In November 2000, the Federal Trade Commission concluded its monopolization case against Mylan Laboratories, Inc., the nation's second largest generic drug manufacturer, by approving a $100 million settlement, the largest monetary settlement in Commission history.

The proposed settlement resolves a complaint that the Commission filed in federal district court in December 1998 alleging that Mylan and three other defendants allegedly engaged in anticompetitive conduct that enabled Mylan to restrain competition and radically increase prices for two generic anti-anxiety drugs, lorazepam and clorazepate. The complaint sought, among other things, a permanent injunction and disgorgement of profits. Thirty?two State Attorneys General and the District of Columbia filed parallel actions. The FTC's proposed settlement resolves the States' claims as well. Combined with a settlement in a related suit between the defendants and certain private plaintiffs, Mylan's payments will roughly equal all profits earned from the conduct challenged by the Commission.

The Commission's complaint alleged that Mylan, Cambrex Corporation, Profarmaco S.r.l., and Gyma Laboratories of America, Inc., violated the Federal Trade Commission Act, which prohibits "unfair methods of competition," by conspiring to eliminate much of Mylan's competition by entering into exclusive licenses that tied up the supply of key active ingredients for the generic versions of two widely-prescribed drugs used by millions of patients. The Commission challenged the licenses as unlawful vertical agreements and conspiracies to monopolize. The complaint also alleged that Mylan monopolized and attempted to monopolize the markets for these drugs. The alleged conduct allowed Mylan to increase the price of the two generic drugs suddenly and dramatically, resulting in significant consumer injury.

Generic drugs are chemically identical versions of branded drugs that are marketed after the patent on the branded drug has expired. Firms that manufacture and market generic drugs often specialize in such drugs, although Mylan manufactures both generic and branded drugs. Generic drugs typically are sold at substantial discounts from the price of branded drugs.

Generic drug manufacturers require the approval of the U.S. Food and Drug Administration ("FDA") to market a generic product. FDA approval takes on average about 18 months. The firm must file an abbreviated new drug application with the FDA, showing that the ingredients used in the generic drug, as well as the process, will result in a product that is equivalent to the branded drug. More specifically, generic manufacturers must receive approval for their active pharmaceutical ingredient ("API") source and must reference the drug master file (禮1) of the API supplier. Typically, the generic drug manufacturer purchases an API -- the chemical that allows the drug to affect the body -- from a specialty chemical manufacturer. The generic manufacturer combines the API with inactive filters, binders, colorings and other chemicals to produce a finished product. More than one drug manufacturer can reference the drug master file of the same API supplier. A generic manufacturer that wants or needs to change its API supplier must obtain FDA approval, a process that averages about 18 months but can take as long as three years.

Lorazepam, the generic version of Ativan, is used to treat anxiety and insomnia and as a preoperative sedative. Clorazepate, the generic version of Tranxene, is used to treat anxiety, as well as hypertension, and as an adjunct therapy for nicotine and opiate withdrawal. Doctors in the United States issue over 18 million prescriptions a year for lorazepam and over three million clorazepate prescriptions a year.

By early 1997, vigorous competition among generic manufacturers had driven down the prices of lorazepam and clorazepate tablets to very competitive levels. In mid-1997, according to the Commission's complaint, Mylan implemented a plan to raise the prices for these generic drugs by seeking long-term exclusive licenses for the drug master files of the APIs. Mylan allegedly identified lorazepam and clorazepate as markets where exclusive licenses would give it significant market power because of limited competition. Mylan allegedly believed that such contracts, by denying its competitors access to the APIs, would exclude some or all of them from the generic market, making it easier for Mylan to raises prices without fear of a competitive response.

Profarmaco, an API manufacturer headquartered in Italy, supplied Mylan and most of Mylan's competitors with lorazepam API and clorazepate API. Cambrex is the parent company of Profarmaco. Gyma Laboratories distributes Profarmaco's products in the United States. In 1997, according to the Commission's complaint, Profarmaco, through Gyma, supplied over 90% of lorazepam API and 100% of clorazepate API to generic manufacturers in the United States market. In late 1997, according to the Commission's complaint, Mylan entered into long-term exclusive licenses with the other defendants to supply Mylan alone with the API necessary to produce lorazepam and clorazepate. Pursuant to those agreements, which were unusual in the generic drug industry, Mylan allegedly agreed to pay a percentage of its gross profits from its sales of lorazepam and clorazepate tablets.

Mylan also unsuccessfully sought a similar exclusive license from the U.S. distributor, SST, of the only other lorazepam API supplier,(禮2) although the FDA had not authorized Mylan to sell lorazepam using this firm's API. Mylan's intent allegedly was to deny its competitors an alternate source of API. According to the Commission complaint, although SST did not agree to an exclusive licensing agreement, it signaled Mylan that it would raise the price that it would charge Mylan's competitors for lorazepam API, making it easier for Mylan to charge a higher price for its lorazepam tablets.

The complaint alleged that, as a result of these agreements, Mylan's competitors were left with insufficient sources of supply of the key active ingredients needed to continue manufacturing their competitive generic products and, therefore, could not effectively compete for the sale of either product. As a result, the complaint alleged that Mylan succeeded in monopolizing the market for these products. Despite no significant increase in its costs, Mylan was able to raise the price of clorazepate by as much as 3,200 per cent and the price of lorazepam by as much as 2600 per cent, depending on the bottle size and strength, to State health insurance programs, wholesalers, retail pharmacy chains and other customers. For example, in January 1998, Mylan raised the wholesale price of clorazepate from $11.36 to $377.00 for a 500-tablet bottle of 7.5 mg tablets. In March 1998, Mylan raised the wholesale price of lorazepam from $7.30 to $190 for a 500?tablet bottle of 1 mg tablets.

Shortly after Mylan raised its prices of lorazepam tablets, SST allegedly raised the price of FIS lorazepam API by approximately 19,000 percent despite no significant increase in its costs. Mylan's competitors matched Mylan's price increases for lorazepam and clorazepate tablets.

The Commission's complaint alleged that through its agreements with the other defendants, Mylan had earned an additional $120 million. The complaint also alleged that ultimate consumers of these drugs paid even higher prices, and many consumers may have reduced the quantity of these drugs that they took, or stopped taking them altogether because they could no longer afford them. Mylan's illegal conduct allegedly deprived some consumers of access to these important drugs and put some consumers' health at risk.

In light of the significant consumer harm caused by the alleged conduct, the Commission determined that a federal court action was preferable to a cease and desist order in administrative litigation. The Commission's complaint asked the court, among other things, to order defendants to rescind their unlawful exclusive licenses and to disgorge the ill-gotten gains that they earned. Under the settlement agreement, Mylan will pay $100 million in disgorged profits into an escrow fund to compensate injured consumers and state agencies. The State Attorneys General will distribute the fund to patients who paid the increased prices and to state agencies, including Medicaid programs, that purchased lorazepam and clorazepate while the licenses were in effect.(禮3) This settlement, when combined with the proposed resolution of private actions involving the same conduct, means that virtually all of the profits Mylan obtained through its allegedly unlawful conduct will be disgorged.

The defendants also agreed to an injunction barring similar anticompetitive behavior in the future, which the Court issued on February 9, 2001. The injunction prohibits, for ten years, any exclusive agreement on active pharmaceutical ingredients that harms competition or creates a monopoly. The injunction also prohibits, for five years, Mylan from entering any exclusive agreements affecting the raw material for lorazepam or clorazepate tablets. Finally, the injunction forbids Mylan, for ten years, from attempting to enter or entering into any exclusive arrangement with a supplier if Mylan lacks regulatory approval to use the supplier's API. The injunction requires, for five years, each defendant to give the Commission advance notice of any proposed exclusive agreement on any other raw materials. The injunction does not apply to exclusive agreements related to the development of new branded or generic drugs, agreements between API suppliers and their brokers (such as that between Profarmaco and Gyma), and purchase orders.

On April 27, the District Court for the District of Columbia gave preliminary approval to the settlement and authorized the State Attorneys General to notify consumers of their rights to obtain a refund. It must grant final approval to the settlement before any funds are disbursed and has scheduled a hearing on November 29, 2001, to consider granting final approval.

Copies of the complaint, the order and stipulated permanent injunction and statements by the Commissioners are available from the FTC's web site. See the hyperlinks from http://www.ftc.gov/opa/2000/11/mylanfin.htm.