Legal: Authorized Generics: Still Legal—and Holding

More than two years ago in these pages, we tackled the regulatory and antitrust concerns being raised about the then-emerging issue of "authorized generics." (See "Permission Granted," Pharm Exec, May 2004.) In exchange for somewhat faster erosion of sales, innovative companies had begun competing with ANDA holders during the 180-day exclusivity period, by marketing a low-priced generic version of their brands. Since these authorized generics are manufactured under the brand name company's NDA, not an ANDA, pharma companies are, by law, allowed to market the drug during the six-month exclusivity period—the period of time that generic companies make most of the profits, profits that brand-name manufacturers otherwise lose completely.

Robert P. Reznick

In the two years since our analysis was published, authorized generics have become more widespread, court cases have been decided, arguments for and against it have been published, Congress has taken a step toward making the future introduction of authorized generics less profitable, and the Federal Trade Commission (FTC) has announced an investigation of the effects of authorized generics on competition. However, opponents continue to be vocal, charging that brand-name manufacturers are "gaming the system" and violating the "spirit" of the Hatch-Waxman Act. Waxman himself has referred to authorized generics as a "loophole" that takes away profits intended for independent generics in order to spur more competition.

James B. Kobak, Jr.

Continued Support

Since the publication of our 2004 article, FDA and two federal courts of appeal have decisively rejected challenges to authorized generics. In response to citizen petitions filed by generic manufacturers Teva and Mylan, FDA determined that a branded company's decision to authorize a generic copy of its innovative drug, either on its own or through an agreement with a third party, was a "marketing arrangement" falling outside the agency's jurisdiction: "FDA does not regulate drug prices and has no legal basis on which to prevent an innovator company from marketing its approved NDA product at a price that is competitive with that charged by a first generic applicant to the market." Moreover, FDA determined that the practice was consistent with the goals of the Hatch-Waxman Amendments: "[I]t can be anticipated to encourage ANDA applicants to offer their products at lower prices during the exclusivity period, thereby reducing the substantial 'mark-up' the ANDA applicant can often apply during the period." Further, in the recently decided Mylan Pharmaceuticals v. FDA, the Fourth Circuit noted that in addition to making generic drugs more speedily available, Congress sought to protect a "countervailing interest ... namely, the intellectual property rights of pioneer drug companies," which have always been "free to license generic versions of their pioneer drugs."

High burden of proof The federal courts are typically disinclined to adopt highly speculative claims of injury that aren't tied to a particular product. A party attacking a specific authorized-generic arrangement would need to prove on a case-by-case, rule-of-reason basis that the presence of an authorized generic prevented the timely entry of other generics and an overall reduction in prices. Indeed, at this time, we are aware of no evidence that the practice of authorized generics has actually deterred any Paragraph IV certification or post-180-day generic entry, let alone a challenge to a patent that was invalid.

Additionally, studies by the Analysis Group, funded by Johnson & Johnson and Bear Stearns, suggest that authorized generics don't significantly decrease the incentives generic companies need to challenge vulnerable patents.

A high burden of proof rests with opponents. Authorized generics expand consumer choice, which is more likely to be viewed as pro-competitive than anti-competitive. But even if one assumes they could have negative consequences in a few special cases, there is nothing in the conduct that seems readily challengeable under current law. The conduct is simply not equivalent to practices, such as price-fixing, which can be treated as presumptively illegal. Even the FTC, which has been monitoring the situation for some time even before announcing its Congressionally inspired plan to conduct a study, has never challenged the practice.

New Tacks and Attacks

As the courts send strong messages over the legality of authorized generics, critics are bringing new arguments to the table, and asking questions that may change the way brand-name companies are willing to price their generic equivalents.

"False generic" Mylan has come up with a more imaginative approach in its filing against Procter & Gamble and Watson Pharmaceuticals in California state court. It involves the authorized generic of the branded drug Macrobid (nitrofurantoin)—the same product for which Mylan unsuccessfully petitioned FTC to stop.

Rather than relying on orthodox antitrust theories under federal law, Mylan alleges that P&G's distribution and licensing agreement with Watson constitutes unfair predatory pricing and price discrimination, among other unfair trade practices, under the California Business and Professions Code. Mylan alleges that by offering both the original P&G brand product and an identical generic manufactured in the same facilities, the parties have created a "false generic," which is misleading, perpetuates a hidden price discrimination, and restricts competition in the generic submarket while preserving a monopoly in the brand-name submarket. The company also alleges that P&G offered Macrobid to Watson at a cost that was not offered to other distributors and purchasers, thus leading, according to the complaint, to predatory pricing.

This case is currently pending. In our view, however, the arguments stretch considerably beyond existing law, particularly the allegations about what are pejoratively styled "false generics." The practice of authorized generics is well-known, and we see nothing in the California Business and Professions Code that imposes a substantive pricing strategy on a generic drug. Indeed, the relatively modest discounts often offered by the sole generic during its 180 days of generic exclusivity would seem to confirm this. Moreover, given the profits typically involved in the sale of generics, when two generics compete with a brand-name drug, we find it hard to believe that any appropriate cost standard would allow such sales to be considered predatory. We also note that Mylan's theories appear to apply only to arrangements that involved sales and distribution arrangements, not licenses.

Best price Another emerging issue is how authorized generics play a role in determining the branded drug's "best price" and "average manufacturer price" (AMP). The effect of deeming the sale of an authorized generic equivalent to a branded drug is to reduce the latter's effective price under Medicare and Medicaid.

Prospectively, Congress resolved many of these uncertainties by passage of Section 6003 of the Deficit Reduction Act of 2005. Effective January 1, 2007, all drugs sold under the same NDA will be considered for purposes of calculating best price and AMP for the brand-name drug, even if the authorized generic is marketed under a different labeler code by a third party. Some ambiguity may remain as to implementation of the statute, but it clearly changes the financial calculus that will determine under what terms a branded pharma company will authorize a generic. Oddly, one possible effect of the legislation may be to cause companies to restructure authorized generic deals to diminish incentives for discounting (to the extent this can be done consistent with antitrust law). In this way, it has the potential to reduce the one clear benefit to consumers that now exists.

A generics trade association has advocated Congress to ban all authorized generics during the 180-day period, but to date, no such legislation has been introduced. Such a radical view doesn't appear to have solid support. Indeed, some generics companies benefit from serving as the purveyors of authorized generics. Only if the FTC study demonstrated substantial harm to consumers from a reduction in patent challenges—something we would be surprised to see—do we believe there will be any real movement toward making authorized generics illegal.

FTC Study

Senators Grassley, Leahy, and Rockefeller, and Representative Waxman, have asked FTC to collect information later this year, via a compulsory process, from 80 brand name, 10 authorized-generic, and 100 independent generic companies, to understand the impact of authorized generics on consumers.

Robert P. Reznick is a partner in Hughes Hubbard & Reed LLP. He can be reached at reznick@hugheshubbard.com

James B. Kobak, Jr. is a partner in Hughes Hubbard & Reed LLP. He can be reached at kobak@hugheshubbard.com