Featured Expert Column: Antitrust & Competition Policy — Federal Trade Commission

06633 - Royall, M. Sean ( Dallas )By M. Sean Royall, a Partner with Gibson, Dunn & Crutcher LLP, with Richard H. Cunningham, Of Counsel in the firm’s Denver, CO office, and Abiel Garcia, an Associate Attorney in the firm’s Los Angeles, CA office.

On November 8, 2017, the Federal Trade Commission hosted a workshop examining competitive dynamics in the pharmaceutical sector.  Participants in the workshop included professors Michael A. Carrier, Aaron Kesselheim, Stephen Schondelmeyer, Neeraj Sood, Erin Fox, and Rena Conti; representatives from industry interest groups Mark Merritt and Todd Ebert; consumer advocate David Mitchell; economists Adam Fein and Hal Singer; FDA Commissioner Dr. Scott Gottlieb; and FTC Acting Chairman Maureen Ohlhausen.

While FTC workshops are informal and have no binding effect on the policies of the agency, they frequently foreshadow areas of future investigative or enforcement focus.  Participants’ comments generally affirmed that areas of long-standing FTC activity in the pharmaceutical sector, including reverse payments and merger enforcement, are likely to remain areas of ongoing focus.  Two notable new issues also emerged:  scrutiny of the industry’s distribution system and potential abuse of FDA regulatory processes to inhibit generic entry.  In addition, Dr. Gottlieb announced three new FDA initiatives to facilitate generic entry into pharmaceutical markets.

A Focus on Middlemen

Nearly half of the workshop’s agenda focused on the intermediaries involved in the pricing and distribution of pharmaceuticals, including Pharmacy Benefit Managers (“PBMs”) and Group Purchasing Organizations (“GPOs”).  PBMs work with the ultimate payor (e.g., health insurance companies) to, among other things, process prescriptions, operate mail-order pharmacies, and negotiate with pharmacies and drug makers for better pricing in exchange for preferential formulary treatment of specific products.  GPOs aggregate the buying power of smaller hospitals, medical offices, and other healthcare entities (such as nursing homes), and occasionally provide additional services.

During her opening address, Acting Chairman Ohlhausen emphasized that two of the questions the FTC is looking to answer are “what benefits do the intermediates provide and what costs are they imposing.”

A panel on PBMs centered on two issues:  transparency and distribution of specialty drugs.  Several panelists mentioned the need for a better understanding of how PBMs operated and called for greater transparency into their pricing practices and revenue streams.  Susan Pilch, Vice President of Policy and Regulatory Affairs for the National Community Pharmacy Association, stated that there was a “lack of awareness” with regards to PBMs and their revenue streams.  She stated that since PBMs have no obligation to disclose any or all of their revenue streams, certain drugs may “increase PBM profits perhaps at the expense of” the plan sponsor.

Other panelists, including Professor Neeraj Sood from USC, contended that the PBM market is highly concentrated, with the top three PBMs controlling more than two-thirds of the market.  Such concentration, combined with the high level of profit enjoyed by PBMs, in Professor Sood’s view, invites empirical research into any potential antitrust issues.  Panelists also focused on PBMs’ operation of specialty pharmacies and how those pharmacies could be used to restrict the availability of branded drugs.  Professor Sood also stated that PBM ownership of pharmacies could lead to misaligned incentives that cause higher prices and/or the overuse of those pharmacies.

A panel on GPOs likewise focused on the need for transparency and a better understanding of revenue streams.  Chester Davis, with the Association for Accessible Medicines, asserted that 90% of generic medicines are purchased by four large buyers, and that this creates an environment ripe for competition-related issues.  Panelists also focused on the various price metrics of pharmaceutical products, such as average wholesale price, wholesale acquisition cost, average sales price, average manufacturer price, and maximum allowable cost.

Multiple panelists discussed the potential competitive implications of market participants’ inability to compare GPOs on an apples-to-apples basis given these varied price metrics and the general lack of transparency into GPO practices.

Commissioner Gottlieb commented in his keynote address that intermediaries are in a position to work in conjunction with branded pharmaceutical manufacturers to slow generic competition.  Specifically, Dr. Gottlieb described that intermediaries could “mak[e] it hard or altogether impossible” for companies working to develop generic equivalents “to get access to the doses of branded drugs needed to complete bioequivalen[ce] studies” for FDA.

Potential Exploitation of FDA Regulatory Processes

Many speakers—including the members of panels ostensibly focused on other issues—asserted that branded pharmaceutical companies may misuse FDA processes to frustrate the potential launch of generic alternatives to their products.  For example, Professor Michael Carrier described a hypothetical situation where branded drug manufacturers use special distribution to limit generic manufacturers’ access to drugs for bioequivalence testing (either through a Risk Evaluation and Mitigation Strategy (“REMS”) or other mechanisms).  He also described a scenario in which a branded drug manufacturer files multiple citizen petitions to delay or complicate approval of generic equivalents.

Acting Chairman Ohlhausen referenced FTC’s pending action against Shire Pharmaceuticals alleging that Shire’s repeated filing of citizen petitions unlawfully harmed competition and emphasized that FTC would continue to challenge “alleged attempts to game the regulatory system for anticompetitive purposes.”  See our past post on the Shire action here.

Several presenters outlined potential changes FDA could consider to address these concerns.  Dr. Aharon Gal, Senior Vice President and Research Analyst at Sanford Bernstein, presented potential solutions he believes would address these issues:  (1) require third-party management of REMS and generic product sourcing; (2) require fees for citizen petitions filing by corporations and use fees to increase staff response capabilities; and (3) make generic product-specific guidelines part of the new drug application process.

Professor Stephen Schondelmeyer recommended that FDA not only manage their Abbreviated New Drug Application (ANDA) review time but also manage “total time” to market for generic products.  Dr. Aaron Kesselheim, professor at Harvard Medical School, suggested an increase in funding for the FDA Office of Generic Drugs, as well as increased funding to generic drug research in general.

FDA Commissioner Gottlieb addressed these issues in unusually colorful and direct terms.  He called on branded pharmaceutical companies to cut out the “shenanigans” in attempting to exploit FDA’s rules in order to subvert competition.  Dr. Gottlieb stated that the games were being played (e.g., denying branded sales to a generic due to a REMS mandate) as a way “to frustrate the ability of generics to purchase the doses of a branded drug they need to run their studies.”

FDA Announces Steps to Facilitate More Rapid Approval of Generics

Dr. Gottlieb also announced three new FDA initiatives intended to increase the number of generic pharmaceuticals available in the marketplace:

  • Expediting the First Three ANDA Filers. Pursuant to this initiative, FDA will expedite review of not only the first ANDA filer’s submission, but also the second and third submissions.  Gottlieb asserted that this “will help encourage the development of generic drugs that lack competition so that safe and effective generics come to the market as quickly as possible.”
  • Facilitating Generic Manufacturer’s Access to REMS Products. Gottlieb announced a program in which branded drugs that have a REMS mandate from FDA will now create a common master file for the implementation of REMS.  Current law requires branded and generic companies to reach an agreement on a single, shared REMS rather than having independent REMS.  FDA’s intent is that this modified approach will facilitate coordinated REMS programs.
  • Expanding Facility Inspection Options. Gottlieb announced a mutual recognition agreement with the European Union in which eight European drug regulatory authorities will be deemed able to conduct inspections of manufacturing facilities that comply with FDA standards.  This agreement will allow manufacturing facilities abroad that have been approved by the eight EU drug regulators to produce drugs for the U.S. market.  The purpose of this change is to make it easier for potential generic competitors to secure a compliant supply chain.

These announcements and Dr. Gottlieb’s emphasis on competition marks a departure from his predecessors and suggests that FDA may now consider competition issues alongside its primary focus on ensuring safety and efficacy.

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Notwithstanding Acting Chairman Ohlhausen’s statement that FTC and FDA “have different missions and spheres of responsibility,” the workshop highlights the interrelationship between the two agencies and may signal increased communication and coordination designed to increase competition in the pharmaceutical sector.