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In its report on so-called “pay for delay” settlements of ANDA litigation (otherwise known as “reverse payments”), the Federal Trade Commission (FTC) is calling for an outright ban on such agreements. Settlements containing “reverse payments” involved payments from the patent- and NDA-holding, branded drug company to a generic company that has filed an ANDA containing a Paragraph IV certification that an Orange Book-listed patent is invalid or unenforceable.

According to the FTC, these settlements are per se violations of Section 1 of the Sherman Antitrust Act. The Commission’s position is supported by only one recent appellate court decision, in the 6th Circuit Court of Appeals decision in In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003). Several other courts of appeals have disagreed, including the Federal Circuit, In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008); the 11th Circuit, Schering-Plough Corp. v. Fed. Trade Comm’n, 402 F.3d 1056 (11th Cir. 2005), and the Second Circuit, In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006). The FTC contends that these courts of appeal have “misapplied the antitrust laws” by upholding this type of agreement, which raises the question of whether it may be the FTC that is “misapplying” the law by demanding a per se rule holding reverse payments to be illegal. Since the FTC’s position is completely goal-oriented (because the result of these agreements is a delay in generic competition), we have reviewed the bases of these several courts of appeals decisions.

In this post, we turn to the 6th Circuit’s decision in the Cardizem case. This case was brought by a variety of patient groups as plaintiffs against Hoechst Marion Roussel and Andrx over a reverse payment-containing settlement agreement in ANDA litigation over U.S. Patent No. 5,470,584 for HMR’s Cardizem CD product. The active ingredient in Cardizem is diltiazem hydrochloride, used for treating angina and hypertension and as a preventative for heart attack and stroke. Andrx filed an ANDA for Cardizem CD and HMR sued triggering the 30-month stay of FDA approval of the generic drug. Andrx filed antitrust counterclaims and stated its intention to launch upon approval, and after expiration of the 30-month stay, the FDA approved Andrx’s generic Cardizem CD. According to the Court, “[o]n June 9, 1999, the FDA approved Andrx’s reformulated product. That same day, HMR and Andrx entered into a stipulation settling the patent infringement case and terminating the Agreement. . . . On June 23, 1999, Andrx began to market its product under the trademark Cartia XT, and its 180-day period of marketing exclusivity began to run.”

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The terms of the agreement were as follows:

• Andrx agreed not to market a generic version of Cardizem CD until Andrx received a final determination in its favor in the patent infringement lawsuit, HMR or Andrx entered into a licensing agreement, or HMR entered into a licensing agreement with a third party (the trigger date being the earliest of these).

• Andrx agreed to dismiss its counterclaims (for unfair competition and antitrust violations).

• Andrx further agreed to pursue its ANDA and not to relinquish or transfer its 180-day exclusivity period or any other right.

• HMR agreed to pay Andrx $40 million per year (paid $10 million every calendar quarter) beginning on the date when the FDA approved Andrx’s ANDA, and $100 million per year (less the interim $40 million payments) once either there was a final judgment that the ’584 patent was not infringed, or HMR dismissed the patent infringement lawsuit, or there was another resolution of the lawsuit between the parties that did not finally resolve issues of invalidity, unenforceability, or infringement, and HMR did not refile or pursue the lawsuit.

• HMR also agreed not to seek preliminary injunctive relief during the ANDA suit.

The FDA approved Andrx’s generic Cardizem CD formulation on June 9, 1998 (one day after the end of the 30-month stay), and HMR began paying Andrx the $40 million/year payment in $10 million quarterly payments. Andrx then filed a supplement to its ANDA specifying that it had reformulated the product and certified that its reformulated product did not infringe the claims of the ’584 patent. The FDA approved this reformulated product on June 9, 1999, and the parties settled the infringement suit and terminated the agreement that day. HMR also paid Andrx a final sum of $50.7 million, for a total of payments equaling $89.83 million. Two weeks later, Andrx began to market its generic product, starting the 180-day exclusivity period. This date of market entry was almost 12 years before the expiration date of the ’584 patent (February 15, 2011).

The agreement contained a number of provisions not found in other, legal agreements. First, Andrx was the first ANDA filer, and the agreement did not require the generic company to change its Paragraph IV certification. Since the parties settled the ANDA litigation, the 180-day exclusivity period could not begin to run until Andrx entered the marketplace — a date delayed by the agreement. Moreover, the agreement contained a provision where Andrx agreed neither to relinquish nor transfer its right to the exclusivity period. In addition, plaintiffs alleged that the agreement covered generic Cardizem products that did not satisfy the dissolution limitations in the patent claims and thus did not infringe the ’584 patent (specifically, that Andrx’s reformulated product released not less than 55% of the drug within the first 18 hours after administration, which falls outside the scope of the limitation of the ’584 patent claims that required not more than 45% release of the drug 18 hours after administration).

The lawsuit against HMR and Andrx was consolidated from a number of complaints from individuals, states, and other groups. These complaints were brought under § 1 of the Sherman Act and § 4 of the Clayton Act (including its treble damages provisions), based on the “but for” argument that a generic Cardizem would have been on the market but for the agreement, and that the exercise of its 180-day exclusivity barred other generics from coming to market. Plaintiffs fell into three groups: (1) the “State Law Plaintiffs,” indirect purchasers, and class representatives, from various states (California, Michigan, Minnesota, New York, North Carolina, Tennessee, and Wisconsin and the District of Columbia) whose complaints, initially filed in state court and then removed to federal district court by defendants, allege violations of state antitrust and consumer protection statutes; (2) the “Sherman Act Class Plaintiffs,” direct purchasers, and class representatives, whose complaint, filed in federal district court, alleges a violation of federal antitrust law; and (3) the “Individual Sherman Act Plaintiffs,” two groups of purchasers, not representatives of any class, whose complaints, filed in federal district court, allege violations of federal antitrust law (filed by The Kroger Co., Albertson’s, Inc., The Stop and Shop Supermarket Co., and Eckerd Corp.); JA 887-896 (filed by CVS Meridian, Inc. and Rite Aid Corp.), the plaintiffs from seven states (California, Michigan, Minnesota, New York, North Carolina, Tennessee, and Wisconsin) and the District of Columbia claim violations of state antitrust law.

The District Court held that the agreement was per se illegal, because the reverse payment provisions and actual payments from HMR to Andrx delayed generic entry and constituted a naked, horizontal restraint of trade. The Court certified the following question for interlocutory appeal to the 6th Circuit:

In determining whether Plaintiffs’ motions for partial judgment were properly granted, whether the Defendants’ September 24, 1997 Agreement constitutes a restraint of trade that is illegal per se under section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and under the corresponding state antitrust laws at issue in this litigation.

In its opinion, the appellate court noted that while the literal meaning of Section 1 of the Sherman Act would render per se illegal every agreement in restraint of trade, the Supreme Court has “long recognized” that the statute is meant only to prohibit unreasonable restraints, and that courts assess whether a restraint is unreasonable using a rule of reason, citing State Oil Co. v. Khan, 522 U.S. 3, 10 (1997). “Under this approach, the ‘finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect.’” State Oil (citing Arizona v. Maricopa Cty. Medical Soc., 457 U.S. 332, 343 & n. 13 (1982)).

However, there are some agreements, according to the Court, that “have such predictable and pernicious anti-competitive effect[s], and such limited potential for procompetitive benefit,” that they are “deemed unlawful per se.” Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 5 (1958). Courts have recognized that certain kinds of agreements cannot satisfy the rule of reason under any circumstances, and such agreements have a “conclusive presumption” of illegality, citing Arizona v. Maricopa Cty. Medical Soc. at 344. For such agreements, “no consideration is given to the intent behind the restraint, to any claimed pro-competitive justifications, or to the restraints actual effect on competition,” the Court opined, citing National College Athletic Ass’n v. Board of Regents of the UNiv. of Okalhoma, 468 U.S. 85, 100 (1984). The Supreme Court is cited as being almost dismissive of such instances: “a per se rule reflects the judgment that such cases are not sufficiently common or important to justify the time and expense necessary to identify them.” Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 50 n. 6 (1977).

Citing the NCAA case, the 6th Circuit identifies naked, horizontal price restraints as being per se illegal according to this line of Supreme Court precedent. This type of agreement is defined as “an agreement between competitors at the same level of the market structured to allocate territories in order to minimize competition,” citing United States v. Topco Assocs., 405 U.S. 596, 608 (1972), stating that “[t]his Court has reiterated time and time again that horizontal territorial limitations . . . are naked restraints of trade with no purpose except stifling of competition. Such limitations are per se violations of the Sherman Act.”

With this analytical framework in mind, the 6th Circuit listed facts it termed “undisputed and dispositive.” First, under the agreement, HMR was assured that Andrx, at the time the only potential competitor in the marketplace for Cardizem, would remain off the market at a cost of $10 million per quarter even after Andrx had obtained FDA approval for its generic version of the drug. Second, as a consequence of this agreement, not only Andrx but all other generic competitors were kept off the market in view of Andrx’s 180-day exclusivity period and the provisions of the agreement that Andrx would not relinquish or transfer the right (which commenced only when Andrx first entered the marketplace; thus there was a direct nexus between the agreement’s provisions keeping Andrx off the market and the delay in generic Cardizem coming to the marketplace from any source).

This was enough for the Court to characterize this as a naked horizontal restraint that is per se illegal. In a footnote, the Court addressed the consequences of a per se determination, instead of applying a rule of reason analysis:

The risk that the application of a per se rule will lead to the condemnation of an agreement that a rule of reason analysis would permit has been recognized and tolerated as a necessary cost of this approach. See, e.g., Maricopa Cty., 457 U.S. at 344 (“As in every rule of general application, the match between the presumed and the actual is imperfect. For the sake of business certainty and litigation efficiency, we have tolerated the invalidation of some agreements that a full-blown inquiry might have proved to be reasonable.”); United States v. Topco Associates, Inc., 405 U.S. 596, 609 (1972) (“Whether or not we would decide this case the same way under the rule of reason used by the District Court is irrelevant to the issue before us.”).

The 6th Circuit was not persuaded by the arguments to the contrary. Specifically, the Court rejected defendants’ argument that the agreement was a proper exercise of the patent right. “[T]he Agreement cannot be fairly characterized as merely an attempt to enforce patent rights or an interim settlement of the patent litigation,” according to the Court. “As the plaintiffs point out, it is one thing to take advantage of a monopoly that naturally arises from a patent, but another thing altogether to bolster the patent’s effectiveness in inhibiting competitors by paying the only potential competitor $40 million per year to stay out of the market.” And arguments that there were pro-competitive effects that offset the anticompetitive effects were unavailing because of the Court’s determination that the agreement was per se illegal.

The Court also determined that the plaintiffs had pleaded sufficiently to satisfy the requirement of asserting an antitrust injury ((1) “injury of the type the antitrust laws were intended to prevent” and (2) injury “that flows from that which makes defendants’ acts unlawful,” citing Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977)). Part of the Court’s decision was based on the standard of review, where all allegations in the complaint are taken as true and all inferences are drawn in plaintiffs’ favor. These included:

(1) Andrx had developed and was ready to market a generic version of Cardizem CD; (2) Andrx had certified to the FDA that its generic product did not infringe any of the patents associated with Cardizem CD; (3) the patent infringement litigation was a ‘sham’; (4) prior to entering into the Agreement, Andrx had represented to the federal district court presiding over the patent infringement litigation that it intended to market and sell its generic version of Cardizem CD as soon as it received final FDA approval; (5) the Agreement entered into by Andrx and HMR provided, among other things, that once the FDA approved Andrx’s ANDA, HMR would commence making quarterly payments of $10 million in exchange for Andrx not bringing its generic product to market; (6) Andrx did not enter the market upon receiving FDA approval on July 9, 1998; (7) pursuant to the Agreement, HMR ultimately paid Andrx $89.83 million; (8) ‘but for’ the Agreement and the payment, Andrx would have begun to market its generic version of Cardizem CD on or shortly after July 9, 1998; (9) the Agreement effectively eliminated generic competition in the market for Cardizem CD from July 1998 through July 1999, when the Agreement was terminated; and (10) due to the lack of a competitive market, the plaintiffs were deprived of the option of purchasing a generic lower-priced drug and paid more than they otherwise would have for Cardizem CD.

The 6th Circuit affirmed the District Court’s determination that these allegations satisfy the Brunswick requirements and that plaintiffs had alleged sufficient antitrust injury that the District Court properly denied defendants’ motion to dismiss. The antitrust injury was to consumers who “were deprived of a less expensive generic product, forcing them to purchase the higher-priced brand name product, because of a per se illegal horizontal market restraint”; preventing such an outcome was “undoubtedly a raison d’etre” for passage of the Sherman Act. In addition, the injury “‘flows’ from that which makes defendants’ act unlawful,’” i.e., causing consumers to pay more for branded Cardizem CD than they would have paid for Andrx’s generic version. And the Court found “incredible” the argument that Andrx would not have entered the market for fear of patent infringement liability in the absence of the $89 million paid by HMR under the agreement.

There are several distinctions that can be used to explain the different outcomes in this case and the other cases that did not find a reverse payment agreement to be per se illegal. For example, in the three cases that did not find an antitrust violation in a reverse payment agreement, the courts were careful to state that there were circumstances in which the agreement could be illegal. These included an extension of the exclusionary right of the patent in excess of the proper scope of the claims, initiation or continuance of “sham” litigation where the patentee knew that the patent was invalid or unenforceable or that the accused product did not infringe the asserted claims, or Walker Process-type violations. Here, the Court found that Andrx’s reformulated product did not infringe the claims of the ’584 patent. From that conclusion, payment from HMR to Andrx was not a legitimate exercise of the patent’s exclusionary right. Moreover, in other instances, the first ANDA filer changed its certification from Paragraph IV to Paragraph III, and thus gave up its 180-day exclusivity period; that was not the case here. Not only did Andrx not change its certification, but the reverse payment agreement contained an affirmative requirement that Andrx neither relinquish nor transfer the right. The effect of this provision was in fact to keep other potential generic entrants from the marketplace. Finally, while in other cases the change in certification permitted other generic drug companies to file their own ANDAs and to thus be able to obtain FDA approval (and in some of those cases that is precisely what occurred, although the patentee prevailed and other generic companies did not enter the market), here the reverse payment agreement had a preclusive effect on other potential generic entrants.

It is likely (although not expressly stated in the opinion) that the fact that Andrx’s reformulated product did not infringe the ’584 patent (and the agreement was at least in part responsible for delaying entry of the reformulated product) was an important factor precluding the 6th Circuit from crediting other considerations that were important in the decisions of the other appellate courts that the reverse payments in those cases were not illegal. As in those cases of legal reverse payment agreements, Andrx’s generic Cardizem CD product entered the marketplace significantly earlier than the expiration date of the ’584 patent. And the Court noted that Andrx’s generic reformulated product, sold as Cartia XT, had “captured a substantial portion of the market” and “sold for a much lower price than Cardizem CD.” From a “big picture” approach, as has been applied by other circuit courts of appeal for other reverse payment agreements, the period of delay from the time the parties entered into the agreement (September 24, 1997) until Andrx first entered the marketplace with its Cartia XT product (July 9, 1999) (i.e., less than 22 months) is significantly shorter than the difference between the time Cartia XT was first marketed and the expiration date of the ’584 patent (February 15, 2011) (i.e., 11 years, 7 months). This “advantage” to the public evaporates under circumstances where the patentee had no right to exclude the generic entrant from the marketplace (because the generic drug product does not infringe the patent claims); that appears to have been the case here, and no doubt influenced the Court’s decision.

Even in a case, as here, where the court holds a reverse payment to be per se illegal, the opinion shows the benefit of assessing these agreements as they arise rather than to create a per se rule that all reverse payment-containing agreements are per se illegal. As the courts of appeal in In re Ciprofloxacin Hydrochloride Antitrust Litigation, Schering-Plough Corp. v. Fed. Trade Comm’n, and In re Tamoxifen Citrate Antitrust Litigation noted, there are many circumstances under which reverse payment-containing agreements are pro-competitive, consistent with the proper exercise of the exclusionary patent right and conserving judicial and societal resources. The FTC’s approach (as well as bills introduced in Congress banning reverse-payment agreements, and the purported provisions of the renewed healthcare reform proposal espoused by President Obama removes these advantages when they exist, and substitute by legislation what courts (like the 6th Circuit) can deliver in those instances when reverse payment-containing agreements cross the line into illegal restraints of trade. While there are certainly political advantages in opposing these agreements in all instances, the experience of several courts of appeals strongly suggest that making the determination per se may restrict rather than advance expeditious generic drug entry. Which isn’t what the FTC, the administration, the generic drug companies, or the public want.

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