Key Points

• Significant price spikes in generic drugs have led to increased scrutiny from lawmakers.
• Fideres has conducted detailed analysis for the generic drug market and identified a number of factors that point to collusive anticompetitive behavior.

The pharmaceutical industry has been facing increased scrutiny from lawmakers who are now ratcheting up efforts to target pharmaceutical companies over increased prices of prescriptions drugs. It has also been a fiercely debated topic amongst the US presidential candidates with the likes of Hilary Clinton and Bernie Sanders actively campaigning against “big Pharma’s unconscionable greed”.

In October 2014 Bernie Sanders and Rep. Elijah Cummings launched an investigation requesting information from 17 generic drug companies on pricing issues. The investigation uncovered data which showed extremely large generic price increases between October 2013 and April 2014. The DOJ now believes that price-fixing between generic drug manufacturers could potentially be widespread.

Generic Vs Branded Drugs

A generic pharmaceutical drug is equivalent to a brand-name product in dosage, strength, route of administration, quality, performance, and intended use.

Pharmaceutical companies that manufacture branded drugs can experience a period of exclusive rights to sell their drug due to patent protection. In the US, patents last on average for 12 years and are put in place to, amongst other things, encourage R&D by the pharmaceutical companies.

In most cases, generic products become available after the patent protections expire. Once generic drugs enter the market, competition leads to substantially lower prices for both the original brand-name product and its generic equivalents.

Generic drugs as a whole have increased steadily from 2004 as a share of total prescriptions, and as of 2014, accounted for 88% of the 4.3 billion prescriptions filled in the United States.  Empirical studies have shown that within a year of generic entry, generics typically will have obtained about 90% of the market for that drug.¹

Potential Collusion

There are a number of factors that make generic drugs highly susceptible to collusion:

• Prescription drugs exhibit a highly inelastic demand curve, which means that as price increases demand remains the same. Consumers generally do not have much choice when the price of their prescription drug increases as it is considered a necessity to their wellbeing. This gives generic manufacturers significant pricing power.
• Generic drugs are subject to commoditization which means that manufacturers are usually forced to compete on price as opposed to other factors like quality, branding and service. This makes price based collusion much easier to monitor and implement.
• The generic drug market is highly concentrated with only a few large manufacturers dominating production. This again makes it easier to facilitate collusion.
• Significant barriers to entry also make it harder for competition to enter the market and bring prices down.

Fideres’s Work

Fideres’s research has identified generic drugs that show signs of potential collusion and anti-competitive behavior. Outlined below is an example of one such drug:

As seen in the graph above in June 2014 the four main manufacturers for this drug increased the price on average 558%.

This graph highlights the strong pricing power of generic manufactures. The inelastic nature of this generic drug shows that the dramatic increase in price resulted in a large increase in sales, however quantity sold remained steady.

This graph shows the high concentration of this generic drug with only three manufacturers producing the drug during the time the price spike was observed.

¹ http://www.gphaonline.org/media/wysiwyg/PDF/GPhA_Savings_Report_2015.pdf