Health Care, Prescription Drugs

How Drug Companies Stifle Competition With ‘Product Hopping’

A proposed bipartisan bill aims to curb this practice
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In 2014, drugmaker Forest Laboratories and its parent, Actavis, had a $28 billion problem. Actavis had spent that sum to acquire Forest and its portfolio of pharmaceutical products. The key patent for one of those drugs, a treatment for Alzheimer’s disease called Namenda IR, was set to expire in July of 2015. Forest had been generating $1.5 billion a year in Namenda IR sales, and Actavis was determined to figure out a way to keep their valuable monopoly going. If they didn’t, generic drugmakers would enter the market and drop Forest’s Namenda revenue by 80 to 90 percent.

The strategy they developed was a relatively common one in the pharmaceutical industry—one that takes advantage of the way federal laws and regulations distort the prescription drug market—called “product hopping.”

Patients needed to take Namenda IR twice daily. Actavis and Forest decided to develop a once-daily version, Namenda XR, and invest huge sums of marketing dollars to convince doctors to switch their patients to the once-daily version. (IR stands for “immediate release”; XR stands for “extended release.”)

If Actavis and Forest succeeded, generics would be stymied, because by law, pharmacies were only able to substitute generic Namenda for the long-marketed Namenda IR, not the new Namenda XR. Generic manufacturers would have to go through the entire application process anew to file generic versions of Namenda XR, and Forest’s patents on the once-daily formulation lasted didn’t expire until 2029.

These strategies often work. Savvy marketing campaigns for new drug formulations are often persuasive to doctors, who write the prescriptions but pass on the higher costs to patients and insurers. (The economics of the generic drug sector effectively preclude countervailing marketing campaigns from competitors.)

But Actavis’ marketing campaign didn’t go as well as its executives had hoped it would. As the patent expiry for Namenda IR grew closer, Actavis had only succeeded at converting 30 percent of IR’s prescriptions into the once-a-day XR formulation. 70 percent of Namenda’s sales were set to be subjected to vigorous generic competition.

So Actavis pivoted, announcing that they would be yanking Namenda IR from the market, forcing Alzheimer’s patients to switch to the new XR product, or forego their medication. That prompted New York’s attorney general at the time, Eric Schneiderman, to sue Actavis for violations of the Sherman Antitrust Act. “Schemes to block competition, without considering the consequences to patients, are a growing trend in the health care industry,” said Schneiderman.

Former New York State Attorney General Eric Schneiderman

Gaming the system to extend monopoly power

Most Americans buy the argument made by branded drug companies that they deserve a patent-enforced monopoly period for their innovative new drugs, because they deserve an economic reward for developing new treatments. But as the Namenda example shows, pharmaceutical companies don’t always give up on preserving their monopolies once their patents expire. Some take advantage of the non-market quirks of the prescription drug business to postpone or prevent legitimate competition from taking place.

Actavis used two common product-hopping techniques: the soft switch, in which manufacturers use tactics like temporary discounts and sales pitches to persuade doctors to switch their patients to the new drug; and the hard switch, which involves forcing patients over to the new drug by pulling the old one from the market, or by formally declaring the old drug “obsolete” in order to make it legally difficult to prescribe.

In another instance, Abbott stymied generic competition for its cholesterol-lowering drug TriCor, by switching the official version from a capsule to a tablet, changing the dose, and discontinuing the capsules, in order to block the generic versions which were meant to substitute for the capsule. Then, once generics came out for the tablet, Abbott changed the dose again, discontinuing the old one. Again, because pharmacies are legally only allowed to substitute generic versions of a drug for the specific formulation that the FDA has approved for generic competition, Abbott was able to extend its lucrative monopoly with this strategy. Generics only ended up with 2 percent of the TriCor market, despite their equivalent quality and far lower price.

The Actavis case, Schneiderman v. Actavis, went up to the U.S. Circuit Court of Appeals for the Second Circuit, which ruled that the soft switch did not violate federal antitrust laws, but that the hard switch did. The court cited, among other things, Actavis’ own CEO, who in conversations with Wall Street investors had bragged about the company’s strategy of “trying to…put up barriers or obstacles” to generic Namenda.

Congress attempts product hopping reform

Unfortunately, around the same time, a different federal appeals court—the Third Circuit—issued a conflicting opinion in Mylan v. Warner Chilcott, arguing that Warner Chilcott’s hard switch from capsules to tablets for its acne medication Doryx did not violate antitrust laws. The Supreme Court has not resolved the conflict, resulting in no clear judicial standard for when product hopping violates existing antitrust laws.

This quandary led several reformers in the U.S. Senate to introduce bipartisan legislation in 2019 called the Affordable Prescriptions for Patients Act. The bill, sponsored by Republicans John Cornyn (Tex.), Shelley Moore Capito (W.Va.), Rick Scott (Fla.), John Kennedy (La.), and Josh Hawley (Mo.) and Democrats Richard Blumenthal (Conn.), Patty Murray (Wash.), and Dick Durbin (Ill.), defined product hopping as anticompetitive, and empowered the Federal Trade Commission to bring litigation to block it. A new version of the bill was introduced in 2023, with a different set of sponsors: Republicans John Cornyn (Tex.), Chuck Grassley (Iowa), Ted Cruz (Tex.), Mike Braun (Ind.), and Lisa Murkowski (Alaska), and Democrats Blumenthal, Durbin, Amy Klobuchar (Minn.), and Peter Welch (Vt.)

The current version of the bill defines product hopping as the anticompetitive use of a “change or modification to, or reformulation of, the same manufacturer’s previously approved drug or biological product that has an indication that is identical or substantively similar to an indication of the same manufacturer’s previously approved drug product.” It instructs the FTC to litigate hard switches; i.e., when the branded manufacturer withdraws the product subject to generic competition, and also soft switches “that unfairly disadvantage the listed drug or reference product relative to the follow-on product.”

Under the bill, it will be up to the FTC to decide through rulemaking what it considers “unfair” on the soft switch side. This will be an area of considerable debate.

How to define anticompetitive product hopping

It is straightforwardly anticompetitive for drug companies to conduct hard switches, in which they pull patent-expiring drugs off the market to prevent generics from gaining a foothold. But soft switches are more nuanced.

Despite all the factors described above, for example, it’s hard to describe as “anticompetitive” an honest effort by a drug company to persuade doctors to switch their patients over to a follow-on product. While generic drug manufacturers can’t spend much of anything on counter-marketing, health insurers and pharmacy benefit managers can. They can explain to doctors that the reformulated drug doesn’t offer meaningful clinical benefits to the patient, relative to the far higher cost.

Sometimes, the insurers and PBMs don’t use that leverage. Instead, they are tempted by large rebates offered by the branded manufacturers that bring in revenue to payors in the short term, but cost them more in the long term because more patients end up on the pricey follow-on product instead of affordable generics. Payors have gotten smarter about these tactics, but PBMs in particular remain tempted by the short-term rebate revenue. It’s important for PBM customers to demand more transparency into how rebates affect product hopping strategies.

In 2016, Michael Carrier and Steve Shadowen proposed a framework for identifying anticompetitive soft switching strategies, by posing a simple question: would the branded manufacturer have attempted the switch if “it did not have the effect of harming generics?” The effort to harm generics comes from the new drug cannibalizing sales of the old (and soon to be genericized) drug. In other cases, a follow-on drug might dramatically expand the market for a product line, because it is so much better than the older drug. Indeed, if the follow-on drug has real benefits, it should significantly expand the number of patients who take the medication.

Also, a follow-on product might be the result of safety issues with the original drug that were flagged by the FDA. In that case, the branded manufacturer has a clear incentive and mandate to switch patients to the follow-on product. The Cornyn bill anticipates this issue, specifically exempting such cases from anticompetitive scrutiny.

Product hopping reform incentivizes innovation

The weakest and most clichéd argument one hears from the drug industry is that extending drug monopolies leads to more “innovation.” The opposite is true. As research by my colleague Gregg Girvan at the Foundation for Research on Equal Opportunity shows, price increases on older drugs don’t lead to more innovation, because legacy companies usually squander the extra cash. Indeed, it’s the expiry of patents on older drugs that drives big companies to develop new ones. If they don’t, they’ll go out of business.

Another innovation argument you hear is that drug companies need to be able to make gobs of money when they change a twice-daily formulation to a once-daily formulation. Otherwise, what incentive do they have to develop the improvement? Again, this is weak sauce.

Let’s say that, due to vigorous generic competition, twice-daily Namenda IR costs $15 for a one month supply, whereas due to monopoly pricing, once-daily Namenda XR costs $485. Is the once-daily version of Namenda really worth paying a 3133% price premium? No. It’s up to the branded manufacturer, in this case Actavis, to either develop a new formulation with a more significant clinical benefit to the patient, or to offer that new formulation at a more competitive price.

That’s how markets are supposed to work.

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Posted at Forbes.

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