News
November 16, 2017

FTC Workshop Signals Continued Focus on Prescription Drug Competition

Advisory

On November 8, 2017, the US Federal Trade Commission (FTC) hosted a workshop entitled "Understanding Competition in Prescription Drug Markets: Entry and Supply Chain Dynamics" to examine the market and economic factors that impact the price of pharmaceuticals, including generic drug competition and supply chain dynamics. The FTC has been particularly aggressive in the prescription drug space in recent years, challenging both mergers that the FTC alleged would substantially lessen competition by eliminating existing and future competition between drug manufacturers, as well as conduct by branded drug manufacturers that the FTC asserts restricts the ability of generic drug manufacturers to compete.1 In addition to these antitrust investigations and enforcement actions, the FTC also develops policy by hosting workshops and requesting public comments, and often uses these opportunities to bring together scholars and practitioners to discuss issues important to its mission of protecting consumers. This workshop signals that parties should expect the FTC to remain active in the pharmaceutical industry during the Trump Administration. However, the FTC may emphasize other methods, such as policy statements or reports, to address what it views as a need both to encourage additional generic drug competition and to reduce the price of pharmaceuticals to consumers generally.

Background

In announcing the workshop, Acting FTC Chairman Maureen K. Ohlhausen noted that "[c]ompetition is key to containing prescription drug costs" and that "it's critical we identify barriers that may prevent drugs from entering the market, even after applicable patent protections have expired." 2 To accomplish this goal, the workshop included speeches from Acting Chairman Ohlhausen and US Food and Drug Commissioner Dr. Scott Gottlieb, as well as panels featuring academics, economists, and industry representatives on generic drug entry and competition, including a discussion of ways to encourage entry and expand access to drugs, as well as panels on the role of intermediaries in the pharmaceutical supply chain (one on pharmacy benefit managers (PBMs) and one on group purchasing organizations (GPOs)).

The FTC's stated purpose for its workshop was to study the barriers to generic drug competition and whether other market forces create inefficiencies that lead to higher drug prices. Acting Chairman Ohlhausen opened the workshop by stating that the Hatch-Waxman Act was enacted to support the broad policy goal of protecting pharmaceutical manufacturers' patent rights in new medicines, which are critical to drive innovation, but also to create legislative incentives to encourage generic drug entry for post-patent pharmaceuticals. This generic drug entry, Acting Chairman Ohlhausen said, causes initial reductions in pharmaceutical prices by twenty to thirty percent and more as additional generic drugs enter the market. The FTC hoped to use the workshop to explore why some markets do not see the same level of generic drug competition when patent protection expires.

Commissioner Gottlieb built on Acting Chairman Ohlhausen's themes and expressed concern about the high costs of life saving medical treatments. He discussed the ways in which the Food and Drug Administration (FDA) has taken steps to encourage generic drug entry, including by expediting the review of the first three generic drug applications where the FDA views competition to be limited, posting a list of off-patent, off-exclusivity products with no approved generic drug offering, hosting its own public meetings to discuss generic drug entry, as well as shortening and streamlining the process for reviewing generic drug applications to reduce review times. Commissioner Gottlieb also expressed concern about what he referred to as the attempts of some "branded firms [to] "game" the system: taking advantage of certain rules, or exploiting loopholes in our system, to delay generic approval" or entering into "restrictive agreements with pharmaceutical supply chain intermediaries[.]"

Fostering Generic Drug Entry

Panelists discussed the benefits of generic drug competition, but identified several dynamics associated with generic drug entry:

  • Patient & Physician Resistance: Many physicians and patients are still resistant to using generic drugs. Panelists attributed this resistance to skepticism regarding the efficacy of generic drugs as well as to promotional efforts by branded manufacturers to encourage use of the branded drug over generics.
  • Unavailability: There may be instances where a generic drug is unavailable in a given market. In some cases, panelists said that a niche patient population may not create enough demand to incentivize generic manufacturers to enter the market. Other challenges that limit the availability of generic drugs could be complex manufacturing processes or shortages of active pharmaceutical ingredients.
  • Consolidation: Panelists also suggested that consolidation among purchasers of generic drugs (i.e., PBMs, wholesalers/distributors, and GPOs) deflates the price of certain generic drugs and has encouraged generic drug manufacturers to exit unprofitable markets. This deflationary pressure allegedly has caused a reduction in generic drug investment and also pushed more manufacturing off shore, which can create vulnerability to supply shortages, quality issues, and the uncertainty of foreign economic policies.
  • Potentially Anticompetitive Conduct: Panelists discussed the steps some branded drug manufacturers allegedly take to limit generic competition, such as: purportedly using allegedly weak or minor patents (such as those related to method of use or release times) to delay generic drug entry; entering into so-called reverse-payment patent settlements, in which value provided by a branded drug manufacturer to the potential generic entrant in the settlement is alleged to have been in exchange for the generic drug manufacturer's agreement to a generic entry date later than would otherwise have occurred; engaging in so-called product hopping, where changes made to an existing product by a branded drug manufacturer are alleged to be for the purpose of transferring patient and prescriber loyalty to a patented product before a generic version of the older product can enter and compete; using the citizen petition process supposedly to delay generic entry rather than raise legitimate safety concern; restricting distribution of the branded drug, e.g., in the case of REMS-restricted drugs, allegedly to deny samples to generic drug manufacturers who may need those samples for bioequivalence testing; and bundling products or offering rebates that violate rules against unlawful exclusive dealing.

Each panelist offered suggestions for how to encourage generic drug entry, but one common theme was to increase antitrust scrutiny to protect against both potentially anticompetitive conduct and market consolidation. Several panelists voiced support for the Creating and Restoring Equal Access to Equivalent Samples (CREATES) Act, which would require branded drug manufacturers to share samples of drugs needed for generic drug manufacturers' bioequivalence testing.

The Role of Intermediaries

The next two panels each focused on the role of intermediaries (i.e., PBMs, distributors/wholesalers, and GPOs) in the pharmaceutical supply chain in an attempt to understand the role of those entities and their impact on the price of pharmaceuticals generally. Each panel emphasized the complexity of the pharmaceutical supply chain, and in some cases, panelists stated that complexity may allow supply chain participants to extract profits that cause an increase in the price of pharmaceuticals to consumers.

PBMs

The debate over PBMs focused on two main issues: the impact of rebates to PBMs from drug manufacturers on drug prices and the role PBMs play in pharmacy competition. First, as is at issue in several ongoing lawsuits related to diabetes drugs, the panelists considered whether and how the rebates negotiated between drug manufacturers and PBMs affect the prices paid by ultimate consumers and payors.3 Some panelists argued that a drive for larger rebates pushes up the list price of drugs and that the rebates paid to PBMs add unnecessary costs to the supply chain at the expense of the consumers. Second, a community pharmacist representative suggested that PBMs use their size to take advantage of the complex supply chain and use that supply chain to compete unfairly with independent pharmacists. In response to both of these arguments, a representative of PBMs maintained that PBMs compete fairly, that the complexity of the pharmaceutical supply chain requires the PBM services, which are demanded by their customers, and that rebates have no impact on the prices of pharmaceuticals.

GPOs

The third panel focused on the role of GPOs and discussed the impact of GPOs' compensation structure (in which they are paid by suppliers, rather than members) on the price and quantities available of the products they purchase. GPOs, which leverage purchasing volume to extract lower prices for healthcare products, are often compensated by their suppliers under a commission model, rather than by their members. Panelists contrasted that model with that of distributors/wholesalers, which offer logistical services to drug manufacturers and are compensated on a service fee basis by the manufacturers themselves. Given that distinction, panelists discussed whether the GPO-pricing model has the effect of increasing prices and lowering volumes as GPOs could benefit from higher than competitive pricing. The panel also discussed whether there are alternative models, such as direct buying programs, that could lead to a more efficient distribution system.

Next Steps

The FTC workshop, as intended, raised more questions than it answered, and signaled an ongoing interest in drug competition by both the FTC and FDA. This process will continue as the FTC further studies drug competition and the complex pharmaceutical supply chain, including by accepting public comments on questions related to the topics discussed during the workshop until December 8, 2017.4

Although no new policy initiatives were announced, the focus of the panels and the topics addressed by the participants indicate that the FTC will continue to enforce the antitrust laws actively in the pharmaceutical industry. Branded drug manufacturers should be mindful of the antitrust laws as they near the loss of patent exclusivity as attempts to extend that exclusivity may be met with FTC review. Generic drug manufacturers may also see increased attention from antitrust authorities who want to ensure there is adequate competition for post-patent drugs.

Notably, the focus on the role of intermediaries in the pharmaceutical supply chain is important for all industry participants and may indicate the likelihood of FTC inquiry into the business dealings of drug manufacturers and both PBMs and GPOs, which have already been the subject of a number of private litigations.

© 2017 Arnold & Porter Kaye Scholer LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.


  1. See, e.g., In the Matter of Teva Pharmaceutical Industries Ltd. and Allergan PLC, Docket No. C-4589, Complaint (Jul. 27, 2016); See, e.g., FTC v. Actavis, Inc., 133 S. Ct. 2223 (2013); FTC v. Shire ViroPharma Inc., No. 1:17-cv-0013, Complaint for Injunctive and Other Equitable Relief (D. Del. Feb. 7, 2017).

  2. Press Release, US Federal Trade Commission, FTC to Conduct Workshop on November 8, Examining Competition Issues Related to Prescription Drug Markets (Oct. 3, 2017).

  3. See, e.g., In re Insulin Pricing Litigation, No. 3:17-cv-00699, Complaint (D.N.J. Feb. 2, 2017).

  4. Those questions can be found on the FTC website.

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