Antitrust's Hidden Hook in Drug Price Increases

• Jurisdiction: United States,Federal
• Citation: Vol. 27 No. 1
• Publication year: 2018
• Author: By Michael A. Carrier
• topic: Antitrust and Competition,Intellectual Property,Health Law

ANTITRUST'S HIDDEN HOOK IN DRUG PRICE INCREASES

By Michael A. Carrier¹

High drug prices have recently been in the news. The media, public, and politicians have lamented significant price increases. At the same time, such developments have been met with explanations that antitrust cannot address price hikes. Critics contend that U.S. courts do not regulate price and that antitrust law is ill-equipped to referee these disputes.

But what if antitrust could address price hikes? What if the price increases were a result of anticompetitive conduct? In that case, antitrust could play a role, addressing the anticompetitive behavior that resulted in high prices. This article focuses on two price hikes that received significant attention, showing how conduct such as settlements, government petitions, exclusive dealing, and restricted distribution systems contributed to the increases.²

The article first introduces Daraprim, which witnessed a 5000-percent price increase shortly after its distribution system was significantly restricted. It then analyzes the EpiPen, which underwent sustained price increases at the same time the company engaged in a patent settlement, citizen petition, and exclusive dealing.

I. DARAPRIM: RESTRICTED DISTRIBUTION SYSTEM

Daraprim received attention for its 5000-percent price increase but not for its restricted distribution system. This section shows how the adoption of this system could constitute monopolization, with the two elements of monopoly power and exclusionary conduct satisfied.

A. Background

Notorious pharmaceutical entrepreneur Martin Shkreli made worldwide headlines in 2015. As CEO of Turing Pharmaceuticals, Shkreli obtained U.S. marketing rights to pyrimethamine (Daraprim) and quickly increased the price 5000 percent, from $13.50 to $750 per pill.³ Pyrimethamine is a decades-old drug used primarily to treat toxoplasmosis, a fatal parasitic brain infection that usually occurs in patients with weakened immune systems, such as those with end-stage HIV infection.⁴

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Turing's price hike was met with widespread outrage among the public and in the medical and public health communities, with the episode leading to censure by other drug companies, congressional hearings seeking ways to address the problem, and policy proposals from presidential candidates. Despite the fact that there were no patents or other forms of market exclusivity protecting the drug, Turing was able to raise the price because the relatively small market in the United States for pyrimethamine had attracted no other generic manufacturers. Indeed, Shkreli later lamented that he did not raise the price even higher.⁵

In addition to increasing price, Turing initiated another less widely understood move—it changed the distribution scheme for the drug. Before its acquisition by Turing, pyrimethamine was available without restriction to patients seeking to fill prescriptions at local pharmacies and to hospitals seeking to stock the product for inpatient use. But in the months before the price hike, apparently as a condition of the sale to Turing, pyrimethamine was switched to a controlled distribution system called Daraprim Direct, in which prescriptions or supplies of the product could be obtained only from a single source: Walgreen's Specialty Pharmacy.⁶ As a result, hospitals could no longer obtain the drug from a general wholesaler, and patients could no longer find it at a local pharmacy.

Instead, Turing required institutions and individuals to set up accounts through Daraprim Direct, and outpatients were only able to receive the drug by mail order.⁷ Comments from Turing executives suggested that a primary goal of the Daraprim Direct system was to make it impossible for anyone other than registered clients to obtain the drug, including generic manufacturers wishing to obtain samples for use in bioequivalence studies needed to obtain Food and Drug Administration (FDA) approval. This behavior could demonstrate monopolization, with the next two sections analyzing evidence of monopoly power and exclusionary conduct.

B. Monopoly Power

Monopoly power has been defined as "the power to control prices or exclude competition."⁸ It can be shown in one of two ways, each of which appeared to be satisfied in the case of Daraprim. First, monopoly power can be proved indirectly by examining a defendant's market share along with barriers to entry that could entrench that market position.⁹ Courts regularly hold that a 90 percent market share supports market power, with several courts finding a 75 percent share to be sufficient.¹⁰

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Evidence that Turing has 100 percent of the relevant market is provided by the lack of effective, FDA-approved substitutes. Pyrimethamine is part of all widely accepted first-line therapeutic regimens for toxoplasmosis.¹¹ In fact, the American Society of Microbiology warned that the 5000 percent price increase would "negatively impact both healthcare costs and individual patient treatments."¹² Regulatory barriers to entry cement the effect of this high market share as generics can enter the U.S. market only after receiving FDA approval.

Second, monopoly power can be proved directly,¹³ such as through observable effects on the market, for example, a price increase or output reduction.¹⁴ Turing's conduct has revealed both types of direct evidence.

To begin, Turing significantly increased price. Even though there was not an increase in the costs of producing pyrimethamine (which costs pennies per pill to manufacture¹⁵), Turing increased the price 5000 percent. In addition, it was able to maintain this increase despite public outrage and substantial attention from the press and politicians.¹⁶ Given the barriers to entry imposed by obtaining FDA review, the high prices likely will be maintained for an extended period of time.¹⁷

Documents provided to a congressional committee offer examples of price increases including patient copays in the thousands of dollars. Just to pick one example, one presentation reported that "[p]atients with commercial/private insurance [are] experiencing increased co-pays, delays in claims approval[,] and rejections," with one facing a copay of $16,830.¹⁸

Output reductions are another direct indicator of monopoly power. After pyrimethamine's price increase, hospitals complained that they were not able to obtain the drug,¹⁹ with Turing's own press release conceding that hospitals and clinics "were having trouble accessing the product."²⁰

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In short, Turing appears to have monopoly power in engineering and maintaining a 5000 percent price increase, preventing hospitals from obtaining pyrimethamine, and ensuring the absence of FDA-approved substitutes for the drug.

C. Exclusionary Conduct

To bring a successful monopolization claim, a plaintiff must show not only monopoly power but also exclusionary conduct. Courts often distinguish between the "willful acquisition or maintenance of [monopoly] power" and "growth or development as a consequence of a superior product, business acumen, or historic accident."²¹ Such a test is easier to state than apply.

In determining whether Turing's refusal to provide samples constitutes exclusionary conduct, consideration of the regulatory background is essential. The Supreme Court in Verizon Communications v. Trinko²² explained that "antitrust analysis must always be attuned to the particular structure and circumstances of the industry at issue."²³ In particular, courts must take "careful account" of "the pervasive federal and state regulation characteristic of the industry," and the analysis must "recognize and reflect the distinctive economic and legal setting of the regulated industry to which it applies."²⁴

A central objective of the Hatch-Waxman Act is to encourage generic entry.²⁵ Congress sought to achieve this goal through several mechanisms, including formalizing the expedited pathway and allowing generics to experiment on brand drugs before the end of the patent term.²⁶ Most relevant for our purposes, the scheme allows generics to earn abbreviated approvals if they can show that their drugs are bioequivalent to the brand's drug.²⁷ But this crucial element of competition is possible only if the generic has access to the brand firm's samples.²⁸ Restricted distribution systems threaten this access.

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Most prescription drugs are available through a standard pharmaceutical distribution chain: from manufacturer to wholesaler, then to retail or mail-order pharmacy, and then to consumer.²⁹ The goal is to distribute the drug as widely as possible, as widespread distribution tends to increase manufacturers' revenues by making drugs available to be prescribed to as many people as possible.

Drugs with limited distribution schemes, by contrast, are not available through standard retail or mail-order pharmacies. Instead, the manufacturer eliminates the wholesaler and distributes the drug only through specialty pharmacies selected by the manufacturer. Funneling sales through one wholesaler gives the manufacturer complete control over the distribution chain, which could prevent generics from having the access to samples they need to conduct bioequivalence studies and reach the market.

Restricting the typical expansive distribution scheme also tends to involve conduct that makes no sense, other than stifling generic entry. The no-economic-sense analysis asks whether conduct allegedly maintaining a monopoly by excluding nascent competition "likely would have been profitable if the nascent competition flourished and the monopoly was not maintained."³⁰ The test focuses on the conduct's "reasonably anticipated impact" (according to "objective economic considerations for a reasonable person") when undertaken rather than its actual impact.³¹ Such conduct provides a simple way to determine whether a company's sole motive is to impair competition. If a firm undertakes conduct that makes no economic sense, then its "anticompetitive intent" can be "unambiguously...