Recent decisions in two different antitrust cases involving price increases and marketing practices for the EpiPen address a relationship solidly embedded in the current architecture of pharmaceutical drug markets: payments between manufacturers and pharmacy benefit managers (“PBMs”) hired by health plans to manage prescription drug programs. These new rulings suggest that while certain manufacturer rebates have come under increased scrutiny in recent years, the standard industry practice remains on firm footing.
In general, health plans hire PBMs to design, manage, and administer drug benefit programs, including to (i) negotiate with manufacturers to obtain rebates to offset the list prices of drugs and (ii) to design and manage formularies and formulary compliance programs. Rather than negotiate with manufacturers on their own, a number of health plans hire PBMs to negotiate collectively on their behalf. In exchange for advantaging or not disadvantaging certain drugs on health plans’ formularies, manufacturers may lower, stop raising, or offer rebates on the list prices of drugs sold to those health plans. PBMs often negotiate “master” agreements between manufacturers and PBMs’ clients, which, in some cases, has been argued to give PBMs de facto control over each individual plan’s formulary. PBMs generally receive from manufacturers a percentage of the negotiated rebates, as well as various administrative or service fees. PBMs also generally retain discretion as to how those payments are characterized, as well as the timing of any rebate remittances to their clients.
In December, a federal district court in Kansas granted summary judgment for Mylan against a competitor’s claims related to Mylan’s EpiPen sales and marketing practices (the “Competitor Action”). The plaintiff alleged that Mylan used exclusive rebate agreements with PBMs to penalize formulary placement for competitor products in efforts to maintain its monopoly and prevent entry by EpiPen competitors. The court, applying a rule of reason analysis, found that Mylan’s rebate payments did not amount to violations of Section 2 of the Sherman Act.
In January, on the other hand, a federal district court in Minnesota allowed a case to proceed that takes a novel approach to challenging Mylan’s payments to PBMs (the “Wholesaler Action”). This new ruling is significant in that the plaintiffs—wholesalers who purchase the EpiPen from Mylan and sell it to health plans represented by PBMs—allege a scheme between Mylan and the PBMs that violated RICO and the Sherman Act. Specifically, the wholesaler plaintiffs allege that Mylan and the PBMs manipulated the traditional rebate structure to “bribe” PBMs to shirk their duty to negotiate for lower EpiPen prices. They claim Mylan and the PBMs characterized substantial payments as fees rather than rebates so that the PBMs would not have to pass on these savings on to their health plans, and/or otherwise failed to share rebate proceeds with their clients.
EpiPen Litigation
Between 2007, when Mylan first acquired rights to sell the EpiPen, and 2016, its list price increased from approximately $100 to $600. These increases have drawn legal scrutiny from a number of market participants.
In August 2017, the Judicial Panel on Multidistrict Litigation consolidated a number of actions against Mylan including the Competitor Action (collectively, the “EpiPen MDL”). These actions address a wide array of allegedly anticompetitive conduct related to EpiPen sales, including: selling EpiPens only in packs of two; entering into discount agreements with schools conditioned on schools not purchasing competing products; securing overlapping patents and engaging in sham litigation to forestall generic competition; and excessive payments to insurers, PBMs, and other Medicaid payors conditioned on excluding competing products from formularies. In February 2020, the court certified two damages classes: a nationwide RICO class comprising all persons who paid or provided reimbursement for EpiPens, and a state antitrust class comprising all persons in particular states who paid or provided reimbursement for EpiPens. In re EpiPen Mktg., Sales Practices & Antitrust Litig., 2020 U.S. Dist. LEXIS 40789 (D. Kan. Feb. 27, 2020). The class actions were originally set for trial in April, but have been postponed due to the pandemic.
Also in 2017, ERISA health plan participants alleged that PBMs breached their fiduciary duties and engaged in self-dealing by their failure to control the list price of EpiPens, all while collecting increasing rebates and fees from Mylan, which purportedly caused individuals to pay inflated out-of-pocket costs for EpiPens. In re EpiPen ERISA Litig., 341 F. Supp. 3d 1015 (D. Minn. 2018) (granting motion to dismiss self-dealing claims, but allowing breach of ERISA fiduciary duty claims to proceed). After the court declined to certify a class, In re EpiPen ERISA Litig., 2020 U.S. Dist. LEXIS 139066 (D. Minn. Aug. 5, 2020), the individual plaintiffs settled with the PBMs.
In March 2020, as part of the Wholesaler Action, two wholesalers expanded upon allegations that Mylan improperly paid inflated rebates to PBMs, and sued Mylan as well as the PBMs, alleging RICO violations as well as antitrust violations under the Sherman Act. See In re EpiPen Direct Purchaser Litigation, No. 20-CV-827 (D. Minn.). The wholesalers claim that Mylan’s payments to PBMs amounted to bribes that convinced the PBMs to abandon efforts to control EpiPen’s list price, and that Mylan shared the profits from price increases with PBMs.
EpiPen MDL Court Dismisses Competitor’s Antitrust Claims Against Mylan
In the Competitor Action, a manufacturer of a competing epinephrine auto-injector (“EAI”) asserted three monopolization claims under Section 2 of the Sherman Act, primarily focusing on Mylan’s rebate agreements with payors.
In January, the EpiPen MDL court unsealed a decision granting Mylan’s motion for summary judgment and dismissing the competitor’s Sherman Act claims. Mylan argued, and the court agreed, that Mylan had not engaged in anticompetitive conduct and the competitor had not sustained antitrust injury.
First, under a rule of reason analysis, the court found that Mylan’s rebating practices with payors were not anticompetitive even though they were often exclusive. To determine whether the rebate agreements were anticompetitive, the court relied on the factors from Third Circuit’s decision in ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir. 2012): (1) whether the defendant has significant market power; (2) whether there is substantial market foreclosure; (3) whether the contract’s duration is sufficient to prevent meaningful competition; (4) comparison between anticompetitive and procompetitive effects; (5) the defendant’s coercive behavior; (6) buyers’ ability to terminate the agreements; and (7) the use of exclusive contracts by defendant’s competitors. Here, the court found that, although Mylan dominated the EAIs market, the rebate agreements were not anticompetitive because (i) they generally were for short durations; (ii) payors had, and sometimes exercised, the right to terminate the agreements; (iii) payors frequently renegotiated the agreements; (iv) Mylan’s competitors offered and successfully negotiated rebate agreements with payors; and (v) “the only consequence for payors who rejected Mylan’s exclusive offers was losing access to greater discounts.”
Next, the court rejected the competitor’s argument that Mylan leveraged its non-contestable demand, i.e., those customers who would not choose an EpiPen substitute even in the face of a cheaper alternative, to force payors into exclusive rebate agreements. The court rejected the premise of this argument, relying on evidence that the competitor was in fact able to secure its own exclusive agreements with some payors.
Finally, the court found that Mylan had also not engaged in anticompetitive conduct outside of its rebating practices. The court held that Mylan’s statements regarding its competitors in the marketplace were neither false nor deceptive, and, in any event, competitors were able to rebut those statements with their own marketing. The court also found that Mylan’s EpiPen sales to schools were not anticompetitive, explaining that competitors could have negotiated similar programs and, again, “the only penalty schools faced for purchasing other EAI devices was losing access to deeper discounts for the EpiPen.”
Notably, the court took no issue with the underlying practice of payments from manufacturers to PBMs and payors. Instead, the court noted that PBMs used formulary placement and rebating techniques to “encourage patients to choose more cost-effective products and negotiate better pricing from manufacturers,” and that the “record provides several examples where payors renegotiated formulary coverage . . . to secure greater rebates for customers,”
RICO and Antitrust Claims Survive Motion to Dismiss in Wholesaler Action
On January 15, 2021, the Wholesaler court denied Mylan’s and the PBM defendants’ motion to dismiss the RICO and Sherman Act claims, allowing the case to proceed to discovery. In their complaint, the wholesalers alleged that in 2013, Mylan’s EpiPen faced the prospect of new competitors in the market for EAIs. According to the complaint, because the majority of EAI sales were covered by health plans, the new competitors would have to secure favorable formulary placements to be able to compete in the market. To maintain its market dominance, Mylan allegedly increased payments to PBMs to ensure the PBMs maintained the EpiPen’s favorable formulary status. The wholesalers further alleged that instead of passing the manufacturer payments on to their client health plans as rebates or using their leverage to control the price of EpiPens, the PBMs pocketed the increased payments and categorized them as fees rather than rebates. Between 2012 and 2016, the EpiPen’s list price went from $240 to more than $600. The wholesalers alleged that, because Mylan had assurance that it could raise prices without sacrificing its favorable formulary placement, Mylan was able to “use[] the list price increases as a way of splitting the increased profits between itself and the Defendant PBMs.” On these allegations, the court denied defendants’ motion to dismiss the RICO and antitrust claims.
The court rejected defendants’ argument that the wholesalers had not sufficiently alleged the existence of a RICO enterprise, reasoning that the complaint sufficiently alleged a shared interest between Mylan and the PBMs in splitting profits from increased list prices. The court also rejected defendants’ argument that they were merely acting in accordance with their market roles in an ordinary business relationship, explaining that the wholesalers had plausibly alleged a “corruption” of the legitimate manufacturer-PBM relationship. The court reasoned that “bribery is a recognized means of participating in the conduct of an enterprise’s affairs,” and Mylan allegedly paid bribes in the form of inflated payments that were not passed on to PBMs’ clients, and each PBM allegedly accepted the bribes “in exchange for abandoning any effort to police EpiPen price increases.”
As to racketeering activity, the wholesalers alleged that defendants had engaged in mail and wire fraud and honest services fraud, as well as violations of the Travel Act, which prohibits using the mail or any interstate commerce facility with intent to carry on “unlawful activity,” including bribery. Although the RICO statute does not list violations of the Anti-Kickback Statute (“AKS”) as predicate acts of racketeering, the court accepted the wholesalers’ theory that particular types of AKS violations may constitute “bribery” under the Travel Act and thus serve as racketeering predicates. Notably, the court only provisionally accepted this novel theory of RICO liability, acknowledging that it lacked precedential support. The court also noted the defendants’ failure to address this theory squarely in their motion to dismiss, and suggested that the theory might ultimately fail. The court further rejected defendants’ argument that AKS safe harbors automatically shielded their conduct from liability, holding that because the safe harbors were affirmative defenses, they were better suited for adjudication on summary judgment.
In ruling that the complaint sufficiently alleged intent with respect to the alleged bribery scheme, the court noted that there were “indicators of concealment,” including allegations that (i) Mylan did not reveal the “true reason” for list price increases when it announced them; (ii) the PBMs “misleadingly classified” Mylan’s payments to avoid passing them on to clients; and (iii) the PBMs “limited the scope of audits that might have revealed the true nature and amount of payments received” from Mylan; (iv) all while the PBMs “continued to represent to their clients and the public that they were working to secure lower prices.”
Finally, the court rejected defendants’ argument that because the wholesalers could pass the cost of any price increases on to their customers, they had not suffered RICO injury. Drawing on antitrust precedent rejecting this “passing on defense,” Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481, 488-90 (1968), the court explained that the same principle applies in the RICO context: direct purchasers generally may sue under RICO, whether or not they pass on the artificially inflated prices to their customers.
The court also allowed the wholesalers’ claim under Section 2 of the Sherman Act to go forward, finding that the complaint plausibly alleged that Mylan enjoyed monopoly power in the relevant product market for EAIs. As to anticompetitive conduct, the wholesalers argued that the alleged bribery scheme unreasonably excluded competition from the market for EAIs because, while bribery by itself is not anticompetitive conduct, see, e.g., Calnetics Corp. v. Volkswagen of Am., Inc., 532 F.2d 674, 687 (9th Cir. 1976), the bribery was allegedly designed to and did prevent competitors from achieving formulary placement and thus from entering the market. In coming to this conclusion, the court noted that Mylan allegedly “paid rebates and other fees not only to secure formulary placement but also to induce PBMs to abandon their role as a price disciplinarian in the market” in direct response to the threat of new entrants into the EAI market, and despite the substantial increase in its list price it maintained a “stable,” “extremely high” market share.
It is unlikely that the Wholesaler Action decision will upend the standard industry practice of PBMs negotiating rebates from manufacturers in exchange for favorable placement on the formularies of PBMs’ health plan clients. For one thing, this case was decided against the backdrop of several other rulings allowing cases to proceed to discovery alleging similar anticompetitive practices by Mylan and PBMs. That the court permitted discovery to proceed is less remarkable in this context.
Further, throughout its opinion the Wholesaler Action court distinguished between, on the one hand, a legitimate manufacturer-PBM relationship, where manufacturers agree to provide rebates to PBMs in exchange for formulary placement and PBMs pass those savings on to health plans and, on the other hand, the allegedly “corrupted” relationship the wholesalers between Mylan and the defendant PBMs. And the Competitor Action court’s recent decision also endorsed the general practice of manufacturer rebates to PBMs, further suggesting that this standard industry practice is not subject to potential antitrust liability.
The Wholesaler Action court did not draw a bright line as to what kinds of allegations would suffice to adequately plead and prove RICO and antitrust violations, including whether such claims would survive only on allegations that PBMs had somehow misled health plans as to the nature and extent of payments from manufacturers. But the court’s reasoning seemed to be guided by its focus on the wholesalers’ assertion that PBMs had “abandoned” efforts to protect health plans based on allegations that (i) Mylan increased its list price more than twofold during the relevant time period yet maintained its dominant market share; (ii) Mylan increased its profits by 148% during this time; and (iii) PBMs kept payments from Mylan for themselves (potentially misleadingly classified as administrative fees) rather than passing them on to their clients.
