FTC Charges Schering-Plough over Allegedly Anticompetitive Agreements with Two Other Drug Manufacturers

Complaint Alleges Illegal Payments to Delay Entry of Generic Products into the U.S. Market

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The Federal Trade Commission today charged three drug makers, Schering-Plough Corporation ("Schering"), Upsher-Smith Laboratories ("Upsher-Smith") and American Home Products Corporation, with entering into anticompetitive agreements aimed at keeping low-cost generic drugs off the market. The Commission's administrative complaint alleges that Schering, the maker of K-Dur 20, a widely prescribed potassium chloride supplement, illegally paid Upsher-Smith and American Home Products millions of dollars to induce them to delay launching their generic versions of the drug beyond any delay they might have agreed to without such payments. The agreements, the FTC said, have cost consumers more than $100 million.

"This is the third complaint the Commission has brought in the past year alleging illegal agreements between brand-name and generic pharmaceutical manufacturers," said Molly Boast, Acting Director of the FTC's Bureau of Competition. "When payments are made to discourage entry, enormous potential for consumer harm exists."

She said that of the previous two cases, both announced in March of 2000, one (against Abbott Laboratories and Geneva Pharmaceuticals, Inc.) has been settled and the other (against Hoechst Marion Roussel, now Aventis, and Andrx Corp.) was scheduled for an administrative trial but has been withdrawn from adjudication for the purpose of considering a proposed consent agreement.

The FTC's Complaint

K-Dur 20, a prescription potassium chloride supplement, is used to treat patients with low blood potassium levels, a condition that most commonly occurs in people taking certain drugs to treat high blood pressure. Low potassium levels in the body can lead to dangerous cardiac problems.

In August 1995, the Commission's complaint states, Upsher-Smith sought FDA approval to manufacture and distribute a generic version of K-Dur 20, on whose formulation Schering holds a patent that will expire in 2006. Legislation commonly known as the Hatch-Waxman Act allows a company to seek approval from the U.S. Food and Drug Administration ("FDA") to market a generic version of a brand-name drug whose patent has not yet expired, while also protecting the interests of the brand-name firm in reaping the fruits of its intellectual property. If the generic firm seeks to bring its product to market before patent expiration, it must certify to the FDA that the patent in question is invalid or is not infringed by the generic product.

Following Upsher-Smith's certification to the FDA, Schering sued Upsher-Smith for patent infringement. This lawsuit served to stay FDA approval of Upsher-Smith's application. By law, if the patent holder files an infringement suit against the generic applicant within the period prescribed by the Hatch-Waxman Act, FDA approval to market the generic drug is automatically stayed for 30 months, unless, before that time, the patent expires or is judicially determined to be invalid or not infringed.

The FTC's complaint alleges that in June 1997, Schering and Upsher-Smith agreed to settle the patent infringement lawsuit with an agreement through which Schering would pay Upsher-Smith not to enter the market. Under this agreement, Upsher-Smith would sell neither the product for which it had filed with the FDA, nor any other generic version of K-Dur 20 (without regard to whether Schering had any basis to claim infringement), until September 2001. In exchange, Schering paid Upsher-Smith $60 million. Although under the agreement Schering received licenses to market five of Upsher-Smith's products, the complaint charges that these products were of little value to Schering and that the $60 million payment had little relation to the value of those products.

According to the FTC, Schering's agreement with Upsher-Smith in turn acted as a bottleneck that prevented other potential generic competitors from entering the market. Under the Hatch-Waxman Act, the first company to seek FDA approval obtains the exclusive right to market the generic drug for 180 days. No other generic can gain FDA approval until this 180-day period expires. As the first company to seek FDA approval for a generic version of K-Dur 20, Upsher-Smith is eligible for the 180-day exclusivity right. Until Upsher-Smith markets its product, its 180 days of exclusivity do not begin to run, so that securing an agreement to delay the launch of Upsher-Smith's product protects Schering from any generic competition to K-Dur 20.

The FTC complaint further charges that Schering also agreed to pay ESI Lederle, Incorporated ("ESI"), a division of American Home Products, to delay marketing a generic version of K-Dur 20. ESI filed an application seeking FDA approval to manufacture and distribute a generic version of Schering's K-Dur 20 in December 1995. Schering sued ESI for patent infringement and triggered the 30-month stay on FDA approval of ESI's product.

In June 1998, the FTC's complaint alleges, Schering and ESI settled the patent infringement case with an agreement by which ESI, in exchange for payments from Schering, promised not to market any generic version of K-Dur 20 until January 2004. The agreement also limits ESI to marketing only one generic version of K-Dur 20 between January 2004 and September 2006 (when Schering's patent expires), and precludes ESI from helping any other firm with studies in preparation for an FDA application for a generic version of K-Dur 20 until September 2006. In exchange, Schering agreed to pay ESI $15 million.

As with Schering's agreement with Upsher-Smith, ESI also agreed to grant Schering a license to two of its generic products. Schering agreed to pay ESI an additional $15 million for the license. The complaint charges that payments ostensibly made for these licenses were in fact to secure ESI's agreement to delay entry and were not based on the value of the products.

The complaint charges that the Schering/Upsher-Smith agreement and the Schering/ESI agreement are unreasonable restraints of trade and that the companies have conspired to monopolize the market for potassium chloride supplements and narrower markets, in violation of Section 5 of the FTC Act. In addition, the complaint charges Schering with unlawful acts of monopolization.

The Commission vote to file the administrative complaint in this matter was 5-0.

NOTE: The Commission issues or files a complaint when it has "reason to believe" that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the named parties have violated the law. The administrative complaint marks the beginning of a proceeding in which the allegations will be ruled upon after a formal hearing by an administrative law judge.

Copies of the Commission's complaint and an analysis to aid public comment are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 202-326-2502. To find out the latest news as it is announced, call the FTC News Phone recording at 202-326-2710.

Mitchell J. Katz

Office of Public Affairs

202-326-2161

Karen G. Bokat

Bureau of Competition

202-326-2912

(FTC File No. 991-0256)

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