Control and Entry: A Bilateral Prescription for Competitive Pharmaceutical Markets
Executive Summary
Consumers suffer from high drug prices that prevent and restrict access to potentially life saving medicine. Two main contributors to this issue are: (1) the Federal Trade Commission’s (FTC or Commission) ineffective use of divestiture remedies to curtail the unilateral effects of challenged mergers in the long run, and (2) high barriers to generic entry in the form of exclusionary conduct and Food and Drug Administration (FDA) approval. Although reforming merger control and promoting generic entry may appear to be distinct issues, they are complementary solutions to a joint issue. Mergers with ineffective remedies amplify the effect of existing unilateral conduct, which raises prices.
These notably high prices and regulatory failures have spurred competition authorities worldwide to form a multilateral task force focused on reassessing pharmaceutical merger control. Thus, the agencies responsible for pharmaceutical industry regulation in the U.S. — primarily the FTC and FDA — should spearhead policy changes in merger control and generic entry. Together, the two agencies can implement several key reforms:
- For settled mergers with remedies, the FTC should place conditions on and monitor asset transfers post-divestiture.
- Prior unilateral conduct should be factored into FTC merger review.
- The FTC should maintain close scrutiny of novel exclusionary conduct by branded drug producers.
- The FDA should implement stricter requirements for citizen petitions filed by branded drug producers.
- The FDA should either reduce the filing costs of Abbreviated New Drug Applications (ANDAs) or the time to approval.
Background
Undoubtedly, pharmaceutical drugs play a crucial role in protecting patients from a litany of life-threatening illnesses and ailments. However, skyrocketing drug prices pose significant barriers to the accessibility of vital medicines. According to the Council of Economic Advisers, the average annual prescription drug inflation relative to general inflation was 1.8% from 2008–2016.¹ To put this number into perspective, Figure 2 shows that partitioning this inflation metric into branded and generic price indices reveals a 208% increase in branded prices, in stark contrast to the 73.73% decline in generic prices.² This exorbitant inflation undeniably causes economic harm to the ailing consumers of specialty branded drugs with few substitutes. A 2019 survey corroborates this sentiment: 35% of Americans who take 4 or more prescription drugs find it difficult to afford any more prescription medicine.³
Given the importance of prescription drugs, ensuring the affordability as well as innovation of novel remedies are vital to promoting consumer welfare and public health. Competition in the pharmaceutical industry does just that: it helps ensure that medications are both available and affordable, and drives innovation in drug research and development (R&D). However, the efficacy of such an approach is declining due to two main issues.
For one, the FTC has retained an ineffective policy of settling challenged pharmaceutical mergers with divestiture remedies that are transient. In a horizontal merger with competing products, the Commission will require one firm to divest overlapping drugs, patents, or even research segments to maintain competition within those specific markets. Ideally, the distribution of divested assets to other competitors would ensure that the merged entity would not gain monopoly power over certain drugs. Further, the approved merger would theoretically enhance efficiencies and consumer benefits in the form of lower production costs, lower prices, and better products. To this end, the FTC, from 1994–2020, only moved to enjoin one out of 67 challenged mergers and settled the remainder with divestiture remedies.⁵
The issue, however, is that divested assets are often transferred post-divestiture, which may negate any competitive effects conferred by remedial actions. Such inefficacy — evidenced by high prices and rampant anticompetitive conduct in the industry — has pushed competition authorities worldwide to reevaluate this standard approach. In 2021, the FTC, the E.U. Directorate General for Competition, and the U.K.’s Competition and Markets Authority, to name a few, assembled the Multilateral Pharmaceutical Merger Task Force “to identify concrete and actionable steps to review and update the analysis of pharmaceutical mergers.”⁶ Given the international concern and the influential standing of the U.S., the FTC is obliged to spearhead effective reforms in this area.
Another significant contributor to high drug prices is branded drug manufacturers’ anticompetitive schemes to delay generic market entry, which otherwise reduces branded prices (Figure 2). Originally designed to facilitate generic entry, the Drug Price Competition and Patent Term Restoration Act of 1984 — otherwise known as the Hatch-Waxman Act — established a new FDA approval pathway for generics with abbreviated new drug applications (ANDAs). However, ANDA loopholes have unintentionally allowed for branded producers to delay and exclude generic entry. Incentivized by these loopholes, branded producers use reverse payment, or pay-for-delay (PFD) agreements to pay their generic counterparts to settle litigation that may invalidate the brand’s patents — in exchange for the generic’s commitment to delay market entry for an interim period. Fortunately, these attempts to maintain monopoly power over drugs past patent terms have been regularly challenged by the FTC after the 2013 Supreme Court ruling in FTC v. Actavis, Inc.. The Court’s decision held that PFD agreements are subject to antitrust scrutiny under the rule of reason, a doctrine that requires analysis of the conduct’s alleged harms to competition.⁷ Consequently, potential PFD agreements post-Actavis dropped from 40 in FY 2012 to 21 in FY 2014: nearly a 50% decline from its peak of 40.⁸ However, despite these strides in controlling firms’ use of PFD agreements, branded companies continue to devise ways to delay and exclude generic entry with concealed, or without, reverse payments. Thus, the FTC and FDA must take additional measures to challenge such anticompetitive conduct and facilitate generic entry, which in turn, lowers prices for consumers.
Together, the widespread use of divestiture remedies and exclusionary tactics in the past few decades have warped the competitive landscape of the pharmaceutical industry to benefit powerful, consolidated firms to the detriment of consumers. The remainder of the brief identifies potential approaches to reestablishing a healthy level of competition with respect to these two separate, yet inextricable issues, and outlines a policy recommendation.
Unilateral Effects of Horizontal Mergers
The Commission defines unilateral effects as anticompetitive effects — such as price increases — brought on by a single merged entity and enabled by the loss of competition in a market. The clearest example of this type of harm is the case of a merger to monopoly: when the merging firms are sole players in a given market. Nonetheless, unilateral conduct is not unique to monopolies: mergers may also allow for unilateral price increases in oligopolies¹⁰, which are characteristic of many drug markets. Evidenced by the disproportionate rise in drug prices, it is clear that the FTC’s merger remedies have failed to “remedy” the unilateral effects of pharmaceutical consolidation. But how exactly has this approach failed?
The failure to control for unilateral effects can be largely attributed to the transfer of assets post-divestiture. The competitive effects of divesting assets to other buyers may not persist if another firm — especially a large rival — later acquires such a buyer and its assets. A 2020 study found that “one-third of all buyers were ultimately merged into or acquired by a top pharmaceutical company, or acquired within two years of purchasing divested assets.”¹¹ Thus for settled mergers with remedies, the FTC must place more stringent provisions on the transfer of assets post-divestiture, and continuously monitor future transactions. Only then can the Commission ensure that the competitive effects of merger remedies are preserved and unilateral effects are curtailed.
Further, price increases stem not from high market concentration, but from unilateral conduct in certain drug markets with few to no close substitutes — particularly brand-dominated markets. Changes in pharmaceutical industry concentration, measured by annual changes in the Herfindahl-Hirschman Index (HHI), indicate a relatively constant trend in industry consolidation (Figure 3). Therefore, instead of higher prices correlating with higher industry-wide concentrations, it appears that price increases are linked to unilateral conduct within more narrowly-defined and specialized drug markets.¹² Numerous instances of such conduct have been well-documented. In 2015, Vyera acquired the life-saving drug Daraprim, raised the price by 4,000%, and used anticompetitive contracts to delay generic entry.¹³ In the same period, Valeant and Mallinckrodt raised the average prices of their existing products by industry-leading factors of 65.6% and 50% respectively.¹⁴ Ultimately, the lack of sufficient competitors in these monopolistic and oligopolistic markets have allowed for dominant firms to exercise market power and profitably raise prices to the detriment of price-taking consumers. Hence, ensuring that unilateral effects are remedied in the long run should be of utmost importance for the FTC.
However, such predatory conduct has prompted some antitrust practitioners to advocate for injunctive relief as the predominant approach to challenging pharmaceutical mergers. Diana Moss, President of the American Antitrust Institute, recommends such an approach based on an FTC-reported statistic that “only 75% of buyers of divestiture assets actually sold the drug, post-divestiture”, which she deems the “failure rate” of divestitures. However, this characterization seems to disregard the baseline “failure rate” of drugs: approximately 1% of patented drugs make it to human trials and less than 0.1% actually enter the market.¹⁶ Further, abandonment of merger remedies for injunctive relief does not fully optimize the tradeoffs between merger efficiencies and competition.¹⁷ For instance, Pfizer’s 2015 acquisition of Hospira was driven by the firm’s declining revenues and Hospira’s hampering administrative costs, and yielded $800 million of projected savings from merger-related cost efficiencies.¹⁸ Such gains from merger efficiencies may also advance R&D efforts, which in turn, advances patient care and public health. The FTC should thus retain a favorable outlook on efficiency-producing mergers, and in the case of challenged mergers, remedy the unilateral effects with the aforementioned monitored divestitures.
Merger Review: Serial Antitrust Offenders
From 1994–2020, approximately 55% of the 70 drug companies that were defendants in non-merger antitrust litigations were also merging parties, buyers of divested assets, or both.¹⁹ And while being a defendant does not fully equate with a record of anticompetitive conduct, such information is important in gauging the potential unilateral effects of mergers.
Prior unilateral conduct is indicative of a firm’s market power and the proposed merger’s unilateral effects. A history of prior unilateral conduct is particularly relevant if the product markets are similar, the conduct is related to the relevant markets, and sufficient proof of the conduct exists.²⁰ With these three conditions met, a relationship between prior conduct and merger effects can be inferred, making past firm behavior a valuable tool in the merger review process. And coupled with other determinants, such as HHI, prior acts may enable the FTC to better assess potential harms to competition and firms’ intentions for pursuing a merger. More specifically, the level of past unilateral conduct could be factored into merger review as a multiplier of potential harm.
Exclusionary Conduct of Branded Producers
Another form of unilateral conduct outside the context of pricing, branded firms often delay, or exclude, generic drugs from entering and competing in markets after patent expiry. These perverse incentives stem from the monopoly power granted by drug patents, and the associated rents that branded producers collect during patent terms. As mentioned earlier, use of traditional PFD agreements involving monetary reverse payments were pervasive pre-Actavis, but have since dwindled due to the FTC’s heightened scrutiny of these settlements. Nevertheless, branded drug producers have quickly adapted to this new legal landscape, and have instead opted for more obscure, nuanced schemes to delay generic entry and continually reap monopoly rents.
Common tactics post-Actavis have been disguised reverse payments and sham litigation. For one, disguised payments reflect the abrupt adaptation of PFD agreements in light of the Actavis decision. Brand-name and generic producers frequently arrange, or otherwise conceal, reverse payments to seem as a legitimate payment for a service.²¹ In the first fully-litigated PFD case since Actavis, In the Matter of Impax Laboratories, the court upheld the FTC’s opinion that “any exchange of value regardless of the form might be actionable as a reverse payment.”²² Similarly, the Courts have affirmed the Commission’s opinions with respect to sham litigation allegations.²³ Historically, sham litigation has been defined as “anticompetitive litigation that is baseless”, or in other words, locking defendants in litigation to hamper their competitive abilities.²⁴ From these cases, it is apparent that the FTC has prudently identified the various forms that exclusionary conduct can take. However, it must maintain its scrutiny with forthcoming conduct, which is expected to be even more sophisticated.
In some other cases, branded drug producers have relied on sham citizen petitions to delay generic entry. Citizen petitions are processes through which citizens and entities can raise concerns to the FDA, which is often misappropriated by branded producers to delay the marketing approval of generics. Allergan exemplified this conduct in In re Restasis (Cyclosporine Ophthalmic Emulsion) Antitrust Litigation, in which the courts “easily established that Allergan’s subjective intent in filing citizen petitions was to frustrate generic competition.”²⁵ However, despite the court’s ruling, the harms caused to generic producers were already realized. Therefore, the FDA must preempt such abuses by tightening the filing requirements for citizen petitions by drug companies, particularly branded ones. This can be accomplished by the passage of a bipartisan bill, such as the Efficiency and Transparency in Petitions Act or Stop STALLING Act.²⁶ Such reforms would deter citizen petition abuses.
ANDAs: High Barriers to Generic Entry
Another approach to facilitating generic entry and reducing drug prices is to reduce barriers posed by ANDAs. A working paper by the National Bureau of Economic Research maintains that rapid drug price increases have encouraged entry in recent years, but price decreases have been limited due to the costs and entry delays associated with ANDA approval.²⁷ Starc and Wollmann estimate that “lowering entry costs by $800,000 per application would have saved consumers $374 million during the period of alleged price-fixing. Reducing delays would have had a bigger payoff: a one-year reduction in time to approval would have led to savings of $596 million.”²⁸ In an effort to maximize consumer surplus, the FDA should thus reduce costs of filing ANDAs or time to approval, but refrain from drastic changes to both. As the authors suggest, lowering fees may draw resources away from other agency activities, and faster approvals may require additional resources.²⁹ Therefore, the complex optimization of these tradeoffs should be determined by internal FDA analysts.
Policy Recommendations
While reforming merger control and promoting generic entry may seem as two disparate matters, they are ultimately complementary approaches to a joint issue. Mergers with ineffective remedies amplify the effects of existing unilateral conduct, which in the pharmaceutical industry largely consists of exclusionary practices that raise prices. Implementing conditional and monitored divestiture remedies will minimize these unilateral effects in the long run, while allowing merger-related efficiencies to benefit firms’ R&D efforts, patient health, and consumer welfare. On the other hand, facilitating generic entry through scrutinizing exclusionary conduct and lowering ANDA barriers will increase competition in branded markets and reduce the overall prices of drugs. The influx of generic competition and reduction of branded market power may also diminish the level of unilateral conduct within brand-dominated, specialized drug markets and further reduce prices.
References
[1] “Measuring Prescription Drug Prices: A Primer on the CPI-Rx ,” Council of Economic Advisors, October 2019, https://trumpwhitehouse.archives.gov/wp-content/uploads/2019/10/Measuring-Prescription-Drug-Prices-A-Primer-on-the-CPI-Prescription-Drug-Index.pdf.
[2] “2016 Drug Trend Report,” Express Scripts, www.express-scripts.com/corporate/node/315.
[3] “Share of American prescription drug users as of 2019, by affordability of drug,” Statista, Dec. 2019, www.statista.com/statistics/1079025/share-of-us-rx-drug-users-by-affordability-of-drug/.
[4] Express Scripts, supra note 2.
[5] Diana L. Moss, From Competition to Conspiracy: Assessing the Federal Trade Commission’s Merger Policy in the Pharmaceutical Sector, American Antitrust Institute, September 3, 2020, https://www.antitrustinstitute.org/wp-content/uploads/2020/09/AAI_PharmaReport2020_9-11-20.pdf.
[6] “FTC Announces Multilateral Working Group to Build a New Approach to Pharmaceutical Mergers,” Federal Trade Commission, March 16, 2021, https://www.ftc.gov/news-events/news/press-releases/2021/03/ftc-announces-multilateral-working-group-build-new-approach-pharmaceutical-mergers.
[7] FTC v. Actavis, Inc., 570 U.S. 136, (2013).
[8] Jamie Towey and Brad Albert, Bureau of Competition, “Is FTC v. Actavis Causing Pharma Companies to Change Their Behavior?”, January 13, 2016, https://www.ftc.gov/enforcement/competition-matters/2016/01/ftc-v-actavis-causing-pharma-companies-change-their-behavior.
[9] “Price Declines after Branded Medicines Lose Exclusivity in the U.S.,” IMS Health, January, 2016, https://www.iqvia.com/-/media/iqvia/pdfs/institute-reports/price-declines-after-branded-medicines-lose-exclusivity-in-the-us.pdf.
[10] Jonathan B. Baker and Joseph Farrell, Oligopoly Coordination, Economic Analysis, and the Prophylactic Role of Horizontal Merger Enforcement, University of Pennsylvania Law Review, Vol. 168 (1985): 18–19, https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=9718&context=penn_law_review.
[11] Moss, supra note 5 at 15–16.
[12] Barak Richman, Will Mitchell, Elena Vidal, & Kevin Schulman, Pharmaceutical M&A Activity: Effects on Prices, Innovation, and Competition, Loyola University Chicago Law Journal, Vol. 48 (2017): 796, https://www.researchgate.net/publication/317398212_Pharmaceutical_MA_Activity_Effects_on_Prices_Innovation_and_Competition.
[13] FTC v. Shkreli, 20-cv-00706-DLC (S.D.N.Y. 2022).
[14] Carly Helfand, “Valeant’s price-hike strategy goes far beyond two high-profile increases,” Fierce Pharma, October 5, 2015, https://www.fiercepharma.com/pharma/valeant-s-price-hike-strategy-goes-far-beyond-two-high-profile-increases.
[15] Richman, supra note 10 at 795.
[16] Dror Ben-Asher, In Need of Treatment? Merger Control, Pharmaceutical Innovation, and Consumer Welfare, Journal of Legal Medicine, Vol. 21 (2000), https://www.tandfonline.com/doi/abs/10.1080/01947640050174813.
[17] Aurelien Portuese, Pharmaceutical Consolidation & Competition: A Prescription for Innovation, Information Technology and Innovation Foundation, June 25, 2021, https://www2.itif.org/2021-pharmaceutical-task-force.pdf.
[18] Jacob Plieth, “Hospira moves the needle for Pfizer spin-out,” Evaluate Vantage, February 5, 2015, https://www.evaluate.com/vantage/articles/news/hospira-moves-needle-pfizer-spin-out.
[19] Moss, supra note 5 at 18
[20] Michael A. Carrier and Gwendolyn J. Lindsay Cooley, Prior Bad Acts and Merger Review, Georgetown Law Journal, Volume 111 (2023): 108, https://www.law.georgetown.edu/georgetown-law-journal/glj-online/glj-online-vol-111/prior-bad-acts-and-merger-review/.
[21] Brian Sodikoff, James Calder, Thomas J. Maas, “Reverse Payments After Actavis”, Bloomberg Law, March 24, 2017, https://katten.com/files/182525_032417_pharmaceutical_law_and_industry_report_-_sodikoff_calder_maas.pdf.
[22] Kenneth Reinker, D. Bruce Hoffman, and George S. Cary, “Fifth Circuit Upholds FTC’s Impax Decision in First Fully Litigated Post-Actavis Reverse Payment Decision,” April 23, 2021, https://www.clearygottlieb.com/news-and-insights/publication-listing/fifth-circuit-upholds-ftcs-impax-decision.
[23] FTC v. AbbVie, Inc., №14-cv-5151, 2017 WL 4098688 (E.D. Pa. 2017).
[24] Christopher C. Klein, Economics of Sham Litigation: Theory, Cases, and Policy, Federal Trade Commission, April 1989, https://www.ftc.gov/sites/default/files/documents/reports/economics-sham-litigation-theory-cases-and-policy/232158_0.pdf.
[25] 333 F. Supp. 3d 135, 141, 154–56 (E.D.N.Y. 2018).
[26] S. 660, Efficiency and Transparency in Petitions Act; S. 1425, Stop STALLING Act
[27] Amanda Starc & Thomas G. Wollmann, Does Entry Remedy Collusion? Evidence from the Generic Prescription Drug Cartel, NBER, March 2022, https://www.nber.org/system/files/working_papers/w29886/w29886.pdf.
[28] Steve Mass, “Regulatory Costs and Delays Reduce Generic Drug Competition,” NBER, July 2022, https://www.nber.org/digest/202207/regulatory-costs-and-delays-reduce-generic-drug-competition
[29] Starc and Wollmann, supra note 25 at 4
