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Last week the Senate Judiciary Committee held a hearing, Intellectual Property and the Price of Prescription Drugs: Balancing Innovation and Competition, that explored whether changes to the pharmaceutical patent process could help lower drug prices.  The committee’s goal was to evaluate various legislative proposals that might facilitate the entry of cheaper generic drugs, while also recognizing that strong patent rights for branded drugs are essential to incentivize drug innovation.  As Committee Chairman Lindsey Graham explained:

One thing you don’t want to do is kill the goose who laid the golden egg, which is pharmaceutical development. But you also don’t want to have a system that extends unnecessarily beyond the ability to get your money back and make a profit, a patent system that drives up costs for the average consumer.

Several proposals that were discussed at the hearing have the potential to encourage competition in the pharmaceutical industry and help rein in drug prices. Below, I discuss these proposals, plus a few additional reforms. I also point out some of the language in the current draft proposals that goes a bit too far and threatens the ability of drug makers to remain innovative.  

1. Prevent brand drug makers from blocking generic companies’ access to drug samples. Some brand drug makers have attempted to delay generic entry by restricting generics’ access to the drug samples necessary to conduct FDA-required bioequivalence studies.  Some brand drug manufacturers have limited the ability of pharmacies or wholesalers to sell samples to generic companies or abused the REMS (Risk Evaluation Mitigation Strategy) program to refuse samples to generics under the auspices of REMS safety requirements.  The Creating and Restoring Equal Access To Equivalent Samples (CREATES) Act of 2019 would allow potential generic competitors to bring an action in federal court for both injunctive relief and damages when brand companies block access to drug samples.  It also gives the FDA discretion to approve alternative REMS safety protocols for generic competitors that have been denied samples under the brand companies’ REMS protocol.  Although the vast majority of brand drug companies do not engage in the delay tactics addressed by CREATES, the Act would prevent the handful that do from thwarting generic competition.  Increased generic competition should, in turn, reduce drug prices.

2. Restrict abuses of FDA Citizen Petitions.  The citizen petition process was created as a way for individuals and community groups to flag legitimate concerns about drugs awaiting FDA approval.  However, critics claim that the process has been misused by some brand drug makers who file petitions about specific generic drugs in the hopes of delaying their approval and market entry.  Although FDA has indicated that citizens petitions rarely delay the approval of generic drugs, there have been a few drug makers, such as Shire ViroPharma, that have clearly abused the process and put unnecessary strain on FDA resources. The Stop The Overuse of Petitions and Get Affordable Medicines to Enter Soon (STOP GAMES) Act is intended to prevent such abuses.  The Act reinforces the FDA and FTC’s ability to crack down on petitions meant to lengthen the approval process of a generic competitor, which should deter abuses of the system that can occasionally delay generic entry.  However, lawmakers should make sure that adopted legislation doesn’t limit the ability of stakeholders (including drug makers that often know more about the safety of drugs than ordinary citizens) to raise serious concerns with the FDA. 

3. Curtail Anticompetitive Pay-for-Delay Settlements.  The Hatch-Waxman Act incentivizes generic companies to challenge brand drug patents by granting the first successful generic challenger a period of marketing exclusivity. Like all litigation, many of these patent challenges result in settlements instead of trials.  The FTC and some courts have concluded that these settlements can be anticompetitive when the brand companies agree to pay the generic challenger in exchange for the generic company agreeing to forestall the launch of their lower-priced drug. Settlements that result in a cash payment are a red flag for anti-competitive behavior, so pay-for-delay settlements have evolved to involve other forms of consideration instead.  As a result, the Preserve Access to Affordable Generics and Biosimilars Act aims to make an exchange of anything of value presumptively anticompetitive if the terms include a delay in research, development, manufacturing, or marketing of a generic drug. Deterring obvious pay-for-delay settlements will prevent delays to generic entry, making cheaper drugs available as quickly as possible to patients. 

However, the Act’s rigid presumption that an exchange of anything of value is presumptively anticompetitive may also prevent legitimate settlements that ultimately benefit consumers.  Brand drug makers should be allowed to compensate generic challengers to eliminate litigation risk and escape litigation expenses, and many settlements result in the generic drug coming to market before the expiration of the brand patent and possibly earlier than if there was prolonged litigation between the generic and brand company.  A rigid presumption of anticompetitive behavior will deter these settlements, thereby increasing expenses for all parties that choose to litigate and possibly dissuading generics from bringing patent challenges in the first place.  Indeed, the U.S. Supreme Court has declined to define these settlements as per se anticompetitive, and the FTC’s most recent agreement involving such settlements exempts several forms of exchanges of value.  Any adopted legislation should follow the FTC’s lead and recognize that some exchanges of value are pro-consumer and pro-competitive.

4. Restore the balance established by Hatch-Waxman between branded drug innovators and generic drug challengers.  I have previously discussed how an unbalanced inter partes review (IPR) process for challenging patents threatens to stifle drug innovation.  Moreover, current law allows generic challengers to file duplicative claims in both federal court and through the IPR process.  And because IPR proceedings do not have a standing requirement, the process has been exploited  by entities that would never be granted standing in traditional patent litigation—hedge funds betting against a company by filing an IPR challenge in hopes of crashing the stock and profiting from the bet. The added expense to drug makers of defending both duplicative claims and claims against challengers that are exploiting the system increases litigation costs, which may be passed on to consumers in the form of higher prices. 

The Hatch-Waxman Integrity Act (HWIA) is designed to return the balance established by Hatch-Waxman between branded drug innovators and generic drug challengers. It requires generic challengers to choose between either Hatch-Waxman litigation (which saves considerable costs by allowing generics to rely on the brand company’s safety and efficacy studies for FDA approval) or an IPR proceeding (which is faster and provides certain pro-challenger provisions). The HWIA would also eliminate the ability of hedge funds and similar entities to file IPR claims while shorting the stock.  By reducing duplicative litigation and the exploitation of the IPR process, the HWIA will reduce costs and strengthen innovation incentives for drug makers.  This will ensure that patent owners achieve clarity on the validity of their patents, which will spur new drug innovation and make sure that consumers continue to have access to life-improving drugs.

5. Curb illegal product hopping and patent thickets.  Two drug maker tactics currently garnering a lot of attention are so-called “product hopping” and “patent thickets.”  At its worst, product hopping involves brand drug makers making minor changes to a drug nearing the end of its patent so that they gets a new patent on the slightly-tweaked drug, and then withdrawing the original drug from the market so that patients shift to the newly patented drug and pharmacists can’t substitute a generic version of the original drug.  Similarly, at their worst, patent thickets involve brand drug makers obtaining a web of patents on a single drug to extend the life of their exclusivity and make it too costly for other drug makers to challenge all of the patents associated with a drug.  The proposed Affordable Prescriptions for Patients Act of 2019 is meant to stop these abuses of the patent system, which would facilitate generic entry and help to lower drug prices.

However, the Act goes too far by also capturing many legitimate activities in its definitions. For example, the bill defines as anticompetitive product-hopping the selling of any improved version of a drug during a window which extends to a year after the launch of the first generic competitor.  Presently, to acquire a patent and FDA approval, the improved version of the drug must be different and innovative enough from the original drug, yet the Act would prevent the drug maker from selling such a product without satisfying a demanding three-pronged test before the FTC or a district court.  Similarly, the Act defines as anticompetitive patent thickets any new patents filed on a drug in the same general family as the original patent, and this presumption can only be rebutted by providing extensive evidence and satisfying demanding standards to the FTC or a district court.  As a result, the Act deters innovation activity that is at all related to an initial patent and, in doing so, ignores the fact that most important drug innovation is incremental innovation based on previous inventions.  Thus, the proposal should be redrafted to capture truly anticompetitive product hopping and patent thicket activity, while exempting behavior this is critical for drug innovation. 

Reforms that close loopholes in the current patent process should facilitate competition in the pharmaceutical industry and help to lower drug prices.  However, lawmakers need to be sure that they don’t restrict patent rights to the extent that they deter innovation because a significant body of research predicts that patients’ health outcomes will suffer as a result.

On March 14, the Federal Circuit will hear oral arguments in the case of BTG International v. Amneal Pharmaceuticals that could dramatically influence the future of duplicative patent litigation in the pharmaceutical industry.  The court will determine whether the America Invents Act (AIA) bars patent challengers that succeed in invalidating patents in inter partes review (IPR) proceedings from repeating their winning arguments in district court.  Courts and litigants had previously assumed that the AIA’s estoppel provision only prevented unsuccessful challengers from reusing failed arguments.   However, in an amicus brief filed in the case last month, the U.S. Patent and Trade Office (USPTO) argued that, although it seems counterintuitive, under the AIA, even parties that succeed in getting patents invalidated in IPR cannot reuse their arguments. 

If the Federal Circuit agrees with the USPTO, patent challengers could be strongly deterred from bringing IPR proceedings because it would mean they couldn’t reuse any arguments in district court.  This deterrent effect would be especially strong for generic drug makers, who must prevail in district court in order to get approval for their Abbreviated New Drug Application from the FDA. 

Critics of the USPTO’s position assert that it will frustrate the AIA’s purpose of facilitating generic competition.  However, if the Federal Circuit adopts the position, it would also reduce the amount of duplicative litigation that plagues the pharmaceutical industry and threatens new drug innovation.  According to a 2017 analysis of over 6,500 IPR challenges filed between 2012 and 2017, approximately 80% of IPR challenges were filed during an ongoing district court case challenging the patent.   This duplicative litigation can increase costs for both challengers and patent holders; the median cost for an IPR proceeding that results in a final decision is $500,000 and the median cost for just filing an IPR petition is $100,000.  Moreover, because of duplicative litigation, pharmaceutical patent holders face persistent uncertainty about the validity of their patents. Uncertain patent rights will lead to less innovation because drug companies will not spend the billions of dollars it typically costs to bring a new drug to market when they cannot be certain if the patents for that drug can withstand IPR proceedings that are clearly stacked against them.   And if IPR causes drug innovation to decline, a significant body of research predicts that patients’ health outcomes will suffer as a result.

In addition, deterring IPR challenges would help to reestablish balance between drug patent owners and patent challengers.  As I’ve previously discussed here and here, the pro-challenger bias in IPR proceedings has led to significant deviation in patent invalidation rates under the two pathways; compared to district court challenges, patents are twice as likely to be found invalid in IPR challenges. The challenger is more likely to prevail in IPR proceedings because the Patent Trial and Appeal Board (PTAB) applies a lower standard of proof for invalidity in IPR proceedings than do federal courts. Furthermore, if the challenger prevails in the IPR proceedings, the PTAB’s decision to invalidate a patent can often “undo” a prior district court decision in favor of the patent holder.  Further, although both district court judgments and PTAB decisions are appealable to the Federal Circuit, the court applies a more deferential standard of review to PTAB decisions, increasing the likelihood that they will be upheld compared to the district court decision. 

However, the USPTO acknowledges that its position is counterintuitive because it means that a court could not consider invalidity arguments that the PTAB found persuasive.  It is unclear whether the Federal Circuit will refuse to adopt this counterintuitive position or whether Congress will amend the AIA to limit estoppel to failed invalidity claims.  As a result, a better and more permanent way to eliminate duplicative litigation would be for Congress to enact the Hatch-Waxman Integrity Act of 2019 (HWIA).  The HWIA was introduced by Senator Thom Tillis in the Senate and Congressman Bill Flores In the House, and proposed in the last Congress by Senator Orrin Hatch.  The HWIA eliminates the ability of drug patent challengers to file duplicative claims in both federal court and IPR proceedings.  Instead, they must choose between either district court litigation (which saves considerable costs by allowing generics to rely on the brand company’s safety and efficacy studies for FDA approval) and IPR proceedings (which are faster and provide certain pro-challenger provisions). 

Thus, the HWIA would reduce duplicative litigation that increases costs and uncertainty for drug patent owners.   This will ensure that patent owners achieve clarity on the validity of their patents, which will spur new drug innovation and ensure that consumers continue to have access to life-improving drugs.

Drug makers recently announced their 2019 price increases on over 250 prescription drugs. As examples, AbbVie Inc. increased the price of the world’s top-selling drug Humira by 6.2 percent, and Hikma Pharmaceuticals increased the price of blood-pressure medication Enalaprilat by more than 30 percent. Allergan reported an average increase across its portfolio of drugs of 3.5 percent; although the drug maker is keeping most of its prices the same, it raised the prices on 27 drugs by 9.5 percent and on another 24 drugs by 4.9 percent. Other large drug makers, such as Novartis and Pfizer, will announce increases later this month.

So far, the number of price increases is significantly lower than last year when drug makers increased prices on more than 400 drugs.  Moreover, on the drugs for which prices did increase, the average price increase of 6.3 percent is only about half of the average increase for drugs in 2018. Nevertheless, some commentators have expressed indignation and President Trump this week summoned advisors to the White House to discuss the increases.  However, commentators and the administration should keep in mind what the price increases actually mean and the numerous players that are responsible for increasing drug prices. 

First, it is critical to emphasize the difference between drug list prices and net prices.  The drug makers recently announced increases in the list, or “sticker” prices, for many drugs.  However, the list price is usually very different from the net price that most consumers and/or their health plans actually pay, which depends on negotiated discounts and rebates.  For example, whereas drug list prices increased by an average of 6.9 percent in 2017, net drug prices after discounts and rebates increased by only 1.9 percent. The differential between the growth in list prices and net prices has persisted for years.  In 2016 list prices increased by 9 percent but net prices increased by 3.2 percent; in 2015 list prices increased by 11.9 percent but net prices increased by 2.4 percent, and in 2014 list price increases peaked at 13.5 percent but net prices increased by only 4.3 percent.

For 2019, the list price increases for many drugs will actually translate into very small increases in the net prices that consumers actually pay.  In fact, drug maker Allergan has indicated that, despite its increase in list prices, the net prices that patients actually pay will remain about the same as last year.

One might wonder why drug makers would bother to increase list prices if there’s little to no change in net prices.  First, at least 40 percent of the American prescription drug market is subject to some form of federal price control.  As I’ve previously explained, because these federal price controls generally require percentage rebates off of average drug prices, drug makers have the incentive to set list prices higher in order to offset the mandated discounts that determine what patients pay.

Further, as I discuss in a recent Article, the rebate arrangements between drug makers and pharmacy benefit managers (PBMs) under many commercial health plans create strong incentives for drug makers to increase list prices. PBMs negotiate rebates from drug manufacturers in exchange for giving the manufacturers’ drugs preferred status on a health plan’s formulary.  However, because the rebates paid to PBMs are typically a percentage of a drug’s list price, drug makers are compelled to increase list prices in order to satisfy PBMs’ demands for higher rebates. Drug makers assert that they are pressured to increase drug list prices out of fear that, if they do not, PBMs will retaliate by dropping their drugs from the formularies. The value of rebates paid to PBMs has doubled since 2012, with drug makers now paying $150 billion annually.  These rebates have grown so large that, today, the drug makers that actually invest in drug innovation and bear the risk of drug failures receive only 39 percent of the total spending on drugs, while 42 percent of the spending goes to these pharmaceutical middlemen.

Although a portion of the increasing rebate dollars may eventually find its way to patients in the form of lower co-pays, many patients still suffer from the list prices increases.  The 29 million Americans without drug plan coverage pay more for their medications when list prices increase. Even patients with insurance typically have cost-sharing obligations that require them to pay 30 to 40 percent of list prices.  Moreover, insured patients within the deductible phase of their drug plan pay the entire higher list price until they meet their deductible.  Higher list prices jeopardize patients’ health as well as their finances; as out-of-pocket costs for drugs increase, patients are less likely to adhere to their medication routine and more likely to abandon their drug regimen altogether.

Policymakers must realize that the current system of government price controls and distortive rebates creates perverse incentives for drug makers to continue increasing drug list prices. Pointing the finger at drug companies alone for increasing prices does not represent the problem at hand.

Last week, Senator Orrin Hatch, Senator Thom Tillis, and Representative Bill Flores introduced the Hatch-Waxman Integrity Act of 2018 (HWIA) in both the Senate and the House of Representatives.  If enacted, the HWIA would help to ensure that the unbalanced inter partes review (IPR) process does not stifle innovation in the drug industry and jeopardize patients’ access to life-improving drugs.

Created under the America Invents Act of 2012, IPR is a new administrative pathway for challenging patents. It was, in large part, created to fix the problem of patent trolls in the IT industry; the trolls allegedly used questionable or “low quality” patents to extort profits from innovating companies.  IPR created an expedited pathway to challenge patents of dubious quality, thus making it easier for IT companies to invalidate low quality patents.

However, IPR is available for patents in any industry, not just the IT industry.  In the market for drugs, IPR offers an alternative to the litigation pathway that Congress created over three decades ago in the Hatch-Waxman Act. Although IPR seemingly fixed a problem that threatened innovation in the IT industry, it created a new problem that directly threatened innovation in the drug industry. I’ve previously published an article explaining why IPR jeopardizes drug innovation and consumers’ access to life-improving drugs. With Hatch-Waxman, Congress sought to achieve a delicate balance between stimulating innovation from brand drug companies, who hold patents, and facilitating market entry from generic drug companies, who challenge the patents.  However, IPR disrupts this balance as critical differences between IPR proceedings and Hatch-Waxman litigation clearly tilt the balance in the patent challengers’ favor. In fact, IPR has produced noticeably anti-patent results; patents are twice as likely to be found invalid in IPR challenges as they are in Hatch-Waxman litigation.

The Patent Trial and Appeal Board (PTAB) applies a lower standard of proof for invalidity in IPR proceedings than do federal courts in Hatch-Waxman proceedings. In federal court, patents are presumed valid and challengers must prove each patent claim invalid by “clear and convincing evidence.” In IPR proceedings, no such presumption of validity applies and challengers must only prove patent claims invalid by the “preponderance of the evidence.”

Moreover, whereas patent challengers in district court must establish sufficient Article III standing, IPR proceedings do not have a standing requirement.  This has given rise to “reverse patent trolling,” in which entities that are not litigation targets, or even participants in the same industry, threaten to file an IPR petition challenging the validity of a patent unless the patent holder agrees to specific pre-filing settlement demands.  The lack of a standing requirement has also led to the  exploitation of the IPR process by entities that would never be granted standing in traditional patent litigation—hedge funds betting against a company by filing an IPR challenge in hopes of crashing the stock and profiting from the bet.

Finally, patent owners are often forced into duplicative litigation in both IPR proceedings and federal court litigation, leading to persistent uncertainty about the validity of their patents.  Many patent challengers that are unsuccessful in invalidating a patent in district court may pursue subsequent IPR proceedings challenging the same patent, essentially giving patent challengers “two bites at the apple.”  And if the challenger prevails in the IPR proceedings (which is easier to do given the lower standard of proof), the PTAB’s decision to invalidate a patent can often “undo” a prior district court decision.  Further, although both district court judgments and PTAB decisions are appealable to the Federal Circuit, the court applies a more deferential standard of review to PTAB decisions, increasing the likelihood that they will be upheld compared to the district court decision.

The pro-challenger bias in IPR creates significant uncertainty for patent rights in the drug industry.  As an example, just last week patent claims for drugs generating $6.5 billion for drug company Sanofi were invalidated in an IPR proceeding.  Uncertain patent rights will lead to less innovation because drug companies will not spend the billions of dollars it typically costs to bring a new drug to market when they cannot be certain if the patents for that drug can withstand IPR proceedings that are clearly stacked against them.   And, if IPR causes drug innovation to decline, a significant body of research predicts that patients’ health outcomes will suffer as a result.

The HWIA, which applies only to the drug industry, is designed to return the balance established by Hatch-Waxman between branded drug innovators and generic drug challengers. It eliminates challengers’ ability to file duplicative claims in both federal court and through the IPR process. Instead, they must choose between either Hatch-Waxman litigation (which saves considerable costs by allowing generics to rely on the brand company’s safety and efficacy studies for FDA approval) and IPR (which is faster and provides certain pro-challenger provisions). In addition to eliminating generic challengers’ “second bite of the apple,” the HWIA would also eliminate the ability of hedge funds and similar entities to file IPR claims while shorting the stock.

Thus, if enacted, the HWIA would create incentives that reestablish Hatch-Waxman litigation as the standard pathway for generic challenges to brand patents.  Yet, it would preserve IPR proceedings as an option when speed of resolution is a primary concern.  Ultimately, it will restore balance to the drug industry to safeguard competition, innovation, and patients’ access to life-improving drugs.

The two-year budget plan passed last week makes important changes to payment obligations in the Medicare Part D coverage gap, also known as the donut hole.  While the new plan produces a one-year benefit for seniors by reducing what they pay a year earlier than was already mandated, it permanently shifts much of the drug costs insurance companies were paying to drug makers.  It’s far from clear whether this windfall for insurers will result in lower drug costs for Medicare beneficiaries.

Medicare Part D is voluntary prescription drug insurance for seniors and the permanently disabled provided by private insurance plans that are approved by the Medicare program.  Last year, more than 42 million people enrolled in Medicare Part D plans. Payment for prescription drugs under Medicare Part D depends on how much enrollees spend on drugs.  In 2018, after hitting a deductible that varies by plan, enrollees pay 25% of their drug costs while the Part D plans pay 75%.  However, once the individual and the plan have spent a total of $3,750, enrollees hit the coverage gap that lasts until $8,418 has been spent.  In the coverage gap, enrollees pay 35% of brand drug costs, the Part D plans pay 15%, and drug makers are required to offer 50% discounts on brand drugs to cover the rest.  Once total spending reaches $8,418, enrollees enter catastrophic coverage in which they pay only 5% of drug costs, the Part D plans pay 15%, and the Medicare program pays the other 80%.

The Affordable Care Act (ACA) included provisions to phase out the coverage gap by 2020, so that enrollees will pay only 25% of drug costs from the time they meet the deductible until they hit the catastrophic coverage level.  The budget plan passed last week speeds up this phase out by one year, so enrollees will start paying only 25% in 2019 instead of 2020.  The ACA anticipated that with enrollees paying 25% of drug costs and drug maker discounts of 50%, the Part D plans would pay the other 25%.  However, last week’s budget plan drastically redistributed the payment responsibilities from the Part D insurance plans to drug makers. Under the new plan drug makers are required to offer 70% discounts so that the plans only have to pay 5% of the total drug costs.  That is, the new plan shifts 20% of total drug costs in the coverage gap from insurers to drug makers.

Although the drug spending in each individual’s coverage gap is less than $5,000, with over 42 million people covered, the total spending, and the 20% of spending shifted from insurers to drug makers, is significant.  CMS has estimated that when drug makers’ discounts were only covering 50% of drug spending in the gap, the annual total discounts amounted to over $5.6 billion.  Requiring drug makers to cover another 20% of drug spending will add several billion dollars more to this total.

A government intervention that forces suppliers to cover 70% of the spending in a market is a surprising move for Republicans—supposed advocates of free markets.  Moreover, although reducing prescription drug costs has become a national priority, it’s unclear whether shifting costs from insurers to drug makers will benefit individuals at all.  Theoretically, as the individual Part D plans pay less of their enrollees’ drug costs, they should pass on the savings to enrollees in the form of lower premiums.  However, several studies suggest that enrollees may not experience a net decrease in drug spending.  The Centers for Medicare and Medicaid Services (CMS) has determined that under Medicare Part D, drug makers increase list prices to offset other concessions and to more quickly move enrollees out of the coverage gap where drug makers are required to offer price discounts.  Higher list prices mean that enrollees’ total out-of-pocket drug spending increases; even a 5% cost-sharing obligation in the catastrophic coverage for a high-priced drug can be a significant expense. Higher list prices that push enrollees out of the coverage gap also shift more costs onto the Medicare program that pays 80% of drug costs in the catastrophic coverage phase.

A better, more direct way to reduce Medicare Part D enrollees’ out-of-pocket drug spending is to require point-of-sale rebates.  Currently, drug makers offer rebates to Part D plans in order to improve their access to the millions of individuals covered by the plans.  However, the rebates, which total over $16 billion annually, are paid after the point-of-sale, and evidence shows that only a portion of these rebates get passed through to beneficiaries in the form of reduced insurance premiums.  Moreover, a reduction in premiums does little to benefit those enrolled individuals who have the highest aggregate out-of-pocket spending on drugs. (As an aside, in contrast to the typical insurance subsidization of high-cost enrollees by low-cost enrollees, high-spending enrollees under Medicare Part D generate greater rebates for their plans, but then the rebates are spread across all enrollees in the form of lower premiums).

Drug maker rebates will more directly benefit Medicare Part D enrollees if rebates are passed through at the point-of-sale to reduce drug copays.  Point-of-sale rebates would ensure that enrollees see immediate savings as they meet their cost-sharing obligations.  Moreover, the enrollees with the highest aggregate out-of-pocket spending would be the ones to realize the greatest savings.  CMS has recently solicited comments on a plan to require some portion of drug makers’ rebates to be applied at the point of sale, and the President’s budget plan released yesterday proposes point-of-sale rebates to lower Medicare Part D enrollees’ out-of-pocket spending.  Ultimately, targeting rebates to consumers at the point-of-sale will more effectively lower drug spending than reducing insurance plans’ payment obligations in hopes that they pass on the savings to enrollees.

Today, the Senate Committee on Health, Education, Labor, and Pensions (HELP) enters the drug pricing debate with a hearing on “The Cost of Prescription Drugs: How the Drug Delivery System Affects What Patients Pay.”  By questioning the role of the drug delivery system in pricing, the hearing goes beyond the more narrow focus of recent hearings that have explored how drug companies set prices.  Instead, today’s hearing will explore how pharmacy benefit managers, insurers, providers, and others influence the amounts that patients pay.

In 2016, net U.S. drug spending increased by 4.8% to $323 billion (after adjusting for rebates and off-invoice discounts).  This rate of growth slowed to less than half the rates of 2014 and 2015, when net drug spending grew at rates of 10% and 8.9% respectively.  Yet despite the slowing in drug spending, the public outcry over the cost of prescription drugs continues.

In today’s hearing, there will be testimony both on the various causes of drug spending increases and on various proposals that could reduce the cost of drugs.  Several of the proposals will focus on ways to increase competition in the pharmaceutical industry, and in turn, reduce drug prices.  I have previously explained several ways that the government could reduce prices through enhanced competition, including reducing the backlog of generic drugs awaiting FDA approval and expediting the approval and acceptance of biosimilars.  Other proposals today will likely call for regulatory reforms to enable innovative contractual arrangements that allow for outcome- or indication-based pricing and other novel reimbursement designs.

However, some proposals will undoubtedly return to the familiar call for more government negotiation of drug prices, especially drugs covered under Medicare Part D.  As I’ve discussed in a previous post, in order for government negotiation to significantly lower drug prices, the government must be able to put pressure on drug makers to secure price concessions. This could be achieved if the government could set prices administratively, penalize manufacturers that don’t offer price reductions, or establish a formulary.  Setting prices or penalizing drug makers that don’t reduce prices would produce the same disastrous effects as price controls: drug shortages in certain markets, increased prices for non-Medicare patients, and reduced incentives for innovation. A government formulary for Medicare Part D coverage would provide leverage to obtain discounts from manufacturers, but it would mean that many patients could no longer access some of their optimal drugs.

As lawmakers seriously consider changes that would produce these negative consequences, industry would do well to voluntarily constrain prices.  Indeed, in the last year, many drug makers have pledged to limit price increases to keep drug spending under control.  Allergan was first, with its “social contract” introduced last September that promised to keep price increases below 10 percent. Since then, Novo Nordisk, AbbVie, and Takeda, have also voluntarily committed to single-digit price increases.

So far, the evidence shows the drug makers are sticking to their promises. Allergan has raised the price of U.S. branded products by an average of 6.7% in 2017, and no drug’s list price has increased by more than single digits.  In contrast, Pfizer, who has made no pricing commitment, has raised the price of many of its drugs by 20%.

If more drug makers brought about meaningful change by committing to voluntary pricing restraints, the industry could prevent the market-distorting consequences of government intervention while helping patients afford the drugs they need.   Moreover, avoiding intrusive government mandates and price controls would preserve drug innovation that has brought life-saving and life-enhancing drugs to millions of Americans.

 

 

 

Joanna Shepherd is Professor of Law at Emory University School of Law.

Today, three of the largest proposed mergers — Bayer/Monsanto, Dow/Dupont, and ChemChina/Syngenta — face scrutiny in both the U.S. and Europe over concerns that the mergers will slow innovation in crop biotechnology and crop protection.   The incorporation of innovation effects in the antitrust analysis of these agricultural/biotech mergers is quickly becoming more mainstream in both the U.S. and E.U. The concerns are premised on the idea that, by merging existing competitors into one firm, consolidation will reduce incentives to develop new products in the future.  Since 2015, the Department of Justice has opposed proposed mergers between Applied Materials/Tokyo Electron, Comcast/Time Warner Cable, and Halliburton/Baker Hughes at least partly based on innovation concerns. Similarly, the European Commission has raised innovation concerns in its analyses of several mergers since 2015, including Biomet/Zimmer Holdings, GlaxoSmithKline/Novartis, and BASE/ Liberty Global.

Although most of these contested deals are not based exclusively on innovation markets, fear of harms to innovation often result in the required divestiture of innovation-related assets.  For example, both the FTC and European Commission allowed the 2014 merger between Medtronic/Covidien only on the condition that Covidien divest its drug-coated balloon catheter business to protect innovation in that market. And just this week, Dupont agreed to divest a large part of its existing pesticide business, including its global R&D organization, to secure approval for the Dow/Dupont merger in the EU.

Certainly the incorporation of innovation effects in antitrust analysis could be relevant in specific mergers or acquisitions if the consolidating firms are the primary innovators in the area, the firms innovate internally, and there are limited sources of external innovation. However, in many industries, this model simply doesn’t apply.  Take, for example, the pharmaceutical industry; as I explain in a recent Article, concerns about consolidation’s impact on drug innovation are largely based on an outdated understanding of the innovation ecosystem in the pharmaceutical industry.

Today, most drug innovation originates not in traditional pharmaceutical companies, but in biotech companies and smaller firms, where a culture of nimble decision-making and risk-taking facilitates discovery and innovation.  In fact, about two-thirds of New Molecular Entities approved by the FDA originate in biotech and small pharmaceutical companies, and these companies account for almost 70 percent of the current global pipeline of drugs under development.

To complete the development process and commercialize their drugs, biotech companies regularly collaborate with large pharmaceutical companies that push drugs through the grueling late-stage clinical trials and regulatory hurdles of the FDA, organize their manufacturing and distribution capabilities to bring the drugs to market, and mobilize their vast sales force to quickly achieve peak sales.  In this current ecosystem, biotech and pharmaceutical firms are each able to specialize in what they do best, bringing expertise and efficiencies to the innovation process.

This specialization has dramatically changed the share of internally-developed versus externally-developed drugs in the pharmaceutical industry. Whereas in the 1970s and early 1980s, almost all drug discovery and early stage development took place inside traditional pharmaceutical companies, today, the companies increasingly shift resources away from internal R&D expenditures and projects and towards external sources of innovation.  Externally-sourced drugs now account for an incredible 74 percent of new drugs registered with the FDA for sale in the U.S.  Internal R&D is no longer the primary source of drug innovation in large pharmaceutical companies.

As a result, antitrust analyses that focus on pharmaceutical mergers’ impacts on internal R&D and innovation largely miss the point.  In the current innovation ecosystem, where little drug innovation originates internally, a merger’s impact on internal R&D expenditures or development projects is oftentimes immaterial to aggregate drug innovation. In many consolidated firms, increases in efficiency and streamlining of operations free up money and resources to source external innovation. To improve their future revenue streams and market share, consolidated firms can be expected to use at least some of the extra resources to acquire external innovation. This increase in demand for externally-sourced innovation increases the prices paid for external assets, which, in turn, incentivizes more early-stage innovation in small firms and biotech companies.   Aggregate innovation increases in the process!

Thus, proper antitrust analyses must take into account the innovation ecosystem in the merging firms’ industries.  In industries in which most innovation originates externally, as in the pharmaceutical industry, analyses should be less concerned with mergers’ impacts on internal innovation, and more focused on whether consolidation will increase demand for externally-sourced innovation and, ultimately, increase aggregate drug innovation.