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Authorized Generics and Consumer Prices Hollis & Liang

An Assessment of the Effect of Authorized Generics on Consumer Prices

Aidan Hollis & Bryan A. Liang

Aidan Hollis, PhD Associate Professor Department of Economics University of Calgary Academic Director Centre for Regulatory Affairs Van Horne Institute 2500 University Dr NW Calgary Alberta T2N 1N4 Canada Tel: 403 220 5861 Fax: 403 220 5861 Email: [email protected]

Bryan A. Liang, MD, PhD, JD Executive Director & Professor of Law Institute of Health Law Studies California Western School of Law Co-Director and Associate Professor of Anesthesiology San Diego Center for Patient Safety University of California, San Diego School of Medicine 350 Cedar Street San Diego, CA 92101 USA Tel: 619 515 1568 Fax: 619 515 1599 Email: [email protected]

July 31 2006

This study does not necessarily reflect the views of GPhA or its members.


An Assessment of the Effect of Authorized Generics on Consumer Prices

Table of Contents

I. Executive Summary …………………………………………………............... 1 II. Introduction and Background ……………………………………………….. 2 III. Concerns with the PhRMA Study ……………………………………………

1. Comparison Method Cannot Show Causality in Market Pricing 2. Use of Wholesale Data Does Not Reflect Consumer Benefit 3. Ignoring Challenges to Invalid Patents and Promotion of Non-

Infringing Processes 4. Inconsistent Choice of Data 5. No Disclosure of Methods for Pricing Analysis 6. Drawing Conclusions from Two Data Points 7. Incorrect Generic Entry Dates 8. Overall

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IV. Research Objectives …………………………………………………………... 9 V. Methods ………………………………………………………………………... 9 VI. Results ………………………………………………………………………….

A. Average Retail Discounts to Brand—Authorized Generic vs. No-Authorized Generic Cases

B. Effects of Authorized Generics on Retail Brand Prices

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VII. Discussion ………………………………………………………………………

A. Study Results B. Hatch-Waxman 180-day Exclusivity Incentives

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VIII. Conclusions ……………………………………………………………………. 21


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I. Executive Summary This study examines the effects of authorized generic (AG) drugs on prices. An AG is the actual brand name drug product, manufactured by the brand company, but sold as a generic by a licensee or subsidiary of the brand, competing with independent generics. When AGs are marketed during the Hatch-Waxman Act’s 180-day exclusivity period for first generic entrant, they significantly reduce incentives for independent generic firms to challenge brand name patents and to develop non- infringing processes. This is of great concern, since the express intent of the Hatch-Waxman Act was to encourage and reward these independent generic firm activities so that less expensive generic drugs could reach the market faster for consumer benefit. Supporters argue that AGs offer significant consumer bene fits. According to a recent report commissioned by the Pharmaceutical Research and Manufacturers of America (PhRMA), wholesale price discounts off brand prices on average were 15.8% greater in markets with AGs than in those without them. However, the PhRMA report focuses solely on wholesale prices and is inconsistent in its use of data. We show that the PhRMA study is flawed on its methods, analysis, and conclusions. We examine the impact of AGs on retail prices, using exactly the same markets as the PhRMA study. We use retail prices since we are interested in benefits to consumers. We find that:

- Discounts off retail brand prices were on average 0.6% less in markets with AGs than in those without them when weighting by sales revenues;

- Discounts off retail brand prices were on average 5% more in markets with AGs when not weighting by sales revenues;

- Brand name prices in AG markets increase more than those in no-AG markets, suggesting that the PhRMA study’s finding of greater percentage “discounts” to brand prices in markets with AGs is due in part to higher brand prices, rather than lower generic prices; and

- AGs raise policy concerns because they may diminish Hatch-Waxman incentives for generic firms to challenge brand name patents, which would result in higher consumer prices.

This study focuses on the effect of authorized generics on pharmaceutical prices, and not on the policy implications of such products. This is not to say, however, that authorized generics do not raise significant policy concerns. They do. For example, authorized generics undermine the generic exclusivity period that Congress created to encourage the generic companies to challenge the patents that block competition. In this important respect, authorized generics undermine the purpose behind this legislation and, in the process, negatively impact consumers.


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II. Introduction and Background This study examines the effect of “authorized generics” on pharmaceutical prices. An authorized generic (AG) is the actual brand-name drug product, manufactured by the brand company, but sold as a generic, competing with independent generics.1 Using comparative data on retail drug prices from products with and without AGs, we provide evidence on the scale of the effect that AGs have on competition, and consider this against the background of the effect that they have on deterring or delaying entry by independent generic producers. We begin by offering some legal and institutional background on AGs in this section. The Drug Price Competition and Patent Term Restoration Act,2 more commonly known as the Hatch-Waxman Act, added section 505(j) to the Food, Drug, and Cosmetic Act.3 This section created the Abbreviated New Drug Application (ANDA) process. The Hatch-Waxman Act, and specifically the ANDA process, were designed to provide independent generic firms a strong incentive to develop and introduce lower cost generic drugs to consumers.4 To implement this policy goal, Congress provided that the first generic ANDA filer that challenged an invalid brand name firm patent on which the brand name product relied, or that developed a non- infringing means to produce the same drug, would be granted a 180-day marketing exclusivity period. This process is known as the paragraph IV certification process.5 The ANDA process also includes significant protection for brand name firms. The brand name firm may challenge the generic firm’s paragraph IV certification, claiming that the generic product violates the brand name firm’s patent rights. If a patent infringement action is filed within 45 days by the brand name firm, the FDA may not approve the

1 An authorized generic (AG) can also be defined as a chemically identical version of a brand

name drug sold as a generic, competing with independent generics. See Federal Trade Commission, FTC Proposes Study of Competitive Impacts of Authorized Generic Drugs, March 29, 2006, available at: http://www.ftc.gov/opa/2006/03/authgenerics.htm.

2 PUB. L. NO. 98-417, 98 STAT. 1585 (1984). 3 21 U.S.C. § 355 et seq. 4 See, e.g., In re Barr Lab., 930 F.2d 72, 76 (D.C. Cir. 1991) (goal of Hatch-Waxman

Amendments to “get generic drugs into the hands of patients at reasonable prices—fast.”). 5 21 U.S.C. § 355(j)(5)(B)(iv) (2003). The section states that:

(iv) 180-day exclusivity period

(I) Effectiveness of application

Subject to subparagraph (D), if the application contains a certification described in paragraph (2)(A)(vii)(IV) and is for a drug for which a first applicant has submitted an application containing such a certification, the application shall be made effective on the date that is 180 days after the date of the first commercial marketing of the drug (including the commercial marketing of the listed drug) by any first applicant.


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ANDA for 30 months, or until the patent dispute has been resolved, whichever is sooner.6

The 30-month stay, its associated patent litigation, and the generic product development process are expensive events for generic firms to weather.7 This is one primary rationale for providing generic firms with the marketing exclusivity period if they are the first to challenge a listed patent. Overall, according to the FDA,

[A]n ANDA applicant whose ANDA contains a paragraph IV certification is protected from competition from subsequent generic versions of the same drug product for 180-days after either the first marketing of the first applicant’s drug or a decision of a court holding the patent that is the subject of the paragraph IV certification to be invalid or not infringed.8

Recently, policy concerns have arisen regarding the use of AGs. AGs are now introduced into the market by brand name firms or their licensees during the first ANDA applicant’s 180-day marketing exclusivity grant. As such, AGs directly compete with the generic firm’s product during the statutory exclusivity period. The brand name firms’ use of AGs during the independent generic firm’s marketing exclusivity period has generated significant debate. Previous analyses have indicated that brand name firm introduction of generics prior to patent expiration raises significant competition concerns.9 Yet a study commissioned by the Pharmaceutical Research and

6 See 21 U.S.C. § 355(j)(5)(B)(iii). 7 The FTC has found that the 30-month stay process has been abused by brand name firms.

According to its recent study conducted, one of the most common ways that patent-holding companies were able to further delay the market entry of generic drugs is through multiple patent listings in the Approved Drug Products with Therapeutic Equivalence Evaluations, usually known as the Orange Book , which is the FDA's official listing of all approved products. See Federal Trade Commission, Generic Drug Entry Prior to Patent Expiration: An FTC Study, July 2002, at http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf. The study found that brand name firms had listed patents in the Orange Book after an ANDA had been filed, requiring the generic filer to re-certify, and resulting in another patent litigation suit filed by the brand name firm, triggering another 30 month stay. Id. Recognizing these concerns, Congress under the Medicare Modernization Act limited brand name firms to only one 30 month stay. See PUB. L. NO. 108-173, 117 STAT. 2066 (2003).

8 FDA Center for Drug Evaluation and Research, Guidance for Industry: 180-Day Generic Drug Exclusivity Under the Hatch-Waxman Amendments to the Federal Food, Drug, and Cosmetic Act, Procedural Guidance 5, June 1998, at 2. Note that Congress eliminated the “court decision trigger” in the Medicare Modernization Ac, and replaced it with a system whereby first applicants may forfeit exclusivity under various circumstances.

9 See, e.g., David Balto, We’ll Sell Generics, Too: Innovator drug makers are gaming the regulatory system and harming competition, LEGAL TIMES, March 20, 2006, available at: http://www.nlarx.org/policy/pdfs/BaltoLegaltimesPatentGeneric3_20_06.pdf; Jeremy Bulow, The Gaming of Pharmaceutical Patents, May 2003, available at: https://faculty-gsb.stanford.edu/bulow/articles/6.27.1036%20Pharmaceutical.pdf; and Bryan A. Liang, The


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Manufacturers of America (PhRMA), the brand name firm trade group, found that on the basis of wholesale price comparisons of nine drugs, AGs “led to generic discounts that were 15.8 percentage points lower on average … than the average for comparable examples in which there was no authorized generic.”10 The present study was undertaken because of the importance of this issue for consumers and its implications for the prospect of future generic drug competition. Below, we first review the PhRMA study, critiquing its methods and data assessment. We then move on to assessing the effects of AGs on consumer prices in the short term, and consider their potential effect on incentives for generic competition in the long term.

Anticompetitive Nature of Brand Name Firm Introduction of Generics Before Patent Expiration, 41 THE ANTITRUST BULLETIN 599-628 (1996). Note that other studies, specifically Berndt et al., Authorized Generic Drugs, Price Competition and Consumers’ Welfare, Oct. 26, 2005, available at: http://www.aie.org/docLib/20051103 _AuthorizedGeneric.pdf, that conclude AGs are pro-competitive, review only three drugs, only assess short run effects, and do not address the key issue of the impact of AGs on reduced surpluses of generic firms and the impact on their paragraph IV certification efforts and challenging patents. Other commentators have also questioned this study’s findings; see American Enterprise Institute, Summary, Authorized Generics: Part of the Solution or Part of the Problem?, October 2005, available at: http://www.aei.org/events/ filter.all,eventID.1177/summary.asp. Further, it should be noted that studies that found that the introduction of a second generic lead to reduced prices cannot readily be applied to AGs because the former are independent competitors, while the AG as a cooperative entity of the brand name firm is not an aggressive market participant and is under control of the brand name firm.

10 IMS Consulting, Assessment of Authorized Generics in the U.S.: Prepared for PhRMA (Spring 2006) (the “PhRMA study”).


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III. Concerns with the PhRMA Study PhRMA recently commissioned a study on authorized generics, produced by IMS Consulting. In this section, we examine the study, which contains significant errors, inconsistencies, and unexplained points. It is difficult not to conclude that its weaknesses make it of questionable value in ascertaining the impact of AGs on consumer welfare. The study claims substantial savings to consumers from AGs, both during and after the 180-day exclusivity period. We begin by addressing the problems in the underlying analytical approach, and then deal subsequently with specific errors in that study. 11

1. Comparison Method Cannot Show Causality in Market Pricing The PhRMA study proceeds by naïvely comparing markets in which there was an AG and markets in which no AG entered during the 180-day exclusivity period with only one entrant. The underlying assumption of this approach is that the two types of markets are about the same, except for the presence of an AG. This assumption is false. Markets in which the brand name firm patentee chooses to use an AG will be systematically different from those in which firms choose not to use the AG strategy. The set of markets in which an AG is introduced, in other words, is not a random selection of markets; characteristics differentiating these markets may include sales volume, number of anticipated entrants, potential for licensing, and other critical features. As we note below, the sample of markets with AGs that the PhRMA study used is also later than the sample of markets without AGs. Therefore the claim that the simple presence of AGs leads to different pricing behavior in the market in general, and as a causal effect, is unsubstantiated and cannot be shown by the PhRMA study comparison. 12

2. Use of Wholesale Data Does Not Reflect Consumer Benefit The PhRMA study uses wholesale data. The study claims that its purpose is to determine whether AGs “benefit patients.”13 But the study uses “outlet-level” prices, which are defined as “the cost to outlets” such as pharmacies and hospitals. As the study notes, this enables the analysis to “capture any savings … at any point in the drug distribution channel; these are interpreted as savings to the healthcare system.” But this conflates a “savings to the healthcare system” with benefits to patients, which may never occur if retail prices do not fall. If one is interested in the benefit to patients, which the PhRMA study alleges is its purpose, then one should examine the price that consumers face, rather than any allegations of consumer benefit from lower wholesale prices.

11 In addition, our copies of the PhRMA study did not include an Appendix D referred to in its

text. Just as a matter of accuracy, the PhRMA study presumably errs on page 9 when it reports the average discounts to brand “across seven brands” rather than the nine evaluated.

12 A more sophisticated analysis is better able to tease out the relationships. For example, see Aidan Hollis, How do Brands’ “Own Generics” Affect Pharmaceutical Prices?, 27 REV. INDUS. ORG. 329 (2005). Hollis develops a model to assess markets with AGs and without, and finds, using Canadian data, that AGs increase brand prices and possibly generic prices. Such an analytic approach would seem highly applicable to the U.S. circumstance.

13 PhRMA study, supra note 10 at 4.


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3. Ignoring Challenges to Patents and Promotion of Non-Infringing Processes

The PhRMA study completely fails to mention that creating strong incentives for generics to challenge patents and to develop non- infringing products are avowed policy goals of the Hatch-Waxman Act. The speedier elimination of invalid patents, implementation of non- infringing processes and access to cheaper drugs, and earlier competition are not considered in the PhRMA study. While this dynamic effect on competition is described elsewhere in our study, it is worth noting that the PhRMA study does not address these issues even glancingly. Thus, the PhRMA study does not provide a relevant assessment of the substantive effects of AGs on patients or third-party payors.

4. Inconsistent Choice of Data The PhRMA study is inconsistent in its choice of data. The study purports to only look to markets with only one independent generic as a comparison group. For example, it excludes the drug Quinapril from consideration in its study because two generics had “shared exclusivity” when the AG was launched (hence there were three generics in the market instead of two).14 Yet it does include Ribavirin, even though when brand name firm Schering-Plough’s subsidiary Warrick launched the AG, there was in fact shared exclusivity for this product—it was being sold competitively by Sandoz and Par Pharmaceuticals. The PhRMA study also notes that “Other IMS Consulting work has shown that brand products are experiencing accelerated rates of generic erosion, therefore recency of no-authorized generics cases was important to maintain comparability with the available authorized generics cases.” It therefore specified as one of its “three main criteria” that the no-AG cases it looked at should be “relatively recent (last three years)”. 15 One might imagine, given this stipulation, that the no-AG markets used would be from the last three years. However, seven of the nine markets chosen for the no-AG sample had their first generic entry in 2001 or 2002. This is generally understood to be more than three years ago. (In contrast, eight of the nine drugs the PhRMA study chose for its AG sample had its first generic entry in 2003 or later.)

5. No Disclosure of Methods for Pricing Analysis The PhRMA study does not indicate how it arrived at the prices it used for its assessments. This is highly problematic since many of the drugs involved have different strengths and dosage forms. For example, Fluoxetine is sold as a tablet, a capsule, and an oral solution, in a variety of strengths. The IMS data we used showed that the prices for different strengths and dosage forms were different, but the PhRMA study simply offers and uses a single price for its analyses without exp lanation. Further, this nondisclosure is of great concern analytically because it may lead to hidden biases. For example, suppose that 20mg doses of a drug are more expensive than 10mg doses, and suppose that over time 20mg doses increase in popularity. Simply looking at 14 See id. at 17. 15 See id. at 6.


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the average price weighted by sales will lead to the conclusion that prices have increased, even if they stayed the same. In addition, the PhRMA study appears to examine the average generic price discount off the brand price at any point in time. This approach is erroneous because brand prices may change over time. In particular, as we show below, 16 brand prices have increased more when there is an AG. Therefore examining the discount from brand prices will lead to a false conclusion. It is instead necessary to examine the discount off the brand price before the point of entry.

6. Drawing Conclusions from Two Data Points The PhRMA study attempted to study the effects of AGs on prices after the Hatch-Waxman 180-day exclusivity provision. Specifically, it segregates markets with 6 or more generics from those with 2-5 generics, and finds that in the latter set of markets, the presence of an AG purportedly led to lower prices. The diagram on page 14 of the PhRMA study purports to show that 33 months following exclusivity, or 39 months following the first marketing of the first generic, prices are lower in markets with an AG. Working backwards from their endpoint of April 2006, this means that only drugs that had their first generic launch by February 2003 could be included for the full 33 months. Among the set of markets with an AG used in the study, only two markets had their first generic enter by February 2003. This is, to say the least, not a very robust sample for policy conclusions regarding the benefits of AGs.17 Further, presenting it as “an observable correlation” with greater discounting “driven by the presence of an authorized generic,” without commenting on the very limited sample size, seems a dramatic oversight at best and somewhat deceptive at worst.

16 See infra Section VI.B. 17 Of course, for a more robust determination of the effect of AGs, additional market analyses

would be helpful. In contrast to the PhRMA study, an analysis of markets where there are AGs and where there are not under the standard Hatch-Waxman legal regime would be important to determine the substantive effect of AGs. Limiting analyses to markets where there is only one independent generic competitor does not provide a broad enough comparison to fully assess a competitive regime with the presence of AGs and in the absence of them. For example, an industry-based survey found that use of AGs delayed market erosion for brand name firms by 6.5 months. See Jon Hess, Authorized Generics: Lifecycle Management’s Compromise in the Patent Wars, CUTTING EDGE INFORMATION, Aug. 23, 2005, at 1, 5. Reiffen and Ward found that long-run equilibrium may entail only slightly higher (1-2 percent) generic drug prices when AG introduction is anticipated by independent generic producers, compared to the equilibrium when AG entry is precluded. David Reiffen & Michael R. Ward, “Branded Generics” as a Strategy to Limit Cannibalization of Pharmaceutical Markets, May 2005, available at: http://www.ftc.gov/be/healthcare/ wp/12_Reiffen_BrandedGenericsAsAStrategy.pdf. Note, however, that these authors do not take into account social welfare considerations of Hatch-Waxman surpluses for future generic firm investment in competing products, although they do observe that AGs may impact the incentive of firms to engage in patent litigation.


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7. Incorrect Generic Entry Dates The generic entry dates determine the 6-month period analyzed in the PhRMA study. However, a number of products were listed with incorrect entry dates:

- The AB Launch date for Metformin XR was December 2003, not October 2003.18 - The AB launch date for Nitrofurantoin was the end of March 2004, not January

2004.19 - The AB launch date for Flecainide was June 2002, not May 2002; and the AG

launch date was June 2002, not March 2002.20 If the incorrect dates were used, the 6-month period for analysis will also be incorrect.

8. Overall There are significant problems with the PhRMA study data, its analysis, its accuracy, and hence the basis for its conclusions regarding AGs. These errors create great concerns regarding the utility of the conclusions provided by it.

18 The final approval was granted and then almost immediately suspended in October 2003. It

was reinstated December 1, 2003. See FDA’s Approval History, available at: http://www.accessdata.fda.gov/scripts/cder/drugsatfda/index.cfm.

19 See FDA’s Approval Letter, dated March 22 2004, available at: http://www.fda.gov/ cder/foi/appletter/2004/76648ltr.pdf.

20 The AB-rated generic began shipping this product June 7 2002 (see http://www.google.com/search?q=cache:j35eU6mqgPEJ:www.parpharm.com/html/nf/PR-FlecainideBeginsShipping.html+tambocor+Alphapharm&hl=en&lr=&strip=1), the same date as the AG (see http://investor.mylan.com/phoenix.zhtml?c=66563&p=irol-newsArticle&ID=303905&highlight=).


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IV. Research Objectives Our research objectives were to assess the impact of AGs on prices and welfare, while staying as close the PhRMA study techniques and data sample as possible. We review: - Average retail discounts to brand in authorized generic vs. no-authorized generic cases;

and - Effects of authorized generics on retail brand prices. Note that because our study uses the same drug markets as the PhRMA study and replicates its methodology, interested readers may readily compare our analysis and results. V. Methods We used exactly the same set of drugs as in the PhRMA study, in order to maintain consistency and for comparison purposes. This meant we used nine drugs in which there was competition between the brand, an AG, and one (or more) independent generic(s); and nine drugs in which there was competition between the brand and one independent generic. We also used data obtained from IMS Health, but since we required retail prices, used the “National Prescription Audit” dataset.21 We treated each strength and dosage form of the drug separately, since combining different strengths and dosage forms of the drug obscures the data and will lead to inaccuracies if relative volumes change over time. We did not assume that brand name drug prices were not impacted by AG introduction, as did the PhRMA study, 22 because of the economic literature suggesting that prices will rise in such markets. We therefore assessed brand name prices in no-AG and AG markets to determine if this occurred and the relative magnitude of any such effects. Unlike the PhRMA study, we have not tried to assess the impact of AGs on drug prices after the 180-day exclusivity period. The reason for this is that, from a practical perspective, the debate is focused substantively on use of AGs during the 180-day exclusivity period. It seems likely to us that, say, two years following generic entry, an AG would have the same impact on prices (if any) as it would have had if it entered

21 IMS Health describes this data source as the “most accurate representation of the total

market”, adding that “top 20 pharmaceutical and financial analysts rely on the National Prescription Audit Plus for their market insights.” See www.imshealth.com/ims/portal/ front/articleC/0,2777,6599_40868211_40868264,00.html). To the extent that there are any errors in the prices reported by IMS Health, we would expect them to be evenly distributed between drugs and therefore not to lead to any bias in our results.

22 See PhRMA study, supra note 10 at 12 (“brand name prices are unaffected by the presence or absence of an authorized generic”).


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immediately after the exclusivity period was over. Hence, market prices post-exclusivity do not provide the key information about consumer welfare in the context of Hatch-Waxman Act policy objectives. We therefore focus our analysis on prices during the 180-day exclusivity period.23 Table 1 lists the drugs we examined in which there was an authorized generic.

Table 1. Drugs Examined with Authorized Generic Molecule Dose Month of Generic Entry24 Independent Generic(s) Metformin XR 500 mg Dec 03 Ivax

Glipizide ER 10 mg Dec 03 Watson

Glipizide ER 5 mg Dec 03 Watson

Glipizide ER 2.5 mg Dec 03 Watson

Glyburide-Metformin 5.0/500 mg May 04 Ivax



Nitrofurantoin 100 mg Mar 04 Mylan

Pyridostigmine Hydroxide 60 mg Feb 03 Sandoz

Paroxetine 10 mg Sep 03 Apotex




Ribavirin 200 mg Apr 04 Sandoz, Par, Three Rivers25

Flecainide 150 mg Jun 02 Par



Zyban 150 mg Jun 04 Teva

23 Indeed, the hypothesis that needs to be tested concerning the effect of AG entry during the

exclusivity period on prices after the exclusivity period, is whether prices are different compared to when AG entry follows the exclusivity period. Since our data, which is for the same drugs as in the PhRMA study, does not allow for this comparison, we, and the PhRMA study authors, cannot examine this hypothesis.

24 Where the date of generic entry was at the end of a month and recorded sales volume in that month was very small, we have assumed the following month as the effective month of entry.

25 The IMS data we used listed sales by Par, Three Rivers, Sandoz, and Warrick during the exclusivity period. Par was Three Rivers’s “marketing partner”. Sandoz, however, was independent of those two.


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We also used the same analog cases without AGs as proposed in the PhRMA study, noted in Table 2. Note that for Prozac, different generic firms sold different strengths and dosage forms, offering another reason why it would be analytically inappropriate to combine all dosages into a single price.

Table 2. Drugs Examined Without Authorized Generic

Molecule Dose Month of Generic Entry26

Independent Generic(s)

Fludrocortisone 0.1 mg Apr 02 Global

Torsemide 100 mg Jun 02 Teva




Nabumetone 750 mg Oct 01 Teva

Buspirone HCl 30 mg Aug 01 Mylan

Ganciclovir 500 mg Sep 03 Ranbaxy

Mefloquine HCl 250 mg May 02 Sandoz

Pergolide 1 mg Dec 02 Teva

Pergolide 0.25 mg Dec 02 Teva

Pergolide 0.05 mg Dec 02 Teva

Ibuprofen/Hydro 7.5 mg Apr 03 Teva

Fluoxetine caps 10 mg Aug 01 Sandoz

Fluoxetine caps 20 mg Aug 01 Barr

Fluoxetine caps 40 mg Aug 01 Par

Fluoxetine tabs 10 mg Aug 01 Par

Fluoxetine soln 20 mg Aug 01 Teva

VI. Results

A. Average Retail Discounts to Brand in Authorized Generic vs. No-Authorized Generic Cases Using retail level prices from IMS National Prescription Audit, i.e., consumer prices rather than wholesale prices used in the PhRMA study, we calculated the average generic discount to the brand’s pre-entry price over the six months approximating the 180-day exclusivity period. For the brand’s pre-entry price, we used the average price of the

26 Where the date of generic entry was at the end of a month and recorded sales volume in that

month was very small, we have assumed the follo wing month as the effective month of entry.


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brand for the three months prior to generic entry in order to provide a representative pre-entry price. In the case of markets with AGs, we used the average price of all the generics and AGs in the market, weighted by the volume of prescriptions filled with each. The results are listed in Table 3. Table 3. Generic Retail Price Discounts from Pre-Entry Brand Prices: Markets with

Authorized Generics

Molecule

Dose

Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Average by product

Metformin XR 500 mg 15% 16% 17% 16% 16% 16% 16% Glipizide ER 10M mg 12% 14% 14% 15% 15% 15% 14% Glipizide ER 5 mg 13% 14% 14% 15% 14% 15% 14% Glipizide ER 2.5 mg 24% 16% 15% 15% 14% 13% 16% Glyburide-Metformin

5.0-500 mg 15% 15% 15% 16% 16% 16% 15%

Glyburide-Metformin

2.5-500 mg 14% 15% 16% 16% 16% 16% 16%

Glyburide-Metformin

1.25-250 mg 16% 17% 16% 17% 17% 16% 17%

Nitrofurantoin 100 mg 13% 19% 21% 21% 21% 21% 21% Pyridostigmine Hydroxide

60 mg 24% 22% 22% 21% 18% 19% 21%

Paroxetine 10 mg 15% 16% 17% 17% 18% 18% 17% Paroxetine 20 mg 14% 16% 17% 17% 17% 18% 17% Paroxetine 30 mg 14% 15% 15% 15% 16% 17% 15% Paroxetine 40 mg 14% 14% 15% 16% 16% 16% 15% Ribavirin 200 mg 29% 28% 24% 24% 21% 21% 23% Flecainide 150 mg 32% 31% 33% 35% 32% 33% Flecainide 100 mg 40% 37% 32% 30% 29% 28% 31% Flecainide 50 mg 36% 37% 33% 31% 30% 27% 31% Zyban 150 mg 15% 18% 20% 19% 20% 20% 19%

Average by month 19% 20% 20% 20% 19% 19% 20%

Notes: The “Average by Product” column shows the weighted average discount from the pre-entry brand price for each product, weighted by the volume of prescriptions per month. The IMS data showed zero prescriptions filled with generic 150mg Flecainide in June 2002. (This does not mean that there were no such prescriptions: the data are rounded to the nearest thousand.) As seen above, at the retail level, price discounts for generic products averaged 20% over the pre-entry brand price, with very little change over the 180-day exclusivity period. Some products, however, had notably lower generic prices. Not surprisingly, Ribavirin, which had two independent generics as well as an AG competing, had relatively lower prices.27 The other drug with relatively high discounts is Flecainide. However, one should not assume that this was because of the AG product. In the Flecainide case, the

27 The fact that including Ribavirin—even though it clearly fell outside the parameters defined

in the study—would lead to the appearance of a larger average discount in the authorized generic markets is probably just accidental.


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AG had relatively small volume of sales (less than half that of the independent generic) and charged prices that were, on average over the exclusivity period, over 50% higher than the independent generic. This suggests that in this case, it was not aggressive price competition by the AG that resulted in relatively large price discounts compared to the brand price.28 If we omit these two products,29 the average price discount falls to 17%.

28 This market was unusual in other respects: both the AG, and the AB-rated generic were

paying licensing fees to 3M. Flecainide is also the earliest drug to have been genericized in this sample (in June 2002); all the others with AGs faced generic competition in 2003 or 2004.

29 The FDA uses a similar methodology when assessing generic competition and drug prices. See FDA, Generic Competition and Drug Prices, available at: http://www.fda.gov/cder/ ogd/generic_comptition.htm (“Since this analysis average individual price ratios without regard to sales volume, eliminating products with low sales volume eliminates the impact of these outliers on the average”, id. at n.2).

Table 4. Generic Retail Price Discounts from Pre-entry Brand Prices: Markets with No Authorized Generics

Molecule

Dose Month 1 Month 2 Month 3 Month 4 Month 5 Month 6

Average by product

Fludrocortisone 0.1 mg 14% 15% 14% 13% 12% 12% 13% Torsemide 100 mg 5% 20% 19% 11% 12% 13% 14% Torsemide 20 mg 7% 16% 13% 11% 11% 11% 12% Torsemide 10 mg 5% 19% 15% 12% 12% 11% 13% Torsemide 5 mg -41% -6% 15% 7% 31% 28% 30% Nabumetone 750 mg 14% 15% 13% 15% 15% 14% 14% Buspirone HCl 30 mg 3% 4% 4% 5% 6% 7% 5% Ganciclovir 500 mg -2% 14% 20% 12% 18% 23% 18% Mefloquine HCl 250 mg -2% 0% 7% 3% 7% 10% 5% Pergolide 1 mg -5% 5% 3% 16% 22% 17% 15% Pergolide 0.25 mg 13% 18% 13% 18% 24% 31% 22% Pergolide 0.05 mg -7% 11% 8% 17% 18% 23% 17% Ibuprofen/Hydro 7.5 mg 8% 12% 12% 12% 12% 10% 11% Fluoxetine caps 10 mg 18% 20% 20% 20% 19% 20% 19% Fluoxetine caps 20 mg 18% 20% 20% 20% 20% 21% 20% Fluoxetine caps 40 mg 15% 15% 15% 15% 15% 15% 15% Fluoxetine tabs 10 mg 1% 9% 9% 9% 9% 8% 8% Fluoxetine soln 20 mg 11% 16% 11% 12% 10% 11% 11% Average by month 4% 12% 13% 13% 15% 16% 15% Notes: The “Average by Product” column shows the weighted average discount from the pre-entry brand price for each product, weighted by the volume of prescriptions per month. Negative numbers indicate that the average generic price in those months was above the pre-entry brand price.


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The strategy the PhRMA study used, and which we are following here, is to compare these price discounts to discounts for drugs that did not have AGs. We have reservations about the theoretical validity of this approach, but for the sake of consistency with the PhRMA study, we use it here. Table 4 therefore shows the price discounting data for the nine products with no AGs. As evident by the percentages in Table 4, the average generic discount for the no-AG set of drugs shows more variability than for the AG set of drugs in Table 3, possibly because many of the drugs in Table 4 had relatively small sales volumes, leading to greater error in the pricing sample. The product in the no-AG sample with very large sales—20 mg Fluoxetine capsules—had very steady discounting averaging 20%. The average discount across drugs increases over time, reaching 16% by the sixth month. When AG and no-AG market discounts are reviewed, the discounts appear to be converging over the period, as shown in Figure 1.

Figure 1. Authorized Generic and No-Authorized Generic Discounts Over Time

Pattern of Generic Discounts

0%

5%

10%

15%

20%

25%

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6

Ave

rag

e D

isco

un

t

.

No AG

AG

Overall, then, using the PhRMA study approach, discounts from retail prices averaged 15% in the no-AG sample, and 20% in the AG sample, with a difference of about 5%—much lower than the 15.8% figure arrived at in the PhRMA study. This 5% figure is approximately the same estimate of price change when moving from one to two generic firms as found in earlier work.30 30 See David Reiffen & Michael R. Ward, Generic Industry Dynamics, February 2002,

available at: http://www.ftc.gov/be/healthcare/wp/11_Reiffen_WP248_ GENERICDRUG INDUSTRYDYNAMICS.pdf.


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However, even 5% overstates the real difference. The number at the extreme lower right of Tables 3 and 4 shows the average across products of each product’s discount, treating each equally. But minor drugs, such as Ganciclovir, are weighted as heavily as major products, such as Fluoxetine. To address this imbalance, we calculated an average of the product discounts, weighting each by the sales revenue of the brand for three months before generic entry. Hence, commercially important products are weighted more heavily. When we do this, the weighted average discount for all products in the no-AG sample is 17.7%, compared to 17.1% in the AG sample; upon adjustment, markets with AGs are actually more expensive. One can easily see why this result obtains when weighting by sales revenues. The large discounts in Table 3 are for relatively small revenue products; conversely, there is a large discount in Table 4 for Fluoxetine 20 mg, which had enormous revenues. Therefore, when we adjust the analysis in this arguably more appropriate manner, the difference between AG and no-AG discounts more or less disappears – if anything, the no-AG sample has larger discounts. Thus, the direct dollar impact of AGs on prices paid by consumers appears to have been approximately zero. The discounts found in our analysis are smaller than those reported in the PhRMA study, which found discounts off wholesale brand prices of 23% in the no-AG sample, and 39% in the AG sample, with a difference of about 15%. There are several possible reasons for these different findings. First, if we take the PhRMA study findings at face value, this implies that the drug distribution network is obtaining larger margins on drugs with AGs than on drugs with no AGs. This may well be the case, since the bargaining power of drug distributors faced with two competing products is much greater than the bargaining power of the typical drug consumer holding a prescription. 31 This gain to the drug distribution network is taken by the PhRMA study to indicate a “savings to the healthcare system” but is, of course, nothing but a transfer of profits from generic drug firms to the drug distribution system. Second, the PhRMA study appears (but without being specific) to determine the discount by subtracting the generic price at a given time from the brand price at the same time, assuming no change in price of the brand name drug. This will lead to larger apparent discounts for drugs in the AG sample because, as we show below, brand prices tend to increase when there is an AG. Third, the PhRMA study simply averages prices across dosages and forms for a particular molecule, which will lead to unknown biases if the relative volume of dosages changes

31 In other words, the bargaining power of wholesalers and pharmacies faced with two

competing products is much greater; they may choose between competing products and obtain lower prices while charging the next purchaser, such as another wholesaler or the consumer, the same or similar price in either case.


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over time as we have noted above. This creates the potential for misleading conclusions.32

B. Effects of Authorized Generics on Retail Brand Prices Previous studies have suggested that AGs lead to higher brand prices.33 The PhRMA study did not review this important potential effect on consumer welfare. We therefore examined brand prices across the different products over time to determine if such an effect is observable in the study markets. Table 5 shows the average increase in brand price during the 180-day exclusivity period in markets with AGs compared to its average brand price during the three months before generic entry.

Table 5. Brand Price Increases Over Pre -Entry Brand Prices: Markets with Authorized Generics

Molecule Dose Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Metformin XR 500 mg 3% 11% 14% 15% 17% 17% Glipizide ER 10 mg 1% 4% 10% 13% 15% 15% Glipizide ER 5 mg 1% 4% 10% 13% 14% 15% Glipizide ER 2.5 mg 2% 3% 10% 12% 13% 15% Glyburide-Metformin 5.0-500 mg 2% 6% 5% 6% 6% 6% Glyburide-Metformin 2.5-500 mg 2% 6% 6% 6% 5% 5% Glyburide-Metformin 1.25-250 mg 4% 5% 4% 5% 4% 5% Nitrofurantoin 100 mg -1% 3% 17% 20% 20% 20% Pyridostigmine Hydroxide

60 mg 6% 10% 9% 9% 11% 11%

Paroxetine 10 mg 2% 5% 7% 10% 13% 12% Paroxetine 20 mg 1% 5% 7% 9% 12% 11% Paroxetine 30 mg 1% 4% 5% 6% 8% 10% Paroxetine 40 mg 1% 3% 5% 6% 8% 8% Ribavirin 200 mg 5% 23% 24% 22% 27% 24% Flecainide 150 mg 0% -1% -1% -4% 13% 11% Flecainide 100 mg 0% -1% -1% 2% 9% 14% Flecainide 50 mg -1% 0% -1% 0% 10% 12% Zyban 150 mg -2% -3% -2% -1% -3% -1% Average by month 2% 5% 7% 8% 11% 12%

Table 6 presents the comparable brand price increases for markets with no AGs.

32 See supra section II.5. No Disclosure of Methods for Pricing Analysis. 33 See Reiffen and Ward, supra note 17, Hollis, supra note 12, and in a more general context J.

Johnson & D. Myatt, Multiproduct Quality Competition: Fighting Brands and Product Line Pruning, 93(3) AMER. ECON. REV. 748 (2003).


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Table 6. Brand Price Increases Over Pre -Entry Brand Prices: Markets with No Authorized Generics

Molecule Dose Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Fludrocortisone 0.1 mg -1% 1% 2% 0% -2% 0% Torsemide 100 mg 2% 3% 3% -1% 2% 7% Torsemide 20 mg 2% 5% 4% 6% 6% 8% Torsemide 10 mg 2% 6% 5% 6% 5% 9% Torsemide 5 mg 2% -1% -3% 0% 4% 3% Nabumetone 750 mg 1% 4% 6% 11% 12% 14% Buspirone HCl 30 mg 1% 3% 2% 1% 1% 8% Ganciclovir 500 mg -3% 19% 7% 0% -17% -19% Mefloquine HCl 250 mg 13% 6% 4% 4% 9% 10% Pergolide 1 mg 1% 0% -1% 9% 10% 16% Pergolide 0.25 mg 0% 1% -4% 8% 4% 6% Pergolide 0.05 mg 7% 0% -2% 9% 10% 11% Ibuprofen/Hydro 7.5 mg- 8% 18% 27% 32% 33% 36% Fluoxetine caps 10 mg 1% 5% 5% 5% 6% 13% Fluoxetine caps 20 mg 2% 6% 7% 8% 8% 13% Fluoxetine caps 40 mg 1% 5% 5% 5% 5% 11% Fluoxetine tabs 10 mg 0% 3% 3% 4% 4% 8% Fluoxetine soln 20 mg -2% -1% 1% 0% 3% 5% Average by month 2% 5% 4% 6% 6% 9%

Figure 2 compares the average brand price increase by month for these two cases.34

34 When we weight the increase in brand prices by the brand revenues in the 6th month, the

pattern remains similar but the differences are smaller: by the sixth month, brand prices increase on average by 12.8% in the no-AG markets, and by 14.7% in the AG markets.


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Figure 2. Brand Name Prices in Markets with AGs and No AGs

Brand Price Increases over Pre-Entry Prices

0%

2%

4%

6%

8%

10%

12%

14%

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6

AG

No AG

An increasing trend for brand prices after generic entry is expected, and is a well-known effect described in the literature. However, the fact that brand prices increase more in markets with AGs may explain a large part the PhRMA study finding that generic price discounts are larger in markets with AGs. It is not so much that generic prices are relatively lower in these markets, but instead, that brand name drug prices are higher. This is bolstered by results we have shown above, where the difference between generic discounts over pre-entry brand prices between markets with AGs and without AGs is, when weighting by commercial significance, approximately zero. VII. Discussion

A. Study Results Our analysis demonstrates that consumers do not face the magnitude of price differentials claimed by the PhRMA study using the identical drug markets and time period. Using retail prices, which are relevant to determining the direct effect on consumers, we find that there is at most a 5% differential between the discount in markets with AGs and in those without them. Further, we find that upon adjusting the data to reflect commercial significance, the difference between generic drug discounts in markets with AGs and without narrows to the almost indistinguishable—if anything markets with AGs have smaller discounts. Hence, AGs do not appear to be associated with significantly greater discounts in generic retail prices.


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Importantly, however, we find one explanation for the PhRMA study’s determination that there is a high generic price discount from brands in markets with AGs. It is not that markets with AGs have lower generic drug prices, but instead, that markets with AGs have brand name prices that are higher than in non-AG markets. Hence, not only are AGs not associated with greater discounted generic prices, they are also associated with higher brand name drug prices when present. Hence, consumer benefits associated with AGs are questionable indeed.

B. Hatch-Waxman 180-day Exclusivity Incentives The Hatch-Waxman Amendments were created to balance innovation with consumer access to cheaper generic drugs.35 The incentives created by the 180-day exclusivity were designed to encourage independent generic firms to invest in new affordable generic drugs and to challenge the many patents that protect name-brand drugs from competition. Any assessment of AGs must evaluate their impact with respect to these policy objectives. As noted above, the PhRMA study did not concern itself with these issues even though they are at the heart of ensuring that consumers have timely access to cheaper generic products under Hatch-Waxman. From a consumer perspective, challenges to brand patents are extremely valuable. If a court finds that the patents protecting a brand monopoly are invalid or that a generic competitor is non- infringing, the resulting competition will lower prices, without any adverse effect on the incentives for innovation. Generic drug development and patent litigation are, however, very expensive and risky. 36 Brands will typically litigate vigorously to defend their monopoly profits, and will typically have filed many patent applications on their products.37 Congress in its wisdom designed a statutory incentive—180-day exclusivity for the first- filing generic—to compensate generic firms for the socially valuable activity of challenging a patent that is ultimately found invalid.38 35 See, e.g., H.R. Rep. No. 98-857, pt. II (1984), reprinted in 1984 U.S.C.C.A.N. 2716-17. 36 An example of this is the case of paroxetine. Apotex filed its ANDA in 1998, and was given

tentative approval by the FDA in May 2001. GSK, the brand name seller of Paxil, fought vigorously in the courts to show infringement of its patents. It sued Apotex for infringement of five different patents: in every case, the patents were found to be either invalid or not infringed. The first generic paroxetine entered the market in September 2003. Since GSK’s sales of Paxil were approximately $2bn a year, it appears that consumers paid roughly $1bn more than was necessary annually, from the time of tentative approval in May 2001 until September 2003. Even though GSK definitively lost in its legal battle to retain its monopoly, it was still able to appropriate a large share of the profits of the first filer through licensing its product as an authorized generic during the 180-day exclusivity period. Note, also, that during the legal battle Apotex faced from 1998 to 2003, there were many opportunities to take a less aggressive stance and to wait longer for a legal issue to be resolved. Apotex was able to enter in 2003 only because it litigated continuously and at great expense.

37 For example, the Orange Book currently lists five patents on Lipitor, with expiration dates in 2009, 2010, 2013, 2014, and 2016.

38 See, e.g., H.R. Rep. No. 98-857, pt. II (1984), reprinted in 1984 U.S.C.C.A.N. 2716-17.


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When AGs enter during the exclusivity period, this statutory incentive for generic companies to challenge patents and to develop non- infringing products is severely compromised. If the AG captures half the sales in the generic market, the reward to the generic company that successfully challenged the patents or discovered a non- infringing product will be reduced by much more than half. 39

If the incentive to challenge patents and develop non- infringing products is severely reduced, then generic companies will respond by investing less in those areas. This means that there will inevitably be fewer challenges even to patents which appear to be relatively weak.40 This could easily result in delays of several months or even longer in the arrival of generic competition. The ultimate losers from such delays, of course, are consumers, who will end up paying monopoly prices longer than necessary. VIII. Conclusions The Hatch-Waxman Act was designed to spur generic firm introduction of generic drug products and carefully balance innovation with consumer access to cheaper drugs. The use of AGs by brand name firms during the 180-day exclusivity period may upset that delicate balance. The claims made in the PhRMA study appear unreliable given the many flaws in that assessment. Our analysis indicates that, in the short term, the prices faced by most

39 A simple example: Suppose that when only one generic enters and obtains 6 months of

exclusivity, the wholesale price for generic drugs during the period of exclusivity is $1 per unit, and the generic firm sells 100 million units. Assuming a marginal cost of $0.40 per unit, and fixed costs of say $20 million to enter, litigate, and begin production, this leads to profits of $40 million for the generic during the 6 month exclusivity period ($100 million [sales] - $40 million [marginal costs] - $20 million [fixed costs]). After exclusivity ends, to make calculations simple, assume that prices fall to $0.40, so there are no more profits available.

Now, suppose that the generic competes against an AG, and that with equal prices both sell 50 million units. Using the PhRMA study figure of 15% reduction in price, wholesale prices for a generic unit fall to only $0.85. The first ANDA filer obtains profits of only $2.5 million ($42.5 million [sales] - $20 million [marginal costs] - $20 million [fixed entry costs]), a small fraction of the reward compared with Hatch-Waxman exclusivity.

The AG in this situation pays production costs of $20 million, royalties of about $20 million, and earns profits of $2.5 million. Wholesalers’ and pharmacies’ profits have increased.

Total profit for the generic industry is now only $5 million—an 87.5% percent reduction. In addition, the brand has not only crushed incentives for the generics in the present market, but also for the future—while at the same time secured a considerable $20 million from royalties at a time when its patent is no longer even valid.

40 See Reiffen & Ward, supra note 30.


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consumers have been virtually unchanged by the presence or absence of AGs. Indeed, much of PhRMA’s alleged “discount” of generic prices associated with AGs appears to be accounted for by higher brand name drug prices in markets in which AGs are present. Allowing authorized generic entry during the exclusivity period intended for the first-filing generic entrant harms the incentives generic firms have to challenge patents or develop non-infringing processes and products. This will lead generic firms to be less aggressive in competing against brand name firms and the ultimate losers will be consumers. With the value of U.S. drug sales having increased to $250 billion in 2005,41 and an increasingly stretched health care budget for government and its citizens, aggressive, independent generic pharmaceutical competition is essential to benefit consumers. Any actions that remove or limit incentives to rapidly discover, develop, and weather the costs of generic drug introduction to consumers should be closely scrutinized. As noted by Rep. Henry Waxman, one of the leaders and drafters of the Hatch-Waxman Amendments:

Brand-name drug companies have increasingly been put ting “authorized generics” onto the market just as the first generic competitor is set to begin its 180-days of exclusive marketing. As you know, the Hatch-Waxman Amendments created this incentive for generic companies who challenge patents on the brand name drug—in exchange for undertaking the costs and risks of patent litigation, the successful challenger is given 6 months of marketing without any other generic competition.

Of course, the practice of using authorized generics substantially reduces the value of the 180-day exclusivity to the generic drug manufacturer who challenged the patent. The practice raises the serious possibility that generic drug manufacturers may stop challenging patents—at least in the substantial numbers they have up until now.

The consequences of leaving inappropriate patents in place are far-reaching: it threatens to significantly delay generic competition, forcing consumers, businesses, and governments to unnecessarily pay monopoly drug prices for much longer periods. This has got to be a concern. 42

The data suggest that any positive impact of AG competition on prices during the 180-day exclusivity period is small at best. But the long term effect of allowing the brand name firm to capture a share of the exclusivity incentive intended for the first ANDA

41 IMS HEALTH US Purchase Activity by Channel, 2005, available at:

http://imshealth.com/ims/portal/front/articleC/0,2777,6599_73915261_77141536,00.html. 42 Statement of Rep. Henry Waxman, Generic Pharmaceutical Association's First Annual

Policy Conference: Securing the Future of Affordable Medicine, September 20, 2005, available at: http://www.waxman.house.gov/news_files/news_statements_generic_ pharmaceutical%20_association_9.20.05.htm .


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filing generic firm may be large. When generic firms decide to enter the market and incur the costs of patent litigation to challenge brand patents, consumers can gain enormously from quicker access and lower prices. Yet generic firms will look at the incentives they face. If the Hatch-Waxman incentives encourage them to invest by paying patent litigation costs to enter as early as possible, then that is what they will do. If these incentives are undermined by AGs, then we should expect a concomitant reaction: delayed generic entry while firms wait for patents (which might have been shown invalid in court) to expire. In this case, the benefits of competition will not inure to consumers, who will be left paying for this policy through higher prices and reduced access to cheaper generic drugs.43

43 Some policymakers have had similar concerns. Sen. Charles E. Schumer (D-N.Y.) has

introduced a bill, cosponsored by Sens. John D. Rockefeller IV (D-W.V.) and Patrick J. Leahy (D-Vt.), that would ban AGs during the Hatch-Waxman 180-day exclusivity period. See S. 3695, 109th Cong. (2d Sess.) (July 19, 2006).

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