Pay for Delay and M&A: Two Hot Topics in Pharmaceutical Antitrust

1. Pay for Delay and M&A: Two Hot Topics in Pharmaceutical Antitrust At the AHLA Annual Meeting Luncheon of the Antitrust/Business, Law & Governance/and Life Sciences Practice Groups July 1, 2014 Faculty : Saralisa BrauFederal Trade Commission, Washington, DC sbrau@ftc.gov Jeffrey W. BrennanMcDermott Will & Emery LLP, Washington, DC jbrennan@mwe.com

2. Presentation Overview Pay-for-Delay • Definition and what’s at stake • Evolving legal standards before and after FTC v. Actavis • What’s next • Counseling tips Pharmaceutical M&A • Recent developments • Key features of antitrust analysis in pharmaceutical mergers • Counseling tips Questions Saralisa’s disclaimer: This presentation was prepared from public sources. The views expressed are my own are not necessarily those of the Federal Trade Commission.

3. Pay-for-Delay Settlements Brand and generic in patent litigation settle the case. Generic agrees to refrain from going to market until a certain date. Agreement includes compensation from the brand to the generic (“reverse payment”): • possibly including cash; IP licenses; co-promotion, co-development, manufacturing, API supply, or “no authorized generic” agreements.

4. Incentives to Pay for Delay Pre-Generic Filing Brand’s Profits Competition Reverse Payment Payment to Generic Generic’s Profits Brand’s Profits Brand’s Profits Consumer Savings

5. Effects of Pay-for-Delayfr-De;layelaySettlements Brand and generic in patent litigation settle the case. 1. Generic agrees to refrain from going to market until a certain date. 2. Agreement includes compensation from the brand to the generic (“reverse payment”): • possibly including cash; IP licenses; co-promotion, co-development, manufacturing, API supply, or “no AG” agreements. FTC (Jan. 2010): Pay-for-delay costs consumers about $3.5 billion a year • On average, settlements with payments prevent entry 17 months longer than settlements without CBO (Nov. 2011): Legislation targeting pay-for-delay would reduce federal deficit by about $4.8 billion over 10 years

6. Pre-Actavis Precedent Circuit courts finding settlements illegal or presumptively unlawful: • In re Cardizem (6th Cir. 2003) • In re K-Dur (3d Cir. 2012) Circuit courts finding settlements legal: • FTC v. Schering-Plough (11th Cir. 2005) • In re Tamoxifen (2d Cir. 2006) • In re Ciprofloxacin (Fed. Cir. 2008 & 2d Cir. 2010) • FTC v. Watson (11th Cir. 2012)

7. Approach of Courts that Found Settlements Legal Must consider the “scope of the patent.” A violation can occur only if the exclusionary effect of the agreement exceeds the potential exclusionary scope of the patent, such as: • If the patent was obtained by fraud • If the patent infringement litigation was a sham • If the agreement covers unrelated or obviously non-infringing products • If the generic agrees to stay out of the market past patent expiry

8. FTC v. Actavis Supreme Court in 2013 rejects the “scope-of-the-patent” test. Reverse payment must be analyzed under antitrust “rule of reason.” • Reverse payment has the potential for “genuine adverse effects on competition.” • “[N]ormally not necessary to litigate patent validity” to determine the competitive effects. • “[L]eave[s] to the lower courts the structuring of the present rule-of-reason antitrust litigation.”

9. Rule of Reason Analysis “[T]he 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.”

10. What’s Next for the FTC? Pursue pay-for-delay matters currently in litigation. • FTC v. Actavis (AndroGel) (N.D. Ga) & FTC v. Cephalon(Provigil) (E.D. Pa. 2008) • Monitor private litigations (currently 17) and file amicus briefs as appropriate • Effexor XR (D.N.J 2011) & Wellbutrin (E.D. Pa. 2008) • Investigate new pay-for-delay matters. • Re-examine settlements filed under the Medicare Modernization Act (MMA) of 2003.

11. The Actavis Court Gave Something to Both Sides Court rejected FTC’s proposed standard of “presumptive illegality” • This was an ambitious argument, given that 3 of 5 U.S. courts of appeals had rejected the Commission’s reverse-payment settlement theory Court said a “quick look” antitrust standard applies only where “an observer with even a rudimentary understanding of economics could conclude” that the activity is anticompetitive • “We do not believe that reverse payment settlements … meet this criterion” Court left the structuring of rule-of-reason trial to the lower courts

12. Where do Brand and Generic Companies Go from Here? FTC will pursue “pay-for-delay” agenda for foreseeable future FTC will probably see a litigation candidate in every virtually every settlement having the pay-for-delay paradigm • Generic agrees not to launch until future • Brand pays something value to generic (besides saved litigation costs) Private suits over settlements—including ones the FTC does not challenge—are now a fixture of the terrain How can settling parties assess the risk that their agreement will trigger an extended investigation and litigation?

13. Assessing Risk of Challenge, on the Assumption the FTC Can’t Bring Every Reverse-Payment Case it Sees Does the agreement contain the reverse-pay settlement features? • A payment coupled with immediate entry, and delayed entry not coupled with a payment, are not “pay-for-delay” agreements What is your justification for the “side deal” fostering payment? Is the payment equal to “fair value for services” in the side deal? How soon will generic enter? How much time is left on patent? How “big” is the drug? A blockbuster? A small also-ran? What do your contemporaneous documents say? • Do they predict early generic entry if no settlement? • Do they forecast the “settlement vs. no-settlement” effect on profits?

14. Other Considerations in Assessing Antitrust Risk The policy arguments ended with Actavis– let them go Slate is clean insofar as no federal court has tried a reverse-payment case under the rule of reason • The only rule of reason trial was before an FTC administrative law judge, who ruled for the respondents (Schering-Plough); Commission reversed FTC and private plaintiffs must prevail on fundamental elements of prima-facie case (market definition, anticompetitive effects) The party with the better facts is likely to stress evidence on validity and infringement in the underlying patent case Legal precedent will build case-by-case

15. Merger Review in the Pharmaceutical Industry

16. Overview of FTC Merger Review Clayton Act Section 7 Standard • “may be substantially to lessen competition” HSR Filing Requirements • Two-part test regarding thresholds: • “Size of person” – one party has net revenues or total assets in excess of $151.7 million; the other party has net revenues or total assets in excess of $15.2 million • “Size of transaction” - $74.9 million BUT if value >$303.4, then size of person test does not apply • 4(c) documents FTC/DOJ Merger Guidelines • Market definition and share • Competitive effects • Entry • Efficiencies FTC handles all pharmaceutical mergers

17. Recent FTC Enforcement Activity Challenging Pharmaceutical Transactions Since 2010, the FTC has challenged 12 pharmaceutical transactions, all of which featured competitive overlaps involving generic drugs and all of which were resolved by divestitures: • Akorn and HiTech (April 2014) (5 generic overlaps) • Endo and Boca (Mar. 2014) (7 generic overlaps) • Mylan and Strides (Dec. 2013) (11 generic overlaps) • Actavis and Warner Chilcott (Dec. 2013) (4 overlaps, 3 brand-generic and 1 generic-generic) • Perrigo and Paddock (June 2012) (7 generic drug overlaps) • Valeant and J&J (Feb. 2012) (1 brand-generic overlap) • Valeant and Sanofi-Aventis (Feb. 2012) (2 brand-generic overlaps) • Teva and Cephalon (Oct. 2011) (3 brand-generic overlaps) • Hikma and Baxter (June 2011) (2 generic overlaps) • Novartis and Fougera (Oct 2010) (4 overlaps, 3 generic-generic and 1 brand-generic) • Watson and Actavis (Jan. 2010) (21 generic drug overlaps) • Watson and Arrow (Jan. 2010) (2 generic overlaps)

18. Some Differences in Merger Analysis in Pharmaceutical Transactions Key focus typically on: • Product market definition (branded, generic, OTC) • Competitive effects analysis in actual, potential, and innovation markets • Both are related and are based on a factual review of how competition functions in a relevant market Less focus typically on: • Geographic market definition • Market participants and share Only industry-specific application of HSR notification provisions (relating to transfers of exclusive rights to pharmaceutical patents).

19. New HSR Rule on Transfers of Exclusive Rights to Pharmaceutical Patents – effective Dec. 2013 Applies only to pharmaceutical and biotech patents Old rule: no HSR trigger if exclusive rights transferred but licensor retained limited manufacturing rights Problem: “evolution of pharmaceutical patent licenses” renders old approach inadequate New rule: HSR may trigger if licensee obtains “all commercially significant rights” in a “particular therapeutic area (or specific indication within a therapeutic area)” • HSR may trigger if licensor retains co-marketing rights or “limited manufacturing rights” (manufactures product solely to supply licensee); no HSR if licensor retains unlimited manufacturing rights Transfer of “all commercially significant rights” is an acquisition of an asset and potentially reportable if it meets the HSR size-of-transaction / size-of-person thresholds FTC anticipates 30 more filings each year (i.e., 2% increase in overall filings, but 35% increase in pharma industry filings based on 2012 statistics)

20. Case Study: Watson/Actavis (Oct. 2012) Overview of Transaction • Transaction valued at $5.9 billion • Horizontal overlaps in 21 generic product markets; FTC review lasted 6 months • Consent provisions require merging parties to divest 18 drugs, and for the other 3 to relinquish manufacturing and marketing rights Actual Competition • 7 overlapping drug products where both parties have products on market; all divested to third parties • 5->4 generic Lorazepam (combined share of 53%), generic Duragesic (combined share 35%) • 4->3 generic Cardizem CD (combined share of 55%), generic Zyban (combined share of 45%), nifedipine ER tablets(combined share of 31%) • 3->2 generic Reglan (combined share of 34%) • 2->1 generic Kadian(combined share of 100%) Potential Competition • Pipeline products: 8 overlapping drug products where one party has product on market and the other merging party is one of a limited number of likely and timely entrants in a concentrated market. • Remedy: 6 divested ; 2 relinquishment of rights where 1 party manufactured the only generic and the other merging party had a profit-sharing and/or marketing agreement with the best-positioned entrant. • Future products in development: 6 overlapping drug products where generic markets do not yet exist, but will be highly concentrated when merging parties enter. • Remedy: 5 divested; 1 amended supply agreement with brand where both merging parties were potential suppliers of future generic product, and one of the merging parties had an exclusive development and manufacturing agreement with brand.

21. Pharmaceutical Mergers – Product Market Definition Turns on Closeness of Substitution Brand-brand mergers – • Potential product market parameters: same therapeutic class; same mechanism of action; same chemical compound; same dosage form, strength or frequency; Rx or OTC; other Generic-generic mergers – • Once drug “goes generic” the brand typically is not a price constraint (function of state mandatory generic-substitution laws); product market is limited to generic versions of brand, and sometimes narrowed to a specific dosage form or strength Brand-generic mergers – • If brand merges with first generic entrant, the product market usually is confined tothose products • Concern is that brand won’t launch the generic, or will scuttle plans to launch its own generic in competition with generic’s 180-exclusivity period under Hatch-Waxman

22. Pharmaceutical Mergers – Antitrust Analysis Highly Fact Specific Mergers between branded drugs – • Focus: do doctors, payers and patients view drugs as close substitutes? • Potential effects: fewer rebates to payers for formulary placement; less discounting to patients, sampling/detailing to doctors, or innovation Mergers between generic drugs (same molecule) – • Very homogeneous; focus on price effect • Data show that even the 5th generic entrant can cause price decline Mergers between brand and generic version of brand – • Anticompetitive risk is higher if merger is with first generic entrant FTC scrutinizes deals involving future/potential competition too

23. Pharmaceutical Mergers – Evidence and Strategy FTC Sources of Evidence • IMS data • Company documents and data • FDA staff • Industry experts, physicians, payors, distributors, retailers Strategy tips prior to filing HSR • Know where the overlaps are, in market and in pipeline • Know the products you’ll readily divest and the ones you’ll try to keep • Get your evidence together • Consider meeting with staff pre-filing, and bring evidence

24. Any questions? Thank You.