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`ANTICOMPETITIVE PRODUCT CHANGES
`IN THE PHARMACEUTICAL INDUSTRY
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`Steve D. Shadowen, Keith B. Leffler & Joseph T. Lukens
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`When faced with a competitive threat from generic drugs, some
`manufacturers of brand-name pharmaceuticals have used a variety of
`anticompetitive tactics to maintain their sales. These techniques include
`settling patent challenges by paying generic manufacturers not to enter, 1
`filing questionable patent infringement lawsuits2 and frivolous ―citizen‘s
`
`Steve D. Shadowen and Joseph T. Lukens are attorneys at the law firm Hangley
`
`Aronchick Segal & Pudlin, P.C., and have represented plaintiffs in antitrust lawsuits alleging
`that competition from generic pharmaceuticals was unlawfully impaired. They were counsel
`for direct-purchaser plaintiffs in the TriCor and Nexium cases discussed infra Parts IV.C–D.
`Keith Leffler is an Associate Professor in the Department of Economics at the University of
`Washington, and he prepared an expert report on behalf of plaintiffs in the TriCor case. The
`views expressed herein do not necessarily reflect those of the law firm Hangley Aronchick
`Segal & Pudlin, P.C. or the University of Washington. The authors are grateful to Michael
`Carrier and Scott Hemphill for their detailed comments on an earlier draft of this Article, and
`to Elizabeth Arthur, David Balto, Josh Davis and other participants at a symposium on these
`issues at the University of San Francisco School of Law. We owe special thanks to Kim Luisi
`for her indefatigable assistance in preparing the dataset discussed infra in Part II, and to
`Nancy Ed for her administrative help with the manuscript.
`See, e.g., In re Ciprofloxacin Hydrochloride Antitrust Litig. 604 F.3d 98, 102 (2d
`1.
`Cir. 2010); Valley Drug Co. v. Geneva Pharm., Inc., 344 F.3d 1294, 1300–01 (11th Cir.
`2003); In re Cardizem CD Antitrust Litig., 332 F.3d 896, 902–03 (6th Cir. 2003).
`See, e.g., In re Neurontin Antitrust Litig., 2009 WL 2751029, at *3–4 (D.N.J. Aug.
`2.
`28, 2009); In re Relafen Antitrust Litig., 218 F.R.D. 337, 341 (D. Mass. 2003).
`
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`petitions,‖3 making dubious ―Orange Book‖ listings,4 and controlling the
`supply of necessary ingredients.5 These investments in impairing generic
`entry increase the returns from brand-name drugs but do not necessarily
`improve medicines for consumers.
`Brand manufacturers also sometimes strategically redesign the brand
`product in anticipation of generic entry. Under the current regulatory regime,
`such a product reformulation prevents the generic product from being
`substitutable at the pharmacy counter for the redesigned brand product, and
`thus impairs the generic‘s most cost-efficient (and only commercially
`feasible) means of competing. Regardless of whether the reformulated
`product brings any medical or other benefits to consumers—indeed, even if
`the reformulated product is undeniably inferior to the original brand
`product—the brand manufacturer‘s reformulation can significantly impair
`consumers‘ access to the far less expensive generic product.
`This is the first of two articles in which we intend to address the proper
`antitrust treatment of pharmaceutical product reformulations that impede
`generic substitution. We begin this article by outlining the legal and
`regulatory context in which product reformulations occur, emphasizing the
`structural aspects of
`the pharmaceutical marketplace
`that make
`reformulations an effective strategy for brand manufacturers. Fundamentally,
`prescription pharmaceutical markets suffer from a ―price disconnect‖; the
`doctor who prescribes the product does not pay for it, and the consumer (or
`her insurer) who does pay does not choose the product. Thus, these markets
`are not founded on the consumer‘s price/quality choice that, in most markets,
`ensures that manufacturers make only those product changes that are likely
`to enhance consumer welfare.
`We next discuss a comprehensive database that we have assembled,
`which
`includes more than four hundred prescription pharmaceutical
`reformulations from 1995 through April 2009. Analysis of this data suggests
`that the vast majority of reformulations are not temporally linked to potential
`generic entry and thus are not reasonably subject to antitrust challenge. A
`well-crafted antitrust rule would be directed at only the subset of
`reformulations that are temporally linked to potential generic entry, and thus
`
`
`3. See, e.g., Gregory Glass & Erin Collins, The Citizens Petition: For The Public Good
`Or Brands Behaving Badly?, 4 J. OF GENERIC MEDICINES 87 (Jan. 2007).
`4. See, e.g., In re Neurontin Antitrust Litig., 2009 WL 2751029, at *1–2; In re Relafen
`Antitrust Litig., 218 F.R.D. at 340–41; In re Buspirone Antitrust Litig., 208 F.R.D. 516, 518–
`20 (S.D.N.Y. 2002).
`5. See, e.g., Eli Lilly & Co. v. Am. Cyanamid Co., No. IP95-0536, 2001 WL 30191, at
`*2–3 (S.D. Ind. Jan. 8, 2001).
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`would not chill the innovation that leads to the great majority of
`pharmaceutical reformulations.
`This latter subset of reformulations in our database—those that are
`temporally linked to prospective generic entry—includes thirty-two that are
`clearly ―suspect,‖ e.g., minor reformulations such as changes from a capsule
`to a tablet or vice versa; changes in chemical structure that, according to
`independent researchers, yielded little or no consumer value; and multiple,
`seriatim product reformulations. We conservatively estimate that these
`reformulations have impaired competition against brand products with more
`than $28.1 billion in annual sales, indicating that this isolated set of product
`reformulations poses a significant public policy concern.6 Another twenty-
`two reformulations involved switches to extended-release products or
`―combination‖ products in advance of generic entry for brand products with
`an additional $15.8 billion in annual sales.7
`After discussing the dataset, we then analyze the details of various tactics
`that manufacturers use in implementing reformulation strategies. In addition
`to physically altering the product, manufacturers often also: (1) switch
`promotional efforts from the original product to the reformulated product; (2)
`introduce the redesigned product before generic entry; or (3) withdraw the
`original product from the market. We examine the economic effect of each
`tactic, with special emphasis on identifying the particular dimension of
`rivalry—price competition or quality comparisons—that is affected.
`Lastly, we examine two recent court decisions, involving the products
`TriCor8 and Nexium,9 that have addressed these issues, and we evaluate the
`extent to which the decisions effectively deal with the unique aspects of the
`pharmaceutical industry and with the tactics the manufacturers use. We
`conclude that the Nexium decision, which holds that reformulations can be
`unlawful only when the manufacturer withdraws the original product from
`the market, is not supportable from the perspective of either economics or
`law. It fails to account for the price disconnect in pharmaceutical markets,
`and its proposed rule would be grossly under-protective of consumers.
`Our second Article will provide the results of additional detailed
`empirical analyses of the dataset, with the goal of identifying the
`manufacturer tactics that cause the most consumer harm. Guided by the
`
`
`6. See infra Part II, tbl.6.
`7. See infra text following Part II, tbl.6.
`8. Abbott Labs. v. Teva Pharm. USA, Inc. (TriCor), 432 F. Supp. 2d 408 (D. Del.
`2006).
`9. Walgreen Co. v. AstraZeneca Pharm. L.P. (Nexium), 534 F. Supp. 2d 146, 148–49
`(D.D.C. 2008).
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`empirical analysis, that Article will conclude by offering a proposal for the
`proper antitrust
`treatment of
`the product-reformulation strategy. An
`appropriate antitrust approach must consider
`the unique economic
`characteristics of the pharmaceutical marketplace and the consequent
`enormous consumer welfare losses that result from impeding generic
`substitution. The approach must also, however, give due regard to the
`possibility
`that antitrust
`liability might dampen welfare-enhancing
`innovation; consider institutional constraints on the courts‘ ability to detect
`and remedy anticompetitive unilateral conduct; and accommodate business
`executives‘ need for usable rules to guide their product-development
`decisions.
`
`I. THE ECONOMICS OF PRODUCT REFORMULATIONS
`
`A. The Regulatory Context
`
`to market a
`Food and Drug Administration (―FDA‖) approval
`prescription pharmaceutical in the United States is specific to its dosage,
`form, and composition.10 For example, the FDA can approve the sale of a
`tablet containing 50 mg of the active ingredient. To change the form from a
`tablet to a capsule the manufacturer must obtain FDA approval. This can
`require a demonstration that the new product‘s active ingredient is absorbed
`into the body at the same rate as the original product,11 or in the absence of
`such a demonstration, can require expensive new clinical studies.
`Product reformulations can be socially useful.12 A change in dosage form
`or composition might save manufacturing costs, ease the administration of
`medication to the patient, or increase patient compliance by reducing the
`dosing frequency. In some cases, the brand manufacturer may claim patent or
`other market exclusivity specific to the reformulated product.13
`
`
`10. 21 U.S.C. § 355(a)–(b) (2006); 21 C.F.R. § 314.50(a)(1) (2009).
`11. 21 C.F.R. § 314.54(b) (2009). A manufacturer that shows that the reformulated
`product is equivalently absorbed is permitted to rely on the studies underlying the approval of
`the original product. Id.
`12. See generally Ernest R. Berndt et al., The Impact of Incremental Innovation in
`Biopharmaceuticals, 24 PHARMACOECONOMICS 69, 71 (2006) (discussing how reformulated
`products can increase compliance, improve pharmacokinetics, and reduce side effects);
`Dennis Z. Kvesic, Product Lifecycle Management: Marketing Strategies
`for
`the
`Pharmaceutical Industry, 8 J. OF MED. MARKETING 293, 296 (2008) (―[M]ore than one-third
`of products launched in 2002–05 by the top 50 pharmaceutical manufacturers were
`reformulations.‖).
`13. See infra Part II, tbl.6.
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`Reformulations can raise antitrust concerns because of their effect on
`generic substitution. Under the Hatch-Waxman Act14 and state regulatory
`regimes, only AB-rated generic drugs may be automatically dispensed by the
`pharmacist without the issuing doctor‘s approval for substitution in lieu of
`the brand drug.15 In order to receive an AB rating from the FDA, a generic
`drug must be: (1) therapeutically equivalent to its brand-name counterpart,
`meaning that the generic has the same active ingredient, form, dosage,
`strength, and safety and efficacy profile, and (2) bioequivalent to its brand-
`name counterpart, meaning that the generic is absorbed in the body at
`approximately the same rate as the brand drug.16
`Without getting the doctor‘s approval, a pharmacist can substitute an
`AB-rated generic 55 mg tablet for a prescription written for ―Brand X 55 mg
`tablet.‖ Since the AB rating is dosage and form specific, however, a
`pharmacist cannot substitute, for example, a generic tablet for a prescription
`written for a ―Brand X capsule.‖17 Minor, medically insignificant changes to
`the brand product can thus prevent automatic substitution of the generic
`product for the brand. To achieve substitutability for the reformulated brand
`product, the generic manufacturer must develop the new products and then
`obtain FDA approval, which takes on average about eighteen months.18
`
`
`14. Drug Price Competition and Patent Term Restoration Act of 1984, Pub. L. No. 98-
`417, 98 Stat. 1585 (codified as amended in scattered sections of 21 and 35 U.S.C.).
`15. See ALLISON MASSON & ROBERT L. STEINER, FEDERAL TRADE COMM‘N, GENERIC
`SUBSTITUTION AND PRESCRIPTION DRUG PRICES: ECONOMIC EFFECTS OF STATE DRUG PRODUCT
`SELECTION LAWS 5 (1985) [hereinafter FTC GENERIC SUBST. REP.].
`16. See CTR. FOR DRUG EVALUATION & RESEARCH, U.S. FOOD & DRUG ADMIN.,
`APPROVED DRUG PRODUCTS WITH THERAPEUTIC EQUIVALENCE, xv (29th ed. 2009) [hereinafter
`Orange Book]. Nineteen states do not specifically rely on the Orange Book, but still require
`that the generic be a pharmaceutical equivalent to the brand (same active ingredient
`absorption, dosage, route of administration). See id. at iv; Jesse Vivian, Generic-Substitution
`Laws,
`33 U.S. PHARMACIST
`30
`(2008),
`http://www.uspharmacist.com/content/t/
`generic_medications/c/9787/.
`17. The reformulation destroys the AB rating even if the tablet has the same active
`ingredient and is absorbed into the body at an identical rate as the capsule, and even if the
`brand manufacturer obtained FDA approval to market the brand tablet only by showing that
`the reformulated product, the capsule, was therapeutically equivalent to the original tablet. See
`Rebecca S. Yoshitani & Ellen S. Cooper, Pharmaceutical Reformulation: The Growth of Life
`Cycle Management, 7 HOUS. J. HEALTH L. & POL‘Y 379, 398 (2007) (discussing how a brand
`manufacturer can sometimes get approval of reformulated product by relying on safety and
`efficacy data of original product).
`18. See LEON SHARGEL & ISADORE KANFER, GENERIC DRUG PRODUCT DEVELOPMENT
`366 (2004) (stating that median approval time for generics in 2004 was eighteen months);
`OFFICE OF INSPECTOR GEN., DEP‘T OF HEALTH & HUMAN SERV., FOOD AND DRUG ADMIN.
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`This regulatory landscape creates an opportunity for brand manufacturers
`to make medically insignificant but economically crucial changes to their
`products. FDA regulations require generic manufacturers to notify brand
`manufacturers of filings requesting approval to market generic versions of
`branded products.19 While the generic‘s FDA application is pending (or even
`before, depending on the brand manufacturer‘s foresight), the brand
`manufacturer can reformulate the product, most simply by changing the
`form, such as from a tablet to a capsule. FDA regulations do not require
`brand manufacturers to notify the generics (or the public) of these requests
`for reformulation, so the generics cannot anticipate and plan against them.
`Manufacturers that redesign their products often also switch their
`promotional efforts, encouraging doctors to write prescriptions for the new
`formulation rather than for the original. If the manufacturer is successful in
`getting
`the prescriptions switched
`to
`the reformulated product, a
`manufacturer entering the market with an FDA-approved generic version of
`the original product will make very few sales because pharmacists will not
`be able to substitute the generic for the reformulated brand product, even if
`the two products are bioequivalent.20 The generic manufacturer must first
`reformulate its product, and then go back to the FDA seeking approval for a
`generic version of the reformulated product. In the interim, the brand
`manufacturer may have obtained a patent on the new formulation; the
`generic manufacturer, even with FDA approval for the reformulated generic,
`will either have to challenge that patent and suffer the Hatch-Waxman Act‘s
`automatic thirty-month stay,21 or wait for the patent to expire.
`Importantly, neither patent law nor FDA regulations require that the
`reformulated brand product be superior to the original product—in terms of
`better medical outcomes, patient convenience, or otherwise. Patent law
`requires only that the applicant show that the product is useful and novel, not
`
`
`GENERIC DRUG REVIEW PROCESS 6 (June 2008) (median approval time for generics in 2006
`was nearly seventeen months).
`19. 21 C.F.R. §§ 314.52(a)-(a)(1), 314.95(a)-(a)(1) (2009).
`20. See, e.g., Yoshitani & Cooper, supra note 17, at 380 (―Through reformulation, a
`drug company alters characteristics of a brand-name drug just enough to qualify for a new
`patent under patent examination procedures . . . while keeping enough characteristics the same
`to use previous clinical testing results for the purpose of FDA approval.‖).
`21. Under the Hatch-Waxman Act, the FDA‘s approval of the generic product is
`automatically stayed for thirty months (unless the patent expires or a court holds the patent
`invalid or not infringed) if the brand manufacturer sues the generic for patent infringement
`within forty-five days of receipt of a notice asserting that the patent is invalid or not infringed.
`See 21 U.S.C. § 355(j)(2)(A)(vii)(IV) (2006).
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`that it is superior in any way to existing products.22 Further, the FDA
`requires only that the product be superior to a placebo, not to existing
`products.23 The FDA has specifically disclaimed responsibility for
`determining whether reformulated brand products are better than their
`originals, asserting that ―[t]he law does not allow the FDA to [do so].‖24
`Consequently, ―[t]he FDA does not consider whether a drug is better than
`others on the market before approving it.‖25
`As an industry insider candidly admitted, ―The goal of reformulation as a
`means of generic defense is clear: to prevent the substitution of the branded
`product by generics on patent expiry.‖26 Brand manufacturers need not
`improve the product, but only change it: ―it is sufficient to alter the branded
`product only to the extent that it is no longer the same as the product that the
`generic companies are using as reference for their [FDA applications]. This
`prevents pharmacies substituting generic product for the reformulated brand
`product . . . .‖27
`
`B. The Economic Context
`
`A skeptic might ask ―So what?‖ Can‘t the market determine whether the
`reformulated product is superior to the original and thus prevent any harm to
`consumers from a product reformulation? The reformulation defeats only
`automatic generic substitution; it doesn‘t prevent FDA approval of the
`generic product. Once the FDA approves the generic version of the original
`brand product, the generic can compete in the marketplace and doctors can
`prescribe it rather than the reformulated brand product. Presented with the
`choice, can‘t consumers decide whether the reformulated brand is worth the
`higher price?
`
`
`22. See 35 U.S.C. § 101 (2006).
`23. See 21 C.F.R. § 314.126(b)(2)–(2)(i) (2009).
`24. Jeanne Whalen, Glaxo Strategy Threatened by FDA Delays, WALL ST. J., June 17,
`2008, at B3.
`25. Id.; see generally Stacey L. Dogan & Mark A. Lemley, Antitrust Law and
`Regulatory Gaming, 87 TEX. L. REV. 685, 709 (2009) (stating that the FDA ―has neither the
`mandate nor the power to take competition concerns into account in approving particular
`pharmaceutical products‖).
`26. Stephen Perrett, The Modified-Release Drug Delivery Landscape: The Commercial
`Perspective, in II MODIFIED-RELEASE DRUG DELIVERY TECHNOLOGY 1, 2 (Michael J.
`Rathbone et al. eds., 2d ed. 2008).
`27. Id.
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`1. Product Reformulations in Ordinary Markets
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`This skepticism would be justified if prescription pharmaceuticals
`competed in typical markets, where product reformulations usually cause
`few competitive problems. In most markets, a manufacturer will reformulate
`a product only when it is likely to lead to increased consumer welfare.
`Consumers compare the new product‘s attributes to those of existing
`products and buy the one that offers the best price/quality combination. With
`the price/quality decision effectively in the hands of the consumers who
`select the product and pay the price, manufacturers will make only those
`product changes that consumers are likely to conclude are worth the price,
`i.e., only those product changes that are likely to increase consumer
`welfare.28
`Assume, for example, that Company A dominates the market for amateur
`photography with its Model 1 camera. Foreseeing that Company B will soon
`enter with a generic version of Model 1, Company A innovates by
`introducing Model 2, which makes minor changes to the original Model 1
`camera. Such innovation certainly may harm Company B because it will not
`make as many sales of its generic Model 1 as it anticipated. This injury to a
`competitor, however, is not relevant to antitrust analysis. In fact, there is no
`antitrust injury because the innovation does not reduce in any way
`competition between Company A and Company B.
`To see this, assume that the original Model 1 was sold by A for a
`monopoly price of $50. With competition from B, however, the price was
`expected to fall to $25. Assume that Company A then introduces Model 2,
`with a real innovation that makes it worth $5 more to users than the original
`version. Nonetheless, even with Model 2 entering the market, Company B
`can compete; it simply needs to offer a price that is $5 or more lower than
`the price of the new improved Model 2. The competitive result is likely the
`same $25 competitive price for Model 1 that would have occurred without
`the innovation.29 With the innovation, Company A can likely charge buyers
`
`28. See, e.g., PAUL A. SAMUELSON & WILLIAM D. NORDHAUS, ECONOMICS 80 (16th ed.
`1998) (asserting that choice and utility theory are founded on ―the fundamental premise that
`people tend to choose those goods and services they value most highly‖); FTC, TO PROMOTE
`INNOVATION: THE PROPER BALANCE OF COMPETITION AND PATENT LAW AND POLICY 3 (Oct.
`2003) (increased consumer welfare results from ―the optimum mix of products and services in
`available
`at
`terms
`of
`price,
`quality,
`and
`consumer
`choice‖),
`http://www.ftc.gov/os/2003/10/innovationrpt.pdf.
`29. The competitive interaction between the two producers will determine the
`equilibrium prices in the duopoly. There is no reason to expect the competitive interaction to
`change as a result of the introduction of the new model.
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`$30 for Model 2. Consumers therefore reap the full benefit of B‘s price
`competition because, absent that competition, the price of Model 2 would
`presumably have been $55. In addition, those consumers who value A‘s
`innovation can pay the extra $5, which is the value of the innovation, while
`getting a competitive price ($25) for the non-innovative aspects of the
`product which now faces price competition from B. Consumers‘ ability to
`make their own price/quality decision ensures that they get both price
`competition and real, valuable innovations.
`Note also that because B offers the original product, whether A
`withdraws its original product from the market is irrelevant in evaluating the
`benefits from the product reformulation.30
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`2. Product Reformulations in the Pharmaceutical Marketplace
`
`Reformulations of prescription pharmaceuticals are different, however,
`because they can be hugely profitable to the brand manufacturer while
`significantly reducing consumer welfare. This divergence between the
`interests of manufacturers and consumers occurs because prescription
`pharmaceutical markets are not
`like other markets. Prescription
`pharmaceutical markets are characterized by a ―price disconnect‖—a doctor,
`rather than the consumer, decides which product will be bought, but the
`consumer (or her insurer), rather than the doctor, pays for the product. The
`result is a marketplace in which consumers do not make the price/quality
`choice that is the foundation of competitive markets. Pharmaceutical
`reformulation schemes are designed to exploit this unusual characteristic of
`pharmaceutical markets.
`It is well established in the economics literature that markets cannot be
`counted on to yield welfare-enhancing outcomes when consumers do not
`make the price/quality choice.31 With respect to the price disconnect in
`
`
`30. In the usual market, the competition between the new entrant‘s version of the
`original product and the incumbent‘s reformulated product is sufficient to achieve the
`competitive duopoly price(s). The incumbent may remove the original product from the
`market in order to better promote the new product, or to defer direct price competition
`between the same models of a product. In ordinary markets, these are all legitimate
`competitive activities that have little impact on the competitive outcome.
`31. See, e.g., JOHN STUART MILL, PRINCIPLES OF POLITICAL ECONOMY 342 (1848)
`(Oxford Univ. Press 1998) (―the foundation of the laisser-faire principle breaks down
`entirely‖ when ―[t]he person most interested is not the best judge of the matter‖); id. at 338 (in
`such cases, ―the supply called forth by the demand of the market will be anything but what is
`really required‖); Kenneth J. Arrow, Uncertainty and the Welfare Economics of Medical Care,
`53 AM. ECON. REV. 959, 967 (1963) (noting that the price disconnect results in an ―extreme‖
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`the Federal Trade Commission
`prescription pharmaceutical markets,
`(―FTC‖) has noted that ―[t]he basic problem is that the forces of competition
`do not work well in a market where the consumer who pays does not choose,
`and the physician who chooses does not pay. Patients have little influence in
`determining which products they will buy and what prices they must pay for
`prescriptions.‖32 Not having the obligation to pay, doctors are relatively
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`example of a case ―in which the usual assumptions of the market are to some extent
`contradicted‖ and that the disconnect forces us to ―recognize the incomplete description of
`reality supplied by the impersonal price system‖).
`32. Drug Product Selection, Staff Report to the FTC, BUREAU OF CONSUMER
`PROTECTION at 2–3 (Jan. 1979) [hereinafter ―FTC Staff Rep.‖]; see also FTC Generic Subst.
`Rep., supra note 15, at 5 (―[T]he institutions of the prescription drug market are markedly
`different from those in most other product markets. For prescription drugs, it has not been the
`consumer who has made the choice among brands; it has been the physician.‖); RONALD S.
`BOND & DAVID F. LEAN, FTC, SALES, PROMOTION, AND PRODUCT DIFFERENTIATION IN TWO
`PRESCRIPTION DRUG MARKETS 75 (1977) (―Since physicians select but do not pay for the
`drugs they prescribe, market forces would require physicians to consider price in their
`prescribing decisions only if consumers were willing and able to make informed decisions
`about physicians‘ prescribing habits when they shopped for medical care.‖); Richard Gilbert,
`Holding Innovation to an Antitrust Standard, 3 COMP. POL. INT‘L 47, 66 (2007) (―[T]he
`objectives of the physician and his patient are not perfectly aligned [because the] doctor may
`be relatively insensitive to cost . . . .‖); Mark A. Hurwitz & Richard E. Caves, Persuasion or
`Information? Promotion and the Shares of Brand Name and Generic Pharmaceuticals, 31 J.
`L. & ECON. 299, 300 (1988) (noting ―prescribers‘ weak incentives for selecting the lowest-
`price brand‖); id. at 300 (―The physician who prescribes a drug on the basis of seller-supplied
`information captures no savings from selecting a cheaper generic supplier. . . so that the price
`elasticity of demand for the branded drug is reduced . . . .‖); id. at 305 (―The physician has no
`substantial economic incentive to choose the lower-priced product, and doctors tend to be
`ignorant of specific drug prices[;] habit accordingly plays a strong role in the physician‘s
`prescription practice.‖); Füsun F. Gönül et al., Promotion of Prescription Drugs and Its
`Impact on Physicians’ Choice Behavior, 65 J. MARKETING 79, 79 (2001) (―[I]n the prescription
`drug market there is a distinct breach in the traditional buying decision process: The decision
`maker is the physician . . . but it is the patient who takes the drug and ends up paying . . . .‖);
`Song Hee Hong et al., Product-Line Extensions and Pricing Strategies of Brand-Name Drugs
`Facing Patent Expiration, 11 J. MANAGED CARE PHARMACY 746, 747 (2005) (noting that, as a
`result of price disconnect and insurance ―prescription drug markets have many characteristics
`that would predict price insensitivity‖); Haiden A. Huskamp et al., Generic Entry,
`Reformulations, and Promotion of SSRIs in the US, 26 PHARMACOECONOMICS 603, 605 (2008)
`(explaining that price disconnect and insurance coverage result in prices that ―well exceed
`marginal production costs‖); Fiona M. Scott Morton, Barriers to Entry, Brand Advertising,
`and Generic Entry in the US Pharmaceutical Industry, 18 INT. J. IND. ORG. 1085, 1086–87
`(2000) (noting ―severe agency problems in the industry‖ because ―[d]octors do not share in
`the cost of the prescriptions they write and thus do not have an incentive to consider the price
`of different products in making a prescription decision‖); id. at 1087 (―[A] critical feature of
`the demand for prescription pharmaceuticals is that the end consumer, the patient, does not
`select the drug he or she will consume.‖); id. at 1088 (―[P]hysicians are also often uninformed
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`price-insensitive, i.e., they select which drugs to prescribe based on factors
`than price.33 This
`other
`results
`in most branded prescription
`pharmaceuticals—until generic entry—obtaining very substantial market
`power regardless of whether there are multiple branded products offering
`similar therapeutic results.34 It is not unusual for such branded products to be
`sold at ten times their manufacturing costs while making sales in the
`hundreds of millions of dollars.35
`them particularly
`insensitivity makes
`Moreover, doctors‘ price
`susceptible to ―detailing‖36 and free samples37 from brand manufacturers‘
`
`11
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`as to the prices and availability of generics.‖); F.M. Scherer, Pricing, Profits, and
`Technological Progress in the Pharmaceutical Industry, 7 J. ECON. PERSPECTIVES 97, 99
`(1993) (―The combination of physician decision-making, imperfect information, and third-
`party payments makes drug demand stronger and less price-elastic than it might otherwise be,
`conferring considerable monopoly power upon the sellers of well-accepted drugs.‖).
`33. See, e.g., G. Michael Allan et al., Physician Awareness of Drug Cost: A Systematic
`Review, 4 PLOS MED. 1486, 1486 (2007) (explaining that studies over the last ten years
`consistently show that doctors ―overestimated the cost of inexpensive products and
`underestimated the cost of expensive ones‖); Michael E. Ernst et al., Prescription Medication
`Costs: A Study of Physician Familiarity, 9 ARCHIVES FAM. MED. 1002, 1004–05 (2000)
`(noting that ―family physicians are unfamiliar with the costs of common prescription drugs,‖
`with 89.9% of doctors underestimating the cost of brand drugs); Lillian L. Glickman et al.,
`Physicians’ Knowledge of Drug Costs for the Elderly, 42 J. AM. GERIATRIC SOC‘Y 992, 992
`(1994) (concluding that doctors do not understand the economic implicati