Tenth Circuit Upholds Pharmaceutical Company’s Exclusive Rebate Agreements in In re EpiPen
The Tenth Circuit recently became the first federal court of appeals to address an antitrust challenge to a relationship central to modern pharmaceutical drug markets: the price negotiations between drug companies and pharmacy benefit managers (“PBMs”) hired by health plans to manage prescription drug programs.
In re EpiPen (Epinephrine Injection, USP) Mktg., Sales Pracs. & Antitrust Litig., No. 21-3005, —F.4th—, 2022 WL 3273055 (10th Cir. July 29, 2022) (available here) is the latest chapter of litigation related to EpiPen, an epinephrine auto-injector (“EAI”) designed to treat life-threatening allergic reactions. In 2017, the Judicial Panel on Multidistrict Litigation consolidated a number of lawsuits in the District of Kansas against Mylan, which acquired the right to sell EpiPen in 2007. In December 2020, the district court granted summary judgment for Mylan on a competitor’s Section 2 Sherman Act claim. That decision, which addressed price negotiations between drug companies and PBMs, was the subject of our previous blog post. To recap, the plaintiff alleged that Mylan’s agreements with PBMs to provide rebates in exchange for EpiPen having preferred or exclusive formulary placement was anticompetitive because it foreclosed Auvi-Q, the competing EAI, from the market. The district court held that Mylan’s rebate agreements did not violate Section 2 of the Sherman Act.
Tenth Circuit Decision
Writing for the panel affirming the district court’s decision, Judge Baldock acknowledged the “nearly impenetrable fog” that descends on antitrust cases involving prescription drugs and the health insurance industry, where the jockeying of pharmaceutical companies to exclude their competitors from equal formulary access often results in a powerful, albeit counterintuitive, form of competition. With the recognition that such practices often benefit patients through lower premiums and reduced cost-sharing, the court held that Mylan’s practices did not cross the line.
A “Consumer Welfare” Standard
The primary question in Epi-Pen was whether Mylan’s rebate agreements were anticompetitive exclusive dealing contracts. The court acknowledged that the line between legal and prohibited exclusionary contracts is not always clear, requiring it to select between two guiding principles: the consumer welfare standard and a consumer choice framework. The court’s choice of the former shines a light on the unique attributes of the health insurance industry.
The court observed that unlike some markets where greater consumer choice leads to more rigorous price competition, the inverse is often true with prescription drugs. Commonly, a health insurance plan that covers more drugs may be more expensive than one that limits a patient’s choices in exchange for greater rebates, such that patients necessarily relinquish a degree of treatment-choice autonomy for lower premiums. As a consequence, the court explained, the adoption of a consumer choice framework would frustrate an EAI consumer who sought out a plan with a tighter formulary and lower premiums, as a plan forced to cover both EpiPen and Auvi-Q would be more expensive.
Market Foreclosure, the Rule of Reason, and the ZF Meritor Factors
Applying well-settled antitrust principles, the court held that a plaintiff challenging an exclusive dealing contract under the Sherman Act must prove both that (1) the defendant’s agreement, which conditions lower prices on exclusivity, is likely to foreclose the plaintiff from the relevant market; and that, (2) left unchecked without pressure from competition, the defendant could harm consumers by raising prices or decreasing output in a manner that outweighs the benefits to consumers.
To answer the first element—likelihood of market foreclosure—the court applied a rule of reason analysis, which, under Section 2, requires consideration of the totality of the circumstances and a balancing of procompetitive effects with anticompetitive harm. In doing so, the court adopted the Third Circuit’s multi-factor test in ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir. 2012). Affirming the district court, the court held that the factors cut in Mylan’s favor. First, it affirmed that Mylan did not foreclose a “substantial share” of the market, often defined as roughly 40% to 50%, because Auvi-Q was foreclosed from at most 31% of the market. (However, the court acknowledged that foreclosing a lower share of the market may support anticompetitive conduct by a monopolist under Section 2.) Furthermore, the court noted that Auvi-Q was not strictly foreclosed as in an exclusive dealing case like ZF Meritor, as patients could still seek coverage for it as a medical necessity or pay out of pocket. That is, Mylan’s practices did not literally cut off patients’ access to the competitor.
Second, it affirmed that the terms of the rebate agreements—two and a half years or less, with early termination provisions—were sufficiently short and easily terminable, such that the plaintiff could compete by either waiting out the agreements or make alluring offers to initiate termination. Third, the court emphasized that the PBMs, not Mylan, instigated exclusivity to stimulate price competition, forcing the pharmaceutical companies to bid for exclusivity through lower prices. Indeed, the court acknowledged the plaintiff’s own expert’s testimony that exclusivity leads to lower prices in the pharmaceutical industry.
By the same token, the appellate court further noted that the coercion required for an exclusive dealing claim was lacking here: Mylan’s rebate agreements, though exclusive, did not coerce the PBMs into foreclosing Auvi-Q from the market. Because the health plans (through the PBMs) must ultimately pay the balance for any covered drug, the court was unconvinced that they would “shoot themselves in the feet” by signing exclusive agreements that would entrench EpiPen and allow Mylan to “apply the squeeze” on them. It also noted the absence of any penalties Mylan imposed for equal or favorable formulary treatment of Auvi-Q other than lower discounts. Quoting a leading Third Circuit case on exclusive dealing contracts—Eisai, Inc. v. Sanofi Aventis U.S., LLC, 821 F.3d 934, 407 (3rd Cir. 2016)—the court wrote that “[t]he threat of a lost discount is a far cry from” coercion, particularly in the absence of evidence that the PBMs were forced to accept terms that were not in their own interest.
Satisfied that Mylan’s agreements were not likely to foreclose Auvi-Q from the relevant market, the court affirmed the district court’s holding on that element alone.
The court also rejected the plaintiff’s argument that Mylan’s agreements had “spillover foreclosure,” whereby doctors, aware of certain major providers’ exclusive listing of EpiPen, prescribed EpiPen by default even if a given patient’s health plan provided equal or even preferred access to Auvi-Q. The plaintiff argued that this spillover foreclosure was compounded by Mylan’s ad campaign that EpiPen was the “preferred plan” for EAIs. The court affirmed not only that the plaintiff failed to adequately quantify the percentage of the market foreclosed by this spillover, but that it could have neutralized the effects of Mylan’s advertisements through advertisements of its own and outreach to prescribing physicians, as well as through competing with Mylan on price. Indeed, the court cited evidence that the plaintiff secured favorable formulary placement after it decided to compete with Mylan on price.
Market Entrenchment and the Price-Cost Test
The court also addressed the plaintiff’s theory that Mylan leveraged EpiPen’s entrenched market share—that is, the share of the market that would remain loyal to EpiPen even when faced with competition—to effectively foreclose the EAI market. According to the plaintiff, Mylan’s demand for exclusivity constituted a volume-based loyalty discount that violated Section 2 of the Sherman Act.
Acknowledging that volume-based loyalty discounts have only recently begun to receive antitrust scrutiny, the court held that the plaintiff’s allegation is best considered under the price-cost test, which evaluates whether the prices charged by a monopolist are predatory—i.e. that price is not below cost. The court did not reach a holding on this issue because it did not consider the parties’ briefing to be adequate.
Synergies of Ancillary Conduct
As a final matter, the court rejected the plaintiffs’ theory that Mylan’s other conduct buttressed the allegedly anticompetitive effects of its rebate agreements. Specifically, the plaintiff alleged that Mylan’s EpiPen4Schools program, through which it donated over one million EpiPens to schools, helped to fortify its loyal patient base by extracting pledges from schools to only stock EpiPen. The court was not persuaded, and affirmed the district court’s rejection of the plaintiff’s theory of liability. Not only did the court affirm that Mylan did not prohibit schools from purchasing Auvi-Q, but it also held that the plaintiff was free to compete by offering a promotional program of its own.
The plaintiff also alleged that Mylan fortified its exclusionary conduct by misclassifying EpiPen as a generic drug for Medicaid purposes, but, holding that the plaintiff did not adequately explain its contentions or ground them in the law, the court considered the argument waived.
* * *
In rejecting the plaintiff’s challenge to Mylan’s exclusive rebate agreements, the Tenth Circuit’s decision provides support for the view that rebate agreements for preferred formulary status have procompetitive effects.