Daniel Lin/Daily News-Record via AP
Through “pay-for-delay” agreements, branded and generic drug companies profit to the tune of billions annually at the expense of patients and payors.
The development of multiple COVID vaccines in record time has raised the prospect of an end to the pandemic in the United States. It was ample public support that set the stage for this achievement. With the federal government offering research grants and a guaranteed market for hundreds of millions of vaccine doses, Moderna and Pfizer, among others, commercialized vaccines that are highly effective.
This success for both the industry and the public, however, seems to be an outlier. The dominant narrative around pharma in the United States has been high prices and unimpressive investment and innovation. A 2019 Gallup survey found that, among 25 sectors, the public viewed pharma the most unfavorably, even below the airline industry and the legal field.
How can this trend be rectified so that achievements such as the COVID vaccines become the rule and not the exception? As with the COVID vaccines, the government must play the lead role—not just by supporting research and development, which already happens on a large scale, but by changing the rules of the game. At present, pharmaceutical companies have an easy path to sales and profits through collusion and monopolization. The corollary is they lack the motivation to win through innovative research and development. Why would branded companies invest in uncertain new drug prospects when they can conspire with generic rivals and tweak old medications to obtain a fresh 20-year patent monopoly?
Now, President Biden has recognized the importance of changing the rules governing pharma. In an executive order issued on July 9, he encouraged the Federal Trade Commission to ban a collusive practice commonly employed by drug companies.
As a basic matter, the law structures market competition and determines the ways in which businesses can obtain an advantage over rivals and grow. If corporations could freely avoid paying employees minimum wages or refuse to install pollution control equipment, many (more) surely would do so to reduce their costs to gain a leg up over rivals. Federal and state laws, however, prohibit these methods of business and do not allow firms to gain a competitive edge through certain conduct that runs afoul of public values. For example, legal restrictions on competitive tactics such as false advertising and industrial sabotage are taken for granted. Accordingly, the choice for the public and policymakers is not between a “free market” and a “regulated market,” but among many possible sets of market rules. One potential configuration of rules promotes investment and invention, while another favors collusion, consolidation, and monopolization.
The law structures market competition and determines the ways in which businesses can obtain an advantage over rivals and grow.
Among the laws that shape business strategy, antitrust plays a critical role in governing competitive methods. At present, antitrust law largely permits pharmaceutical companies to grow and profit through collusion and monopolization. Pharmaceutical companies perpetuate their monopolies, charge high prices for decades-old medicines, and fail to innovate because the law, with its ambiguities and weak remedies, gives them effective license to do so.
What are some of the specific practices these companies use today to protect their revenues and profits?
First, branded drug companies have paid generic drug companies to postpone market entry. Once even a few generic companies enter a prescription drug market, prices fall precipitously. To avert this outcome, which erodes their market share and revenue, branded drug companies, in the process of settling patent litigation against a potential generic entrant, offer the generic company cash and other things of value in exchange for the rival dropping its challenge to the branded company’s patent(s) and postponing the generic drug’s market entry. If the first-in-line generic rival postpones entry, other competitors must wait too under federal law. Through these so-called “pay-for-delay” agreements, branded drug companies share a portion of their monopoly profits with the generic rival on the condition of this delayed market entry. Branded and generic companies thereby profit to the tune of billions annually at the expense of patients and payors. In one prominent example, Pfizer extended the monopoly of its popular anti-cholesterol medication Lipitor by offering inducements to a generic rival to stay out of the market for three years.
Second, branded drug companies, as they approach the expiration of patents on a lucrative medication, make small tweaks to the existing product to extend their monopolies. These modifications include switching the medication’s form from a tablet to a capsule or vice versa. Such changes frequently have minimal clinical benefits but can allow the manufacturer to obtain additional patent protection. In addition to such reformulations, companies initiate a marketing campaign to try to persuade doctors that the new formulation is more efficacious or safer than the old version. Sometimes, entering a pay-for-delay agreement with generic rivals can give branded companies the time to switch the market over to the new formulation. In contrast to most goods and services, a pricing disconnect exists for prescription drugs: Physicians make the product selection decision for patients through their prescription authority while patients use the drug and share the costs with third-party payors such as Medicare. If a physician prescribes the reformulated version, pharmacists cannot substitute the generic equivalent of the previous version because none exists.
If this kind of “product-hopping” campaign succeeds, the drug company has a new lucrative and patent-protected monopoly. An analysis of Food and Drug Administration new drug approvals found that such reformulations accounted for two-thirds of “new” drugs between 2011 and 2015. Decades-old medications like insulin remain expensive due to such product-hopping.
Third, some pharma companies employ a patenting offensive in which they file dozens or hundreds of applications, sometimes without consideration for the merits of the claims, incrementally over time. They hope that this ever-growing “patent thicket” will scare off prospective competitors, who may fear potentially ruinous patent infringement damages if they enter the market. For the 12 best-selling drugs in the United States in 2018, pharma companies sought patents on assorted features and production processes and tried to gain an extra period of patent exclusivity that would delay generic competition, on average, 38 years. AbbVie, for instance, has nearly 250 patents and patents pending on its autoimmune treatment Humira, most of them received or filed after the drug was approved for sale by the Food and Drug Administration in 2002. This monopoly means Humira is extraordinarily expensive. A recent congressional investigation found it cost, on average, $77,000 per patient per year.
The collusive and monopolistic practices of pharma companies, and powerful corporations in general, are often effectively legal.
Fourth, apart from misuse and manipulation of the patent system, drug companies have used exclusive contracts with pharmacy benefit managers (PBMs), insurers, and suppliers to exclude rivals. For instance, drug companies have offered PBMs and insurers large rebates not to pay for competing medications and to grant their products exclusive coverage. Mylan is accused of using such contracts with PBMs and payors to block rivals to its EpiPen, which is used in the event of potentially fatal anaphylactic reactions to certain foods, insect bites, and medications. (The Open Markets Institute, where I work, filed an amicus brief in support of a rival’s antitrust lawsuit against Mylan.) Thanks to its marginalization of rivals, Mylan maintains a monopoly and charges approximately $700 for a two-pack of EpiPens, ensuring that some who desperately need the device cannot obtain it.
Pharma companies have also entered exclusive contracts with suppliers of active pharmaceutical ingredients to prevent rivals from manufacturing the same drug. After acquiring the unpatented anti-parasitic medication Daraprim prescribed for patients with HIV/AIDS, cancer, and other conditions that compromise the immune system, Martin Shkreli (the infamous “pharma bro”) raised its price 4,000 percent overnight and entered an exclusive contract with the manufacturers of the active pharmaceutical ingredient to block competitors from making Daraprim.
Antitrust law, on paper, restricts all four practices—to an extent. The FTC, state governments, and private parties have brought lawsuits challenging collusion and monopolization in prescription drug markets. They have even won some cases.
Yet pharmaceutical companies continue to engage in these practices. Why? Enforcing existing antitrust rules is extraordinarily difficult. The government and other antitrust plaintiffs typically carry the legal burden of establishing that these practices harmed consumers, a showing that requires paying for expensive economists and extensive legal discovery. Pharmaceutical defendants usually also have the right to offer business justifications, no matter how theoretical or dubious, for their conduct. As a result, the collusive and monopolistic practices of pharma companies, and powerful corporations in general, are often effectively legal. And even when these companies face legal liability, they can expect to return only a portion of their ill-gotten gains. Pharmaceutical companies collude with each other and monopolize markets because these practices pay under current rules.
But the FTC can strengthen fair-trade rules. It has expansive authority to identify and prohibit “unfair methods of competition” and can ban conduct that is otherwise permitted by the Sherman and Clayton Acts (the two principal federal antitrust statutes). Earlier this month, the FTC rescinded a 2015 policy statement that narrowly interpreted this authority and can now use its power to ban unfair methods of competition power.
What are some of the things the FTC should do to remake pharma? It should ban pay-for-delay agreements among branded and generic drug companies, as President Biden called for in his Executive Order on Promoting Competition in the American Economy. But the FTC should do more and also restrict product-hopping, challenge drug companies that indiscriminately seek patents, and outlaw exclusive contracting by dominant firms. (In July 2020, the Open Markets Institute led a public-interest coalition that petitioned the FTC to prohibit exclusionary contracts through rulemaking.) Some of these actions can be undertaken independently and others by partnering with sister agencies like the Patent and Trademark Office.
Through the deployment of its fair competition power, the FTC can protect the public from high prescription drug prices and channel pharmaceutical company strategy in socially beneficial directions. The commission should attack easy methods for pharmaceutical companies to collude with generic competitors and monopolize markets by making insignificant modifications to old drugs, abusing the patent system, and using contracts to foreclose rivals. By doing so, the FTC would spur these companies to lower prices and to undertake the risky and expensive—but publicly valuable—work of developing treatments for a range of acute and chronic conditions and producing more breakthroughs like the COVID vaccines.
