Skyrocketing drug prices are in the news. Overnight price increases have riveted the attention of the public, media, and politicians of all stripes. But one reason for high prices has flown under the radar. When drug companies reformulate their product, switching from one version of a drug to another, the price doesn’t dramatically increase. Instead, it stays at a high level for longer than it otherwise would have without the switch. Although more difficult to discern than a price spike, this practice, when undertaken to prevent generic market entry, can result in the unjustified continuation of monopoly pricing, burdening patients, the government, and the health care system as a whole.
Not all reformulations pose competitive concerns. Empirical studies have shown that more than 80 percent can be explained by improvements that are not temporally connected to impending generic entry. But a dangerous subset of such reformulations is undertaken for one, and only one, reason: to delay generic entry. In such cases, reformulation is called “product hopping.”
When generics enter the market, the price can fall dramatically overnight, by as much as 85 percent. For that reason, brand firms have every incentive to delay this moment of reckoning as long as possible. Sure enough, making trivial changes to their drugs has that effect. Every state has a substitution law that requires or allows pharmacists to offer a generic drug when the patient presents a prescription for a brand drug. But such substitution is thwarted if the drug is not the same—in particular, if it is not bioequivalent (able to be absorbed into the body at the same rate) and therapeutically equivalent (having the same active ingredient, form, dosage, strength, and safety and efficacy profile). A minor change to a drug’s formulation can prevent the pharmacist from substituting the generic.
Product hopping raises nuanced issues arising at the intersection of patent law, antitrust law, the federal Hatch-Waxman Act, and state drug product substitution laws. It is even more complex given the uniquely complicated pharmaceutical market, in which the buyer (patient, insurance company) is different from the decision maker (doctor).
Courts applying US antitrust law have struggled to create a robust and defensible legal framework for separating anticompetitive product hops from competitively benign, legitimate product development. In this post, we propose a framework that would help courts defer to legitimate reformulations while targeting anticompetitive switches.
Different Courts, Different Decisions
One example of a minor formulation change that prevented generic entry involves the Alzheimer’s drug Namenda. Facing the end of its patent term, brand firm Forest switched from Namenda IR (taken twice a day) to Namenda XR (taken once a day), allowing it to enjoy 14 additional years of patent protection. The original version was wildly profitable, earning $1.5 billion per year. Forest’s decision to pull that blockbuster drug off the market would have made no economic sense for Forest—if the reformulation hadn’t had the effect of thwarting generic competition. Put differently, the economics show that Forest’s sole motive in making the switch was to impair generics. The US Court of Appeals for the Second Circuit upheld an injunction that prevented Forest from removing this drug from the market.
Another example, the harms of which the court did not fully appreciate, involves the acne-treating drug Doryx. Brand firm Warner Chilcott stopped selling the original capsule versions of its drug, removed capsules from its website, and bought back and destroyed capsules while introducing a reformulated version in tablet form (in successively different doses and with score marks allowing splitting). The US Court of Appeals for the Third Circuit admitted, for the purpose of its decision, that Warner “had indeed made the Doryx ‘hops’ primarily to ‘delay generic market entry.’” Despite these flashing red lights, the court upheld the conduct, focusing on the effect of the switch on generic competitor Mylan, which was still able to enter the market with a profitable generic of one of the versions of Doryx, instead of focusing on the conduct’s effect on consumers, who were forced to continue paying higher prices. It did so even though Warner forecast that its switch away from a product making tens of millions of dollars a year would not result in increased sales or profits—the switch made economic sense for Warner solely because it impaired generic substitutability. The substantial costs that Warner incurred in reformulating the product were not investments in increasing consumer welfare but investments in impairing competition. Nor is that the only concerning court decision. The District of Columbia Court in another case explained that when introducing Nexium, AstraZeneca kept its other heartburn drug Prilosec on the market, which allegedly “added choices” even though such a switch prevented many consumers from choosing a generic version of nearly identical Prilosec.
A Rational Framework For Anticompetitive Product Hopping
Instead of ignoring the regulatory regime or focusing on whether the original drug is removed from the market (hard switch) or remains on the market (soft switch), courts need to start taking account of the realities of the pharmaceutical industry. In particular, courts should consider whether the brand firm, in reformulating its drug, “cannibalizes” the sales of the original product; that is, encourages doctors to write prescriptions for the reformulated instead of the original product. Merely reformulating and selling a product, without cannibalizing its sales, does not present anticompetitive concern. Courts also should consider the timing of the switch, as timing that is unrelated to generic entry does not call for scrutiny.
For switches in which the brand firm cannibalizes the original product at a time when generic entry is expected, we suggest the application of a conservative, respected test that asks if the conduct would make economic sense for the brand firm if it did not impair generic competition. In other words, would the brand have switched the product if it did not have the effect of harming generics?
Such a test offers significant leeway to the brand firm, which would avoid liability unless the switch was a money-losing proposition for it (absent the effect of impairing competition), even if the switch in fact resulted in a net loss of consumer welfare (the standard under antitrust’s traditional “Rule-of-Reason”). It also recognizes that both hard and soft switches can result in anticompetitive harm: The hard switch in Abbott Laboratories v. Teva Pharmaceuticals (TriCor) resulted in generics obtaining 2 percent of the market, and the soft switch in Walgreen led to 25 percent generic penetration, each far less than the 85 percent that would have been expected absent product hopping.
Applying a no-economic-sense test to product hopping would defer to legitimate reformulations while targeting anticompetitive switches—those in which the brand manufacturer has invested in impairing generic competition instead of in making economically rational improvements in its product. In either case, it would allow courts to apply an analysis more connected to the economics of the pharmaceutical industry.
Authors’ Note
Counsel for direct-purchaser plaintiffs in Nexium and Doryx cases.
Pharmaceutical Product Hopping: A Proposed Framework For Antitrust Analysis posted first on http://ift.tt/2lsdBiI
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