Let’s say you start up a drug company and it developed a cure for sneezing (hypothetical). The drug becomes a billion dollar revenue machine for your company. You file all the paperwork and get the right to sell that drug for 15 years (patent) with no competition. All is going well but the patent is about to expire and you are set to lose billions in revenue. How do you keep generics from that revenue stream?
Pay-to-Delay Patent Settlements
One way to delay losing revenue is by offering millions to generic manufacturers to delay copying your drug. You are literally paying them not to make anything for a period of time. Usually it can range anywhere from 6 months to a year. Life was good for both sides. But all good things must come to an end. A recent ruling by the US Supreme Court proclaimed that drugmakers can face lawsuits over so-called pay-to-delay patent settlements. As a result there will be more anti-trust scrutiny by the Federal Trade Commission as these deals are reviewed on a case-by-case basis, as well as additional class action lawsuits. Everyone hates a monopoly.
If anti-competitive behavior takes place, buyers such as wholesalers, pharmacies, unions, insurers and federal and state government agencies can expect to seek to recover alleged overpayments through the court system. For example, the European Commission fined Lundbeck and four other drugmakers for reaching agreements to block entry of generic versions of the Celexa antidepressant. Lundbeck was fined $125.6 million, while the others – including Ranbaxy Laboratories – paid a total of nearly $70 million.
After a recent spate of judicial and regulatory decisions, generic drugmakers face higher legal, regulatory and insurance costs. Smaller players are expected to find it more difficult to compete. If you develop the drug, you want to do tons of studies and show hundreds of pages of data for generics to have to copy. The idea is to set the bar high so it will be expensive for others to copy also. The only choice is to merge or buy other generic makers to develop large scale savings. To me this sounds like we are beginning to see the development of generic big pharma. Larger pharmaceutical companies have the money and manpower to handle the legal and regulatory changes.
Generics Are Underdogs
Another issue is a move by the FDA to revise rules to allow generic drugmakers to update labeling after being alerted to side effects. Current regulations prevent such updates, even if generic drugmakers become aware of a potential risk. By contrast, brand-name drugmakers can update warnings before obtaining FDA approval. The change will likely spur more product-liability litigation. Generic drugmakers need to be more concerned with the safety profiles of the drugs they attempt to copy and spend more time and money investigating adverse side effects.
Now add that generic drugmakers continue to face greater pricing pressure from customers. Then there are fewer huge blockbuster drugs losing patent protection compared with the past few years, suggesting fewer opportunities to make money. To cope, the biggest generic players are expected to further emphasize higher-margin drugs and those pose more barriers to rivals.
Who do you think ultimately pays the price?