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Shire US, Inc. v. Allergan, Inc.

United States District Court, D. New Jersey

March 22, 2019

SHIRE US, INC., Plaintiff,
v.
ALLERGAN, INC., ALLERGAN SALES, LLC, and ALLERGAN USA, INC., Defendants.

          OPINION

          JOHN MICHAEL VAZQUEZ, U.S.D.J.

         This matter concerns antitrust allegations in the Medicare Part D ("Part D") prescription drug market. D.E. 64. Plaintiff, Shire US, Inc. ("Shire"), alleges that Defendants are engaged in an "ongoing, overarching, and interconnected scheme" to systematically block Plaintiff from competing with Defendants in the Part D prescription drug market for treatment of dry eye disease in violation of Sections 1 and 2 of the Sherman Act and state law. D.E. 64 ¶¶ 1, 25. Defendants consist of Allergan, Inc.; Allergan Sales, LLC; and AllerganUSA, Inc. (collectively "Defendants" or "Allergan"). The present matter comes before the Court on Defendants' motion to dismiss Plaintiffs First Amended Complaint ("FAC") for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). D.E. 14. The Court reviewed all submissions[1] and held oral argument on February 26, 2019. For the reasons that follow, Defendants' motion to dismiss is granted.

         I. BACKGROUND [2]

         Plaintiff Shire alleges that Allergan is coercing Part D prescription drug plans to effectively exclude Shire's superior dry eye disease ("DED") treatment drug from the market through a combination of anticompetitive bundling and exclusive dealing arrangements. FAC ¶ 1 • DED occurs when the eye does not produce enough tears or when tears are not of the correct consistency. Id. ¶ 34. The disease is evidenced by inflammation and damage to the ocular surface, resulting in blurry or fluctuating vision and eye fatigue. Id. About one million Americans currently receive prescription drug treatment for DED. Id. ¶ 36.

         The Parties and Their Products

         Shire and Allergan are competitors in the pharmaceutical industry. Id. Shire is a New Jersey pharmaceutical company that develops, manufactures, markets, and distributes pharmaceutical products worldwide. Id. ¶ 26. Allergan is a Delaware pharmaceutical company that engages in research, development, manufacturing, sales, distribution, and marketing of specialty pharmaceutical products. Id. ¶ 30.

         Both companies offer a prescription drug for the treatment of DED. Shire offers Xiidra® and Allergan offers Restasis®. Id. ¶ 1. Xiidra and Restasis are the only FDA-approved prescription drugs on the market for treatment of DED. Id. ¶ 38. There are no reasonably available substitutes to treat DED. Id. ¶ 116. Over-the-counter treatments, such as artificial tears, are insufficient to treat the underlying inflammation that causes DED. Id.

         The FDA approvals for Xiidra and Restasis are different in scope. Id. In July of 2016, the FDA approved Shire's Xiidra for treatment of both the symptoms and signs of DED. Id. ¶ 8. Clinical studies show that patients taking Xiidra experienced relief from DED symptoms of within as little as two weeks, and from underlying inflammatory conditions within six to twelve weeks. Id. ¶ 8. In contrast, the FDA has approved Restasis® only for treatment of a specific symptom of DED - reduced tear fluid volume - which affects only ten percent of those with DED. Id. ¶ 38. Restasis has been on the market for fifteen years, during which time patients have reported ocular burning from using the drug. Id. ¶¶ 1, 40. One study indicated that 23% of patients discontinued use of Restasis within three months of first using it and 43% of patients stopped use within six months. Id. ¶ 40. Clinical studies reflect that it typically takes longer than six months for Restasis to become effective. Id. ¶ 40.

         Given Xiidra's potential advantages over Restasis, it has been referred to by industry officials as a "big game changer." Id. ¶ 47. In the two years following its launch in 2016, Xiidra captured approximately 35% of the commercial DED market, and around 10% of the Part D DED market. Id. ¶ 122. Restasis maintains approximately 90% of the Part D DED market. Tic/. ¶ 131.

         The Part D DED Market

         For purposes of its antitrust claims, Plaintiff identifies the Part D DED market as the relevant product market. Id. ¶ 115. Congress passed Medicare to provide affordable medical assistance to the elderly, and enacted Part D specifically as an optional outpatient prescription drug program for senior citizens to receive discounted and subsidized prescription drugs. Id. ¶¶ 50-53. Because DED is a condition that progresses with age, it disproportionally affects the elderly. Id. ¶ 37. Prescriptions for DED treatment under Part D account for approximately 40% of all DED prescriptions.

         Participants in Part D can choose from a variety of plans. Id. ¶ 53. The list of drugs covered by a particular plan is called the plan's "formulary." Id. ¶ 54. Formularies offer drugs in a number of tiers that dictate the patient's copayment. Id. ¶ 61. Drugs with the lowest copayment are listed in the "preferred" tier, followed by the "non-preferred" tier. Id. ¶ 61. If a drug is not listed on a formulary, then it is considered "not covered" and the patient must either pay for the drug in full (at a price that is typically two to five times higher than that listed on the formulary) or have his or her physician file a successful appeal with the plan seeking an exception.[3] Id. Hence, drugs not covered on formularies are faced with a competitive disadvantage in the Part D marketplace. Id. ¶64.

         Plaintiff alleges that commercial prescription drug plans are not substitutes for Part D because individuals covered by Part D (individuals aged 65 and older or with permanent disabilities) receive lower premiums for a comprehensive list of prescription drugs. Thus, Part D participants have no need for traditional, commercial prescription drug plans. Id. ¶ 117. In fact, Plaintiff alleges that it, Defendants, and other industry participants recognize Part D as its own independent market, often using different staff or hiring third parties to engage with Part D administrators. Id. ¶ 118. Plaintiff adds that the Part D administrators also treat the Part D DED market differently than any separate commercial business that they may engage in. Id. ¶ 120.

         The Alleged Anticompetitive Conduct

         Plaintiff essentially alleges two forms of anticompetitive conduct by Defendants: anticompetitive bundling and exclusive dealing contracts. Id. ¶¶ 126-27. First, Plaintiff alleges that Defendants engaged in anticompetitive bundling by contracting with "Plan 1" and "Plan 2" to offer Restasis in a bundled portfolio of drugs at a price below its average variable cost. Id. ¶¶ 86, 91, 97. Second, Plaintiff alleges that Defendants engaged in an exclusive dealing contract with "Plan 3" whereby the plan is contractually barred from offering any other DED drug on its formulary for the foreseeable future. Id. ¶ 107.

         A review of the seller-side of the Part D market is required to properly understand these claims. "Pharmaceutical companies negotiate annually with Part D plans to gain placement of their drugs on the plans' formularies for the coming year." Id. ¶ 68. The negotiations usually begin around April of "the preceding plan year and culminate in August of the same year when the plans finalize their formularies for the coming year." Id. Certain Part D plans delegate their negotiation and selection process to administrators. Id. ¶ 72. For example, "several of the top ten Part D plans and many smaller ones use another top ten plan (Plan 3) to negotiate and administer their formulary coverage." Id. As a result, Plan 3 negotiates with pharmaceutical companies on behalf of numerous Part D plans. Id. Similarly, "[p]harmaceutical companies typically contract with third party agents to oversee negotiations with plans for placement of their drugs on the plans' formularies," often to "keep[] [their] dealings with Part D plans separate from [their] dealings for commercial business." Id. ¶ 71.

         During these annual negotiations, a pharmaceutical company seeks to secure its drugs' preferential placement on the Part D plan's formulary by minimizing the Part D plan's costs in offering the drugs. Id. ¶ 69. Although pharmaceutical companies do not sell their drugs directly to Part D plans, Part D plans reimburse pharmacies for dispensing covered drugs to participants. Id. ¶ 60. Therefore, to lower the plan's reimbursement expenses, pharmaceutical companies offer rebates and discounts to patients who acquire a prescription drug through a particular Part D plan. Id. ¶¶ 69-70. Pharmaceutical companies also offer price protection, meaning that if the price for their drug increases during the contractual term, rebates will also proportionally increase, ensuring that the plans do not incur any additional costs. Id. ¶ 70.

         The top three plans in Part D are Plan 1, Plan 2, and Plan 3.[4] About 70% of the Part D prescriptions for DED treatment are derived from the three plans. Id. ¶ 109. Despite Plaintiffs view that Xiidra is superior to Restasis, Plaintiff has been unable to secure a "preferred" position for Xiidra on any of the formularies of these plans. Id. ¶¶ 87-109. Plaintiff alleges that this is because Defendants have unlawfully engaged in (1) anticompetitive bundling with Plan 1 and Plan 2, and (2) improper exclusionary contracting with Plan 3.[5] Id. ¶¶ 86, 91, 97, 107.

         Shire alleges that Allergan's technique of "bundling" rebates across its products, including Restasis, to secure exclusivity on top plans' formularies constitutes unlawful anticompetitive conduct. Id. ¶ 148. Allergan offers a number of products in its Part D portfolio aside from Restatsis. Id. ¶ 74. Among these other products are Lumigan®, Combigan®, and Alphagan P®. Id. The FDA approved Lumigan, Combigan, and Alphagan P for treatment of high eye pressure in patients with glaucoma or ocular tension. Id. ¶¶ 75-77. The FDA has not approved a generic substitute for any of these three drugs in the United States. Id. For the four quarters spanning from the third quarter of 2016 to the second quarter of 2017, the three glaucoma drugs accounted for almost $750, 000, 000 of Allergan's sales in Part D plans. Id. ¶ 78. Restasis accounted for $719, 000, 000 of Allergan's sales in Part D plans during this same period. Id. Thus, Plaintiff alleges that Allergan has "more than enough financial wherewithal" to offer Restasis to Part D plans "at an effective price that is below Allergan's average variable cost" and potentially even "for free" given the commercially advantageous positioning of Allergan's other offerings. Id.

         Regarding Plan 1, which is responsible for nearly 25% of the Part D DED market, Plaintiff offered "substantial rebates and discounts" in attempts to have Xiidra placed on the plan's formulary. Id. ¶ 89. In response, Plan 1 informed Plaintiff that any placement of Xiidra on its formulary would result in the loss of rebates from Allergan, stating that "[y]ou could give [Xiidra] to us for free, and the numbers still wouldn't work." Id. ¶ 89. Further, Plan 1 told Plaintiff that it would need Allergan's "permission" for Xiidra to be listed on the formulary. Id. ¶ 90. Plan 1 eventually listed Xiidra on its formulary but only in its "non-preferred" tier, resulting in copayments that are two to five times higher than if Xiidra was listed in the "preferred tier" with Restasis. Id. Plaintiff believes that if the plan's formulary included Xiidra in any capacity other than "non-preferred," Plan 1 would "lose the price protection, rebates, and discounts on the entirety of Allergan's Part D portfolio." Id. ¶ 91. Plaintiff alleges that '[t]his makes it impossible for Shire to offer discounts on Xiidra that compete with the bundled rebates provided by Allergan and keep Xiidra's price above its cost." Id.

         Regarding Plan 2, which is responsible for over 11% of the Part D DED market, Plaintiff also offered "substantial rebates and discounts" to list Xiidra on its formulary. Id. ¶¶ 92-93. Plan 2 stated that listing Xiidra on its formulary would contractually cause Plan 2 to lose all of its "price protection" and "bundled rebates" from Allergan. Id. ¶ 93. Plan 2 added that it would need to first "check with Allergan and get its permission[.]" Id. ¶ 94. Nevertheless, the Centers for Medicare & Medicaid Services ("CMS"), who contract with Part D administrators, id. ¶ 53, later informed Plan 2 that it would have to offer Xiidra given its formulary classifications. Id. ¶ 94. Plan 2, however, only placed Xiidra on its formulary as "non-preferred" with prior authorization and "step through" requirements. This means that Plan 2 patients must first try Restasis and experience "failure" before Plan 2 will contribute towards their prescriptions for Xiidra. Id. ¶ 94. Additionally, the copay for Xiidra is still two to five times higher than if it was listed in the "preferred" tier. Id. ¶ 95. Plaintiff alleges that "[t]his makes it impossible for Shire to offer discounts on Xiidra that compete with the bundled rebates provided by Allergan and keep Xiidra's price above its cost." Id. ¶ 97.

         Plaintiff alleges that Defendants had an exclusionary agreement with Plan 3. Id. ¶ 107. Plan 3 is responsible for 34% of the Part D DED market. Id. ¶ 98. Plaintiff alleges that it met the pricing requirements that Plan 3 had indicated would secure Xiidra's listing on Plan 3's formulary. Id. ¶ 100. Plan 3 confirmed that the offered pricing would "get it done" and that Plaintiff need not improve its offer. Id. ¶ 100. Plan 3 later retracted these statements, explaining that Xiidra could not be added to the formulary because it would create "too much disruption" as Allergan's contract with Plan 3 prohibited offering another DED treatment on the formulary. Id. ¶¶ 101-102. A "Shire executive" then asked Plan 3 how it could "get out" of this position in the future, to which Plan 3 responded, "you don't."[6] Id. ¶ 102. Therefore, Xiidra is "not covered" by Plan 3's formulary, requiring Plan 3 patients to pay two to five times more for Xiidra than if Xiidra was listed as a "preferred" drug on the formulary like Restatsis. Id. ¶ 104. Plaintiff alleges that Defendants' agreement with Plan 3 prohibits the plan from contracting with Defendants' competitors (such as Plaintiff) beyond the one-year term, regardless of the offer that the competitor may make. Id. ¶ 107.

         Plaintiff also relies on a public statement by Allergan's CEO in mid-2017, stating that Allergan has "blocked" Plaintiff from the Part D DED market. Id. ¶ 14. Plaintiff continues that the financial terms (including discounts, rebates, and price protection) that Plaintiff offered the three Part D plans "far exceeded" the discount rates on Xiidra that Plaintiff successfully offered to commercial prescription drug plans. Id. ¶ 106. Thus, Plaintiff alleges that Allergan is engaged in an "overarching and interconnected scheme of anticompetitive tactics, which have successfully blocked Shire's access to the Part D market[.]" Id. ¶ 108.

         Plaintiff alleges that Allergan's conduct will effectively deny or severely limit Part D beneficiaries' access to Xiidra, the only drug approved for the treatment of both the signs and symptoms of DED. Id. ¶ 136. Plaintiff asserts that Defendants' conduct forces Part D patients (i) to make higher copayments for Xiidra; (ii) to accept less value for their copayment because Restasis is inferior to Xiidra; and (iii) to incur higher costs for DED treatment by purchasing a topical steroid used in conjunction with Restasis treatment, which is unnecessary when using Xiidra. Id. ¶ 137. Plaintiff continues that it "will continue to lose millions of dollars in sales and profits from within the [Part D DED market]" as a result of Defendants' actions. Id. ¶ 151.

         II. PROCEDURAL HISTORY

         Plaintiff filed its Complaint on October 2, 2017, alleging seven causes of action: (I) monopolization under the Sherman Act, 15 U.S.C. § 2; (II) attempted monopolization under the Sherman Act, 15 U.S.C. § 2; (III) agreements in restraint of trade under the Sherman Act, 15 U.S.C. § 1; (IV) monopolization under the New Jersey Antitrust Act, N.J.S. § 56:9-4; (V) attempted monopolization under the New Jersey Antitrust Act, N.J.S. § 56:9-4; (VI) agreements in restraint of trade under the New Jersey Antitrust Act, N.J.S. § 56:9-3; and (VII) tortious interference with business relationships. Compl. ¶ 25. Defendants filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) on December 5, 2017. D.E. 14. Plaintiff filed opposition, D.E. 31, to which Defendants replied, D.E. 32. Plaintiff filed a letter of supplemental authority, D.E. 48, and Defendants responded, D.E. 50.

         On September 28, 2018, Plaintiff sought leave to amend its Complaint for the sole purpose of including money damages in the relief sought. D.E. 55. Because the proposed amendment did not alter any of the substantive allegations set forth in the original Complaint, the parties agreed that Defendants' pending motion to dismiss would apply to the FAC. See D.E. 58. On February 26, 2019, the Court held oral argument on the motion. D.E. 70.

         III. STANDARD OF REVIEW

         Rule 12(b)(6) of the Federal Rules of Civil Procedure permits a defendant to move to dismiss a count for "failure to state a claim upon which relief can be granted[.]" To withstand a motion to dismiss under Rule 12(b)(6), a plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly,550 U.S. 544, 570 (2007). A complaint is plausible on its face when there is enough factual content "that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal,556 U.S. 662, 678 (2009). Although the plausibility standard "does not impose a probability requirement, it does require a pleading to show more than a sheer possibility that a defendant has acted unlawfully." Connelly v. Lane Const. Corp.,809 F.3d 780, 786 (3d Cir. 2016) (internal ...


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