“Reverse” Payments Anti-Competitive In K-Dur Pact But Not All Cases – FTC

The Federal Trade Commission's ruling that the settlement between Schering-Plough and Upsher-Smith relating to K-Dur is anti-competitive stops short of defining all "reverse" payments as illegal.

"We recognize...that there may be hypothetical situations where a pro-competitive settlement could require payment of some money to the generic challenger," ¹ FTC's opinion, released Dec. 18, states. "This means we are unwilling to say reverse payments included in a settlement agreement are always illegal."

However, the five-member commission found that neither Schering nor Upsher provided evidence that their settlement met such hypothetical conditions.

The two companies settled patent litigation relating to K-Dur in 1997. The terms of the agreement included "unconditional" payments to Upsher amounting to $60 mil., delayed entry of Upsher's generic version of K-Dur until Sept. 2001, and Schering licensing rights "in prescribed territories" to six Upsher products, including Niacor SR , according to the opinion.

FTC's ruling that provisions in the Schering/Upsher settlement constitute "unfair methods of competition" reverses the June 2002 decision of an administrative law judge who dismissed the FTC's original March 2001 complaint against the companies. The ALJ's ruling was appealed to the full commission.

The ALJ found that reverse payments from brand to generic companies in patent settlements are not "established" antitrust violations (² (Also see "K-Dur Case: Reverse Payments Not “Established” Antitrust Violations – Judge" - Pink Sheet, 8 Jul, 2002.), p. 3).

FTC had previously said that reverse payments are a "clear indicator" of antitrust behavior. However, there appears to be a split among federal appellate branches about the nature of reverse payments.

The Atlanta-based 11th Circuit Court of Appeals recently declared that Abbott's payments to Geneva and Ivax relating to Hytrin (terazosin) generics should not be "automatically condemned" under antitrust laws (³ , p. 9).

A June decision by the Cincinnati-based Sixth Circuit Court of Appeals in Cardizem CD antitrust litigation said an agreement by Hoechst Marion Roussel to pay Andrx $40 mil. per year not to enter the U.S. market was a horizontal market allocation and per se illegal under the Sherman Act (⁴ 'The Pink Sheet' June 16, 2003, In Brief).

The FTC opinion may provide some guidance about when reverse payments could be viewed as pro-competitive.

According to the opinion, Schering and Upsher hypothesized in the K-Dur case that a "cash-starved" generic company may be able to enter earlier and more effectively if it receives some up-front support from the pioneer manufacturer.

While FTC acknowledged that "it is possible that this trade might ultimately yield competitive benefits," it noted companies "must do more than suggest hypothetical benefits."

Firms "that rely on this argument also must show that the generic, in fact, was cash-starved; explain why the pioneer was the best source for the necessary funds; and demonstrate that the up-front support actually resulted in an entry date earlier than would be expected without it," FTC said.

"We have no evidence [in this case] that would establish these conclusions. To the contrary, Upsher expressly waived any intention to rely on financial need as a defense option," the commission said. "Upsher was not cash-constrained; the company passed on to its shareholders an amount equal to or in excess of the sums received from Schering."

FTC cited other hypothetical examples of pro-competitive settlements involving reverse payments.

"If the generic challenger is more optimistic about the litigation outcome than the pioneer, a pioneer may be willing to pay some money to bridge the gap in the expectations," the opinion notes. Additionally, "a judgement-proof generic manufacturer may be willing to hold out for 'unreasonable' settlement terms because its downside risks of damage exposure are small."

The magnitude of Schering's payment is "a particular source of concern," the opinion notes. "There is a strong public policy in favor of litigation settlements....But these public policy considerations...do not mean that all settlements are presumptively efficient, regardless of cost."

FTC found that Schering's payment to Upsher was not linked to an appropriate valuation of the six product licenses it received under the settlement agreement.

"The magnitude of the payment was not based on Schering's evaluation of the Upsher licenses," the opinion states. "We therefore conclude that Schering did in fact pay Upsher for delayed entry" of a generic version of Schering's potassium chloride agent, FTC said. "In the circumstances of this case, [it] was an agreement that unreasonably restrains commerce."

FTC based its findings on a review of the settlement negotiations between Schering and Upsher, as well as both companies' conduct following the settlement.

"The Schering participants in the settlement negotiations were not knowledgeable enough about the products licensed from Upsher to determine for themselves whether the Upsher licenses were worth the payments agreed upon," the opinion notes.

Schering's commercial assessment of Niacor SR was not completed until one day after the $60 mil. payment had been agreed upon by the two companies, FTC said. Furthermore, the Schering employee responsible for making the Niacor SR assessment was not involved in the negotiations with Upsher.

The opinion also notes that Schering declined an opportunity to co-promote Kos' extended-release niacin product Niaspan "only the week before the negotiations for Niacor SR were completed."

The Kos negotiations "did inform several Schering personnel about the commercial problems of sustained-release niacin products - information that we need to weigh in determining whether Schering really paid $60 mil. for the rights to such a product," FTC noted.

"Based on the record as a whole, we find that Schering knew sustained-release niacin had significant unresolved safety issues, limited market appeal in the U.S., and even less outside the U.S," the opinion states.

Additionally, Schering "could have done much more...to ascertain whether Niacor SR merited such a substantial, unconditional investment. For example, nobody at Schering was assigned to evaluate the likelihood of obtaining regulatory approval for Niacor SR in the U.S. or in Europe."

FTC also rejected Upsher's argument that its negotiated delayed entry was "pro-competitive because the company was able to increase its capacity and enter in force on a date certain, with greater market impact."

"After consummation of the agreement, Upsher slowed the pace of its work on the launch" of generic K-Dur and shuffled personnel to other projects," FTC said. "This suspension...undercuts any argument that a three-year delay was a requisite for substantial entry."

The commission cited several reasons for rejecting the ALJ's finding that proof of anti-competitive effects requires proof on the merits of the underlying patent case (⁵ (Also see "FTC K-Dur Case Incorrectly Defines Market, Judge Says In Ruling For Schering" - Pink Sheet, 8 Jul, 2002.), p. 4).

"First, Schering's presumptively valid patent did not necessarily confer a right to exclude generic entry in the circumstances of this case," FTC said. "Second, there is a recognized distinction between the standard for proving that an agreement is likely to cause competitive harm and the standard for proving damages after the fact."

"Third, we believe that an inquiry into the merits of the patent case would not be conclusive in most of our antitrust cases anyway. Fourth, we are also concerned that a mandated inquiry into these issues, as part of an antitrust review, would ultimately have a chilling effect on the efficient settlement of patent litigation."

Under an FTC order, both Schering and Upsher are barred from entering final settlements of patent litigation in which "an ANDA filer receives anything of value; and the ANDA filer agrees not to research, develop, manufacture, market or sell the ANDA product for any period of time."

However, such settlements are not prohibited when "the value paid by the NDA holder to the ANDA filer...includes no more than (1) the right to market the ANDA product prior to the expiration of the patent that is the basis for the patent infringement claim; and (2) the lesser of the NDA holder's expected future litigation costs to resolve the patent infringement claim or $2 mil." Schering and Upsher must notify the commission of such settlements.

Schering and Upsher plan to appeal the FTC's ruling; the case can be heard by a federal appeals court in any jurisdiction where the companies do business.