Speed of Pharmaceutical Innovation at Stake in N.Y. Antitrust Lawsuit

Ballard Spahr LLP

A pharmaceutical firm’s ability to efficiently produce and promote a better treatment for Alzheimer’s disease lies at the center of an antitrust lawsuit pending before the U.S. Court of Appeals for the Second Circuit. In State of New York v. Actavis plc Forest Laboratories, LLC, the New York Attorney General claims that the federal antitrust laws require Forest Laboratories to continue manufacturing an older version of its Alzheimer’s drug—alongside a newer version that it has developed—to facilitate competition with generic versions of the old medication. Forest contends that requiring it to keep producing the older version will divert its limited manufacturing and promotional resources and, in effect, require it to subsidize generic manufacturers.

Ballard Spahr attorneys collaborated with Melissa A. Schilling, a professor at New York University’s Stern School of Business, on an amicus brief filed on behalf of a dozen leading professors of management, organization, and policy in support of an appeal of an October 2014 district court ruling that enjoins Forest from discontinuing the old drug. The district court reasoned that the injunction was necessary to promote competition and consumer welfare; the professors argued that the ruling would have precisely the opposite effect. They noted that, given the immense cost of research and development, forcing a company to continue supporting a product when it is no longer efficient to do so stifles innovation and undermines competition.

The new Alzheimer’s drug developed by Forest Laboratories, Namenda XR, offers a number of advantages over its old product, Namenda IR. One is that XR must only be taken once a day, compared to twice a day for IR, and another is that XR can be easily mixed into soft or liquid foods. Both innovations are significant for Alzheimer’s patients, who have difficulty remembering to take medications and have trouble chewing and swallowing (and may even refuse to take medicine).

The district court based its injunction on the “rule of reason,” which compares the effect of Forest’s decision to discontinue IR against pro-competitive justifications. The professors noted that this approach overlooks important policy considerations, chiefly the need to promote innovation. The Hatch-Waxman Amendments, a 1984 law establishing the current system for generic drug approvals, balances incentives for the innovations that lead to new products against improved access to existing products through generic drugs, and has increased the introduction of generics. In New York, one of several states whose laws require substitution of generic drugs by pharmacists, generics drug makers enjoy a further advantage. In this environment, using antitrust laws to halt the discontinuation of older products then forces branded companies to subsidize the marketing and sales efforts of the generic companies.

Absent reversal on appeal, the district court’s ruling requires Forest to engage in a “dual roll” strategy, under which it maintains the old product for a period after the introduction of the new product. As a result, the company will incur greater expenses to support both products and a greater burden of managing regulatory filings and requests, along with handling returns. In turn, distributors and pharmacists face higher inventory carrying costs and supply chain complexity. If the Attorney General ultimately prevails, the already substantial cost of innovation in the pharmaceutical industry could become prohibitively high due to the constraints companies will face in phasing out older and less effective medications.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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