Overgenerous protection?

I'd never heard of the Express Scripts prescription-price index before I read 'Much ado about something', an article on generic drugs companies in the latest issue of the Economist (it may be available here but it may be paywalled, I can't easily tell as I've got a subscription). The article said that "whereas the average price for branded medications in America has risen by 127% over the past seven years, the average for generics is down by 63% over that period".

I was rather intrigued by this from a competition perspective, so I went to the source. Express Scripts is a US listed company that provides various pharmacy processing and management services, and it has a website, 'The Lab', where it publishes a range of interesting analysis and research. One of its publications is its Drug Trend Report, and on p57 you'll find this graph of the prescription-price index, which measures the prices of the most commonly prescribed drugs in both their branded and generic versions (it's also on p6 of the Executive Summary pdf).

It's hazardous drawing conclusions from one country, and one country with a rather dysfunctional health system at that, but these patterns do lead you to wonder whether patent protection hasn't been overdone. Yes, of course, the costs of developing safe new drugs are high and rising, and patents should enable drugmakers to recover their costs and earn an appropriately risk-adjusted rate of return on their outlays. And yes, you'd have to do the heavy lifting of comparing actual and fair WACCs to be make a fully informed call (and even then there'd be judgement calls involved). But price divergences of this order at a minimum make you wonder whether the length or scope of protection haven't been overdone. Overgenerous protection  would also help explain the squalid trade of branded producers bribing potential generic competitors not to produce (as I wrote about here, here and here).

I'm hesitant even to mention the Trans Pacific Partnership - every anti-trade nutter in the country will be reaching for their tin-foil helmet - and I'm going to reserve final judgement on the thing till I see all of it as a package. But if, as has been widely speculated, one of the elements is extended life for intellectual property protection, then it's probably a step in the wrong direction.

Smoking gun found as drug deals go down

I've been a bit exercised by these "pay for delay" drug deals where patent holders buy off generic drug competition - see here and here - and I know I'll have to let them go, and get on with other things, but one final post on the topic, as I've been pointed towards a brand new piece of empirical research on them that finds that they are very likely anticompetitive.

Up front, I should say that I'm normally minded, when I see some business behaviour that doesn't look like it fits with what the economics theory would suggest a firm would do, to look for a benign, rational explanation. Businesses will often have logical and proper reasons for what they do, even if on first inspection an economist can't see what those reasons are. And I've even changed my mind on some things that I would once have regarded as out of hand anticompetitive (retail price maintenance, for example) and I can now see why a company might have a legitimate reason to do it, and why consumers might not be harmed or could even benefit.

But at first blush these "pay for delay" delays looked suss to me, and although there are respectable and even heavyweight competition economists (Willig, for example) who believe they are, or can be, above board, I'm at a minimum still of the view that most "pay for delay" deals are rorts on the consumer.

So I was intrigued when a blogging colleague put me on the trail of "Do "Reverse Payment" Settlements of Brand-Generic Patent Disputes in the Pharmaceutical Industry Constitute an Anticompetitive Pay for Delay?", by Keith M. Drake, Martha A. Starr, and Thomas McGuire, NBER Working Paper No. 20292,July 2014, © 2014 by Keith M. Drake, Martha A. Starr, and Thomas McGuire (the copyright thingy is there because the NBER papers say third parties citing them have to put it in).

You can see the abstract here and you can read the whole thing if your organisation has a sub to the NBER or if you fork out US$5 online. If you're in the teaching trades, and in particular if you're in the competition teaching trades, you might want to share it with your students, as the topic is interesting, the writing's accessible, and the maths and stats are fairly easy.

The researchers looked at settlements of patent drug litigation between incumbent patentholder companies and generic competitors, and split them into two buckets - those where there were "reverse payments" from the patentholder to the generic, and those where there weren't. "If, in settlement, the brand manufacturer in effect buys a longer period of monopoly sale by “paying for delay” with a “reverse payment,” expected profits to the brand go up", they reasoned (p12) - "longer" here being longer than the average outcome that would have been expected from fighting on in the litigation. So they looked for the stock price impact of news of settlements, which should quickly reflect that rise in expected profits by way of higher share prices. And, since it's at least possible that settlements might have been struck for good reasons that weren't anticompetitive, they were especially interested in whether the settlements with reverse payments had a bigger effect on stock prices than the ones that didn't.

They were pretty careful, too, to isolate the impact of the news of the settlement, by comparing the actual share price movement with three different measures of what might have happened to the share price in the absence of the settlement. So they looked for "abnormal" or "excess" returns over and above what the company or the share market might have delivered in any case.

This is their key result (pp26-7): "For multiday event windows" - that's where the share price impact is measured over a few days - "cumulative abnormal returns for the reverse payment settlements are 5.5% to 6.0% higher than those for the other settlements and in all cases the difference is significantly different from zero...the incremental stock price jump of approximately 6% upon announcement of a settlement with indication of a reverse payment compared to one without is consistent with the hypothesis that reverse payments buy an anticompetitive delay in generic entry".

Incidentally, they also looked at trading volumes (again compared with the volume that might have been expected in any event), and again the same pattern came through. Investors were much more interested in news that the money had changed hands than in news that it hadn't.

Maybe I'll have my mind changed by some new evidence, but on this showing, if there are strong incentives to wreak a rort (check), and it looks like a rort (check), and it's carrying a large sack of non-consecutively-numbered dollar bills under one arm (check), it's a rort.

Drug deals busted

A wee while back I posted about obnoxious "pay for delay" arrangements between drug patentholders and generic drug manufacturers, which involved the patentholders paying - I would say bribing - the generic makers not to produce when the patent expires, thereby extending the patentholder's monopoly pricing power.

I didn't know about these kinds of arrangements before the Economist wrote about them, but to my mind they are such a breath-taking interference with competition that I've done a bit of mugging up since.

My first reaction had been that they were clearly, and rightly, illegal under New Zealand's competition law (bang to rights under s27 of the Commerce Act), but that I didn't know what the legal state of play was overseas. Here's an update.

It's illegal in the European Union under Article 101 of the Treaty on the Functioning of the European Union which says "The following shall be prohibited as incompatible with the internal market: all agreements between undertakings...which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:...(b) limit or control production, markets, technical development, or investment" (italics mine). And often enough it'll also trespass against the misuse of substantial market power provision in Article 102.

The Europeans have been able to sheet the law home, too. According to this press release from the European Commission, just this month Servier, a French drug company, and five generic manufacturers got pinged nearly €430 million (call it NZ$670 million): "Servier made payments to the generic companies against the certainty that they would not enter the market and refrain from legal challenges [to Servier's patents]  for the duration of the agreement. In one case, the settlement was not based on cash payments but on a market-sharing arrangement with the generic company".

The Commission (which has a couple of other pay for delay scalps on its belt) summarised by saying that Servier "tried hard to unduly prolong its exclusivity. And it managed to do so not through innovation or the strength of its patents, but thanks to its deep pockets and in complicity with its generic rivals. Such behaviour is prohibited in the European Union. When companies break these rules, they will be pursued and penalised accordingly. Pharmaceutical companies should focus their efforts on innovating rather than attempting to extract extra rents from patients and taxpayers". I'm no great fan of the Brussels machine, and even in the competition area I think they've lost the plot from time to time, but on this one they've nailed it.

In the States, it's not so clearcut. There, the case that matters, at least for now, is last year's Federal Trade Commission (FTC) vs. Actavis Pharmaceuticals (in the background I can hear the collective heavy sigh of competition lawyer readers as yet another economist clambers awkwardly over the fence into their territory). Competition tragics can find the full decision here: if life's too short, it has a summary at the front, and there's a good Wikipedia article on it, but in any event the gist of it goes like this.

The drug companies said they had a patent dispute, that the supposed "pay for delay" payments were part of the patent settlement, and that what was legal under patent dispute litigation was home free and not subject to antitrust litigation review. The FTC wanted "pay for delay" ruled always and everywhere illegal.

The FTC lost in its first two outings in lower courts, but won the penalty shoot-out 5-3 in the Supreme Court. Or sort of: the court didn't go the whole hog and say "pay for delay" was always wrong - "This Court declines to hold that reverse payment settlement agreements are presumptively unlawful" - but it did say that they couldn't hide behind the skirts of patent law and could be found to be anti-competitive if challenged. There could be “potential for genuine adverse effects on competition", and "Payment for staying out of the market keeps prices at patentee-set levels and divides the benefit between the patentee and the challenger, while the consumer loses". Sometimes the arrangements might be okay, but it would come down to the facts, and the court was minded to look especially sceptically at large brown paper bags being passed under tables: "The size of the payment from a branded drug manufacturer to a generic challenger is a strong indicator of such  power", "such power" meaning the power "to work unjustified anticompetitive harm".

There was a withering dissent from three of the judges (including the Chief Justice), so who knows how settled the matter is. But at least it's good to see that the FTC has been given the opportunity to take on these rorts. I'm sorry for any genuine patent disputes that might end up wearing some collateral damage by having to go through the antitrust mill to prove they're above board. But I haven't a skerrick of sympathy for the collusive jack-ups.

Drug deals gone bad

I was shocked - shocked! - to read in the Economist last week that drug companies, faced with the prospect of superprofits on patented drugs evaporating when the patents expire and the off-patent drugs can be substituted by much cheaper 'generics', have been paying generics producers not to enter the market.

The Economist says "Since the early 2000s “pay for delay” agreements have become more common. A company with a patent due to expire strikes a deal: it pays potential entrants a fee not to compete, preserving its monopoly. A pay-for-delay deal between AstraZeneca and three big generic manufacturers helped to protect Nexium from competition between 2008 and May 2014".

I don't know what the legal status of these contracts is in the US, but I do know what our competition law says. "No person", says s27 of the Commerce Act, "shall enter into a contract or arrangement, or arrive at an understanding, containing a provision that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market", and if "pay for delay" isn't one of those contracts, agreements, or understandings, then I don't know what is.

The American Constitution wisely forbids "cruel and unusual punishments", which is just as well, as otherwise there would be a good case for tattooing the words of s27 or its American equivalent in large letters on the foreheads of the corporate executives involved.