Besides financial services firms, there is probably only one other industry that has generated as much public anger in recent years—the pharmaceutical sector. Fiercely protective of its intellectual property, and fully aware that competitors are ready to pounce with cheaper versions of the same drug when the time is right, pharma firms have been ruthless in leveraging their stranglehold on consumers, so much so that the sector has been one of the worst hit by regulatory fines for anti-competitive—and downright shocking—behaviour over the past few years.

Consequently, in October a United Nations Conference on Trade and Development (UNCTAD) held in Geneva, Switzerland, met to discuss anti-competitive practices in the pharmaceutical industry.

At the heart of the UN’s concerns is patent protection, which pharmaceutical firms say is necessary to cover the average U.S.$1.38bn costs of developing a newer, better drug. In both the United States and Europe, patents have a term of 20 years—sometimes extendable by up to five years—during which they are legally enforceable.

However, once this term expires, patented products and technologies are no longer legally protected and are open to competition from rival generic drug manufacturers. This means that a pharma company’s major revenue stream is likely to take a hit—an unappealing prospect for investors, and more than a headache for a sector where research and development and marketing costs are spiralling upwards.

Consequently, pharma companies are increasingly trying to extend the life of their patents and delay exposure to competition. As such, regulators around the world are concerned that financial pressures will force pharma firms to abuse the use of their exclusive right by trying to hike prices, or by expanding the scope of their patents so that research and development costs are raised to such an extent that rivals simply cannot even consider making a better or more generic version of the same drug. There are also concerns that pharma firms will simply pay rivals not to develop similar drugs so that their market share is not encroached.

“We’re not questioning the merit of patent protection,” says Ebru Gokce, an UNCTAD economist working on competition policy and consumer protection issues. “We’re questioning the anti-competitive nature of practices, such as pay-for-delay agreements, that prolong market exclusivity,” she adds.

“For now, pay-for-delay deals are much more prevalent in developed countries. But we’ve seen a few in emerging markets, and as generic manufacturers in developing countries continue to grow, this tactic may become more frequent.”

Ebru Gokce, Economist, UNCTAD

“For now, pay-for-delay deals are much more prevalent in developed countries,” Gocke says. “But we’ve seen a few in emerging markets, and as generic manufacturers in developing countries continue to grow, this tactic may become more frequent.”

“Pay-for-delay” agreements occur when a patent holder compensates a competitor to delay or abandon the launch of a generic drug. The practice is not illegal, and not all pay-for-delay agreements are considered anti-competitive: Only those agreements that unreasonably delay the generic entry and result in harm to consumers or unnecessarily inflated prices are likely to be considered anti-competitive.

In fact, relatively few agreements result in any legal censure. In the most recent monitoring report published by the European Commission on 2 December 2015, only 12 percent of the total patent settlement agreements in the European Union concluded between January 2014 and December 2014 were potentially problematic. Nevertheless, lawyers warn that there can be a “fine line” between what is deemed acceptable and not, and pharmaceutical companies looking to enter into any such agreement must be mindful that they do not fall foul of EU competition rules (as well as the potentially eye-watering fines that the Commission can hand out).

There have already been some notable casualties. In 2013 Johnson & Johnson and Novartis were fined €16m (U.S.$17.04M) for pay-for-delay violations relating to an expiring patent for fentanyl, a pain-killer 100 times more potent than morphine that is used notably for patients suffering from cancer.

In 2014 French pharmaceutical firm Servier was handed a €330m (U.S.$351.51M) anti-trust fine in the largest pay for delay case ever brought by the European Commission after being found guilty of protecting its bestselling blood pressure drug perindopril from price competition between 2005 and 2007. Perindopril generated more than U.S.$1bn per year in sales for Servier, revenues which the company feared it would lose when its patent control over the drug’s molecule expired. To protect its market share, Servier bought the technology needed to develop an alternative version and made a series of patent settlements with companies trying to produce generic forms of the drug. Those generic drugs producers involved in the agreement—Niche/Unichem, Matrix Teva, Krka, and Lupin—received fines totalling €97m (U.S.$103.32M).

PHARMA PRICE HIKES

Price hikes in the pharmaceutical sector are more common in the United States than in the European Union, where member states have national health service programmes that can use their clout to force down prices in exchange for allowing drugs manufacturers access to sell approved drugs to all hospitals, surgeries and pharmacies.
“In the United States, extreme drug price hikes are potentially more common due to the prevalence of private medical insurance companies, which pay a large proportion of healthcare and drugs costs, and the fact that deals are negotiated individually with different insurance companies rather than on a national scale as in the United Kingdom,” says Justin Wilson, senior associate in the life sciences and chemistry group at intellectual property firm Withers & Rogers Wilson.
Perhaps the most widely-known pharmaceutical price hike of recent years concerns Turing Pharmaceuticals and its former CEO, Martin Shkreli, who increased the price of anti-parasitic drug Daraprim by 5,000 percent from U.S.$13.5 to U.S.$750 per pill overnight after obtaining the manufacturing licence and being the sole supplier in the United States—a point that evidently escaped regulators.
It is not the only firm to leverage its commercial advantage to the detriment of patients. Valeant Pharmaceuticals increased the price of Zegerid by 530 percent, Glumetza by 550 percent, Isuprel by 530 percent, generic anti-depressant Wellbutrin by 300 percent, and Nitropress by 237 percent. Consumers pushed back on the U.S.$1,000 per pill cost for the Gilead HCV treatment (which was set to cost U.S.$90,000 per treatment total), so that treatment cost less than half (U.S.$40,000) in most cases.
Mylan’s decision to hike the price of its EpiPen by 548 percent made headline news. Yet other drugs in the company’s portfolio that were similarly hiked received much less coverage, says Toshal Patel, an independent consultant at Tagus Scientific Consulting: Ursodiol for gall stones, Dicyclomine for IBS, and metoclopramide for GERD also had significant price increases of 542 percent, 400 percent and 312 percent, respectively.
In 2015, Rodelis Therapeutics purchased cycloserine, an antibiotic used to treat tuberculosis and which features on the World Health Organization’s List of Essential Medicines, and increased the price from U.S.$500 to U.S.$10,800 for 30 capsules—a mere U.S.$360 per cap. However, the political fallout caused by the price increases resulted in the drug being returned to its former owner, a non-profit organization associated with Purdue University (though the new drug price was still double the original).
The European Union has a better record of fighting price hikes. For example, around three-quarters of EU member states use “reference pricing” to control drug costs. Under such a scheme, patients pay some portion of the difference between the drug’s list/retail price and the reference price (often the price quoted for a generic version of the drug). So, for example, if the list price of a drug is €100 (U.S.$106.52), and the reference price is €20 (U.S.$21.3), and a patient pays 10 percent of any price above the reference price as a prescription or health insurance charge, then the patient would pay just €8 (U.S.$8.52) extra for the more expensive drug.
Some countries have also taken the step to ensure that they use predominantly generic versions of drugs in the near future. According to Patel, Japan’s medicines regulator has been pursuing a policy of cutting drug prices for the main listed drugs by around 5 percent every two years with an aim to increase the share of the generic drugs to 60 percent of its formulary by 2020.
—Neil Hodge

More recently, in September the European Union general court, which hears actions taken against EU institutions, upheld a decision to fine Danish drug maker Lundbeck almost €100m (U.S.$106.52M) for paying rivals to delay sales of generic copies of its anti-depressant citalopram once the drug’s basic patent had expired.

In 2002 Lundbeck concluded six agreements concerning citalopram with four other pharmaceutical firms (Generics (U.K.),1 Alpharma, Arrow, and Ranbaxy) that produced and/or sold generic medicinal products. In return for agreeing not to enter the citalopram market for a specified term, Lundbeck paid substantial kickbacks and provided other incentives to maintain its dominant position. These included purchasing stocks of generic products for the sole purpose of destroying them and offering guaranteed profits in a distribution agreement.

The Danish competition regulator tipped off the European Commission in 2003, and ten years later in June 2013 the Commission fined Lundbeck €93.7m (U.S.$99.81M) and the other four companies €52.2m (U.S.$55.6M) between them. What the companies’ legal bills and document discovery costs were is anyone’s guess.

Rory Ashmore, an associate in the European Union and competition team at law firm Charles Russell Speechlys, says that “the outright failure of Lundbeck’s appeal in every aspect serves as a powerful reminder of the Commission’s powers to impose severe penalties for infringements of competition law.”

“In particular, pharmaceutical producers and, indeed, companies throughout various innovative sectors of industry should remember that when the question of patent infringement arises, any temptation to leverage present cash flow and ‘buy’ potential competitors out of the race should be resisted—failure to do so will be clamped down upon hard by the regulators,” he adds.

Banning “pay-to-delay” agreements had been a campaign issue for Democratic nominee Hillary Clinton in her bid for the White House. She claimed that such agreements cost U.S. consumers around U.S.$3.5bn a year and that getting rid of them would be a key part of her plan to reduce America’s health bill if elected. But following her election defeat, pharmaceutical firms should now be able to breathe a sigh of relief as President-elect Trump has never made such an undertaking.

There is little doubt that pharma firms are feeling price pressure. Investors want greater returns, which means price hikes are becoming more routine – some of them quite scandalous (see sidebar). R&D costs are also rocketing as the timeline to bring new drugs to market often takes longer—due in no small part to the extensive clinical trial programmes required to obtain marketing approval.

Furthermore, pharmaceutical research used to be mainly concerned with small-molecule drugs, but now there is an increasing trend for developing biological drugs, which have a more complicated production process. These therefore incur more cost. And how medicines are sold is also taking its toll: for example, distributors are not paid a flat fee, but rather a percentage of the price. “So if there is a competitor raising prices, you want to raise prices too so that the middlemen don’t push the competitor’s drug to make more money,” says Max Jacobs, an analyst at Edison Investment Research.

Yet even in the European Union—where countries have traditionally had more success than the United States in capping medicine costs for consumers and healthcare organisations—there is more pressure from drug pricing than ever before. In the United Kingdom, for example, the National Health Service’s Cancer Drug Fund has been forced to increase its spending by 70 percent to £340m from an initial £200m budget simply because it could not afford the drugs on its approved list.