Professor Joanna Shepherd Explains Pharmaceutical Product Hopping in New CPIP Policy Brief

CPIP has published a new policy brief by Joanna M. Shepherd, Vice Dean and Thomas Simmons Professor of Law at Emory University School of Law. The brief, entitled The Legal and Industry Framework of Pharmaceutical Product Hopping and Considerations for Future Legislation, discusses the practice of so-called “product hopping,” where a pharmaceutical company turns its focus to newer versions of its existing drugs. The newer versions, which may include extended-release formulations, different dosages, and the like, can be protected by new patents if they independently meet the patentability requirements, including novelty, nonobviousness, and utility. However, these newer versions may not be covered by a state’s automatic substitution laws since there are no generics yet available. Those laws only apply when generic versions are on the market.

Prof. Shepherd explains that the product hopping phenomenon is incentivized by the legal and industry framework in which pharmaceutical companies operate. Indeed, the current system allows generic drug companies to free ride on the extensive research, development, approval, and marketing costs borne by the branded drug companies, and the latter are thus motivated to create new and innovative drugs that will further benefit consumers. Despite these benefits, some suggest that we need legislative changes to rein in product hopping, and some even argue that the practice itself violates the antitrust laws. Prof. Shepherd looks at the existing case law on the antitrust issue—a total of two cases at the federal appellate level—to find points of agreement, and she uses that synthesis to suggest considerations for future legislative efforts to balance the needs of consumers and producers. Finally, Prof. Shepherd warns that any legislation aimed at product hopping should be cautious so as not to ultimately harm consumers, reduce innovation, and increase health care spending.

The Executive Summary and Conclusion are copied below:

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Executive Summary

Ensuring that Americans can afford health-improving and life-saving drugs should be a top priority for policymakers. However, efforts to reduce drug prices must be made carefully so as not to jeopardize the innovation that creates those critical drugs in the first place.

Recently, in the name of reducing drug prices, the makers of innovative drugs have become targets of antitrust suits alleging that their business practices constitute anticompetitive behavior. One such practice is sometimes called “product hopping.” This is the act of shifting a customer base from an older drug to a newer one with a longer remaining patent life. A generic drug maker is still free to sell the generic version of the older drug once its patent expires, but product hopping prevents the generic drug maker from benefitting from state laws that automatically substitute generic drugs at the pharmacy counter. Because product hopping makes it more difficult for generics to “free ride” on the manufacturers’ efforts, many have argued that the practice is anticompetitive.

Case law in this area is sparse, and there is a troubling uncertainty in the industry about what practices will, and should, trigger an antitrust violation. Current legislative proposals attempt to limit or prohibit the two basic forms of product hopping: the “hard switch,” in which the older drug is pulled from the market and replaced with its newer counterpart; and the “soft switch,” in which the older drug remains for sale, but all marketing efforts are shifted to the new drug.

The purpose of this policy brief is to address broad and vague language within those proposals that run counter to their stated goals and to advocate for clear and reasonable standards for assessing when a business’s activities should be deemed anticompetitive. As discussed further below, language that is too broad in scope could cover normal business practices that should not fall under antitrust law. Vague language would introduce legal uncertainty into the equation and weigh heavily on drug developers’ investment decisions, leading to fewer innovative treatments and higher levels of overall national health care spending.

This brief contains four parts. First, I will discuss the legal and industry framework that incentivizes product hopping. Second, I will discuss the current state of product-hopping case law as laid out in New York v. Actavis and Mylan Pharmaceuticals v. Warner Chilcott. Third, I will present considerations for future product-hopping legislation. The guiding principles for determining anticompetitive practices should be: (1) whether a hard switch eliminates consumer choice with no offsetting consumer benefit; and (2) whether a soft switch includes conduct that significantly interferes with consumer choice to the point at which it is effectively eliminated, with no offsetting consumer benefit. Fourth, I will discuss the potential consequences of legislation that is written too broadly or vaguely.

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Conclusion

All parties generally agree upon the importance of maintaining choice in the pharmaceutical market. But we must bear in mind that true choice is promoted not only by a competitive marketplace of sellers but also by the continual introduction of new and better treatments. Any new legislation must strike a balance that allows for a free and open market without stifling innovation in medicine. And any new antitrust law should be focused on preventing anticompetitive behavior from all sides, rather than preserving or reinforcing the regulatory advantages to which generic drug makers have grown accustomed. Above all, the law must be clear and unambiguous, so that those who are responsible for bringing innovative medicines to the world are not hampered by the inefficiencies of regulatory uncertainty.

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To read the policy brief, please click here.