You’re probably used to the idea of your doctor prescribing you a brand-name drug and your pharmacist automatically substituting a lower-cost generic equivalent that saves you, the drugstore, and your insurer money. But there’s practice known in the industry as “product hopping” that brand-name drug makers can use to repeatedly delay generic versions from reaching consumers.
Getting a new drug on the market is a costly and time-consuming process, which is why brand-name drugs have exclusivity windows that last for years. The lack of competition lets them determine the price, recoup their expenses, and make a profit.
Creating a generic equivalent used to also require significant time and effort to get FDA approval, but the 1984 Drug Price Competition and Patent Term Restoration Act (aka Hatch-Waxman Act) abbreviated the process so long as the generic was equivalent to the original.
Additionally, for decades states have allowed pharmacists to substitute “AB-rated,” therapeutically equivalent generics for brand-names unless the patient or physician demands otherwise. But for a drug to get that AB rating from the Food and Drug Administration it must, among other factors, not only contain the same active pharmaceutical ingredient as the brand-name drug, but also the same dosage and form.
And this is where “product hopping” comes in.
Imagine you’re the head of a drug company that’s bringing in a pile of cash for your popular brand-name product Morranicillin. You know that the patent on this wonder drug is set to expire in the not so distant future and that GenericCorpUSA is waiting in the wings to introduce a cheaper equivalent that will immediately decimate your market share because most pharmacies will automatically start swapping out the new generic.
But in order for that generic version of Morranicillin to be auto-swapped at the pharmacy, it needs to be virtually identical. So in advance of the generic launch, you tweak the dosage of standard Morranicillin, or switch the standard version from tablets to capsules.
Each time you do this, GenericCorpUSA needs to revise its generic to match. At the same time, the makers of Morranicillin stop selling the older, slightly different version of the drug and flood doctors’ offices with free samples of the version for which there isn’t a ready generic equivalent.
Studies show that doctors often don’t think about the cost of a particular drug they prescribe.
“Doctors’ ignorance of costs, combined with their tendency to underestimate the price of expensive drugs and overestimate the price of inexpensive ones, demonstrate a lack of appreciation of the large difference in cost between inexpensive and expensive drugs,” concluded the authors of one 2007 study.
Additionally, once doctors find something that works, many tend to stick with that brand even when a generic becomes available.
In a brief [PDF] filed with a federal appeals court this week, the Federal Trade Commission argues that, through product hopping, a “brand-name manufacturer’s well-timed tweaks to its drugs can thus create an ever-retreating horizon of generic competition at the expense of consumers.”
The FTC’s brief is related to a lawsuit between two drug companies — Warner Chilcott, maker of brand-name acne drug Doryx, and Mylan, which is seeking to release a generic version.
Mylan accuses Warner Chilcott of violating federal antitrust laws by engaging in three different product hop reformulations of Doryx. The suit claims these changes were or no therapeutic benefit to patients and only served to delay the release of a true generic equivalent for Doryx.
The FTC isn’t necessarily siding with Mylan in this lawsuit, but the agency does believe that the U.S. District Court judge erred in granting summary judgment to Warner Chilcott.
In granting that judgment, the court ruled that Doryx was readily interchangeable with other oral tetracyclines and therefore no reasonable juror could believe that Warner Chilcott had monopoly power.
And even though the court accepted Mylan’s argument that the Doryx product hopping was done “primarily to defeat generic competition,” it also said that Mylan could have invested money to advertise and market its generic product if it wanted to compete with Doryx, rather than relying on the “regulatory windfall” provided by automatic substitution at the pharmacy.
The FTC counters in its brief that the District Court exhibited a “basic misunderstanding of the special characteristics of the pharmaceutical marketplace.”
The agency argues that automatic substitution is necessary to address the “disconnect between prescribing physicians and payors” that “often insulates brand-name prescription drugs from effective price competition.” It contends that without the ready availability of an AB-rated generic, “a given drug may be priced at monopoly levels even if other drugs are therapeutically similar.”
And while product hopping might not be illegal, the FTC says it can sometimes be evidence of monopoly power.
“The manufacturer of a brand-name drug generally undertakes a product hop to preserve high profits that generic versions of the same drug would undercut but that no alternative drug, competing in the same market, has yet disciplined,” explains the brief. “If such a broader market existed, competition from those alternative drugs should already have driven down the price for the brand-name drug, and a brand company would thus normally have little incentive to make minor product changes solely to defeat generic entry.”
The FTC points to the recent Second Circuit opinion [PDF] in a lawsuit filed by the state of New York against drug maker Actavis. The drug company was accused of pulling nearly all of its Namenda IR Alzheimer’s drug from the market shortly before the patent expired, and making a push on the new Namenda XR drug with a patent that protects the company through 2029. By shifting doctors away from prescribing IR, Actavis took away opportunities for generic drug makers to offer a lower-cost version of the original.
In that case, the Second Circuit concluded that the forced switch was anticompetitive because it had the “effect of significantly reducing usage of rivals’ products” in order to protect the Namenda monopoly.
This ruling, argues the FTC, contradicts the conclusion of the lower court in the Mylan case.
The Second Circuit also held that to make an antitrust case, “generics need not be barred ‘from all means of distribution’ if they are ‘bar[red]… from the cost-efficient ones,'” and that when it comes to generic drugs automatic substitution is “the only cost-efficient means of competing available to generic manufacturers.”
Whether product hopping is a matter of legally trying to protect one’s investment or a predatory, anticompetitive practice will likely be decided by the U.S. Supreme Court at some point. Regardless of whether it’s legal, it does highlight the importance of talking to your physician to make sure you’re not being prescribed a brand-name drug just because they haven’t thought about a possible lower-cost generic.
