The Rise of Big Generic: Why Knockoff Prescriptions Now Cost $1,200
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`Saturday, 08 August 2015 00:00
`By Steve Hendricks (/author/itemlist/user/51264), Truthout (http://truth-out.org) | News Analysis
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`(Image: Jared Rodriguez / Truthout (http://www.flickr.com/photos/truthout))
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`Not that long ago, the generic drug industry was the ugly stepchild of the Big Pharma
`family - the uncomely domain of penny pills and piffling profits. The big names in
`pharma preferred to hawk Prozac, Viagra and other brand-name elixirs at five and 10
`dollars a pop, leaving smaller firms that had all the prestige of Kmart to scramble
`over the nickels and dimes to be had off generics. It was, however, a good era for
`anyone who needed a cheap generic, as a majority of Americans did (and still do)
`each year. But times have changed, and decidedly not for the better.
`
`The capstone event of the new era came on May 28, when the Federal Trade
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`/newshour/rundown/drugmaker pay 1 2 billion settle pay delay lawsuit/) one of
`the largest in the FTC's history - with Teva Pharmaceuticals over shady trade
`practices. The size of the settlement was only part of the news. The other part was
`that Teva responded with the corporate equivalent of a shrug, even declaring itself
`"pleased" with the deal, which might have been taken for bravado but for the
`concurrence of Teva’s investors, who kept the company's stock price steady as could
`be. It's not news that a billion dollars is chump change to Big Pharma. The news is
`that Teva isn't Big Pharma. Teva is a generics maker - Mid Pharma at best. But such
`has been the consolidation in the generics trade that even its players are now
`behemoths, and this is where the danger lies.
`
`Teva has been a consolidator (http://www.reuters.com/article/2015/04/22/us-
`teva-pharm-ind-acquisitions-idUSKBN0ND1JC20150422) among consolidators,
`hoovering up half a dozen companies in the last 15 years at a cost of more than $30
`billion. Headquartered in Israel, Teva does most of its business in the West. In the
`United States it employs 7,500 people and fills 1.5 million prescriptions a day, more
`than half a billion a year. In Europe it fills nearly twice that. All of which makes it the
`biggest seller of generics in both America and the world. Teva has plans to grow
`bigger still and has cast an acquisitive eye on, among other companies, its nearest
`rival in the generics field, Mylan (which has so far resisted Teva’s overtures). By one
`slightly hyperbolic assessment (http://www.forbes.com/sites/stephenbrozak
`/2015/04/22/tevamylanperrigo-merger-mania-in-pursuit-of-generic-margins/), if
`the Mylan purchase were to go through, "Every man, woman and child in the U.S.
`will eventually take a pill manufactured by the new entity." This is not good news for
`any man, woman or child - unless she or he holds stock in Teva.
`
`Consolidation Results in Skyrocketing Prices
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`As Big Generic has consolidated, competition has of course dropped, and makers of
`generics have raised prices flamboyantly (http://abcnews.go.com/Health/generic-
`drug-prices-skyrocketing-lawmakers-warn/story?id=27060992). In October 2013, a
`month's supply of doxycycline, a widely used antibiotic that has been available in
`generic form for three decades, cost hospitals $1.20. Just six months later, it cost
`$111.00, an increase of 9,150 percent. In July 2013, a month of tetracycline, another
`antibiotic long generically available, cost pharmacies $1.50, but a year later it was
`$257.70, an increase of 17,080 percent. These are extreme instances, but they are not
`aberrant.
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`According to Medicare and Medicaid data, from July 2013 to July 2014, the price of
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`more. Among this 10 percent, the average increase was 448 percent. By remarkable
`coincidence, the most frequently prescribed generics were among the more dramatic
`risers. One report (http://genericpharmafinance.com/generic-drug-prices-continue-
`to-soar/) found that in 2010, the 50 most popular generics cost an average of $13.14
`per prescription, but by 2014, it was $62.10, a 373 percent spike. Big Generic is wont
`to point out that although the prices of half of all generics have gone up, half have
`gone down. Less often do they point out that the increases have far outpaced the
`declines. They are like the grocer who advertises the dime knocked off his cauliflower
`while quietly trebling the price of bread.
`
`Naked price-gouging is indisputably behind the price hikes, but to give the
`pharmaceutical devils their due, it is not always the only thing behind the hikes.
`Shortages of raw materials, subcontracted factories that fail inspection, surges in
`demand due to unexpected outbreaks, backlogs at the Food and Drug Administration
`in processing applications by would-be manufacturers and other circumstances can
`contribute to high prices. But which circumstance is responsible for what part of the
`price of any given drug is mostly unknown because manufacturers rarely release the
`data that would tell us.
`
`When Sen. Bernie Sanders, the Democrat of Vermont now running for president,
`held a hearing (http://www.sanders.senate.gov/newsroom/recent-business/senate-
`hearing-on-generic-drug-prices) on the scandalous price of generics last fall, three
`manufacturers of some of the most appallingly priced drugs refused to testify. Teva,
`which makes doxycycline and tetracycline, was one of them. What can be said with
`certainty is that, even setting aside rank greed, consolidation in the industry makes
`all of the above challenges worse. The closure of a single factory or the disruption of a
`single supply line doesn't much matter when six or eight companies make a drug. It's
`a different story when only two or three do.
`
`It may, then, come as a surprise to those familiar with oligopolistic pricing to learn
`that Teva's share of the US generics market in recent years has ranged from just 13 to
`22 percent. Second-place Mylan has held a mere 8 to 13 percent. The four biggest
`generics manufacturers combined control only 40 to 50 percent. Those numbers
`don't have the ring of oligopoly, but the generic market is different from most, chiefly
`because even the biggest manufacturers can make only a modest fraction of the
`thousands of generic drugs in existence. Teva and Mylan, for example, make 400 or
`so each, many overlapping. Other manufacturers make but a few dozen. The industry
`as a whole may not be oligopolistic, but the production of particular drugs most
`assuredly is.
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`The Rise of Big Generic: Why Knockoff Prescriptions Now Cost $1,200
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`make modafinil, a generic version of Cephalon s name brand Provigil. Modafinil is
`used to combat severe daytime sleepiness caused by debilitating illnesses like
`narcolepsy, sleep apnea and idiopathic hypersomnia. Idiopathic hypersomnia can
`keep sufferers perpetually groggy or, worse, asleep for up to 20 hours a day, and
`modafinil is the only drug that helps some sufferers. But modafinil is perhaps best
`known as a "smart drug" (http://www.newyorker.com/magazine/2009/04
`/27/brain-gain) used by students, with varying degrees of legality, to stay alert when
`cramming for exams. (Recent research (http://www.futurity.org/modafinil-
`drug-creativity-803372/), by the way, has cast a dubious light on the efficacy of
`modafinil for enhancing one’s studying.)
`
`Cephalon held the exclusive patent to modafinil and had been selling it since 1998,
`but the patent was set to expire in 2006. Teva wanted a piece of the action when it
`did expire. Cephalon, however, wasn't ready to give up its monopoly, so in 2005 and
`2006, it paid more than $300 million to Teva and three other makers of generics to
`stay out of the market until 2012. That only four firms wanted to sell one of the
`world's most lucrative pills speaks to the industry's consolidation - and the four have
`since been reduced to three because Teva bought one of them. Teva's target Mylan is
`one of the other two survivors.
`
`Tricks of the Trade
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`Generic firms love "pay to delay" deals, as they are known in the trade, because of the
`guaranteed profit. Name-brand firms of course love the extension of their monopoly.
`In certain narrow circumstances, the deals are legal, the key being that consumers
`don't get fleeced. But after buying off its competitors, Cephalon's profits on Provigil
`took on a fleece-like texture. In 2005, when the first deal was struck, annual US sales
`of the drug were $475 million. Just two years later, they topped $800 million. By
`2011, the last full year of Cephalon's monopoly, they reached $1.1 billion.
`
`The growth was only partly due to an increase in prescriptions. It is the vulgar norm
`in the pharmaceutical industry to raise the price of a drug that is about to go over the
`patent cliff, and Cephalon was vulgarly normal. In 2004, a month's supply of Provigil
`cost about $166 (drug prices vary from pharmacy to pharmacy), but by 2007 it was
`$272, by 2009 it was $409, and by the last year of Cephalon's patent in 2012 it was
`$1,001. The gross take - an altogether apt phrase - during the extra years of Provigil's
`monopoly came to about $5 billion, not a shabby return on $300 million in
`baksheesh to the generic companies.
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`drug approaches the patent cliff is to develop a new drug to replace the old one, often
`by making the merest of tweaks, like putting an extended-release coating on an
`immediate-release tablet. Sometimes the benefits are more substantial, but even
`then they may be outweighed by new side effects or may be helpful only to a small
`subpopulation of patients.
`
`Regardless, the drug maker will tout its new pill - often spending millions, even tens
`of millions, to herald its improvements (and minimize its flaws) - and a lot of doctors
`and patients will be swayed. Those who aren't swayed may migrate to the new drug
`anyway because the price of the old one has been jacked up so high, as Cephalon did
`with Provigil, that even the spendy new drug is a bargain. The value of all this is not
`just the short-term profiteering but getting a base of doctors and patients hooked on
`the new drug before the old one turns generic. Most doctors and patients don't care
`to fix what ain't broke, so if the new drug works OK, they're less likely to use the old
`drug even after it goes generic and its price plummets.
`
`This was essentially Cephalon's strategy for Provigil and its lightly tweaked
`replacement, Nuvigil. Trouble was, in 2005, Cephalon was running behind in getting
`FDA approval for Nuvigil. By buying off Teva and the rest, Cephalon was buying time
`to get the drug approved and market it to doctors and patients. Nuvigil finally
`arrived in pharmacies in mid-2009 (priced at $269 a month, compared to Provigil's
`jacked-up $409) and grossed $39 million over the remainder of the year. By 2012,
`when Provigil went generic, annual sales of Nuvigil had reached $437 million. In all,
`Cephalon took $1 billion from Nuvigil during the extra years of its Provigil monopoly
`and along the way established a solid base of doctors and patients from which to
`wring future profits.
`
`At first, the FTC's investigation into these shenanigans encompassed all the firms
`involved. But when the FTC brought suit in 2008, it declined to prosecute Teva and
`the other generics makers that Cephalon bought off and instead sued only Cephalon,
`the fattest of the mischievous cats. Why, then, does Teva now have to cough up $1.2
`billion to the FTC? The answer is that, so promising was Cephalon's growth, Teva
`bought the company in 2011 (at a price of $6.8 billion).
`
`Teva is thus in the unusual position of having to pay the feds for fixing prices with
`itself - yet another testament to the consolidation of the industry. It is also a
`harbinger of the future because generics firms, flush with their oligopolistic profits,
`are getting into the name-brand game, while name-brand firms, themselves
`mega-consolidated, are getting into the generics game they had once scorned for its
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`it amounted to just three months of companywide profits or, put another way, less
`than a year of the six years of ill-gotten gains on Provigil and Nuvigil. Taking that hit
`was far better than going to trial and chancing that a judge would order Teva to
`disgorge all of its Provigil plunder. Looked at from a certain light, the FTC's mighty
`settlement was a bit like catching a bank robber with $1 million in loot and asking if
`he wouldn't mind surrendering $200,000 and keeping the balance.
`
`The Feds' Failure to Curb Consolidation
`
`The leniency of the government's settlement, which is a habitual problem, is only
`part of the problem. A far bigger concern is that the feds have done little to curb the
`consolidation in the generics industry. What happened to modafinil after Provigil
`went generic in 2012 is emblematic. By the end of that year, things looked good for
`consumers: a month's supply of modafinil dropped from Provigil's larcenous peak of
`$1,101 to as low as $5. But the descent was ephemeral. Only months later, the price
`soared to more than $1,200 - seven times the true value of even name-brand Provigil
`(if you take as its true value the cost, $166, before Cephalon made the pay-for-delay
`deals and started hiking up Provigil's price). The price has since dropped again, but
`only from the stratospheric to the tropospheric.
`
`On a recent day in my city, Boulder, Colorado, the lowest advertised price for the
`most common dose was $706. Even in more competitive precincts - lower
`Manhattan and downtown San Francisco, for example - the cost was $520. Big
`Generic has yet to offer an explanation for the grisly prices, but surely it is no
`coincidence that when prices reached their nadir in 2012, more manufacturers seem
`to have sold generic modafinil than sell it today. Just how many more is not clear
`since data is scant on which firms made which drugs in which years.
`
`The federal government could put an end to this nonsense by keeping markets
`competitive, either by blocking the merger of companies that make the same drugs
`or by requiring merging companies to share the rights of production for such drugs
`with competitors. Regulators sometimes take these steps, but their efforts fall far
`short of what's needed - a state of affairs that won't change anytime soon, because
`the free-marketeers who run Congress and the White House like nothing so much as
`markets free of competition.
`
`Another, more straightforward reform would be simply to make drug companies sell
`their wares at lower prices, as nearly every other developed country does. Price caps
`on drugs might seem a long shot in the United States, but modest variations on the
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`example, would allow Medicare to negotiate prices (http://www.nationaljournal.com
`/health-care/obama-wants-price-negotiations-for-high-cost-drugs-20150202) with
`drug companies - a practice banned by George W. Bush and the Republican-
`controlled Congress when they enacted Medicare's prescription drug benefit in 2003.
`A related proposal (http://www.sanders.senate.gov/newsroom/recent-business
`/sanders-fights-rising-drug-prices), introduced in Congress last month by Sanders
`and Representative Elijah Cummings, a Maryland Democrat, would essentially bar
`drug companies from charging Medicaid for increases in the prices of generics that
`surpass the rate of inflation. A similar law already exists for Medicaid's purchases of
`brand-name drugs.
`
`But these temperate proposals would do little for the 200 million Americans who
`aren't covered by Medicare or Medicaid and whose prescription benefit (when they
`have insurance at all) grows more meager each year. Abetting this stinginess is one of
`Obamacare's great failures. Under the most basic Obamacare plan, the average
`copayment for generic drugs is 32 percent, which would leave the patient who has a
`$700 modafinil prescription stuck paying $224 out of pocket each month, nearly
`$2,700 a year. (Out-of-pocket costs aren't capped until $6,600 for an individual and
`$13,200 for a family.) This is in addition to the plan's annual premium, which,
`depending on one's age, health, income and state of residence, runs from $1,000 to
`$8,000.
`
`Naturally, price controls on drugs won't come about tomorrow - or rather,
`unnaturally, since not long ago it was in the natural order of things for Americans to
`firmly regulate essential goods and services. That's why all 50 states have public
`utility commissions that cap utility rates.
`
`Even today, in our seemingly laissez-faire age, public utility commissions are so
`embedded in our political subconsciousness that if you asked the voters of any state,
`from bluest Massachusetts to reddest Alabama, whether to dissolve their public
`utility commission and let electric companies charge what they will, you'd be
`hard-pressed for takers.
`
`But precisely because such parallels endure, and because their mechanism is easily
`understood (unlike the chain of events leading from the government's busting of an
`oligopoly to the consumer's paying less at Walgreen's), price caps on drugs might
`well win popular approval. Indeed, it's already happening. In April, a poll by
`Princeton (http://kff.org/health-costs/poll-finding/kaiser-health-tracking-
`poll-april-2015/) Data Source found that 60 percent of Americans, including 51
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`numbers rose to 76 percent of Americans and 66 percent of Republicans when the
`question was about high-cost drugs for chronic conditions.
`
`http://www.truth-out.org/news/item/32182-the-rise-of-big-generic-why-...
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`These super-majorities can only grow as pharma's consolidation continues.
`Eventually, even our lawmakers, steeped though they are in a marinade of pharma
`money and Ayn Rand fantasy, will have to take heed.
`
`Copyright, Truthout. May not be reprinted without permission
`(mailto:editor@truthout.org).
`
`STEVE HENDRICKS (/AUTHOR/ITEMLIST/USER/51264)
`
`Steve Hendricks has written on health issues for Harper's and Outside. He is the author, most
`recently, of A Kidnapping in Milan: The CIA on Trial (http://www.powells.com/biblio
`/9780393065817). His website is SteveHendricks.org.
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