Generic Drugs: Inserting ‘Competition’ Into the Manufacturing Environment
The evidence is in; generic drugs help U.S. patients (and taxpayers) save significantly on the nation’s annual prescription drug bill. In the Association for Accessible Medicines 2018 Generic Drug Access & Savings in the U.S. report, the leading U.S. industry association for generic manufacturers cites some convincing statistics to support this position. For example, while 90 percent of all U.S. prescriptions filled in 2017 were generics, generic drugs made up only 23 percent of prescription drug spending. Moreover, total savings from generic drugs in the U.S. totaled $265.1 billion in 2017, up from $97.3 billion in 2008. Lastly, while the average primary copay, i.e., the amount established by the health care insurance plans, is $40.30 for brand name drugs, for generic pharmaceuticals, it is $6.06, an out-of-pocket patient differential of over six-and-a-half times.
For brand drug pharmaceutical companies, this “inconvenient truth” has led to the proliferation of anticompetitive tactics against generic competitors. Following Harvard Business School Professor Michael Porter’s Five Forces of Competitive Strategy framework, brand name pharmaceutical companies (possessing patent-protected drugs) will strategically attempt to erect all available legal and regulatory barriers to forestall generic entry against their soon-to-be off patent drugs. Such rent-seeking activities, if successful, will offer a “de facto” marketplace extension of their patent protection. While there are additional rent-seeking expenses to erecting these barriers, the brand name companies undertake a benefit-cost analysis and, if the financial benefits forecasted exceed “1”, they initiate their patent extending strategies. However, the impact on consumer welfare, i.e., patients seeking lower-cost pharmaceuticals or public benefits, are consequently less than “1”.
U.S. generic pharmaceutical manufacturers find themselves regularly confronted by a myriad of legal and regulatory rent-seeking activities generated by their brand name pharmaceutical competitors. However, the legislative and executive branches of the U.S. government are actively addressing these anticompetitive practices. On the legislative front, U.S. Senators Amy Klobuchar (D-MN) and Charles Grassley (R-IA) introduced in the 116th Congress a bill, the Preserve Access to Affordable Generics and Biosimilars Act (S.64), to limit anticompetitive pay-for-delay legal deals between a brand name manufacturer and a generic manufacturer that prevent or delay the introduction of affordable generic versions of brand name drugs. According to a January 2010 FTC study, Pay-For-Delay: How Drug Company Pay-Offs Cost Consumers Billions, these anticompetitive deals were expected to cost consumers and taxpayers $35 billion in higher drug costs over the next decade. In addition, since 2001, the Federal Trade Commission, an independent federal agency, has filed a number of lawsuits to stop these deals, and it supports federal legislation to end such pay-for-delay settlements.
A companion bill, the Creating and Restoring Equal Access to Equivalent Samples (CREATES) Act of 2019, was re-introduced by Senators Charles Grassley (R-IA) and Patrick Leahy (D-VT) in February 2019. The CREATES Act targets abusive delay tactics that are employed by brand name manufacturers to block the development of less expensive generic and biosimilar pharmaceuticals. The CREATES Act addresses the first delay tactic, which occurs when a brand name company prevents potential generic and biosimilar competitors from obtaining samples of the branded product. The second delay tactic addressed occurs when a brand name drug company whose product requires a distribution safety protocol (known as a Risk Evaluation Mitigation Strategy (REMS) with Elements to Assure Safety) refuses to allow generic and biosimilar competitors to participate in the safety protocol with the explicit intent to delay competition.
A 2018 U.S. Congressional Budget Office study estimated that the CREATES Act would reduce spending by $3.3 billion over the 2019 to 2028 period; increase revenues by $600 million over the same period; reduce unified budget deficits by $3.9 billion over the same period; and reduce spending subject to appropriation, on net, by $87 million over 2019 to 2023. “The Commission supports the goals of the CREATES Act to protect the competitive process by eliminating incentives and opportunities for branded manufacturers to engage in manipulation of the REMS process to delay generic entry,” said Marcus Meier, FTC acting director, in a July 27, 2017, House Committee on the Judiciary hearing.
In conjunction with the above-mentioned Congressional legislation, the executive branch – namely the U.S. Food and Drug Administration (FDA) – is actively addressing anticompetitive behavior erected by brand name pharmaceutical manufacturers. Under the leadership of former FDA Commissioner Scott Gottlieb, the agency announced its “Drug Competition Action Plan” in June 2017. As part of this plan, in July 2017 the FDA initiated an update to its Manual of Policy and Procedures for Abbreviated New Drug Applications (ANDAs) that grants priority review to generic drugs until there are at least three approved ANDAs for a specific branded product. Moreover, to increase competition, the FDA has also released a list of pharmaceuticals with no known generic equivalents, including all drugs with expired patents and exclusivities, with the intention of updating the list every six months. In addition, in May 2018, FDA Commissioner Gottlieb began releasing the names of brand name pharmaceutical companies identified as slowing down or blocking the FDA generic approval process by withholding product samples, including Actelion Pharmaceuticals Ltd., BioMarin Pharmaceutical Inc., Celgene Corp., GlaxoSmithKline, and Novartis Pharmaceutical Corp., with the intention of updating the “name and shame” list semi-annually.
With strong bipartisan support for addressing brand name pharmaceutical company anticompetitive tactics, the CREATES Act is likely to get to President Trump’s desk for his signature this year. Pay-for-delay legislation could soon follow. This new legislation, along with continued regulatory and enforcement efforts from the FDA (under the agency’s new Commissioner and continuation of the “Drug Competition Plan”) and the FTC, respectively, will ensure a consistent policy focus on lowering prescription drug costs for American consumers.
However, “Big Pharma” will not go down without a Congressional fight. When it comes to rent-seeking activities, “Big Pharma” has deep “financial pockets” and skilled lobbying expertise. As Citizens for Responsibility and Ethics in Washington uncovered in its June 2018 report, A Bitter Pill: How Big Pharma Lobbies to Keep Drug Prices High, twenty-two of Forbes magazine’s top 25 largest drug and biotech companies in the world were found to have lobbied on some variation of the term “drug pricing.” Collectively, these 22 companies spent more than $80 million on lobbying activities during the period of January through September 2017 – an investment that ultimately paid off in competition enhancing legislation stymied in the 115th Congress.
Thomas A. Hemphill is David M. French Distinguished professor of strategy, innovation and public policy in the School of Management at the University of Michigan-Flint.
