Thursday, August 20, 2009

Legal Payoffs in Healthcare, but Who’s Complaining?


Medicis Pharmaceutical is a small dermatology drug company with a big problem: its lead product, an anti-acne tetracycline called Solodyn, is losing its patent protection, allowing other, larger drug makers to introduce cut-price generic versions of the stuff.

Oh, and Solodyn is roughly half the company’s sales, which means, as far as profits go, it's a big deal to Medicis.

So what's a company to do in this capitalist system of ours? Will it compete its way to prosperity?

Well, sort of—Medicis recently launched a Botox competitor that has potential to capture a slug of that highly profitable business.


But mainly it’s been buying off the generic Solodyn competitors by way of entirely legal “settlements” with the erstwhile cut-price drug makers.

Specifically, Medicis has sued and then “settled” with Impax, Teva and, just last week, Sandoz, allowing Medicis to keep the generics off the market for a few years.

The winners, of course, are Medicis, which keeps its big fat mark-ups on the Solodyn franchise intact for now, as well as Impax et al, for whom the settlement reduces litigation costs both now and down the road, when they can introduce licensed generic versions of the drug at presumably higher mark-ups than if a raft of generics were to immediately take down pricing to where old-fashioned Economics 1 would tell you it should go: the marginal cost of production.

The losers, of course, are the consumers who can't buy generic Solodyn, but must instead continue paying the big fat mark-ups.

This is all entirely legal, of course.

And, like so much of our healthcare system—particularly when it comes to lawyers getting involved—bizarre.

But don’t expect Congress to do a thing about it. After all, they’re mostly lawyers.



Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

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6 comments:

Mark said...

Jeff,

In my banking days, I raised many hundreds of million of dollars for drug development companies, almost all of which "went down the drain". This happened not necessarily because these were bad companies, but because successful drug development is a long-shot crapshoot, except that the player's odds in craps are a lot better. (Now that I think about it, perhaps Steve Wynne should get out of the casino business and instead short biotech stocks, but I digress.)

I actually have no idea why sources of capital continue to fund these biotech companies (but thank God they do, because every once in a while they truly do come up with something miraculous), but anything whatsoever that's done to make that rare profitable drug less profitable will slowly but surely drive that risk capital away. You (and all those folks in Congress who have never studied the enormous drug development failure rate) should keep that in mind, because these companies need massive investment flows in order to keep those drug development pipelines humming.

Anonymous said...

Jeff,

I am not sure what you mean by saying that we should not expect Congress to do anything about it. That's quite wrong. Congress is actively working on figuring out how to expand the length of patents and copyrights to make sure that this type of "unfortunate" event does not happen to any "poor" company out there.

There are a few blogs out there (I read techdirt) that cover this type of insanity and while the calls for revamping the patent system are getting louder, the lobby machine is unlikely to let that happen in any constructive fashion.

At least, be happy that not all of your DNA has been patented yet. You might soon end up being sued for being yourself, literally.

Jeff Matthews said...

Mark, I understand the economics of the business, and the need for patent protection. (It took a few years to figure out, but as an investor, I never buy any drug company that doesn't have an approved drug, given the less-than-zero-sum game of drug development roulette.)

But when lawyers pervert the generic process by turning it into a legal stick-up for the patent-holder, it seems way beyond the fairness of the patent laws.

If a company can 'buy' extended patent protection from the private sector, shouldn't the government get a piece of the vig, since government laws drive the monetary value of an extended patent?

Why not let a company simply pay the FDA to accomplish the same thing?

My two cents. Given your background in this, I'd be interested in yours.

JM

cheyfaith said...

Hi Jeff,

There is a misperception among patients and consumers that generic drugs are identical in terms of bioequivalence to their branded counterparts. This is not typically the case. The FDA requires that generic alternatives contain the same active ingredient, but a range of bioequivalence is allowed. When you consider how many factors affect the results of clinical trials, it's easy to see how a generic drug might cause unanticipated side effects or even result in unintended clinical outcomes for patients.

Self magazine recently published the results of a a very interesting evaluation it conducted on generic drugs:

http://www.self.com/health/2009/06/dangers-of-generic-drugs

Pharmaceutical companies need to charge a higher price than generic companies to recoup R&D costs and fund new R&D projects. However, I think that branded pharmaceuticals should lower their prices immediately prior to patent loss, effectively offering their branded drug at a generic price, or enter into an authorized generic agreement with a high-quality manufacturer that will make a bio-identical drug instead of a bioequivalent drug. This would ensure that patients get the best medicines at good prices once patents expire.

Anonymous said...

Disclaiemer: I haven't studied this specific situation in depth (and therefore won't comment on it).

That said, the law around introduction of generics is well established and in my opinion functions well. Hatch-Waxman balances the need to i) give generic companies the incentive to file ANDAs and bring out new generics products and ii) allow branded pharma companies the opportunity to defend their IP.

Under Hatch-Waxman, the first generic company to file a good ANDA with a Paragraph IV Patent Certification gets the prize of a 180 day window to sell the exclusive generic. There is an opportunity to make really nice margins in this time (due to limited competition, from only from the generic that the branded company often launches).

The system incents generic makers to compete for the rights to that 180 day window, and this is what drives them to invest in getting an ANDA filed. It is also what spurs them to file an ANDA despite the risk that they will be sued by the branded pharma company for patent infringement.

Settlements in those suits could theoretically push back the date that generics hit the market. However, the way things play out is based on how the branded and generic companies handicap the odds that the patent will hold up. If the case is weak, the generic will come to market quickly. It it's strong, the generic won't come to market until patent expiry. The zone in between? That's where things get interesting.

Mark said...

>>...when lawyers pervert the generic process by turning it into a legal stick-up for the patent-holder, it seems way beyond the fairness of the patent laws.<<

Yes, I agree that this is rather convoluted, and that my original comment didn't really address this specific point. I guess I was really making more of a "knee-jerk shot across the bow" in defense of long patent protection for drug developers (for the reasons I stated above).