How Pharma Companies Game the System to Keep Drugs Expensive

It's rare that Harvard Business Review carries any article about the pharmaceutical industry. Here is a masterpiece by Erin Fox, director of Drug Information at University of Utah Health.  

I help the University of Utah hospital system manage its drug budgets and medication use policies, and in 2015 I got sticker shock. Our annual inpatient pharmacy cost for a single drug skyrocketed from $300,000 to $1.9 million. That’s because the drug maker Valeant suddenly increased the price of isoproterenol from $440 to roughly $2,700 a dose.

Isoproterenol is a heart drug. It helps with heart attacks and shock and works to keep up a patient’s blood pressure. With the sudden price increase, we were forced to remove isoproterenol from our 100 emergency crash carts. Instead, we stocked our pharmacy backup boxes, located on each floor of our hospitals, to have the vital drug on hand if needed. We had to minimize costs without impacting patient care.

This type of arbitrary and unpredictable inflation is not sustainable. And it’s not the way things are supposed to work in the United States. Isoproterenol is a drug that is no longer protected by a patent. Theoretically, any drug company should be able to make a generic version and sell it at a competitive cost. We should have had other options to buy a competitors’ copy for $440 or less. But that’s not happening like it should. The promise of generic medications is getting further from reality each day. As the U.S. Senate considers President Donald Trump’s choice to head the Food and Drug Administration, now is the time refocus efforts on generic drugs.

How generics are supposed to work?

The 1984 Drug Price Competition and Patent Term Restoration Act gave pharmaceutical companies exclusive protections for innovating a new drug. If they brought a new therapy to life, they enjoyed patent protection to effectively monopolize the market. That was the payoff for shouldering the high risk and high costs of developing new drugs.

But once the patent and the exclusive hold on the market expires, the legislation encouraged competition to benefit consumers. Any drug company would be able to manufacture non-brand name versions of the very same drug, so-called “generics.” And for a while, the system worked well.

Not anymore. The system intended to reward drug companies for their innovations, but eventually protect consumers, is systematically being broken. Drug companies are thwarting competition through a number of tactics, and the result is high prices, little to no competition, and drug quality problems.

The ways companies stop generics

One of the ways branded drug manufacturers prevent competition is simple: cash. In so-called “pay for delay” agreements, a brand drug company simply pays a generic company not to launch a version of a drug. The Federal Trade Commission estimates these pacts cost U.S. consumers and taxpayers $3.5 billion in higher drug costs each year.

“Citizen petitions” offer drug companies another way to delay generics from being approved. These ask the Food and Drug Administration to delay action on a pending generic drug application. By law, the FDA is required to prioritize these petitions. However, the citizens filing concerns are not individuals, they’re corporations. The FDA recently said branded drug manufacturers submitted 92% of all citizen petitions. Many of these petitions are filed near the date of patent expiration, effectively limiting potential competition for another 150 days.

“Authorized generics” are another tactic to limit competition. These aren’t really generic products at all; they are the same product sold under a generic name by the company that sells the branded drug. Why? By law, the first generic company to market a drug gets an exclusivity period of 180 days. During this time, no other companies can market a generic product. But the company with the expiring patent is not barred from launching an “authorized generic.” By selling a drug they’re already making under a different name, pharmaceutical firms are effectively extending their monopoly for another six months.

Another way pharmaceutical firms are thwarting generics is by restricting access to samples for testing. Generic drug makers need to be able to purchase a sample of a brand-name product to conduct bioequivalence testing. That’s because they have to prove they can make a bioequivalent product following the current good manufacturing practices (CGMP) standard. These manufacturers don’t need to conduct clinical trials like the original drug company did.

But the original drug developer often declines to sell drug samples to generics manufacturers by citing “FDA requirements,” by which they mean the agency’s Risk Evaluation and Mitigation Strategies program. The idea behind this program is a good one: give access to patients who will benefit from these personalized medicines, and bar access for patients who won’t benefit and could be seriously harmed. However, brand drug makers are citing these requirements for the sole purpose of keeping generics from coming to market.

Problems with generic drug makers

Although makers of a branded drug are using a variety of tactics to create barriers to healthy competition, generic drug companies are often not helping their own case. In 2015, there were 267 recalls of generic drug products—more than one every other day. These recalls are for quality issues such as products not dissolving properly, becoming contaminated, or even being outright counterfeits.

A few high-profile recalls have shaken the belief that generic drugs are truly the same. In 2014, the FDA withdrew approval of Budeprion XL 300 — Teva’s generic version of GlaxoSmithKline’s Wellbutrin XL. Testing showed the drug did not properly release its key ingredient, substantiating consumers’ claims that the generic was not equivalent. In addition, concerns about contaminated generic Lipitor caused the FDA to launch a $20 million initiative to test generic products to ensure they are truly therapeutically equivalent.

In some cases, patent law also collides with the FDA’s manufacturing rules. For example, the Novartis patent for Diovan expired in 2012. Ranbaxy received exclusivity for 180 days for the first generic product. However, due to poor quality manufacturing, Ranbaxy couldn’t obtain final FDA approval for its generic version. The FDA banned shipments of Ranbaxy products to the United States. Ranbaxy ended up paying a $500 million fine, the largest penalty paid by a generic firm for violations.

Due to these protracted problems with the company that had won exclusivity, a generic product did not become available until 2014. The two-year delay cost Medicare and Medicaid at least $900 million. Ranbaxy’s poor-quality manufacturing also delayed other key generic products like Valcyte and Nexium. Ironically, it was Mylan—involved in its own drug pricing scandal over its EpiPen allergy-reaction injector—that filed the first lawsuit to have the FDA strip Ranbaxy of its exclusivity.  Mylan made multiple attempts to produce generic products but was overruled in the courts.

Ways to Fix the System

Pharmaceutical firms are currently using a set of tactics to make their temporary monopolies semi-permanent. Eliminating these tactics will not be easy. Still, doing so will fulfill the deal that policy makers offered to drug makers and consumers: a temporary monopoly on sales to help pay for drug development.

First, restrictive distribution programs need to be stopped. Generic companies must also be allowed to purchase samples of these medications to conduct bioequivalence studies. (One measure to close these loopholes already has bipartisan support.) Next, pay-for-delay agreements should be eliminated as well as a corporation’s ability to issue citizen petitions with the intent of delaying generic competition.

Encouraging and enforcing high-quality standards for medications must also be an industry imperative. To create transparency around drug quality, the FDA has proposed a system of letter grades for manufacturers. In an economic study, one official notes that lack of transparency “may have produced a market situation in which quality problems have become sufficiently common and severe to result in drug shortages.”

Another way to achieve greater transparency in medication quality is to change the product labeling laws. Labels should disclose the medication’s manufacturer. Currently, hospitals and pharmacies don’t always know which company actually made the product. This makes it difficult to base purchase decisions on quality.

Generic medications can provide great benefits for patients and health systems when there is adequate competition and quality. But their promise is unfulfilled, and it’s costing consumers. By eliminating restrictive distribution schemes, pay-for-delay, and citizen petitions as well as providing more transparency around quality, hospitals, clinicians, lawmakers, and the new leaders at the FDA have a clear opportunity. They can start to reverse rising health care costs and ensure quality medications are accessible to the American people.

Source: https://hbr.org/2017/04/how-pharma-companies-game-the-system-to-keep-drugs-expensive