Pharma Scheme (Finally) Under Attack
The Market Ticker ® - Commentary on The Capital Markets
Posted 2012-07-27 10:01
by Karl Denninger
in Health Reform
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Pharma Scheme (Finally) Under Attack
 

Finally we have a challenge to this outrageous practice....

WASHINGTON — It would seem a business executive’s dream: legally pay a competitor to keep its product off the market for years.

Congress has failed to stop it, and for more than a decade generic drug makers and big-name pharmaceutical companies have been winning court rulings that allowed it.

The issue is what would facially appear to be an act of unlawful restraint of trade, in which putative competitors enter into agreements to fix both prices and availability of products that should compete with one another -- specifically, generic .vs. "branded" drugs.

The scheme goes like this: A generic drug company figures out how to "bypass" a formulation that is patented, and argues that the patent prohibiting them from doing is invalid.  Rather than adjudicating the validity of the patent the patent-holding company pays off the generic company to keep the drug off the market.

The problem is that up until now the courts have ruled that patents must be presumed valid and that as the sole legal practitioner of a lawful patent these agreements are legal and not a violation of anti-trust law.  Legislative fixes for this problem have been stalled in Congress as well.

But now, we have a decision that says this:

In this month’s case in Philadelphia, In Re: K-Dur Antitrust Litigation, No. 10-2077, a three-judge panel unanimously ruled that lower courts “must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facie evidence of an unreasonable restraint of trade.”

That we now have conflicting Circuit opinions means that the case will probably head to the Supreme Court, where we will find out if anti-trust law still has any sort of meaning, or whether alleged competitors can collude to shut out effective competition -- and the market.

The impact on health care expense should this challenge succeed and the practice be ruled anticompetitive and therefore unlawful under anti-trust law is likely to be profound.  While I'm sure the pharmaceutical industry will attempt to argue that a "catastrophe" will occur if they are prohibited from paying off potential competitors rather than competing on the merits, one hopes that the Supreme Court sees through what appears to me to be a transparent attempt to restrain trade and sends them packing.

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User Info Pharma Scheme (Finally) Under Attack in forum [Market-Ticker]
Jaytheblues
Posts: 1
Incept: 2010-01-15

New England
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Based on the Supreme Court's recent track record, confidence is not high.

Dusty88
Posts: 126
Incept: 2011-10-21

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There are clearly things going on in the pharmaceutical industry that I don't understand. I am a veterinarian and we have experienced an unbelievable number of drug supply problems and backorders the past 2 years. I hear the same thing from docs, anesthesiologists, etc (BTW, most of these aren't veterinary products; they are human-based products that we also use in veterinary medicine). Sometimes it's regulation and inspection problems, but quite often it is a supply problem. It's too far off of normal to just be a series of coincidences.
Crzymorse
Posts: 1183
Incept: 2010-06-25

Maryland
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Dusty,

The generic companies limit supply to drive up prices. It's a shame with so many people out of work we choose not to fully supply the market. The proprietary drugs are generally available as they sell at about 95-98 percent gross profit margins as do most of your clinical diagnostics.

And that's the margin from the producer to the wholesaler not the end user. Figure you have another markup to the end user. So Walmart makes more than it costs to manufacture the pill.
Anti
Posts: 4278
Incept: 2007-10-09
Silver
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This appears to be different from what I thought was a similar practice going on when a patent expires. These days the patent holder seems to be able to collude with the competitor(s) to keep prices up for a bit longer.

I don't pay real close attention since my drug expenses are $0 and I aim to keep it that way.

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Grashopa
Posts: 2608
Incept: 2009-02-03
Green
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The FDA has been manufacturing drug shortages the last 2 years, I've already been hit by it myself but you can't fight the government. Its just a tactic in the health care 'debate' that paints drug companies as evil for not supplying the market.

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Crzymorse
Posts: 1183
Incept: 2010-06-25

Maryland
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It's not the FDA, it's the pharma companies. It called collusion. There is no reason as I explained to have a shortage at 90 percent gross profit margins on pills that have a variable cost of pennies as the incremental cost to build inventory is inconsequential. Unless there is more money to be made by artificially manufacturing a shortage.
Dusty88
Posts: 126
Incept: 2011-10-21

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Many generics are produced at only 1 plant, even if they enter the market under different vendor labels. If a particular product is running short in spite of a high profit margin, a competitor would love to produce the product. Thus there also has to be a regulatory component to such a problem.

Crzymorse
Posts: 1183
Incept: 2010-06-25

Maryland
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My point is there are no competitors. It's not a regulatory issue especially with generics. Why would a competitor stay out of the market...

Dusty88
Posts: 126
Incept: 2011-10-21

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My thought is it shouldn't be that difficult of a business to break into. With my medical knowledge, my nephew's manufacturing industry experience, and my husband's logistics experience, we could theoretically start manufacturing generics. But knowing the handstands I have to do just to buy and sell drugs, I can't imagine maintaining the permits to manufacture and distribute them. So, IMO, it takes capture not just collusion.
Blackswan
Posts: 5560
Incept: 2007-11-06
Gold
Just outside of Philly
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Insulin should cost pennies. Instead they keep putting patents out for essentially the same biologicaly engineered stuff.

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