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It was the morning of July 2 — the short, slow workweek preceding the Independence Day holiday. Christine White, a health care antitrust partner at Chicago’s McDermott, Will & Emery, was leaving her midtown Manhattan office for a client meeting when she got the news: In Washington, D.C., Federal Trade Commission administrative law judge D. Michael Chappell had just exonerated pharmaceutical giant Schering-Plough Corp. and generic drugmaker Upsher-Smith Laboratories Inc. of charges of anticompetitive behavior. The case wasn’t White’s or even McDermott’s. But it was one that the health care antitrust bar had been watching closely for 16 months, ever since the FTC filed charges against Kenilworth, N.J.-based Schering and Minneapolis-based Upsher. It had grown out of a three-year probe into settlements between brand-name drugmakers and their rivals, generic drug manufacturers. Chappell’s decision had the potential to redraw the battle lines in an ongoing war over the FTC’s authority to closely regulate such settlements. White hastily printed the first 50 pages of Chappell’s 122-page decision before rushing out the door to hail a cab. Reading it while standing on the side of the street, she was pleasantly surprised: If upheld, the decision could give her clients, makers of brand-name drugs, enormous latitude in settling patent disputes with generic drugmakers. A few hours later, in a conference room overlooking Rockefeller Center’s skating rink — just yards from White’s office — Louis Solomon, a name partner with New York’s Solomon, Zauderer, Ellenhorn, Frischer & Sharp, got word of the decision. Solomon was meeting with a team of lawyers he had assembled to represent generic drugmaker Andrx Corp., which had been accused by the British pharmaceutical company AstraZeneca of infringing upon its patent for the heartburn drug Prilosec. Solomon says that when he read the decision later that afternoon, “my head was gratified [and] my heart was elated.” It may have been the first time that White, counsel to the brand-name companies, and Solomon, a generics-side lawyer, agreed on anything. But odd alliances are the story of the Schering decision. Brand-name pharmaceutical firms and generic drugmakers are on one side; the FTC, class action lawyers, and consumer interest groups are on the other. In mid-August FTC staff attorneys Karen Bokat, Markus Meier, and Elizabeth Hilder filed a 98-page brief appealing Chappell’s decision to the full FTC. Pretrial motions and hearings are anticipated for this fall, and the five-member commission is expected to issue its opinion this winter. Unless Congress jumps in, this case will define the law of drug patent settlements and may decide the fate of the plaintiffs’ bar’s assault on the prescription drug industry. The roots of the conflict go back to the 1984 enactment of the Drug Price Competition and Patent Restoration Act, commonly called the Hatch-Waxman Act. The measure was intended to bring down the price of prescription medicines by encouraging makers of generic drugs to enter the U.S. market. For the most part, that goal has been met. The generics industry, which accounted for less than 20 percent of filled prescriptions before 1984, now accounts for more than 40 percent, saving consumers an estimated $8 billion to $10 billion a year. The act allowed generic drugmakers to seek FDA approval to sell their versions of brand-name prescription drugs before the end of the drugs’ 20-year patent terms. It also reduced the amount of testing that generic drugmakers would be required to perform on so-called bio-equivalent drugs, duplicates of brand-name drugs that have already been approved by the FDA. Under the law, generic drug companies need only file an Abbreviated New Drug Application (ANDA) with the FDA, saving money and time. At the same time that it tried to speed the development of the generic drug industry, Hatch-Waxman also sought to preserve incentives for large pharmaceutical companies to research and develop new products. It gave patent holders a 45-day window to file infringement cases against any generic drugmaker that files an ANDA to market a generic version of one of its drugs. Any infringement claim automatically triggers a 30-month stay on FDA approval of the generic drug. Since some brand-name drugs are protected by several patents, a single ANDA filing can leave a generic drugmaker exposed to multiple infringement claims. That’s a lot of litigation, so as a balance, Hatch-Waxman provides an inducement to generic drugmakers. Because the first company to file its ANDA is likely to bear the financial burden of facing its brand-name rival in court, it gets a 180-day period of market exclusivity. During that time, no other generic drugmaker can launch its version of the brand-name drug. That is no small consideration: When only one generic drug is in the market, its maker typically can charge 75 percent of the price of its brand-name counterpart. But once the 180-day period is over, and other firms are allowed to introduce their generic versions of the drug, the price drops sharply. That is how the law works in theory. Here is how it worked in practice: In August 1995, Upsher filed an ANDA for a generic version of Schering’s K-Dur 20, a prescription-only potassium supplement used to treat hypertension. Schering holds a patent on K-Dur 20 until 2006, so it sued Upsher within the 45-day window stipulated by Hatch-Waxman. (Upsher filed late in the life of Schering’s patent because it wanted to obtain FDA approval just as the patent expired.) By June 1997 the two companies were embroiled in intense litigation in federal district court in Newark. As the trial neared, Judge William Walls, who was overseeing the case, tried to get the parties to settle, and a deal was struck. Schering, represented by Washington, D.C.’s Covington & Burling, agreed to pay Upsher $60 million to stay out of the business. Upsher, represented by the New York intellectual property boutique Fitzpatrick, Cella, Harper & Scinto, pledged to keep out of K-Dur 20′s market until 2001 and gave Schering the rights to market five of its other products. Covington partner Anthony Herman, who worked on the settlement, says its terms made sense. “It was a close case and expensive to litigate,” he says. “In the end, consumers were better off. The generic product got on the market before the patent expired, much sooner than it would have had Upsher lost the case.” The FTC didn’t see it that way. In its complaint against the companies, it argued that Schering’s agreement with Upsher unfairly prevented other generic drug makers from entering the market for K-Dur 20. This, the FTC said, kept the supplement priced at an abnormally high level, costing consumers as much as $100 million in overexpenditures. At the same time that it filed the Schering complaint, the FTC filed a separate action against Madison, N.J.-based American Home Products Corp. (now Wyeth). Like Upsher, AHP had signed an agreement involving its generic K-Dur 20 product with Schering. Prior to filing the complaints against Schering, Upsher and AHP, the FTC had filed only two other formal complaints alleging anticompetitive patent settlements. Both were filed in May 2000 and involved hypertension drugs; both ended in consent agreements. AHP chose that path, too: In mid-February, it settled its K-Dur 20 case with the FTC, agreeing to provide the agency with prior notice when making some other kinds of agreements with brand-name drugmakers and pledging never to enter into the type of arrangement that it had with Schering. But Schering and Upsher decided to fight, obtaining new counsel in Washington, D.C.’s Howrey & Simon (now Howrey Simon Arnold & White) and New York’s White & Case, respectively, and setting the stage for Chappell’s decision. In it, Chappell dismissed the FTC’s complaint and found that government lawyers did not prove that Schering had monopoly power in the market. He also ruled that, because the FTC had failed to prove that Schering’s patent on K-Dur 20 was invalid, the case was groundless. (Lawyers on both sides of the case declined to discuss it, citing the ongoing nature of the litigation.) Chappell’s decision reveals an Achilles’ heel in the Hatch-Waxman process — the need to address the validity of the patent claim during adjudication of antitrust claims, according to William MacLeod, a partner at Washington, D.C.’s Collier Shannon Scott. The trouble, says MacLeod — who represents the Pharmaceutical Research & Manufacturers of America, a trade group — is that none of the FTC’s current administrative law judges has experience in trying patent cases. Two FTC lawyers who spoke on a confidential basis say that if the patent-validity aspect of the Schering decision is upheld, the FTC won’t have the resources to hire a flock of patent specialists and may stop pursuing those kinds of cases. That’s not to say that the FTC has been sitting still. In late July, the agency suggested reworking the Hatch-Waxman Act, reporting to Congress that the act’s exclusivity provisions had been corrupted by drug companies. The FTC says that 14 of the 20 settlements involving expiring brand-name drug patents between 1992 and 2000 had the potential to delay the entry of generic equivalents into the market. The agency supports a bill, introduced by Sen. Patrick Leahy, D-Vt., that would open the settlement process up to public scrutiny by requiring that drug companies give copies of Hatch-Waxman-related settlements to the FTC and the U.S. Department of Justice. The Leahy bill isn’t likely to pass. But chances are better for the Greater Access to Affordable Pharmaceuticals Act, introduced by Sens. Charles Schumer, D-N.Y., and John McCain, R-Ariz. The bill aims to close the loophole in the Hatch-Waxman Act that lets brand-name drugmakers rack up 30-month stays on their generic competition by listing numerous patents — each of which can be contested — for the same product. The House is scheduled to consider the measure this fall; the White House has already announced opposition to it. In the meantime federal courts are hearing a handful of class actions involving such drugs as the antibiotic Cipro, the cancer-fighter tamoxifen, and K-Dur 20. Michael Flannery, a partner at St. Louis’s Carey & Danis, is co-lead counsel in the K-Dur 20 class action, representing consumer plaintiffs in the suit, which is being filed in Virginia. Flannery contends that Schering, Upsher and AHP colluded to corner the market on K-Dur 20. Bayer Corp., Barr Laboratories Inc. and The Rugby Group (now part of Watson Pharma Inc.) also face multidistrict litigation on charges of price collusion and monopolistic practices. In January 1997 Barr agreed not to sell Bayer’s brand-name drug Cipro in the United States in exchange for $24 million in payments to both Barr and Rugby. A similar case, consolidated in the Eastern District of New York, alleges that AstraZeneca (then known as Zeneca Group) and Barr entered into a confidential arrangement in the early 1990s, in which Barr agreed to stop challenging AstraZeneca’s patent on tamoxifen in exchange for $21 million and the right to sell the generic version of the drug. Sarah Lock, a lawyer with AARP Foundation Litigation, is serving as co-counsel, representing indirect purchasers in the tamoxifen case. (AARP joined the litigation at the end of May as a part of its overall strategy to battle the rising prices of prescription drugs.) Hatch-Waxman isn’t a simple law to understand, but even more complicated may be unraveling the tangle of competing interests surrounding the industry: business interests looking for profit, politicians looking for an issue, lobbyists looking for a win, class action lawyers looking for deep pockets, consumers looking for relief. It’s a prescription for stalemate. And there’s no drug for that.

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