Second Circuit Holds A Hard Switch Between Drugs Is An Unlawful Product Hop Under Section 2

On May 22, 2015, in a much-watched case, the Second Circuit upheld a preliminary injunction against Actavis PLC and its wholly owned subsidiary, Forest Laboratories, LLC (collectively "Actavis" or "Forest"), finding that Actavis's "hard switch" strategy to launch an extended-release version of its blockbuster Alzheimer's therapy and delist the immediate-release version would likely violate Section 2 of the Sherman Act.1 The Court held that because generic competition depends heavily on state drug substitution laws that allow pharmacists to substitute generics for branded products, the combination of launch and product removal constituted an anticompetitive "product hop" that would likely impede generic competition on the merits for the original immediate-release version of the drug.

Factual and Procedural Background

In January 2004, Forest launched its twice-daily immediate-release therapy for moderate-to-severe Alzheimer's, Namenda IR (memantine)2, generating over $1.5 billion in annual sales for the last several years. Five generic manufacturers have tentative FDA approval to launch on July 11, 2015 when regulatory exclusivity expires, and seven more may be approved for entry as early as October 2015. This generic entry was expected to reduce Forest's share of the immediate-release memantine market by over 80% within six months.

Forest developed a once-daily, extended-release version, Namenda XR, to improve patient compliance with treatment and extend its Alzheimer's franchise. Newly issued patents covering Namenda XR prevent generic entry until 2029. FDA approved Namenda XR in June 2010 and Forest launched in July 2013. As part of its initial "soft switch" launch strategy, Forest stopped actively marketing IR; promoted XR to physicians, caregivers, patients, and pharmacists; and discounted XR so patients would pay a lower co-pay for XR than IR. Internal Forest forecasts estimated that this "soft switch" strategy would only net a 30% market conversion.

The Court found in the record that, in order to boost the switch rate to an estimated 80 to 90%, Forest instituted several new strategies, which the Court called a "hard switch": (1) on February 14, 2014, Forest publically announced it would discontinue Namenda IR in August 2014, (2) Forest notified FDA of its intent to delist Namenda IR, and (3) Forest requested that the Centers for Medicare & Medicaid Services remove IR from its formulary so Medicare plans would not cover its prescription or use.

The State of New York filed its complaint in September 2014, alleging that the planned withdrawal of Namenda IR violated § 2 of the Sherman Act, and seeking a preliminary injunction requiring Forest to keep Namenda IR on the market at least through licensed generic entry in July 2015. The district court granted the preliminary injunction, finding that the State was likely to succeed on the merits and that competition and consumers would suffer irreparable harm if Forest's proposed actions were not halted.

The district court made several critical findings: (1) withdrawing IR from the market forced Alzheimer's patients to switch to XR as the only available alternative; (2) generic IR is not equivalent to XR and, thus, is not substitutable3 for branded XR; (3)...