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Each week, Health Affairs' Rob Lott brings you in-depth conversations with leading researchers and influencers shaping the big ideas in health policy and the health care industry.
A Health Podyssey goes beyond the pages of the health policy journal Health Affairs to tell stories behind the research and share policy implications. Learn how academics and economists frame their research questions and journey to the intersection of health, health care, and policy. Health policy nerds rejoice! This podcast is for you.
Hello, and welcome to a health podocy. I'm your host, Rob Lott. I'll admit that I have a relatively simple understanding of the relationship between brand name drugs and generic drugs. Generally, I get it. Brand name drugs get a period of time when they're the only version of that drug on the market, And during that time, they can typically charge what the market will bear.
Rob Lott:Then at some point, generics are allowed to enter and that competition forces prices down. But of course, I know it's a lot more complicated with all kinds of different negotiations and strategies that different parties use to eke out additional revenue from the market. Now one of those strategies is to add another kind of drug to the mix altogether. Not a brand name drug and not a traditional generic, but rather an authorized generic. That is a version of the drug sold by the brand name manufacturer but marketed without the brand name.
Rob Lott:And it's at this point where I just have to give in and do my best impression of Adam Sandler doing an impression of Jerry Seinfeld by asking, Who are the ad wizards who came up with this one? That's a joke, but it's a serious issue. It affects countless Americans and their wallets every day. And it's the subject of today's Health Odyssey. I'm here with Doctor.
Rob Lott:Keith M. Drake, a director with Greylock MacKinnon Associates. And with his colleagues, he's the author of a paper in the June issue of Health Affairs, looking at trends in authorized generic drug launches and their effects on competition in oral solid drug markets in The US. I can't wait to hear more and to learn more about what's going on in this space. Doctor.
Rob Lott:Keith Drake, welcome to The Podicy.
Keith Drake:Hi. Thanks so much for having me.
Rob Lott:Well, let's just start with the landscape. Let's take one step back and look at traditional generic drugs. What role do they play in the market and how widespread are they?
Keith Drake:Yeah. I mean, you summed it up really well. We generic drugs are just copies of brand drugs, and we want firms to discover new drugs. So we let them sell for a while without having copies so they can sell at a high price and make good money. But at some point, we also want drugs to be cheap, so we let other firms sell copies of those drugs.
Keith Drake:And when generic copies become available, there's really intense price competition, and that competition makes drugs cheap for us all.
Rob Lott:Okay. So now add into the mix, if you will, the idea of authorized generics. What are they? How do they differ from both brand name drugs, traditional generics? How does how does that work?
Keith Drake:Yeah. So the the brand drug seller has FDA approval, and it can use that FDA approval to sell its brand drug, but it can also sell a generic version of its drug. So an authorized generic is really the same thing as the brand drug. It's just that instead of the brand label, it has a generic label. And the reason a firm sells an authorized generic is once generic drugs are available, most of the prescriptions get quickly converted to generic products.
Keith Drake:So by selling an authorized generic, the brand drug seller can retain some of the sales that it's losing when generics enter.
Rob Lott:By converted, mean the patient who would go into the pharmacy and used to purchase the brand name drug, they start purchasing the generic instead. Is that right?
Keith Drake:Yeah. So your doctor actually usually will give you a prescription for a brand drug because doctors are familiar with the brand names. But when you bring that prescription to the pharmacy, if a generic version is available, it will usually be automatically substituted. So usually once generic products are available, even though doctors are still prescribing with the brand name, most prescriptions actually received by patients are generic products.
Rob Lott:Got it. Okay. Now before we talk about your study, can you say a little more about sort of what we know about the effect of authorized generics, especially what do they mean for consumers, and what are the trends we've seen over the years?
Keith Drake:Yeah. So one thing that's really important to keep in mind is there's usually just one initial generic product, one generic firm selling a generic product. And that's because of something called the 80 generic exclusivity period. So Congress set this up, and they did it to try to incentivize generic firms to challenge patents listed for a brand drug. So if you're the first generic firm to challenge a patent, you get this thing called the hundred and eighty day generic drug exclusivity period.
Keith Drake:And it's it's great for generic firms because they can sell at a really high price without competition. So that's important to keep in mind because an authorized generic is usually introduced at the same time as the first kind of traditional generic product. So there's actually usually two initial generic products. There's the first firm challenging the patent, and then there's also the brand drug seller who's selling unauthorized generic product. So the FTC did a big study of these when they first started popping up in 02/2011.
Keith Drake:And they found that authorized generics basically function like other generic products. They compete on price. They bring the price down and they seem to be good for consumers for the most part.
Rob Lott:Okay. What happened in 2011? Was there a change or was it just someone had the brilliant idea for the first time?
Keith Drake:Well, when brand drug sellers started selling authorised generics, the generic firms made a huge fuss because they thought, hey, we're supposed to be the only seller during this one hundred and eighty day exclusivity period. You are taking away our profits. There's gonna be fewer kind of patent challenges because of this. So the FTC so so actually, I think some members of congress asked the FTC to look into this, and they did this really huge study. And they basically found that authorized generics are good for price competition, and they don't seem to be affecting the number of patent challenges that basically every drug with any kind of reasonable sales has their patents challenged at some point.
Rob Lott:Got it. Okay. So against this backdrop, tell us a little bit about your study. What was the main question you asked, and what answers did your findings reveal?
Keith Drake:Yeah. So we wanted to see if authorized generics were still having similar effects on competition. And, actually, there's one other finding from the FTC's report that I should talk about. It's the the FTC did see that there were some settlement agreements between brand and generic firms that included a promise that the brand would not sell an authorized generic. So in those cases, you only see one initial generic product.
Keith Drake:So the FTC determined that that was really bad for competition, because not only do you have only one initial generic product, but that promise not to sell was is really valuable for generic firms. So the FTC has argued that those promises are leading to a delay in when generic entry first starts, which is really bad for consumers.
Rob Lott:Gotcha. So just to make sure I understand, normally when there is an authorized generic in the mix, basically the market for that generic drug is basically split in two between the first generic entry and the authorized generic. But there's a world in which generics and the brand name manufacturers can come to an agreement and basically the generic gets to have 100% of the generic market if the brand name company agrees to sort of back off. Is that a fair interpretation?
Keith Drake:Yeah. You're exactly right. There should be two generic products at first, but when there's an agreement like this, there's only one generic product. And that's that means there's higher generic prices, and it probably also means that people were paying for the brand drug for more for longer than they should have. They should have had generics available sooner.
Rob Lott:Got it. Okay. So against that backdrop, against the FTC report and their finding, what where did you go from there?
Keith Drake:Yeah. So we just tried to see if the FTC's findings were still relevant to today. And largely our findings well, our findings were similar in some ways and different in others. We found that authorized generics, when they are sold, are still usually introduced at the beginning of generic competition. So there are often two initial generic products like I was talking about.
Keith Drake:But I think the really surprising thing from our study was, especially for these top selling drugs, authorized generic launches are much rarer in recent years than they were in the period that the FTC studied. So, like, the FTC study said that, you know, 90% of top selling drugs have an authorized generic, and we found that that percentage has dropped to be less than 40%.
Rob Lott:Wow. I wanna hear a little more about your theory to explain what happened there. We'll dig into that after this break. And we're back. I'm here with doctor Keith Drake talking about his recent study in the June issue of Health Affairs about authorized generics.
Rob Lott:Just a moment ago, you said you were a little surprised to see a drop off, if you will, in the percentage of brand name drugs that were also having an authorized generic brought into the market. It was a drop off from the FTC report, your findings were significantly lower. What's going on there? What do you think explains that?
Keith Drake:Well, I think the most important explanation is that these no authorised generic agreements are affecting a lot of the generic entries that are happening. And they've changed a little. Actually, firms have gotten into trouble for expressly promising not to sell an authorized generic. So a lot of recent agreements don't include an express promise, but they have set up the deal to include incentives for the brand not to sell an authorized generic. So they kind of accomplish the same thing, but they're more complicated to try to avoid getting into trouble.
Rob Lott:Without getting too far into the weeds, what kind of incentives might be established?
Keith Drake:Yeah, so one thing they do is use the tiered royalty provision. So just to give a simple example, the way it'll work is if the brand sells its authorised generic, it doesn't get any royalties on the traditional generic product. But if it withholds its authorised generic launch, it gets 50% of the traditional generics profits. So of course, prices are higher with one product. So if you're splitting the market either way, you make more money if there's only one product.
Keith Drake:So it's good for both the companies, but it's bad for purchasers of drugs.
Rob Lott:Oh, it sure is. And that's a great segue actually for my next question, which is, do we know have we been able to quantify how that affects what patients are paying at the pharmacy counter?
Keith Drake:Yeah, that's a great question. I mean, I think what patients actually pay really depends on their insurance. So if if you don't have insurance, you're probably paying a lot more. If you if you have insurance, you're probably paying a higher co pay. If you're buying a brand drug when you should be buying a generic.
Keith Drake:We think about, you know, things on a bigger level, I guess, usually. And I think in terms of how much it's costing the system, it's probably billions and billions of dollars.
Rob Lott:Can you put these trends in sort of the broader context? This is just like one avenue of these firms kind of, you know, trying to find their best angle on the profit, but obviously there's this whole patent and intellectual property ecosystem. And how do you see this piece of the puzzle fitting in with things like evergreening and product topping, all the patent tickets that really complicate matters? Where does this fit into that landscape?
Keith Drake:Yeah. I think they work together to make the problem worse. So a lot of people don't realize like a drug does not just have one patent. A top selling drug will have ten, twenty, 30 patents or more. But most of them have almost no chance of actually being upheld in court.
Keith Drake:They've gotten issued much later, and they kind of cover ancillary aspects of a drug. So that's actually not a problem if generic firms are just kind of ignoring those patents and entering anyway. But if they're reaching deals that, you know, it kind of delay their entry well into the life of these patents that probably shouldn't have been issued in the first place, that's that's a big problem.
Rob Lott:So in a way, a lot of these patents are sort of used as leverage or as sort of like an excuse to come to an agreement. Is that fair?
Keith Drake:I think it helps them come to an agreement for later entry than they otherwise would without a reverse payment or pay for delay. That's my perspective for sure.
Rob Lott:So the history here, we look back on the original generic market was created in 1984 with the Hatch Waxman Act, and that sort of set into motion this whole system of using market exclusivity in order to incentivize additional revenue and allow drug developers to earn a profit, but then also to force prices down to keep things affordable. Do you have a sense of whether this sort of rise and decline of authorized generics was even on the radar of the folks writing that legislation back in 1984? And I'll ask you maybe to do a little Back to the Future here and imagine we've invited nineteen eighty four Henry Waxman, he's sitting here at the table with us. What do you think he would say after he read your paper?
Keith Drake:That's a great question. I I am sure that they were not thinking about authorised generics because, you know, the generic firms were really surprised when brand firms started selling their own generic products. I think, you know and I think senator Hatch and representative Waxman are both on record as being very against pay for delay generally and saying that was definitely not an intended part of the act. So I so I think if you could get get them to sit down and think about this, they would probably say, you know, authorized generics, when they're used to compete on price and sold as any other generic, they can have positive effects. But the way they've kind of been used in bargaining about the timing of generic entry is really problematic, and I think, you know, something should be done about it.
Rob Lott:Well, you just asked my next question. What can we do about this? What are the policy levers sort of at our disposal to address what's really become a problematic situation?
Keith Drake:It's a great question. There's lots of antitrust litigation about these cases, but they're really hard cases because they're complex and you have to explain these things to a jury. It's difficult. So I, you know, I think that litigation will continue, but it's it's I'm not sure it will kind of win out in the end. There are some bills that have tried to ban pay for delay.
Keith Drake:I think Amy Klobucher, in particular, introduced one. So if that actually got passed, maybe it would make a big difference. I I like the idea of, you know, there are these nonprofit generic firms that have really tried to address some of the supply shortages. I think it would be really interesting if they got into the business of challenging patents and kind of refused to enter into some of these questionable deals that might hold the rest of the industry more accountable. I so I've been kind of trying to make that happen with no success so far.
Rob Lott:That's really fascinating. It's like, what do you what happens when you remove the need for profit from the equation? It maybe changes what a negotiation would look like.
Keith Drake:Exactly. Right.
Rob Lott:Awesome. Well, lots more to monitor and lots more to learn about this market in the years ahead. Do you have any other projects in this space that you can share with us?
Keith Drake:Yeah, you know, I have a working paper in which we looked at the stock price reaction to some of these deals. And, you know, we found that the brand stock prices are going up by billions of dollars on average. And or sorry, I should say in total in reaction to some of these deals. So we kind of estimate the overall harm from pay for delay to be in the billions of dollars per year. That's that's probably the most relevant one.
Rob Lott:Well, that's probably a great place to wrap up. Doctor. Keith Drake, thank you so much for taking the time to talk to us today.
Keith Drake:Thanks so much for having me.
Rob Lott:And to our listeners, thanks for tuning in. If you enjoyed this episode, please tell a friend, leave a comment, smash that subscribe button, and tune in next week.
Keith Drake:Thanks for listening. If you enjoyed today's episode, I hope you'll tell a friend about a health policy.