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Price-Fixing Case Reveals Vulnerability of Generic Drug Policies

By ANDREW MULCAHY

A massive lawsuit filed in May by 44 states accuses 20 major drug makers of colluding for years to inflate prices on more than 100 generic drugs, including those to treat H.I.V., cancer and depression. If true, the alleged behavior is not just a violation of antitrust law, but also a betrayal of the government policies that created and defended the entire generic drug industry. 

Most prescriptions in the U.S. today — 9 in 10 — are filled with generics, which are just as safe and effective as their brand-name equivalent. And yet generics account for only 22 percent of U.S. prescription drug spending. These prices are so low because of competition between makers of different versions of the same generic drug. The more competing generic alternatives, the lower the price, theoretically right down to the marginal cost of manufacturing the pill. 

This success is the result of decades of careful federal and state policymaking, all geared towards introducing competition in prescription drug markets. The entire generic industry has its origins in the Hatch-Waxman Act of 1984. Prior to Hatch-Waxman, a company that wanted to sell a competing version of a drug whose patents had expired had to conduct lengthy and expensive clinical trials to get approval from the U.S. Food and Drug Administration. Hatch-Waxman established a quicker, less-expensive path to FDA approval that leans on the scientific research supporting the already approved brand-name drugs.  

Hatch-Waxman also created incentives for generic drug makers to challenge drug patents that prevent competition. Successful challengers win a 180-day period of exclusivity during which their generic is the only one allowed to compete with the brand-name drug. The floodgates open and additional competition pushes prices down further after the 180-day period.  

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Pfizer Pioners New Ways to Frustrate Generics

The best-selling drug in pharmaceutical industry history, Pfizer’s cholesterol-lowering Lipitor, lost its patent protection Thursday. But the huge savings that consumers, insurance companies and the government usually realize when generic versions of a best-selling pill hit the market are still six months away, and, consumer advocates fear, may never come to pass.

The reason is the unprecedented series of side deals that Pfizer has signed in recent months with some insurers and pharmacy benefit managers to offer lower-priced versions of Lipitor, known generically as atorvastatin. They also are offering consumers $4 co-pays – comparable to prices paid at discount outlets like Walmart and Costco – so they’ll continue buying the brand name version of the drug.

Government officials fear the full cost of the drugs might then be passed along to insurers and Medicare, although the companies involved say that won’t happen.

The goal of the maneuvers is to keep as many of the estimated 8 to 10 million Americans who take Lipitor ($7.2 billion in U.S. sales in 2010; $10.7 billion worldwide) on either the branded product or on an “official” generic, which in Lipitor’s case will be marketed by Watson Pharmaceuticals. They will sell for about half the price of the branded product for about six months, when a number of generic makers are expected to hit the market. Their versions of atorvastatin could sell for as low as $50 a month, which is less than a tenth its current price and comparable to other generic statin drugs already on the market.

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