Health care continues to be the subject of intense scrutiny by federal and state antitrust authorities. The intersection between pharmaceutical drug pricing and antitrust regulation was the focus of a recent federal appellate court decision in FTC v. Lundbeck, Inc., where the Eighth Circuit rejected antitrust charges brought against Lundbeck (formerly Ovation) for its acquisition of rights to Indocin® and NeoProfen®. Both drugs were used to treat infants suffering from patent ductus arteriousus (PDA), a life-threatening congenital heart defect that affects prematurely born babies.
When Lundbeck acquired the rights to Indocin in August 2005, Indocin was the only FDA-approved drug available to PDA patients in the United States. NeoProfen was already being used for PDA treatment in Europe, but had not yet secured U.S. approval. Several days after Lundbeck acquired NeoProfen in January 2006, Lundbeck raised prices on Indocin by 1,300 percent, from $36 per vial to $500 per vial. After the FDA approved NeoProfen for use in July 2006, Lundbeck began marketing NeoProfen at prices slightly below Indocin levels. Antitrust enforcers at the Federal Trade Commission and in Lundbeck's home state of Minnesota opened investigations and eventually filed a lawsuit in federal court.
Following a bench trial, the district court dismissed the complaints. The court held that, although hospitals actually purchased the drugs, doctors specializing in neonatology were the relevant customers because of their influence on the hospital's purchasing decisions. The FTC and Minnesota failed to prove that Indocin and NeoProfen were in the same product market because the doctors perceived differences between the drugs' safety, side effects, and clinical studies. Moreover, doctors did not switch between the two drugs on the basis of price. In other words, because doctors did not view the products as substitutes, the district court found that they were not in the same product market.
The antitrust enforcers appealed, and lost again. The Eighth Circuit focused on whether the district court had committed "clear error" in its fact-findings. The enforcers raised four arguments on appeal:
- The hospitals, not the physicians, were the consumers, and the hospitals would switch between the two drugs based on price differences. The enforcers used the testimony of a neonatologist to support their view. Lundbeck offered testimony by five clinical pharmacists and seven neonatologists, who testified that the relative price of the drugs was not a factor in choice of drug treatments. The appellate court found no error in the trial court's finding that the testimony of the 12 Lundbeck experts was more persuasive than the testimony of the enforcers' witness. The Eighth Circuit also pointed out that the "FTC offers no evidence that hospitals would disregard the preferences of the neonatologists and make purchasing decisions based on price."
- Because the products are functionally similar, they must be in the same product market. The trial court found persuasive the testimony of Lundbeck's experts that treatment decisions were based on perceived clinical advantages/disadvantages of each drug due to their different active ingredients and varying side effects. The appeals court held that there was no clear error in this finding, and rejected the enforcers' appeal on this point. Citing to a string of federal court decisions, the appeals court concluded that, "functionally similar products may be in separate product markets, depending on the facts of the case."
- The enforcers' expert provided evidence of the ability of customers to constrain price increases with respect to customers who viewed the two drugs as substitutes and would therefore switch between them based on price. The appeals court again found the Lundbeck expert testimony to be more persuasive and held that the number of neonatologists willing to switch between the two drugs based on price was insufficient to exercise any price constraint, and even those willing to switch would do so only if there was a very significant price decrease.
- Lundbeck's internal documents indicated that the two drugs were in the same product market. The Eighth Circuit agreed that industry recognition is one, non-dispositive factor in determining the product market, but found the Lundbeck documents were ambiguous in this case. The documents stated that Lundbeck anticipated a large price increase in one of the drugs (Indocin IV) would draw generic competitors into the market. Therefore, Lundbeck began promoting its other drug (NeoProfen) as a superior treatment. The antitrust enforcers argued that this business strategy meant that Lundbeck viewed the two products as competitors. The appellate court found that the documents could also be interpreted to mean that "while Indocin IV was vulnerable to generics, NeoProfen was not, and thus the products are not interchangeable. If there are two permissible views of evidence the factfinder's choice between them is not clearly erroneous."
Judge Kopf, sitting by designation from the District of Nebraska, filed a brief concurrence. Although he agreed that the "clear error" standard "carried the day," he found it "perplexing" for the trial judge to rely on physicians to define the product market when they "had no responsibility to pay for the drugs or otherwise concern themselves with cost." He stated: "In an antitrust case, it seems odd to define a product market based upon the actions of actors who eschew rational economic considerations." The comments underscore the challenge of defending product markets in complex consumer interactions in the health care industry. In the future, other antitrust enforcement actions may propose a different product market definition, based upon Judge Kopf's comments.