A Nearsighted Approach to Product Market Definition: Court Rejects Low-Cost Rival’s Antitrust Claims Alleging Novartis Blocked Competition in the Sale of Eye-Disease Treatments
One antitrust case we have been watching closely is the patent-related antitrust suit filed by biotechnology company Regeneron alleging rival Novartis blocked competition in the sale of an innovative treatment for degenerative eye diseases.
The groundbreaking treatment involves the use of pre-filled syringes containing a specialty medication used to treat certain ophthalmic diseases—including wet age-related macular degeneration (“Wet AMD”)—that must be injected regularly, and frequently, into a patient’s eye. Treatment for Wet AMD has been notoriously expensive, averaging $24,000 per year for monthly injections with the Novartis product. Regeneron’s competing treatment is significantly less expensive, averaging $16,000 a year, thus providing a significant advantage to consumers, specialty pharmacies, and end-payors in the chain of distribution.
Last week, a federal court in New York dismissed—wrongly, we believe—Regeneron’s antitrust claims against Novartis based on a finding that the product market was too narrowly construed. The decision by Judge Hurd in the Northern District of New York cuts against standard antitrust principles and provides a clear path for appeal.
Regeneron and Novartis manufacturer competing drugs—Eylea and Lucentis—which are FDA-approved treatments for a degenerative eye disease afflicting 10 million Americans. These anti-VEGF drugs have traditionally come in vials, which would be loaded by a physician into a needle for injection, but the market has recently moved to pre-filled syringes (PFS), which are lauded for convenience, safety and accuracy. Both Regeneron and Novartis manufacture versions of their drugs in vials and as a PFS.
The antitrust suit by Regeneron was brought as follow-on litigation to a patent-infringement suit filed by Novartis. Regeneron alleged that Novartis fraudulently obtained its patent related to the PFS version of the drug—a so-called Walker Process claim—and further conspired with the main packaging company to delay Regeneron’s entry into the market and raise its costs through supply agreements.
Regeneron defined its relevant product market as anti-VEGF drugs in prefilled syringes, thus excluding the non-PFS versions of anti-VEGF drugs. The court found this too narrow because it is coextensive with the definition contained in the patent at issue, concluding that this would allow any patented product to become a product market in and of itself, which would automatically confer complete monopoly power to any patentee.
While it is true that the existence of a patent does not automatically make a relevant market, the court’s flawed logic turns antitrust on its head. By the logic of this opinion, if a well-supported market definition happens to be coextensive with the scope of the patent, then the court would tautologically dismiss the antitrust claim. The court also utterly ignores the basic premise that markets are defined by demand substitution caused by price competition. Here, the court assumed that competition exists between anti-VEGF PFSs and vials (which would require the doctor to fill the syringe on-site). There was no reason for the court to so assume such competition, given Regeneron’s well-pleaded factual allegations which must be accepted as true at the pleading stage.
Regeneron alleged that following the introduction of PFSs, 80% of patients switched from vials to PFSs. In part, Regeneron further alleged, patients switched because their doctors demonstrated a strong preference for the significantly safer PFSs over filling syringes themselves. Regeneron cited several sources in its pleadings that evince that PFSs were preferred to vials because of these safety concerns, not price. Accordingly, Regeneron alleged that a 5-10% increase in the price of PFSs would not divert sales back to vials. The court asserted that Regeneron had not met its burden to limit the market to PFSs. That conclusion is hard to square with the factual allegations, which, in our view, sufficiently establish that a PFS-only market is at least plausible.
A patent holder certainly has the potential to have market power based on its exclusive ability to manufacture a new product. The question that needs to be asked in analyzing the relevant market is whether non-infringing alternatives are an adequate substitute for the innovation of the patent.
In this situation, Regeneron alleged that physicians—who make the ultimate decision on which product to purchase (rather than the end consumer)—have engaged in a one-way substitution, substituting away from—and only away from—the previous vial-based treatment for Wet AMD. This is not an unusual situation. In any market where there is technological innovation, products become legacy products. At one point in time, there was some substitution between a buggy whip and a gas pedal, but it proved to be one-way substitution.
The court held that it was Regeneron’s burden to show that the subject of the patent at issue is so novel that there is no fitting substitute. That is not the law. The well-established test for product market definition is the SSNP test – whether a small but significant price increase to the PFS version would or would not cause physicians to substitute back to the vial form of anti-VEGF drugs. Regeneron alleged that they would not.
On a motion to dismiss, where the court must draw reasonable inferences in favor of the plaintiff, the court incorrectly assumed that just because you can still buy a buggy whip, gas pedal manufacturers can never exercise monopoly power.
Edited by Gary J. Malone
Tagged in: Antitrust Litigation,