Letter from AmeriKat: Will narrowing innovator-generic price gap change IP law?

The AmeriKat observing the latest
IP dynamic duo...
The AmeriKat can be solitary by nature.  She is accustomed to prowling for IP news and developments into the early witching hours.  Her green eyes are known to silently observe those and the surroundings around her.  As a young kitten, she was seen to hunt alone, arriving and circulating at IP events by herself.  But times have changed.  In the past few years she was fortunate to encounter individuals with whom she would go on to forge an unstoppable team bond and lasting friendships.  IP law is riddled with legendary pairings (be harmonious or discordant or both) - Hatch and Waxman, Apple and Samsung, Ginbsurg (Happy Birthday!) and Scalia, RIAA and EFF.  This week's AmeriKat is devoted to a new pairing which could impact the dynamics in IP law -  Senator Bernie Sanders (Independent-Vermont) and Congressman Elijah E. Cummings (Democrat-Maryland).

Narrowing innovator-generic price gap sees rise of Sanders-Cummings investigation:  Like night follows day, generic drugs are expected to be marketed at a discount price  - on average 80-85% less than the innovator's price.  Why?  In simplified terms, generics need only undertake an abbreviated and less costly process to obtain the regulatory approval necessary to market their product.  This was not always the case.  Prior to 1984's Hatch-Waxman Act, the generic industry in the US was in decline with generics in the same boat as innovators, undertaking the same costly regulatory process.  But with the Hatch-Waxman Act, regulatory approval for generics became quicker and cheaper and generic market share quickly engulfed the innovators'.

Senator Sanders (I-VT)
The rise of the generic industry in recent years has been further fueled by several innovator products falling off the patent cliff.  With the expiry of the likes of Lantus, Abilify, and Copaxone , over $40 billion worth of sales will be vulnerable to generic entry in 2015.  But the certainty of much cheaper generic drugs may no longer be guaranteed.  A report published by Elsevier shows that the price of some drug groups has increased by upwards 100%.  An analysis published on the Drug Channels blog also reported similar price increases, including the antibiotic tetracycline and blood pressure drug captorpril which are reported to have seen costs increases of 17,000% and 4,000%, respectively.

A recent Forbes article attributes the rapid price increase of some generic drugs to the flurry of mergers and acquisitions witnessed in the life sciences sector in the past 18 months.  With consolidation, the number of potential generic competitors has reduced in number.  Fewer generic entrants means less price competition, resulting in price increases.  The article also cites other factors such as manufacturing and quality issues which have resulted in drug supply shortages.  But without more evidence, these explanations seem more like speculation than justification.

This lack of concrete evidence may be why, last Fall, Congressman Cummings and Senator Sanders, wrote letters to 14 generic drug manufacturers (including Actavis, Teva and Mylan) requesting information about escalating prices of generic drugs.   Data supplied by the Healthcare Supply Chain Association (HSCA) on recent purchases by group purchasing organizations (GPOs) of ten generic drugs were cited by the pair.  In particular, the average market price of albuterol sulfate, a common asthma treatment, in October 2013 was $11.  Six months later, by April 2014, it rose to $434.  The price increase of doxcycline was 8,281%.  These price increases are especially significant considering that, as reported in a 2014 IMS report, generic products accounted for 86% of dispensed prescriptions in 2013.  In a statement, Senator Sanders proclaims "Generic drugs were meant to help make medications affordable for the millions of Americans who rely on prescriptions to manage their health needs. We’ve got to get to the bottom of these enormous price increases."

Last November also saw the introduction of legislation that would require generics to pay rebates to state Medicaid programs for products that increase in price faster than inflation.  The President of the Generic Pharmaceutical Association (GPhA), Ralph Naes, stated that the proposed legislation
"misses the forest for the trees. In actuality, generic drugs continue to be a resounding success in lowering health care costs and benefiting patients. Indeed, generics saved $239 billion in 2013 (a 14% increase in savings from 2012) and more than $1.46 trillion over the recent decade. Further, the Express Scripts 2013 Drug Trend Report issued in 2014 shows that since 2008, the price of brand drugs has almost doubled, but the price of generic drugs has been cut roughly in half. 
Unfortunately the newly proposed legislation makes it clear that the hearing was not intended to be meaningful examination of ways to ensure savings. The proposed bill reflects a basic misunderstanding of the pharmaceutical marketplace, and attempts to impose brand pharmaceutical provisions on generic drugs. This effort is misguided and will threaten patient access to affordable medicines."
Congressman Cummings
The innovator-generic dynamic and the pricing of pharmaceutical products, especially in the US, are highly complex issues.  Notwithstanding their complexity, the AmeriKat is struck by the potential IP ramifications of generic price increases, together with fewer generic entrants.  For example, litigants often face arguments that an innovators' IP protection should be curtailed for public policy reasons in order to make way for significantly cheaper generic medicine (especially in relation to issues involving regulatory data protection, patent term extension or supplementary protection certificates).  But if, in fact, the presumption that a generic medicine will always be cheaper is becoming a fiction, what happens to these arguments?  Will the often-cited public policy and competition arguments lose their purported potency?  What if there no longer is an expectation that a dramatic irrevocable price decrease, following a generic launch, will automatically occur?  Will it become more difficult to obtain a preliminary injunction in order to protect the status quo?  

As far as the AmeriKat understands, the Cummings-Sanders investigation is still on-going.  However, she will be interested to see if any particular factors, beyond domestic legislative and pricing issues, is to blame.  If the price increases are due to global market factors and decisions, including consolidation, the issue of generic price increase may not be an issue facing only US politicians.  Sounds like a perfect topic for an eager IP economist...

For more information see these articles from Wall Street Journal, GaBI and the New York Times.

Letter from AmeriKat: Will narrowing innovator-generic price gap change IP law? Letter from AmeriKat: Will narrowing innovator-generic price gap change IP law?  Reviewed by Annsley Merelle Ward on Monday, March 16, 2015 Rating: 5


  1. Here is one perspective. It is not the full story but is part of the bigger picture.

    The impact of the higher quality standards being enforced by the FDA has a role to play. Since around 2008 onwards the FDA went on a mission to improve the quality standards being adopted by all pharma companies, both brand-side and generic-side companies. (There had been a number of high profile examples of sub-standard quality systems being in place, including GSK in Puerto Rico, and Ranbaxy in India, to name only the tips of the ice-bergs). This led to all companies to increase their investment in their quality systems (and rightly so). For branded companies where the margins are thick, the businesses could absorb the extra costs. For some generic companies where the margins are thin, and their businesses are based on selling hundreds of different products, the choice has been to simply reverse out of certain products. This has led to shortages in certain products over the last few years, with off-patent cancer medications being partiularly hard hit.

    And when competitors drop out of markets, that leaves the market for a reduced number of players. Further, those remaining players that have had to increase their investment in quality systems to stay in the game will naturally seek to recoup their costs from somewhere, and that is when prices start to creep up.

    See http://www.pharmacytimes.com/publications/issue/2014/may2014/Generic-Drug-Economics-at-Root-of-Many-Drug-Shortages, and many articles like this for more details.

  2. It is also interesting to note - from a purely big picture point of view - that patent law is rarely segmented by particular art field, with the almost singular exception being pharma.

    I think that one aspect that may be a takeaway here is that such singling out (and possible fragmentation) does not work.

    The ends were most likely well-intentioned. The means to those ends appear to have been reliance on a short cut (lax quality controls - and non-inclusion of the costs of those controls).

    Policy - and political policy to be specific - sometimes cannot force a market to behave in ways outside of human nature.

    That being said, and especially in view of Pharma patenting, one aspect that bears special scrutiny here is how close in price does this singular "quality" aspect bring generics and non-generics in price.

    One should realize that it is not - nor ever has been - the PRIME argument for the excessive (?) profit margins for patented drugs that "quality" is the driver. Rather, it has typically been the fact that pure research and the number of failures that these companies experience in attempting to bring an actual drug having the utility claimed in patents is so high that those so very view that make it out of the development cycle "need" to have a high margin in order to pay for all that other non-fruit bearing research.

    This factor simply does not exist for generic manufacturers who are not engaged in that early (and costly) stage of development.


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