M.C. Escher By Way of Generic Drug Pricing

January 18, 2019By Sara W. Koblitz

Though FDA does not have the legal authority to control or even directly address drug prices, Commissioner Gottlieb has certainly not shied away from the issue.  In fact, drug (and biologic) competition and accessibility is one of Dr. Gottlieb’s main efforts at the Agency (see e.g. discussions here and here).  Typically, the conversation about accessibility frames drug prices as too high, but the discussion has recently taken an interesting turn into questions about whether some drug prices are too low.  And it’s clear from the Commissioner’s latest FDA Voices Blog post on the issue, he understands the complicated economic principles behind this discrepancy, but questions abound about whether FDA can adequately address it.  Indeed, it seems like FDA is stuck in a bit of an M.C. Escher piece, in which its attempts to address drug pricing render the Agency stuck in an infinite loop of high drug prices.

Much concern has been raised about the costs of healthcare and drugs in the U.S.  Typically, the concern is with brand or innovator drugs, usually those with thick patent portfolios and exclusivities, who charge high prices presumably to recoup their investments in research and development.  A myriad of strategies have been implemented to address high drug prices, and though pricing falls predominantly under the umbrella of HHS rather than FDA, FDA has been working within its statutory mandate to tackle high drug prices in any way that it can.  To this end, we have seen the Drug Competition Action Plan, which endeavors to introduce more generic competition as efficiently as possible to drive down drug prices, directly or indirectly, for consumers.

Indeed, competition has done an overall good job keeping generic prices low.  For many products, there is enough competition in the market to keep prices low – very low.  And while, yes, generic competition is anemic for some products, typically more complex products, there is a glut of competition for others.  The Drug Competition Action Plan attempts to introduce more competition for those drugs with “inadequate” competition – often fewer than three generic versions of a product – but an articulated goal of this plan is to “spur new entrants.”  Theoretically this should lead to more competition for drugs with inadequate competition.  But while over 1,000 generic drugs were approved in 2017, “which is the most in FDA’s history in a calendar year by over 200 drugs,” it’s a pretty good bet that not all of these products were generic versions of drugs with inadequate competition.  And it’s a pretty good bet that not all “new entrants” are developing supply chains and manufacturing processes to submit ANDAs only for drugs with inadequate competition.

In fact, there are so many generic versions of some drug products that the competition is driving prices down so low that the generics are not profitable for their manufacturers.  In such a scenario, a generic manufacturer facing significant competition from other generics needs to distinguish its version somehow.  Because its generic product is, by definition, exactly the same as its competitors’, the only possible distinction between manufacturers is price.  The cheaper their products, the more likely they are to get a contract to provide the generic version for these providers.  This is why, in theory, more generic approvals for a product should reduce the price of a drug substantially.  Combined with the fact that there are only a handful of major third-party payors, generic drug manufacturers may find themselves in a race to the bottom in an effort to secure a contract.

As Dr. Gottlieb explained in a late November drug shortage meeting co-hosted by Duke-Margolis Center for Health Policy (Go Blue Devils!), the market dynamics in a glut of generics may keep the price of generics so low that the manufacturers cannot sustainably continue to manufacture the drug.  Without making much of a profit, impetus to stay in the market decreases and players drop out.  In addition, with higher GDUFA program fees for based on the number of approved ANDAs held, it can be expensive to hold ANDAs that aren’t generating significant profits.

Even generic giant Teva experienced some downturn in 2017 as a result of “accelerated price erosion and decreased volume mainly due to customer consolidation, greater competition as a result of an increase in generic drug approvals by the U.S. FDA, and some new product launches that were either delayed or subjected to more competition.”   While Teva may not be leaving the generic market, it’s clearly feeling pressure from decreasing generic prices.  If even large companies like Teva are feeling the pressure, there is real risk that more established generic companies – those that already have adequate cGMP programs, supply and distribution chains, and all the other manufacturing necessities that make drug manufacturers go – are feeling it too.  And this type of pressure can lead to decisions to pull out of a market, especially if a given generic product is expensive to produce (i.e., more complex products).  A market exodus could disrupt the generic supply and ultimately lead to drug shortages.   Alternatively, with slashed profit margins, companies that otherwise may have invested in capital infrastructure upgrades and maintenance may no longer have the funds to do so (especially after paying GDUFA fees).  Without these upgrades, they may not have the capability to maintain supply, ultimately leading, once again, to drug shortages.  We have seen this type of issue arise recently when even long-standing generic companies have had manufacturing issues, leading to the unavailability of some products.

Fewer players, particularly established players, means fewer reliable generic options, which could lead to a shortage of generic versions of products – even if the brand version is plentiful.  Such a shortage would cause even generic manufacturers to raise prices based on basic principles of supply and demand (which, are admittedly a little wonky here given the drug pricing market, but once contracts are up for renegotiation, fewer competitors for a given contract should result in higher contractual prices even for generics).  And even if no shortage occurs, fewer competitors (theoretically) leads to a smaller supply, which should also impact pricing.  Therefore, Dr. Gottlieb cautions, the underpricing of generic drugs may lead to price increases.

With this dichotomy, FDA seems to be engaging in a battle on two fronts.  While diligently trying to reduce prices of brand products, FDA is also trying to figure out ways to prop up the price of generics to reduce market departures.  And FDA is taking all of this on without the legal authority to address prices directly.  Without this authority, FDA is attempting to use its review tools to direct and influence market competition.   But this is where the conundrum arises: as FDA and Congress are encouraging more competition in the generic market through the Competitive Generic Therapy program and the List of Off-Patent, Off-Exclusivity Drugs without an Approved Generic, FDA (or another governmental authority taking on such a task) must figure out a way to either reduce generic competition driving out established generic manufacturers or otherwise somehow inflate contractual prices for generic manufacturers to discourage attrition and/or drug shortages.  Somehow FDA needs to balance the country’s needs for more generic versions of complex products while discouraging extraneous competition in the generic market.  It’s a delicate and completely unintuitive balance.

FDA tackled a somewhat similar mass exodus problem in the vaccine market in the 1980s.  There, policymakers had to address high prices of vaccines arising from potential shortages as the number of vaccine manufacturers shrank from 26 to 4 in just 10 years.  The impetus of this exodus differed from the situation with generic drugs, as it resulted from soaring legal and insurance costs due to potential product liability.  Nevertheless, the principle is the same: when faced with a potential shortage, costs soar while availability plummets – neither is good for the public health.  In that situation, manipulation of the market would not have had an effect on retention of vaccine manufacturers since supply and demand would not impact the external costs.  Instead, Congress intervened with a new program compensating those injured by childhood vaccines under the National Childhood Vaccine Injury Act of 1986, indicating industry acceptance that a competition-based market solution may not be effective in drug shortage situations.

While a markedly different situation here, the economics behind drug shortage issues demonstrate that market incentives may not be enough to keep prices manageable.  The complex and intertwining relationship between drug competition and drug pricing indeed calls for a multifaceted solution, but query whether the manipulation of market dynamics can really be effective here.  It seems that while FDA is trying to find a way to bring equilibrium to drug pricing, the band-aids put on the market (in the form of competition-based incentives) keeps leading to overcorrection.

That’s not to say that FDA is not trying to stem drug shortages and market exodus through other means because it absolutely is as part of its public health mandate.  But there doesn’t appear to be a simple solution for this giant game of whack-a-mole.  It’s admirable that Dr. Gottlieb and FDA are trying innovative methods to address the problem.  But with its hands tied with respect to activities directed specifically at drug pricing under its statutory mandate, the reliance on competition here seems to leave FDA and industry stuck between a rock and a hard place.

Recently, Congress has decided to figure out a better model to control drug pricing.  There have been no shortage of proposals to address drug pricing.  From the Patient Right to Know Drug Prices Act passed in October 2018, designed to increase transparency in drug pricing, to the recent proposal to start manufacturing generic drugs at HHS, you have to give Congress credit for thinking outside the box.  But now that we’re talking nationalizing generic drugs, somewhere between a rock and a hard place isn’t looking so bad.