Should The Federal Government Manufacture Generic Drugs?

Sen. Elizabeth Warren’s new proposal fails to think through why there are generic drug shortages in the first place.
December 19, 2018
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Sen. Elizabeth Warren (D., Mass.) and Rep. Jan Schakowsky (D., Ill.) have introduced a new bill called the Affordable Drug Manufacturing Act, which they describe as “an ambitious proposal to address the skyrocketing price of prescription drugs.” The core idea in the bill is to create a new Office of Drug Manufacturing within the U.S. Department of Health and Human Services, which would be authorized to “manufacture generic drugs…where competition is lacking.” In an interview with Larry Mantle of Southern California Public Radio, I describe why while I agree with the goal of more competition, I’m not convinced that the Warren-Schakowsky proposal will achieve that goal. An edited transcript of my remarks follows.

Larry Mantle: Avik, good to have you with us again. What are your concerns about this legislation?

Avik Roy: Hi Larry, well first of all, let me just say I think it is extremely important to encourage there to be competition in areas where we don’t have it. Competition has been proven over the last many years to be the biggest driver of lower prices in our prescription drug system, particularly when drugs go off patent. That general concept and philosophy and intention of this bill, I think, is not controversial.

I would say I would categorize my skepticism about the bill in two buckets: one would be the “how,” and two would be the “why.” So on the “how” front, how exactly would this Office of Drug Manufacturing be able to work in such a way that, first of all, it’s compliant with the incredibly rigorous technical specifications that the FDA requires for drug manufacturing?

And B, do so in a way that is dynamic and competitive with what happens in the private sector? I don’t see a lot of evidence that a new agency within HHS would be able to manufacture in a cost effective way that competes with what these established manufacturers in the private sector do. And again, also how the FDA from a legal standpoint would have the proper oversight over such an office that would apparently be independent within the Health and Human Services Department and therefore not directly under the FDA’s jurisdiction, so that’s the “how.”

The thing that I think is actually more fundamental here is the “why,” which is to say I don’t see this bill as really thinking through why it is we lack competition where we do, and it turns out that in most of the cases, particularly for off patent drugs, where we lack competition, the reason why we lack competition is due either to the FDA being somewhat aggressive, shall we say, in restricting competition through failing to approve alternate competitors, or there are situations where a combination of the way Medicare pays for drugs and FDA regulations has led manufacturers to conclude that it’s not economical for them to produce drugs at commodity prices in a particular area.

So what I would have loved to have seen in this bill is more thought on those fronts to really think through what is it the FDA could be doing differently to encourage more competitors to enter markets, and where should we rethink the way Medicare in particular pays for drugs such that generics are encouraged to enter the market. Without understanding those two components, all we’re doing here is attempting to patch over a problem that the federal government has actually caused, and the patch may not actually work.

Larry Mantle: Well let’s talk about the FDA restrictions on competition, as you put it. Presumably the FDA is positioning this as health and safety restrictions in making sure the efficacy is going to be there for generics under supervised manufacturing. In what areas, Avik, do you think that goes too far?

Avik Roy: Yeah, so absolutely the FDA has a proper public role in guaranteeing the safety of our prescription drug supply, and they should continue to do so, but there have been examples, and I think if you talk to generic manufacturers, what they’ll tell you is that sometimes the inspection regime that the FDA imposes on them makes it impractical for them to manufacture drugs where they otherwise would be willing to enter a market. So that might involved, for example, the length of time involved in a review. It may involve uncertainty as to exactly when reviews will happen and what the cost of those reviews will be. It may have to do with plants that otherwise seem to be working fine, but otherwise are being delayed by inspections. So it’s not to say that the FDA shouldn’t guarantee the public safety of our drug supply; they absolutely should. But we have to think through where the FDA is perhaps doing so in a way that makes it uneconomical for generic manufacturers to come in.

Remember, this is a fairly highly regulated market, and because of competition, generic prices, drugs that off patent are often priced at a very low rate. A bottle of mineral water can cost more than certain generic drugs. It’s important for us to understand that whatever regulatory burdens we’re putting on these companies that we’re aware of the costs of that regulatory so that we don’t discourage people from entering.

Larry Mantle: Avik, I just wanted to follow up on your Medicare reimbursement issue. So are you saying that Medicare is paying too low a price for some of these generics, meaning there’s no profit potential for the manufacturer?

Avik Roy: Well it’s not so much a matter of low, though that can come into play, but it has to do with fluctuations due to the Average Selling Price plus six percent formula that particularly Medicare Part B uses. That’s the section of Medicare that involves drugs that are infused in a physician’s office typically, and that can involve a lot of cancer drugs. And so what will happen is due to just fluctuations in the market, the price of a drug may go up at one point, and then may go down, and then a manufacturer all of a sudden is in a crunch where they’re spending all this money on the infrastructure to manufacture a drug, but they can’t make money selling the drug. And so it’s not so much that the price is too low, but perhaps that the price is not always stable enough for these generic drugs. There may be a way to rethink that formula such that you do have a market element to it so that you can keep the price pressure low or towards drug prices being lower, but also have enough stability that again manufactures aren’t discouraged from entering the market.

From The Competition Prescription: A Market-Based Plan for Making Innovative Medicines Affordable.

Larry Mantle: Julie writes on the [KPCC web] page, “It’s not this complicated. The problem is profit and greed. Remember the EpiPen debacle? The greedy, price-gouging CEO of Mylan jacked up the price 400% just because he could.”

Avik Roy: That’s a classic example of where FDA regulations stymied competition. So the FDA has historically had this paradigm where in order to approve a generic competitor to a drug that is delivered through a specialized device. So EpiPen is an injectable pen that injects epinephrine which is 110 years old in terms of it being discovered, so it’s been off patent for a very long time. But the pen that Mylan manufactures, there’s a patent around that, and what the FDA has required of generic competitors to EpiPen is that unless your pen delivers epinephrine in exactly the same biochemical fashion as Mylan’s pen, it can’t be considered generic even if the dosage is the same, the clinic effects are the same, and the benefits to the patient are the same. That’s been the historic position of the FDA, and that’s the reason why there were no generic competitors to EpiPen, and EpiPen exploited that monopoly power, or Mylan did, to charge egregious prices.

So one thing that FDA commissioner Scott Gottlieb has tried to do, and he’s spoken out about this while FDA commissioner and also prior to being FDA commissioner. He’s spoken about the need for the FDA to come up with a new regulatory pathway that certifies competitors to EpiPen that have the same clinical effect and the same dosages, but may not work exactly the same way, and they’ve done that. They’ve approved the first competitor to EpiPen in that way. That’s a great example of where I wish this bill were more active in helping to create a statutory pathway for complex generics.

And also, another thing that this bill could have contemplated was grants to non-profits or other manufacturers to come in where competition is weak instead of trying to create a new bureaucracy that may not actually succeed in providing that competition.

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