Trump Wants to Lower Drug Prices. Try More Competition.

There are plenty of legal shenanigans in the pharmaceutical industry. Here's a look into key issues and a few bipartisan solutions available to Congress.

By Dante Witt Published on February 20, 2019

In his State of the Union, President Trump said he wanted the federal government to take action to reduce drug prices. That is a live issue in congress. Next Tuesday the Senate finance committee will hear from pharmaceutical companies’ executives. We’d all love for drug prices to be lower, but tinkering with a complex system like the pharmaceutical industry could easily backfire.

As it turns out, though, there may be some things Washington could do to improve competition and thereby lower prices.

Diving Into the Drug Industry: “Pay-to-Delay Deals”

When a drug’s patent is about to expire, its maker sometimes will pay one or more other companies not to make a generic version of the drug. (It’s called pay-to-delay.) That way, the original company can keep selling the brand-name drug at a higher price. Consumers will have to either pay that price or just make do without that particular medicine.

Obviously, the brand-name company can’t afford to pay off very many companies. But sometimes only one or a very few generics companies are interested.

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And the brand-name companies have a couple of weapons. First, they weaponize a law that the first generic company to apply for FDA approval on a drug gets dibs. The law says no other company can make a generic version for 180 days. That law was written to entice at least one generics company to make each new drug. The thinking is that if the first one into the generics market gets 180 days as the sole generic provider, it makes it more tempting to jump in.

But it also means the brand-name company only has to pay off one generics company for a while. And the first-in generics company can even stall to stretch the exclusivity period out longer than 180 days. This isn’t the only way companies manage to keep their monopolies, though. Pay-for-delay deals also happen in Europe, where there is no 180-day exclusivity.

Maintaining Control With “Authorized Generics”

Brand-name companies also can threaten to make an “authorized generic.” You see, sometimes it’s only worthwhile to make a drug if your company can get a big enough share of the market for the drug. If your company has to compete with the brand-name company and its authorized generic, you just can’t get enough customers cheaply enough to make a profit from your generic.

Don’t want to accept the brand-name company’s pay-off not to make the drug? If you don’t accept, the brand company will make an authorized generic to snatch away many of your potential customers. And one generic isn’t as good as two. The creation of one generic causes a drug’s price to drop 30%, but a second generic reduces the drug’s price by as much as 90%.

And that tactic can come in handy for the brand-names even if they have already paid a generic maker to wait. If a second generics company tries to start producing a drug, the brand-name company can threaten to make an authorized generic, which might make the drug not worthwhile for the second generics company.

All this means that even when patents expire on drugs, the original maker can continue to be the only seller. And without competition, the original seller can keep prices high.

All this means that even when patents expire on drugs, the original maker can continue to be the only seller. And without competition, the original seller can keep prices high.

They Need to be Profitable… But Shouldn’t Monopolize

But before you say big pharma is clearly evil for doing this, remember it’s extremely expensive to develop, test, and produce a drug. The companies need the hope of lots of future profit for it to be worth their while to research and produce effective new drugs. And generics companies claim that pay-to-delay agreements are really just a type of out-of-court settlement that happens when one company sues a brand-name company over a dubious patent. Those agreements, they say, make it less risky to sue the brand-name companies. And if they sue successfully, they may be able to produce generics sooner than they would have otherwise.

But a lot of people are skeptical of that explanation. What they are doing looks a lot like anti-competition, monopolizing behavior.

Some Bipartisan Options for Congress

There are some changes that might help the market run more efficiently.

  • Congress could change the rules so that authorized generics have to wait 180 days after the first generic is made, just like all the others.
  • Congress could pass a bipartisan bill that bans pay-to-delay agreements between drug companies. This bill would save almost $4 billion per year. A somewhat narrower bill didn’t apply to a certain kind of expensive-to-create medicines. It would save consumers $11 billion and the government $4.79 billion in ten years.
  • Congress could pass the CREATES Act. This bill does a couple of things. It makes drug companies sell samples to generics companies after the patent on a given drug has expired. That lowers the cost of producing a generic version. This is important in cases where the FDA has required drugs with known risks to have restricted distribution channels. Currently, a company can misuse these rules to keep a generics company from buying enough samples to produce a generic version. That bill would save almost $4 billion.

The pharmaceutical industry engages in plenty of legal shenanigans. Existing laws play into their tactics. If Congress addressed even one of these areas, we might see market competition bring some drug prices down significantly. President Trump could support any of these ideas without offending Republican or Democratic voters.

This can be a bipartisan issue. I hope we soon see a bipartisan solution.

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