Microsoft word - byline _tcc_ national law journal 12_4_06.doc
Monday, December 4, 2006
Plavix case illustrates perils of generic drug wars
Regulatory problems, poor judgment led to BMS' costly situation.
By, Thomas C. Carey/Special to The National Law Journal
This year, Peter R. Dolan, the chief executive officer of Bristol-Myers Squibb Co. (BMS), was faced with
the threat of generic competition for Plavix, a blockbuster anti-clotting drug with about $3.2 billion in
annual U.S. sales. In responding to this threat, he committed several errors that have cost BMS more than
$500 million in sales, have cost him his job and may yet cost him his freedom. This story gives a rare
look at the currents that swirl around executives at pharmaceutical companies who must make huge
gambles in the face of an uncertain legal and regulatory environment.
Before the Plavix matter came to a boil, the attorneys general of 35 states filed suit against BMS in 2001
and 2002, alleging that BMS had excluded generic competition for two proprietary drugs through
manipulative Food and Drug Administration (FDA) filings and baseless lawsuits. These cases were
settled in 2003 for more than $125 million, and left BMS and its practices subject to close scrutiny by the
state attorneys general.
Then in 2004 the U.S. Securities and Exchange Commission (SEC) accused BMS of managing its
reported earnings to arrive at a smooth growth curve that was not indicative of the company's true results.
To settle the matter, in June 2005, BMS entered into a deferred prosecution agreement with the U.S.
Attorney's Office for the District of New Jersey. See
. In that agreement, BMS agreed, among
other things, to be complete, truthful and prompt in providing information to the federal authorities. The
U.S. attorney agreed to drop its criminal complaint if no violations of the agreement occurred in the next
The Plavix litigation commenced before those lawsuits arose, but the settlement occurred afterwards. In
November 2001, Apotex Corp., a privately held drug manufacturer controlled by its chief executive
officer, Bernard Sherman, filed an abbreviated new drug application (ANDA) providing a "Paragraph IV
certification" under 21 U.S.C. 5050)(2)(vii)(IV), alleging that the patent covering Plavix was invalid. This
filing started a brief period during which BMS could sue Apotex for infringement, thereby triggering a
statutory 30-month automatic stay preventing the FDA from approving any ANDA filing with respect to
Plavix. 21 U.S.C. 355(j)(5)(B)(iii).
Before continuing this story, a little background is necessary. The first generic maker to file an ANDA
has a 180-day period of exclusivity during which the FDA may not approve another ANDA with respect
to the same proprietary drug. The 180-day period does not start until the first ANDA filer enters the
470 Park Avenue South, 10th fl., New York, New York 10016 • Phone: (212) 725-4500 • Fax: (212) 725-9188
market. If it does not enter the market, whether because of ongoing litigation or because it has agreed not
to, the 180-day period never starts, thus preventing other competitors from coming to market almost
This bottleneck can create tremendous value for the benefit of the brand drug company. Realizing that
value, brand drug companies are sometimes willing to pay the first ANDA filer more to stay off the
market than the generic drug company would make by selling the generic drug. See the Federal Trade
Commission's Prepared Statement on Barriers to Generic Entry before the Special Committee on Aging
of the U.S. Senate (July 20, 20062006/07/P052103BarrierstoGenericEntryTestimonySenate07202006.pdf, at 11-12. The 'reverse payments' issue
These "reverse payments" are viewed quite negatively by the FTC, which generally sees them as a
violation of antitrust laws. In 1999, the FTC began challenging reverse payment arrangements, and their
incidence dropped dramatically. The basic theory espoused by the FTC was that reverse payments
constituted an illegal restraint of trade in violation of § 5 of the Federal Trade Commission Act and § 2 of
the Sherman Act. The FTC gained additional leverage in its campaign against reverse payments in 2003,
when Congress required drug companies to disclose to the FTC and the U.S. Department of Justice
agreements made to settle Paragraph IV litigation. See the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, P.L. 108-173 (2003) at Title XI, Subtitle B, § 1112.
The tide turned against the FTC in 2005, however. First, the 11th U.S. Circuit Court of Appeals disputed
both the FTC's analytic framework and its conclusions in Schering-Plough v. FTC
, 402 F.3d 1056 (11th
Cir.), cert. denied, 126 S.Ct. 2929 (June 26, 2006). The 11th Circuit said that the FTC was incorrect in
applying antitrust standards to a reverse payments arrangement without first considering applicable patent
law. The court held that if the settlement does not seek to expand upon the exclusionary powers of the
patent and the litigation is not a sham, then reverse payments are not unlawful and may in fact be pro-
competitive. The 11th Circuit's analysis has been followed in the 2d Circuit in In re Tamoflaxen Citrate
, 429 F.3d 370 (2d Cir. 2005).
The FTC received another setback in 2005 when the Federal Circuit held that a generic drug manufacturer
that is not the first ANDA filer and that has not been threatened with a lawsuit by the brand drug
company cannot sue for a declaratory judgment concerning the validity of the patent because of a lack of
ripeness. Teva Pharmaceuticals USA Inc. v. Pfizer Inc.
, 395 F.3d 1324 (Fed. Cir.), cert den., 126 S. Ct.
473 (2005). In the view of the FTC, this decision strengthens the power of a patentee and a first ANDA
filer, acting together, to block any competition, even if the patent itself is invalid. See the FTC Statement
It was against this regulatory backdrop that BMS had to wrestle with Apotex. BMS' 30-month stay
expired in September 2005. In January 2006, while the patent litigation was still ongoing, the FDA
approved Apotex's ANDA application. Settlement discussions then began in earnest, with the parties
entering into a settlement agreement in March 2006. The settlement agreement
The agreement contained two types of provisions: those that required FTC and state attorneys general
approval to become effective and those that would apply if such approval were denied. The terms that
required regulatory approval included a license for Apotex to make a generic version of Plavix starting on
March 17, 2011, eight months before the patent would expire; a commitment by BMS not to launch an
authorized generic of Plavix; and BMS' purchase of Apotex's unsold inventory of generic Plavix for $40
The terms that would take effect upon a regulatory denial were that BMS would pay $60 million to
Apotex; BMS would limit its damages recovery in an infringement suit brought after Apotex launched its
generic product to 70% of Apotex's sales; and BMS would not seek a temporary restraining order or a
preliminary injunction against such a launch without giving Apotex five days prior notice.
The proposed payment of $60 million was startling enough. As events would show, the five-day head
start was critical to Apotex, which was prepared to launch its generic upon a moment's notice. BMS'
limitation on its potential damages, which precluded treble damages that might otherwise be available
under 35 U.S.C. 284, was enough to guarantee that Apotex would pursue an "at risk" launch if the
regulators did not approve the settlement.
In May 2006, when the state attorneys general objected to the settlement agreement, BMS and Apotex
signed a revised settlement agreement that accelerated slightly the date when Apotex would be licensed to
sell Plavix, and provided that BMS' infringement damages in the event of an Apotex launch would not
exceed 50% of Apotex sales. BMS' commitment not to launch an authorized generic was deleted. In a
letter sent to three U.S. senators on July 7, Sherman, the Apotex CEO, contended that he expected that the
settlement agreement would be rejected by the regulators, and that his main focus in negotiating the
"somewhat bizarre arrangement" was to clear the way for an "at risk" launch of Plavix once the rejection
After the revised settlement agreement was filed, Apotex's lawyers apparently told the FTC that there
were oral side agreements that BMS had not disclosed to the FTC or the attorneys general. See M.
Schuchman, "Delaying Generic Competition-Corporate Payoffs and the Future of Plavix," The New
England Journal of Medicine, Sept. 28, 2006, at 1300. Among the rumored side deals was BMS'
agreement not to launch an authorized generic, a term that was dropped from the written version of the
settlement agreement. In an interview, Sherman has hinted at the existence of incriminating e-mails, but
he has refrained from being more specific. See Stephanie Saul, "A Generic Drug Tale, With an Ending
Yet to be Written," N.Y. Times, Aug. 15, 2006,
On July 26, the FBI commenced a criminal investigation and raided Peter Dolan's office, apparently
looking for evidence that the Plavix regulatory disclosures were misleading. On July 28, BMS announced
that the state attorneys general would not approve the second settlement agreement. At a court hearing
held on Aug. 4, BMS' lawyers accused Sherman of sabotaging the settlement agreement by giving false
information to the regulators, which Sherman denied. Launch and injunction
On Aug. 8, Apotex launched its generic version of Plavix. One customer immediately placed a $75
million order. On Aug. 13, BMS sought a preliminary injunction prohibiting any further sales of the
generic and requiring a recall of the generics that had been sold. On Aug. 31, the U.S. District Court for
the Southern District of New York granted the preliminary injunction, but refused to order a product
recall. In its refusal, the court pointed to the five-day head start that BMS had agreed to give Apotex in
the settlement agreement. The court reasoned that, having negotiated away its ability to prevent the
generic launch, BMS was not in a position to ask the court to order a recall. In the 23 days prior to the
preliminary injunction, Apotex had sold enough generic Plavix to cost BMS more than $500 million in
The preliminary injunction was a major victory for BMS, but it came too late for Dolan. On Sept. 12, the
board of BMS terminated Dolan and the company's general counsel. The criminal investigation had since
been broadened to encompass possible securities fraud violations in connection with the Plavix
On Oct. 31, the Federal Circuit heard an appeal by Apotex of the injunction granted by the trial court.
While no decision has yet been rendered, the recording of the hearing, available at
mp3/06-1613.mp3, suggests a great reluctance to overturn the
injunction. That is where this tale stands now. Lessons to be learned
What lessons can be learned from the experience of BMS? First, regulatory problems have a way of
compounding. Had BMS not been the subject of prior regulatory scrapes, it would not have had to seek
approval for its settlement agreement with Apotex, making its position much stronger.
Second, BMS appears to have negotiated with Apotex in the belief that its patent was not likely to be
upheld. Yet the trial court, in issuing the preliminary injunction, found that Apotex had not raised a
substantial question regarding the validity and enforceability of the patent. It appears that BMS greatly
underestimated the strength of its legal position, and thus made unusual concessions to Apotex in order to
settle the case. By waiving treble damages and agreeing to give Apotex a five-day head start in a generic
product launch, BMS virtually guaranteed that Apotex would proceed with a generic launch. BMS should
not have overlooked the statutory presumption that its patent was valid.
Third, while the subject of reverse payments is extremely controversial, brand drug companies should be
aware that the courts are more inclined to accept them than are the regulators. A bill to curb the practice,
S. 3582 (Preserve Access to Affordable Generics Act), has been introduced in the Senate and referred to
committee. But until such legislation is adopted, reverse payments are on the table as an option to settle
Paragraph IV litigation, notwithstanding the train wreck that the Plavix wars have been for BMS. It is
important, however, that the settlement be structured properly to conform to the structures of Schering-
Plough v. FTC
Finally, it pays to know your adversary. Apotex launched a generic version of Paxil in 2003 without first
settling its ongoing patent litigation. Having gone at risk once, it was likely to do so again. BMS should
have resisted terms intended to facilitate that move. Thomas C. Carey is a partner at Bromberg & Sunstein, an intellectual property firm in Boston. He can be
reached at .
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