Simpson Thacher & Bartlett, counsel for the pharmaceutical company Warner Chilcott, retained Cornerstone Research and Dr. Henry Grabowski of Duke University to determine if the exclusive supply agreement between Warner Chilcott and Barr Pharmaceuticals had any anticompetitive effects. The Federal Trade Commission, 34 states’ attorneys general, and classes of consumers, third-party payers, and direct purchasers alleged that the supply agreement delayed Barr’s introduction of a lower-priced, generic version of Warner Chilcott’s oral contraceptive Ovcon. Charles E. Koob and Peter C. Thomas, both partners at Simpson Thacher & Bartlett, served as counsel for Warner Chilcott.
Contrary to plaintiffs’ claims, Dr. Grabowski’s analysis showed that consumers and third-party payers do not always benefit from the introduction of a generic drug. He explained that suppliers of branded pharmaceutical products often compete with other branded products by giving physicians free samples for their patients, a practice that has an effect similar to a price discount. Dr. Grabowski noted that such promotional efforts typically decline substantially after generic entry, when the returns from promotions are likely to flow primarily to the generic product. As a result, the benefit from any price discount offered by a generic product may be partly or completely offset by the loss from a reduction in free samples.
Dr. Grabowski’s theoretical explanation was supported by two empirical analyses: an analysis of actual reductions in the volume of free samples of other branded oral contraceptive drugs caused by generic entry, and an analysis of the tradeoffs that would have occurred had Barr introduced its generic version of Ovcon earlier. Dr. Grabowski showed that, prior to Barr’s introduction of a generic version of Ovcon, Warner Chilcott distributed 40 percent of its Ovcon product as free samples—a competitive strategy that provided an effective price discount of about 30 percent. He also showed that Barr’s generic product would likely have provided a discount of only about 10 percent during this period. Dr. Grabowski concluded that consumers and third-party payers would therefore have paid more for the oral contraceptive (as well as lost certain non-price benefits associated with free samples) had Barr introduced its generic product earlier rather than participating in the supply agreement with Warner Chilcott.
Warner Chilcott settled the cases with the consumer and third-party payer classes for attorneys’ fees and an agreement to distribute a small amount of free product to primary care physicians, health clinics, and charitable organizations. In approving the settlements, the court noted that the plaintiffs “faced significant risks in establishing both liability and damages” because of the savings accruing to consumers from free samples.