High drug prices, particularly cancer drugs, are the most significant health concern for Americans today. High drug prices reduce access to therapy, cause treatment abandonment and financial bankruptcies, as well as severe emotional and family distress. The availability of generic cancer drugs reduces these concerns. Unfortunately, drug companies have engaged in strategies that delay or prevent the availability of generics. High prices have also “infected” generics prices in “niche” cancer markets with limited or no competition. Explaining these strategies and increasing public awareness could prevent such potential abuses.
Generic Drugs—Background
In 1984, the U.S. Congress passed the “Drug Price Competition and Patent Term Restoration Act,” referred to as the Hatch-Waxman Act. The act allows generic manufacturers to file an abbreviated new drug application (ANDA) with the U.S. Food and Drug Administration for approval of a generic drug, using existing knowledge related to patented drugs. Brand companies benefit from patent term extension periods that compensate for lengthy FDA regulatory reviews. The first generic company to file an ANDA has 180 days of market exclusivity rights before other generics can enter the market. The Hatch-Waxman Act improved the introduction of generics into the U.S. market. Generics accounted for less than 20 percent of U.S. drugs before 1984, compared with 85 percent today. Generics have saved $1.5 trillion between 2004 and 2013.
Unfortunately, the act’s intentions have been subverted by drug companies, which have taken advantage of the complex intersections of patent, antitrust and state laws to extend the lifetime of patented drugs and delay the availability of generics.
Reverse Payment or ‘Pay-For-Delay’ Patent Settlements
In reverse payment patent settlements, or “pay-for-delay,” brand companies enter into financial agreements with potential generic competitors to delay their entry into the market, thereby securing longer periods of exclusivity.
The recent entry of generic imatinib (a drug that treats chronic myeloid leukemia) into the U.S. market exemplifies this issue. In an agreement with the generic company Sun Pharmaceutical, Novartis delayed the U.S. entry of generic imatinib for six months beyond the patent expiration date of its patented drug Gleevec (pushing back the release from July 2015 to February 2016). Generic imatinib then entered the U.S. market in February 2016 at a price of $142,000/year (six-month first-generic exclusivity). This is not a real “generic” price; Gleevec is priced today at about $146,000/year. In Canada, generic imatinib is available for $8,800/year while Gleevec costs $38,000/year. Thus, 12 additional months were added beyond the patent expiration date, during which near-monopoly prices were imposed by both the patent and generic company.
The Federal Trade Commission (FTC) estimates that pay-for-delay settlements cost taxpayers $3.5 billion per year.
Authorized Generics
Authorized generics are produced by brand pharmaceutical companies or in collaboration with other companies, and marketed under a different label at “generic prices.” The threat of introducing an authorized generic is a coercive tool, as its introduction reduces generic first-filer revenues by 40 percent to 60 percent in the subsequent 30-month period.
In negotiations with generic companies, brand companies often promise not to introduce authorized generics that would compete with true generics. This is a form of market division: the generic company agrees to delay entering the market (prolonging the brand drug’s monopoly), and the brand company agrees not to introduce an authorized generic during the first-generic filing exclusivity period.
Product Hopping
Product hopping, also referred to as “forced switching” or “ever greening,” involves a brand-name company switching the market for a drug (prior to its patent expiration date) to a reformulated version that has a later-expiring patent, but which offers little or no therapeutic advantages. The newer version could have a slightly different tablet or capsule dose, or a slow-release formulation (e.g., given once a day rather than twice daily), etc. The company then advertises heavily to convince doctors and patients to switch to the new drug, and may even withdraw the often profitable older drug from the market before its patent expiration date in order to force the use of the alternative formulation. When the generic version of the drug becomes available, pharmacists cannot substitute it for the new (branded) version because state laws allow drug substitution only if the dosage strength and other characteristics remain the same.
Lobbying Against Cross-Border Drug Importation
The price of identical brand name drugs around the world can be as low as 20 percent to 50 percent of the U.S. prices. Generics can become available earlier outside the United States. To obtain affordable medications, some patients may import drugs for personal use. International online pharmacies are as safe as domestic ones. The pharmaceutical lobby, the most powerful interest lobby in the U.S., has successfully blocked legislation to allow drug importation. Drug importation is a clear advantage when, for example, a company like Turing Pharmaceuticals establishes a monopoly in a niche market in the U.S. and increases the price of a drug overnight by more than 5,000 percent. The same drug (under a different company) remains at the same old price elsewhere.
Lobbying, Advertising, or Buying Out the Competition
Even after the patent expiration, companies can rely on lobbying, branding and aggressive advertising to produce profit. The United States and New Zealand are the only countries that allow television advertising of prescription medications. In 2012, $3.5 billion was invested in pharmaceutical marketing in the U.S.
A recent trend that has emerged is drug companies buying out competitors and, once a monopoly is secured, increasing the drug prices several fold overnight. Nothing changes with regard to the drug other than the drug ownership. For example, Turing Pharmaceuticals acquired pyrimethamine (a drug used to treat toxoplasmosis), became the sole U.S. manufacturer and increased the tablet price from $13.50 to $750. Valeant Pharmaceuticals, another company notorious for using this approach, has increased drug prices by at least 20 percent more than 120 times since 2011. Turing and Valeant are extreme examples of a common marketing strategy. Pfizer also recently increased the U.S. prices of 105 of its drugs by up to 20 percent.
Solutions
Drug companies have abandoned their mission to both help patients and make profit in favor of a mission focused solely on profit maximization. The guiding principle of George Merck, past president of Merck Company, that “medicine is for the people” and “not for the profits,” has been long forgotten.
Potential corrective measures include: 1) Allow Medicare to negotiate drug prices. 2) Develop mechanisms to propose fair drug prices. 3) Penalize anticompetitive pay-for-delay. 4) Allow the importation of drugs for personal use. 5) Monitor and prevent potential monopolies in small markets. 6) Reduce costs associated with the introduction of generics. 7) Encourage the presence of multiple (rather than few) generic companies. 8) Establish (as Canada has) reasonable prices for generics to prevent price gouging (for example, setting the highest generic price at <50 percent during the 6-month exclusivity period of the first generic, and <10 percent to 20 percent of the patent drug in general). 8) Ask for transparency about research costs when justifying high prices. 9) Continue to challenge weak patents. 10) Eliminate television advertising for prescription drugs.
Hagop Kantarjian, M.D., is a nonresident fellow in health policy at Rice University’s Baker Institute and chairman of the leukemia department at The University of Texas MD Anderson Cancer Center.
Vivian Ho, Ph.D., is the James A. Baker III Institute Chair in Health Economics, director of the Center for Health and Biosciences, a professor in the Department of Economics at Rice University, and a professor in the Department of Medicine at Baylor College of Medicine.