manufacturer, Sandoz, launched a version of generic Doryx capsules.[12]  Mylan then shifted its development efforts to 75 mg and 100 mg tablet formulations, which it launched in 2010.[13]  From 2008 to 2011, Defendants reformulated Doryx several more times, altering the dosage quantity and tablet scoring.[14]  Mylan argued that each of Defendants’ “product hops” were anticompetitive because “Mylan’s generic would not automatically be substituted unless Mylan redesigned the generic to match the new version of Doryx and secured an AB-rating from the FDA.”[15]

At the District Court, Mylan’s antitrust claims survived a motion to dismiss, although Judge Diamond noted that he was “skeptical that the ‘product hopping’ alleged here constitutes anticompetitive conduct under the Sherman Act.”[16]  In April 2015, Judge Diamond granted Defendants’ motion for summary judgement, determining that Mylan could prove neither element necessary to establish monopolization under the Sherman Act.[17]  Regarding the anticompetitive conduct prong, the District Court concluded: “Even if Defendants’ product changes prevented Mylan from taking advantage of more profitable means of distributing its generic Doryx, the changes did not ‘bar’ Mylan from the market or severely restrict the market’s ambit.”[18]

In affirming the District Court’s ruling, the Third Circuit cited heavily to the lower court’s “thorough and persuasive opinion.”[19]  The Third Circuit agreed with the District Court that Mylan had established neither monopoly power nor anticompetitive conduct under Section 2 of the Sherman Act.[20]  Regarding monopoly power, Mylan argued that the relevant market consisted of only the name-brand and generic Doryx products, within which Defendants maintained 100% of sales prior to generic entry.[21]  The Third Circuit rejected Mylan’s argument, finding that the relevant market consisted of all oral tetracyclines prescribed for the treatment of acne.  In defining the relevant market, the Third Circuit emphasized the extensive evidence of the interchangeability and cross-elasticity of demand between Doryx and other oral tetracyclines.[22]  The Court concluded that in this broader market of all oral tetracyclines, Defendants did not possess monopoly power because their share of the market never exceeded 18%.[23]

The Third Circuit, like the District Court, addressed the second prong of monopolization under the “rule of reason” burden-shifting framework set forth in United States v. Microsoft.[24]  The Court stated that, under this framework, if the plaintiff successfully establishes anticompetitive conduct, the burden shifts to the defendant to proffer “nonpretextual procompetitive justifications” for the conduct in question, which the plaintiff may rebut “or demonstrate that the anticompetitive harm outweighs the procompetitive benefit.”[25]  In finding that Mylan failed to satisfy the first prong of the Microsoft Corp. test, the Court emphasized that Mylan had not been foreclosed from the market.[26]  The Court rejected Mylan’s argument that Defendants’ conduct was anticompetitive because it prevented generic companies from competing by the most efficient means (generic substitution laws),[27] noting that “Mylan reaped generous profits from its sale of the generic [Doryx] tablet, in the amount of $146.9 million.”[28]  The Court also pointed out that Doryx capsules were on the market without patent protection for more than twenty years, during which time generic companies were free to introduce generic versions.[29]

The Third Circuit distinguished the case from New York v. Actavis on both procedural and factual bases.[30]  The Court noted that Actavis was decided at the preliminary injunction stage, whereas the present case had “proceeded through full discovery and resulted in a robust record void of any evidence of anticompetitive conduct.”[31]  The Third Circuit also stated that in Actavis, the defendants’ reformulation extended their period of patent exclusivity and served to “completely bar generics from entering the market.”[32]  In contrast, “[h]ere, there were no patent cliffs on the horizon, and the evidence demonstrates that there were plenty of other competitors already in the oral tetracycline market.”[33]