Xryem: Pharmaceutical Settlement Acceleration Clause Found Anticompetitive Due To Risk Of "Profit Crushing Competition"

• Published date: 03 December 2021
• Subject Matter: Anti-trust/Competition Law, Litigation, Mediation & Arbitration, Antitrust, EU Competition , Trials & Appeals & Compensation
• Law Firm: Haug Partners
• Author: Mr David Shotlander and Ralph E. Labaton

On August 13, 2021, in a decision that largely flew under antitrust and patent practitioners' radars, U.S. District Judge Lucy H. Koh mostly denied a motion to dismiss in the alleged 'reverse payment' case, In Re Xyrem (Sodium Oxybate) Antitrust Litig.¹ In a notable twist, the Court ruled that acceleration clauses, which have the potential to permit generic entry before the allegedly delayed launch date, threatened 'profit-crushing competition,' which the Court held to be an anticompetitive result. Acceleration clauses are common features in Hatch-Waxman patent settlements and the ramifications of this decision could have a significant impact for all pharmaceutical patent settlements.

I. XYREM BACKGROUND

The plaintiffs allege that Jazz Pharmaceuticals and Hikma Pharmaceuticals, among others, engaged in a conspiracy related to Jazz's branded narcolepsy drug, Xyrem (sodium oxybate). The plaintiffs allege that Jazz entered into 'reverse payment' settlements with the first-to-file generic company (Hikma) as well as with the later-filing generic drug-makers. Jazz allegedly assured Hikma that it would face no generic competition during its first 180 days on the market, an alleged $480 million value to Hikma.² Specifically, the plaintiffs allege reverse payments via (a) Jazz's agreement not to launch an authorized generic ('AG') version of Xyrem through a third party during Hikma's 180-day first-to-file exclusivity period; (b) Hikma's royalty obligation to Jazz, which escalates as Hikma's market share increases (disincentivizing a Jazz AG launch); and (c) an 'acceleration clause' that would allow Hikma to sell AG product immediately if (1) a generic version of Xyrem enters the market without Jazz's permission; or (2) Xyrem's unexpired patent claims are rendered invalid or unenforceable.³

Judge Koh denied defendants' motion to dismiss, finding that the plaintiffs sufficiently alleged that Jazz conveyed value to Hikma'i.e., the assurance that it would face no generic competition through its first 180 days'through the three reverse payments from Jazz to Hikma outlined above.⁴ While the Court's findings as to the third-party AG provisions and the escalating royalties are not clear outliers, the characterization of standard acceleration clauses as potential 'payments' represents a significant departure from the Supreme Court's landmark decision in FTC v. Actavis, Inc.⁵

II. ACCELERATION CLAUSES, GENERALLY

Hatch-Waxman settlements routinely incorporate acceleration clauses. Acceleration clauses ensure that the first-filer maintains its place in line, without which first-filers are far less likely to settle. Acceleration clauses thereby encourage settlement'a desirable outcome confirmed by Actavis. As for a later-filer, it may enter the market with some exclusivity'just those that chose to settle and itself'if it prevails in its patent litigation. But if the later-filer loses the litigation, it must wait for the patents to expire to launch and, when it does launch later, it will launch into a fully saturated market. Thus, the detriments of losing for later-filers significantly outweighs the expected benefit of winning, making...