In March, the House Energy & Commerce Committee held a hearing to examine the state of generic drugs and determine whether slow new drug approvals contribute to higher pricing. At the hearing, the Food and Drug Administration (FDA) pointed to market forces, not regulatory hurdles, as causing limited competition and subsequent high prices. Although market forces are part of the story, the FDA should assume some responsibility and work to become a more nimble organization that can help unleash greater competition in the market.
According to a new FDA report, the agency approved 813 new generic drugs in 2016—a record in its history. Although that represents progress, the same report found nearly 3,000 applications remain in the queue, awaiting approval. Assuming the FDA maintains the 2016 pace for reviews, most applicants will wait more than 3.5 years before they are able to enter the market and compete with an incumbent player.
Although it is true that market forces probably led to the monopoly in the first place, that monopoly is preserved for years by FDA delays. Pharmaceutical makers are aware of the FDA’s slowness to move generic drug applications and have been gaming that system to reap windfall profits. Reports are replete with examples of generic drug makers that, upon finding themselves in a monopoly position, raise prices by hundreds or thousands of percentage points, knowing full well that it will be years before they face any competitive threats. In essence, the system grants these companies a new exclusivity patent for having done nothing more than win a war of attrition against their competitors—a move that, in turn, allows the companies to increase their prices dramatically.
In a recent review of generic drugs with the highest price increases between 2013 and 2015, we found four cases of generic drugs with monopoly market status: calcitonin (used to treat bone disease like osteoporosis), neostigmine (for neuromuscular disease), nitroprusside (for managing blood pressure) and vasopressin (an anti-diuretic hormone). With the monopoly came dramatic price increases: 2,300 percent for calcitonin, 3,000 percent for neostigmine, 1,800 percent for nitroprusside and nearly 3,000 percent for vasopressin.
With price spikes between 1,800 and 3,000 percent, market forces do create a profit motive for competitors to move into the space and chase these dollars. But that potential gets eroded once companies realize that their ROI won’t be realized for three years or more, with no guarantee of approval. Particularly for public companies, which must demonstrate shareholder return each quarter, asking investors to hold tight for that long for an application that may not make it through the process is an unacceptable risk.
A bipartisan bill, the Lower Drug Costs Through Competition Act (HR 749), would expressly direct the FDA to fast-track generic drug applications in cases where there is dearth of market competition. If enacted, this bill would greatly speed the approval times for new entrants seeking to offer an alternative to the incumbent, creating new competition that should modulate prices. The FDA would approve or deny the application within six months, thereby removing the barriers that have prevented companies from offering another option to purchasers and serving as a check on excessive price spikes.
When new entrants are approved, prices decline rapidly. For example, now that there is a generic alternative to Nitropress and Nipride, the brand-name versions of the blood pressure drug nitroprusside, with two more generic versions about to enter the market, the price has fallen from a high of $880 in 2015 to about $200 today. That price will continue to drop as group purchasers leverage competitive friction to extract further concessions in costs.
Clearly, the fix is simple. Congress should move swiftly to enact legislation that closes anticompetitive loopholes, starting with HR 749, and put an end to these market dysfunctions once and for all.
Michael J. Alkire is COO, Premier, Inc., Charlotte, N.C.